2023 (3) TMI 469 - AT - Income Tax

Deduction u/s 57(iii) - interest expenses on the borrowed funds which was diverting the interest bearing funds - assessee borrowed funds which have been invested in the firm M/s. Sweeto Apparels - HELD THAT - It is pertinent to note that the mention of the assessee that the loan was taken for expansion of business from A.Y. 2007-08 onwards the fact remains that the position in A.Y. 2013-14 has remained similar in present AY 2015-16 as relates to capital investment in purchase of new shops. Tribunal in SHRI RASHMIN RAMNIKLAL VORA 2019 (6) TMI 1695 - ITAT AHMEDABAD categorically mentioned that there was debit balance of assessee s capital account in the partnership firm as the opening debit balance and closing debit balance was having a major difference as closing debit balance was much more higher. The assessee has paid net interest to the partnership firm but at the same time assessee has withdrawn more money from the partnership firm that actually invested in the partnership firm. Tribunal has also distinguished the factual aspect in assessee s case and in case in CIT v/s. Rajendra Prasad Moody 1978 (10) TMI 133 - SUPREME COURT The facts are exactly identical to A.Y. 2013-14 and therefore, it is noticed that as per specific provision of Section 28(v) any interest, salary etc. earned by a partner from a partnership firm is taxable under the head profit and gains of business or profession and there is no question of categorizing it under the head income from other sources. Thus, the claim of the assessee for deduction u/s 57(iii) is not justifiable and has rightly been disallowed by the AO and the CIT(A). Thus, the appeal of the assessee is dismissed.

Summary

Issues:
1. Interpretation of judgments related to income tax law.
2. Disallowance of interest expenses under Section 57(iii) of the Income Tax Act.
3. Taxability of income earned by a partner from a partnership firm.

Interpretation of Judgments Related to Income Tax Law:
The appeal challenged the order passed by the Ld. CIT(Appeals) for A.Y. 2015-16, arguing that the Commissioner Appeals erred in interpreting the judgment of the Hon'ble Supreme Court in the case of CIT v. Rajendraprasad Moody, Calcutta. The appellant contended that the Commissioner Appeals wrongly confirmed an income amount different from the one initially returned, emphasizing on the purpose of expenditure under Section 57(iii) of the Act. The appellant cited legal precedents to support the claim that the purpose of expenditure, not the actual income earned, is crucial for deduction under Section 57(iii).

Disallowance of Interest Expenses under Section 57(iii) of the Income Tax Act:
The Assessing Officer disallowed interest expenses claimed by the assessee under Section 57(iii) of the Act, as the borrowed funds were diverted for investments in a partnership firm. The appellant argued that the interest expenses were incurred wholly and exclusively for making or earning income, citing the expansion of the partnership business and subsequent losses. However, both the Assessing Officer and the CIT(A) upheld the disallowance, emphasizing that the expenditure did not lead to income under Section 28(v) of the Income Tax Act, which taxes partner's earnings from a partnership firm under the head profit and gains of business or profession.

Taxability of Income Earned by a Partner from a Partnership Firm:
The appellant, a partner in a firm, claimed that the losses debited to their account were due to business expansion and were linked to the income sought to be earned. The appellant argued that interest paid on personal borrowings for investment in the partnership firm was a legitimate expenditure under Section 57(iii), supported by legal decisions and past income sources. However, the Tribunal, based on previous rulings and the specific provision of Section 28(v), held that partner's earnings from a partnership firm are taxable under the head profit and gains of business or profession, not as income from other sources. The Tribunal dismissed the appeal, noting the similarity of facts to a previous case and the non-justifiability of the deduction claimed under Section 57(iii).

In conclusion, the ITAT Ahmedabad dismissed the appeal, upholding the disallowance of interest expenses and emphasizing the taxability of a partner's income from a partnership firm under specific provisions of the Income Tax Act. The judgment highlighted the importance of interpreting legal precedents accurately and applying the relevant sections of the Act to determine the tax treatment of expenditures and earnings in partnership businesses.