2020 (12) TMI 71 - AT - Income Tax

Disallowance of proportionate bank interest and drawings made by the Managing Partner of the firm - Interest payment attributable to interest paid on funds diverted for non business purposes viz. gifts made - AO proposed to disallow a portion of bank interest on the ground that interest bearing funds had been diverted for non business purposes and the purpose of making the gift was not explained by the assessee and the assessee has also not proved that the gift was made by the assessee out of commercial expediency - HELD THAT - The partner has withdrawn his own funds from his current account with the firm. It cannot be said that the assessee's funds should be used for business purposes only and the partners' cannot withdraw their money which leads to the firm borrowing interest bearing funds. In our opinion, this issue is squarely covered by the decision of this Tribunal in the case of S. Jameela vs. ACIT 2012 (7) TMI 1117 - ITAT COCHIN As gone through the reconstituted partnership deed dated 31st March, 1994 and 28th June, 2018. As per the latest reconstituted partnership deed dated 28th June 2018, clause 6 specifically mentions that the partners are at liberty to withdraw any amount from the partnership against the amount outstanding in his credit in the firm. Being so, withdrawal of money by the partner from his current account does not carry any interest and he is at liberty to draw the same from his current account. Accordingly, we find force in the argument of the Ld. AR that no proportionate disallowance of interest could be made - Decided in favour of assessee.

Summary

Issues:
- Maintainability of Revenue's appeal based on CBDT Circular 17/2019
- Disallowance of bank interest and drawings by CIT(A) for assessment year 2007-08

Analysis:

Issue 1: Maintainability of Revenue's Appeal
The judgment addressed the Revenue's appeal for the assessment year 2004-05, where the tax effect was below the limit set by CBDT Circular 17/2019. The Circular mandated filing appeals before ITAT only if the tax effect exceeded 50 lakhs. As the tax effect in this case was less than 50 lakhs, the appeal was deemed not maintainable. However, the judgment clarified that the issues raised could be examined in future proceedings if necessary, with the option for the Revenue to apply for a recall if falling under exceptions in the Circular. Consequently, the appeal by the Revenue was dismissed in accordance with CBDT Circular No. 17/2019.

Issue 2: Disallowance of Bank Interest and Drawings
The second part of the judgment focused on the assessee's appeal for the assessment year 2007-08 regarding the disallowance of bank interest and drawings by the CIT(A). The CIT(A) had upheld the disallowance based on the Kerala High Court's decision in a specific case. The assessee argued against this decision, citing various legal precedents including a Supreme Court ruling and a Tribunal decision. The argument centered on the adequacy of own capital to utilize funds for non-business purposes without disallowance. The judgment referenced a previous case involving a similar issue and highlighted that the partner's withdrawal from the current account did not necessitate interest-bearing funds for business purposes. The Tribunal concluded that the partnership deed allowed partners to withdraw amounts without interest implications, leading to the allowance of the assessee's appeal. Ultimately, the appeal of the Revenue was dismissed, while the appeal of the assessee was allowed, based on the findings related to the disallowance of bank interest and drawings for the assessment year 2007-08.

In summary, the judgment addressed the maintainability of the Revenue's appeal under CBDT Circular 17/2019 and the disallowance of bank interest and drawings by the CIT(A) for the assessment year 2007-08, providing detailed analysis and legal interpretations for each issue.