Savla Agencies Vs JCIT (ITAT Allahabad)
ITAT Allahabad held that the interests on the credit balance in the capital account of the partners of the firms has to be calculated on the actual duration of the credit remains in the capital account and not on opening or closing day of financial year.
Facts- The matter here relates to disallowance of interest on capital accounts of the partners of the firms. Notably, the assessee calculated the interest on the daily product basis whereas the AO took the closing balance in the capital account and re-computed the allowable interest under section 40(b)(iv) of the Income Tax Act read with Clauses of the partnership firm which allows interest payment to the partners @ 12%. CIT(A) dismissed the appeal filed by the assessee. Being aggrieved, the present appeal is filed.
Further, AO also disallowed the claim of interest payment to the legal heirs of the deceased partners.
Conclusion- Held that the interests on the credit balance in the capital account has to be calculated on the actual duration of the credit remains in the capital account and not on opening or closing day of financial year. In such a case, if a partner keeps a credit balance on the opening day but subsequently withdraws the amount then payment of interest on the opening balance will not be proper and justified. Similarly, if the partner withdraws the amount at the fag end of the financial year then the payment of interest only on the closing balance would also be not proper and justified when a credit balance remained for the whole financial year except on the last date of financial year.
Therefore, the approach of the Assessing Officer in calculating the interest by considering only the closing balance as on the end of the financial year is not proper and justified. Accordingly, so far as the interest calculated by the assessee firm on daily product basis is concerned, the same is proper and justified.
Further held that the claim of interest paid to the legal heirs on this amount which is in the nature of loan and the interest was already subjected to TDS under section 194A of the Act, the same cannot be disallowed merely on the ground of passing an entry on 31st March, 2011 or on the ground that it is not an loan amount.
