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TMI Blog2023 (6) TMI 1110X X X X Extracts X X X X X X X X Extracts X X X X ..... s by these firms to be allowed as a deduction while computing the income of these firms. However, the same shall be limited to the extent of allowability u/s 40(b) of the Act. in the present case, in the assessment years 2011-12, 2012-13, 2016-17 and 2017-18 has been allowed. The same cannot be questioned in the assessment years 2013-14 to 2015-16. Similarly, in the case of M/s. Century Silicon City it has been allowed in the assessment years 2012-13, 2016-17 2017-18. Hence, it cannot be questioned in the assessment years 2013-14 to 2015-16 and the revenue cannot be allowed to take different view in different assessment year as the judicial discipline requires consistency in these proceedings. On this count also, this disallowance is not justified. From the proviso to section 28 (v) of the Act, it is seen that if there is any disallowance of interest in the hands of the firm due to clause (b) of section 40, income in the hands of the partner has to be adjusted to the extent of the amount not so allowed to be deducted in the hands of the firm. Hence, it is seen that the operation of the proviso to section 28(v) of the Act will come into play only if there is some disallowance in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elete any or all of the grounds of appeal urged above. 2. The facts of the case are that the assessees herein are partnership firms in Real Estate business and filed returns of income for these assessment years as follows: (i) Century Shelters, Bangalore: Sl. No. Assessment year Declared income (Loss) (Rs.) Claim of payment of interest (Rs.) 1. 2013-14 (-)7,31,59,321/- 4,80,00,000/- 2. 2014-15 (-) 8,19,56,557/- 4,89,13,370/- 3. 2015-16 (-) 9,15,43,286/- 5,36,92,085/- Total 15,06,05,455/- (ii) Century Silicon City, Bangalore: Sl. No. Assessment year Declared income (Loss) (Rs.) Claim of payment of interest (Rs.) 1. 2013-14 (-) 19,59,61,563/- 9,13,90,665/- 2. 2014-15 (-) 21,94,64,054/- 11,47,14,845/- 3. 2015-16 (-) 24,58,17,366/- 12,85,55,078/- Total 33,46,60,580/- 3. In these cases, assessment orders were framed u/s 143(3) of the Income-tax Act,1961 ['the Act' for short] disallowing the interest on borrowed capital paid to the partners by these firms. While disallowing interest payment, the A.O. enquired with the assessees the necessity of paying such interest to the partners. The assessees herein explained that the said amount wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the retiring partners, has not been utilized wholly and exclusively for the purpose of the business. Therefore, the proportionate interest of Rs. 4,80,00,000/- on the said capital cannot be said to be incurred wholly and exclusively for the purpose of business. Therefore, AO has held that the interest expenditure of Rs. 4,80,00,000/- was not allowable, under section 37(1) or section 36(1)(iii), as the expenditure was not laid out wholly and exclusively for the purpose of business. 3.2 Same is the position in the case of M/s. Century Silicon City, Bangalore. Against this, assessees carried on appeals before the ld. CIT(A) in all these assessment years. The ld. CIT(A) observed that there is no economic rationale for the transfer of sum of Rs. 20 Crore each by the assessee firm to the retiring partners. The transaction has been arranged only with a view to transfer the total amount of Rs. 40 Crore from the company M/s Century Real Estate Holdings Pvt Ltd. to its Directors, Shri P. Ravindra Pai and Shri P. Ashwin Pai, who are also the retired partners, by using the assessee firm as a conduit. The ld. CIT(A) observed that there are certain glaring discrepancies, in the facts noted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Survey No 116/2 totally measuring 1 Acre 20 Gunthas) as capital to the assessee firm. However, it is ironical that upon revaluation of the properties vested with the firm (which included the property contributed by Shri A. Ramkrishna), no amount from the Revaluation account was transferred to the current or capital account of Shri A. Ramkrishna, though he was continuing as partner to the firm as on the date of revaluation. (iv) The revaluation of properties was done on 01.04.2010. In the same Financial Year 2010-11, five partners of the firm, namely Shri P. Ravindra Pai, Shri P. Ashwin Pai, Shri Dev S Patel, Shri Dayananda Pai and Shri P Satish Pai retired from the partnership, as per the reconstitution and retirement deed dated 18.01.2011. However, the gains of Rs. 40 Crore arising on Revaluation were transferred to the capital accounts of Shri P. Ravindra Pai and Shri P. Ashwin Pai only (in equal ratio), and not to other retiring partners. (v) Shri P. Ravindra Pai and Shri P. Ashwin Pai are also the Directors in the company M/s Century Real Estate Holdings Pvt Ltd, which is the majority stake holder in the assessee firm. It is holding 51% in the firm, as on the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposed to be delivered by Justice Ranganath Misra in the aforesaid case, has also made very pertinent observations regarding the consequences of tax avoidance and duty of Courts to intervene therein;- "The evil consequence of tax avoidance are manifold: (i) there is substantial loss of much needed public revenue particularly in a welfare State like ours; (ii) there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money directly causing inflation; (iii) there is "the large hidden loss" to the community by some of the best brains in the country being involved in the perpetual war waged between the tax avoider and his expert team of advisers, lawyers and accountants on the side and the tax-gatherer and his perhaps not so skillful, advisers on the other side: (iv) there is the sense of injustice and inequality which tax avoid ancearouses in the breasts of those who are unwilling or unable to profit by it and (v) last but not least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guideless, good citizens from those of the "artful ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the partnership deed, or relates to some other period, or exceeds certain prescribed monetary limit etc. The issue at hand in the instant case is the admissibility or otherwise of interest expenditure on capital in the hands of partnership firm. It is clear from the overall scheme of the provisions under Chapter IV (Computation of Business Income) that the claim of deduction of interest on capital has to be examined first under the specific provisions of section 36(1)(iii), and then under the residuary provisions of section 37. In the event that the interest expenditure per se is found to be admissible under any of these provisions, then, in the case of partnership firms, it has to further found whether the claim is not expressly inadmissible, either in whole or in part, by virtue of applicability of clause (b) of section 40. Therefore, it is not correct to state that admissibility of interest to partners of firm is governed by section 40b, and therefore the same cannot be disallowed under section 36(1)(iii). Section 40 is not a standalone section, it has to be read with section 30 to section 38. 3.7 The ld. CIT(A) observed that this issue came up for adjudication before the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions 40A and 438 deal with Business Disallowances. Keeping in mind the said scheme the position is that Sections 30 to 38 are deductions which are limited by Section 40. Therefore, even if an assessee is entitled to deduction under Section 36(1)(iii), the assessee(firm) will not be entitled to claim deduction for interest payment exceeding 18/12% per se. This is because Section 40(b)(iv) puts a limitation on the amount of deduction under Section 36(1)(iii). 15. It is vehemently urged on behalf of the assessee that partner's capital is not a loan or borrowing in the hand of a firm. According to the assessee, Section 40(b)(iv) applies to partner's capital whereas Section 36(1)(iii) applies to loan/borrowing. Conceptually, the position may be correct but we are concerned with the scheme of Chapter IV-D. After the enactment of FA 1992, Section 40(b)(iv) was brought to the statute book not only to avoid double taxation but also to bring on par different assesses in the matter of assessment. Therefore, the assessee-firm, in the present case, was required to prove that it was entitled to claim deduction for payment of interest on capital borrowed under Section 36(1)(iii) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, no corresponding adjustment of interest income assessable in the hands of partners of the firm is permissible in the instant case, as the disallowance of interest has not been made under clause (b) of section 40 and as such, proviso to section 28(v) does not apply. This view has been upheld by ITAT, Ahmedabad Bench in case of Shankar Chemicals Works Vs ACIT (2011) (12 taxmann.com 461) (Ahmedabad-Trib.). The relevant part of the judgement is reproduced as under, - "From the proviso to section 28(v), it is seen that if there is any disallowance of interest in the hands of the firm due to clause (b) of section 40. income in the hands of the partner has to be adjusted to the extent of the amount not so allowed to be deducted in the hands of the firm. Hence, it is seen that the operation of the proviso to section 28(v) will come into play only if there is some disallowance in the hands of the firm under clause (b) of section 40 but in the instant case, the disallowance is under section 14A and not under section 40(b) and, therefore. the proviso to section 28(v) is not applicable and the partner of the firm did not deserve any relief on this account." 3.10 In view of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under section 30 to 38 therefore same cannot be disallowed in any other sec that is 36(i)(iii) or sec 37 of the Act and further sec 40 is an overriding section which provides that notwithstanding anything contained in sec 30 to sec 38. Hence clause (b) of the sec 40 provides that any payment of interest, bonus, remuneration etc. shall be deductible if following conditions are satisfied and further to allow the payment of interest. a) It should be authorized by the partnership deed. b) It should not pertain to a period prior to partnership deed. c) It should not exceed the permissible limit. 4.3 Same is the position in the case of M/s. Century Silicon City for the assessment year 2013-14, 2014-15 and 2015-16. Now the contention of ld. AR is that this payment has been made in the course of business for the purpose of carrying out the business of the assessee. Now the question that arises for our consideration is whether payment of interest by these two partnership firms towards use of partners' capital is in the nature of "expenditure" or not for the purpose of section 36(1)(iii) read with section 40(b) of the Act or whether interest payment is allowable under the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC), wherein held as under: "11.4 Section 4 of the Indian Partnership Act 1932 defines the terms partnership, partner, firm and firm name as under : "Partnership" is the relation between persons, who have agreed to share the profits of a business, carried on by all or any of the partners acting for all. Persons who have entered into partnership with one another are called individually 'Partners' and collectively a 'firm' and the name under which their business is carried on is called the 'firm name." Thus, it is clear from the above that firm and partners of the firm are not separate person under Partnership Act although separate unit of assessment for tax purposes. There cannot therefore be a relationship inferred between partner and firm as that of lender of funds (capital) and borrowal of capital from the partners, hence section 36(1)(iii) is not applicable at all. Section 40(b) is the only section governing deduction towards interest to partners. In the light of what is already noted above that firm and partners not being two separate persons, the question of borrowing capital by the firm from its partners does not arise at all and, therefore, section 36(1)(iii) is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) Vide deed of Reconstitution and Retirement of partnership dated 18.1.2011, clause no.13 reads as follows: "Clause 13. The partners shall be paid such other remuneration, interest and commission as may be mutually agreed to upon by the parties time to time." 4.9. (a) In case of M/s. Century Silicon City, the partnership deed dated 21.3.2007 clause no.15 reads as follows: "Clause 15. In all matters not expressly provided for herein, the provisions of the Partnership Act, 1932 shall apply." (b) The deed of Retirement of Reconstitution of partnership dated 7.8.2007 clause no.15 reads as follows: "Clause 15. The partners shall be paid such other remuneration, salary as may be mutually agreed to upon by the partners from time to time. (c) "Clause 21. In clause in the partnership deed may be varied with mutual consent of all the parties." (d) Consequent to this, the assessee firm passed the following resolution of First deed on First day of April, 2010, which reads as follows: (e) On the basis of above Resolution, M/s. Century Silicon City has paid the interest to partners in these assessment years. Section 40(b) of the Act reads as follows:" "In the case of any fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as a deduction in computing the income of these assessees. Further, it has to be noted that the interest has been paid to the partners by these two firms on the opening balance standing at the beginning of the each assessment year and the quantification of the amount of respective partners of these firms are quantified not in these assessment years under consideration and which has been quantified when they brought in the capital to the firm either in cash or kind. As held by the jurisdictional High Court in the case of CIT Vs. Sridev Enterprises cited (supra) that status of the amount standing as outstanding on the first day of accounting year is the amount that stood outstanding on the last day of the previous accounting year; therefore, its nature and status cannot be different on the first day of current accounting year, from its nature and status as on the last day of previous accounting year. In the present case, in the assessment years 2011-12, 2012-13, 2016-17 and 2017-18 has been allowed. The same cannot be questioned in the assessment years 2013-14 to 2015-16. Similarly, in the case of M/s. Century Silicon City it has been allowed in the assessment years 2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whole amount of interest expenditure incurred for this purpose will be subject to disallowance under section 14A of the Act because the same has been incurred for earning exempt income. Hence, the actual earning of exempt income is not relevant. In the earlier period, when dividend income was not exempt, interest expenditure incurred on borrowed funds used for investment in shares was held to be fully allowable expenses, even if, there was no actual receipt of dividend or insufficient/meagre amount of dividend income. The logic was that the entire expenditure has been incurred for earning taxable dividend income and hence, it is allowable, even if there is nil or small amount of dividend income and hence, it is allowable, even if there is nil or small amount of dividend income. This aspect has been approved by various courts and hence, the same judgement supports this view also that even in case of 'nil' or small amount of dividend income, the entire interest expenditure incurred for making investment in shares is to be considered as expenditure incurred for earning exempt income and the same has to be disallowed under section 14A of the Act. Hence, this plea is also rejected."Bein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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