2017 (11) TMI 199 - AT - Income Tax

Addition u/s.68 - Held that - As the assessee was able to explain the deposit in the bank account, also as the authorities below failed to bring on record any evidence contrary to the fact that the cash was not available with the assessee, we are of the view that the explanation of the assessee was plausible and therefore the assessee was able to explain the source of cash deposit. Claim of interest paid to partners as deduction - interest on outstanding amount of remuneration - Held that - The terms and condition of the partnership deed in the present case were the guiding factors for determining whether the deduction claimed u/s.36 were relatable to the remuneration received by the partner of a firm from such firm. In our considered opinion, if the relevant clauses of the partnership deed provides for payment of remuneration which is independent and separable from the capital contribution made by the partners in the firm and the partnership deed provides for the payment of interest on such contribution, in that eventuality the deduction u/s.36 against the remuneration received by the partners cannot be permitted. The deduction of interest paid can only be permitted if the assessee is receiving the interest income from the capital contribution made by him. In view thereof, we find that the ground raised by the assessee for allowing the deduction is without any merit. Accordingly, we dismiss this ground.

Issues Involved:
1. Addition of ?32 lakhs under Section 68 of the Income Tax Act.
2. Disallowance of adjustment of interest paid amounting to ?9,87,295 towards remuneration received by the assessee from M/s. Soundarya Constructions.

Issue-wise Detailed Analysis:

1. Addition of ?32 Lakhs under Section 68:

The assessee contested the addition of ?32 lakhs made by the Assessing Officer (AO) under Section 68 of the Income Tax Act, which was upheld by the Commissioner of Income Tax (Appeals) [CIT (A)]. The AO noted cash deposits totaling ?36,10,000 in the assessee's bank account, for which the assessee failed to satisfactorily explain the source.

The assessee argued that the AO ignored other bank accounts and available cash shown in the books of accounts. The CIT (A) confirmed the disallowance, leading to the appeal before the Tribunal.

The Tribunal examined the details of the cash deposits:
- ?10,00,000 on 22.08.2008: The assessee claimed this was from the opening balance as of 01.08.2008. The Tribunal referenced the jurisdictional High Court's judgment in P. Padmavathi v. ITO, where it was held that once the source of cash is explained, the Revenue should not question the timing of the deposit. The Tribunal found the assessee's explanation plausible and set aside the addition.
- ?5,00,000 on 17.02.2009: The assessee had an opening balance of ?3,23,864 on 01.02.2009. The Tribunal accepted that the assessee had sufficient means to make the deposit and set aside the addition.
- ?12,00,000 on 11.09.2008: The assessee demonstrated that this amount was withdrawn from another bank account. The Tribunal found the explanation satisfactory and set aside the addition.
- ?5,00,000 on 04.11.2008: The assessee stated this was received from the firm as a drawing from his capital. The Tribunal accepted this explanation and set aside the addition.

In conclusion, the Tribunal found no reason to sustain the CIT (A)'s order and deleted the addition of ?32 lakhs.

2. Disallowance of Adjustment of Interest Paid:

The assessee claimed a deduction for interest paid on borrowed capital amounting to ?11,45,607, which was disallowed by the AO. The assessee argued that this deduction should be allowed under a conjoint reading of Section 10(2A), Section 28(v), and Section 36(1)(iii) of the Income Tax Act, asserting that the interest was paid for capital borrowed for business purposes.

The Tribunal noted that the assessee received remuneration of ?9,87,295 from the firm as per the partnership deed, which did not correlate with the capital contribution. The partnership deed provided for interest on capital at 18% per annum, independent of the remuneration. The Tribunal concluded that there was no nexus between the capital contribution and the remuneration received.

The Tribunal held that for Section 36 to apply, the interest paid must be for capital borrowed for business purposes. Since the remuneration was independent of the capital contribution, the deduction under Section 36 was not permissible. The Tribunal upheld the CIT (A)'s order, finding no merit in the assessee's claim for the deduction of ?9,87,295.

Conclusion:

The appeal was partly allowed. The Tribunal deleted the addition of ?32 lakhs under Section 68 but upheld the disallowance of the interest adjustment of ?9,87,295. The order was pronounced in the open court on 2nd November 2017.

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