2022 (6) TMI 1280 - AT - Income Tax

Disallowance of interest paid on debit balance of the assessee-partner s capital account in the partnership firm - HELD THAT - Proviso to section 36(1)(iii) stipulates that the amount of interest paid in respect of capital borrowed for acquisition of an asset for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which the asset was first put to use, shall not be allowed as deduction . This proviso makes a pitch for disallowance of interest only when the asset acquired with the borrowed funds is not put to use. No disallowance can be made if the borrowed funds are utilized for acquiring an asset which does not produce any income albeit it has been put to use. The relevant criterion for disallowing interest is to examine the date up to which the asset acquired with the borrowed funds was first put to use. If the asset has been actually put to use, deduction of interest cannot be denied even if no income resulted from such an asset. The ld. CIT(A) has gone with the income criterion and not the user criterion for disallowing the interest, which is not justified. AR submitted that the assessee acquired his share in the running hotel in the year 2013, however, failed to place any concrete evidence either before the AO or the ld. CIT(A) to demonstrate the activities of the hotel as to whether it was really in operation during the year. Similar position obtains before the Tribunal as well. Since the assessment order was passed u/s.144 and the assessee could not lead evidence before the authorities below in this regard, I consider it expedient to remit the matter to the file of the AO for examining the question of deductibility of interest on the touchstone of the discussion made herein above. Needless to say, the assessee will be allowed a reasonable opportunity of hearing to put forth the relevant evidence in support of his case. Assessee appeal is allowed for statistical purposes.

Summary

Issues:
Confirmation of disallowance of interest paid on debit balance of the assessee-partner's capital account in the partnership firm.

Analysis:
The appeal was against the disallowance of interest paid on the debit balance of the assessee-partner's capital account in a partnership firm. The Assessing Officer observed that the assessee received remuneration from the firm and paid interest on the debit balance of the capital account. The assessment order under section 144 of the Income-tax Act, 1961 was passed as necessary documents were not provided. The CIT(A) upheld the disallowance. The assessee contended that interest paid to the firm should be allowed as deduction similar to interest received from the firm. However, the Tribunal disagreed, stating that interest deduction is governed by section 36(1)(iii) and not section 28(v) which deals with taxing interest income from a firm. The Tribunal cited the legal maxim "generalia specialibus non derogant" to emphasize that special provisions override general ones.

The Tribunal further explained that section 36(1)(iii) allows deduction for interest paid on capital borrowed for business purposes. If the capital is borrowed for non-business purposes, interest payment does not qualify for deduction. The Tribunal highlighted the importance of the business purpose criterion for interest deduction. The assessee claimed that the amount withdrawn from the firm was used for purchasing shares in a hotel for business purposes. However, the CIT(A) denied the deduction as no income from the hotel was shown. The proviso to section 36(1)(iii) disallows interest deduction if the asset acquired with borrowed funds is not put to use. The Tribunal criticized the CIT(A)'s focus on the income criterion instead of the user criterion for disallowing interest.

The Tribunal noted that the assessee failed to provide concrete evidence regarding the hotel's operational activities to support the claim. Due to the lack of evidence presented before the authorities, the Tribunal decided to remit the matter back to the Assessing Officer for re-examination. The assessee will be given a chance to present relevant evidence supporting the deduction claim. Ultimately, the appeal was allowed for statistical purposes, emphasizing the need for a thorough examination of the deductibility of interest paid on the capital account balance in the partnership firm.