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TMI Blog2019 (7) TMI 938X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the total income of the firm as if it is the income received before such discontinuance. Therefore there cannot be any dispute that the income received during the relevant years is to be charged to tax in accordance with the provisions contained in Section 176(3A). Whether such income received is profit and gains derived out of the business, coming within the purview of Section 28 ? - The receipts in the cases at hand are derived by way of income out of the business activities carried on by the firm before its discontinuance. Therefore it has to be construed that the receipts are profits and gains arose out of the business activity of the firm. Hence the finding of the Assessing Authority as well as the Tribunal that it is not an income coming within the purview of Section 28, as it is not profit or gains arising out of the business, cannot be accepted. The income charged to tax, which were received in the subsequent years of the discontinuance of the business, can only be treated as profit and gains arose out of the business of the firm, coming within the purview of Section 28. Deduction on the payments of interest to partners u/s 40(b) when income was taxed u/s 176 (3A) - HE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7,50,361/- and ₹ 2,21,933/-, as gains out of the business conducted earlier, during the previous years corresponding to the assessment years 2005-06 and 2006-07. The assessee filed returns claiming deduction of expenses to the tune of ₹ 18 lakhs and ₹ 5 lakhs, in the respective years, which pertain to interest paid to its partners which were reflected in the capital account of the partners. The deduction claimed in this regard were disallowed by the Assessing Officer, on holding that, eventhough the income received after discontinuance of business of the firm is taxable under Section 176(3A) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short), such receipts cannot be considered as income derived under Section 28 of the Act. Appeals filed by the assessee before the Commissioner of Income Tax (Appeals) were allowed. It was found that the payment of interest made to any of the partners can be disallowed only if it does not relate to any period falling prior to or after the date of the partnership deed or if the payment was not authorised under the terms of the partnership or if it is not in accordance with any earlier partnership deed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputed contentions raised as above, the following questions of law arise for consideration :- (1). Whether payment of interest made to the partners of the firm, after discontinuance of its business, is an allowable deduction falling within the purview of Section 40(b) of the Act? (2). Whether the claim of deduction with respect to payment of interest made to the partners can be disallowed, with respect to a firm which discontinued its business activity, under Section 176 (3A) of the Act? 6. Heard Adv. Nisha John appearing for the appellant and Sri P.K.Ravindranatha Menon, Senior Counsel for Government of India (Taxes) on behalf of the respondents. 7. Section 189 of the Act provides that, where any business carried on by a firm has been discontinued, the assessment shall be made on the total income of the firm as if no such discontinuance had taken place. It provides that, all the provisions of the Act including the provisions relating to levy of penalty or any other sum chargeable under any provisions of the Act shall apply, so far as may be, to such assessment. Therefore it is evident that, with respect to a firm which discontinued its business, the assessment need to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not an income coming within the purview of Section 28 of the Act, as it is not profit or gains arising out of the business, cannot be accepted. Therefore we are inclined to hold that the income charged to tax, which were received in the subsequent years of the discontinuance of the business, can only be treated as profit and gains arose out of the business of the firm, coming within the purview of Section 28 of the Act. 9. Next question to be decided is whether the assessee is entitled to claim deduction on the payments of interest made to the partners, under Section 40(b) of the Act. Section 40 of the Act carves out exemptions with respect to allowable deductions enumerated under Sections 30 to 38 of the Act. Sub-clause (b) (iv) of Section 40 provides that, in the case of a firm which is assessable as such, payment of interest to any partner which is authorised in accordance with the terms of the partnership deed, and relating to any period falling after the date of such partnership deed, cannot be allowed as deduction in so far as such amount exceeds the amount calculated at the rate of 12% simple interest per annum. There is nothing to indicate that in the case of an assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X
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