Century Sheltors Vs ACIT (CESTAT Bangalore)
CESTAT Bangalore held that amount taxed in the hands of partner u/s 28(v) needs to be allowed in the hands of the firm u/s 40(b) of the Income Tax Act.
Facts- The assesse is a partnership firm carrying on the business of buying, selling and developing immovable property. In these case, assessment orders were framed u/s. 143(3) of the Income Tax Act disallowing the interest on borrowed capital paid to the partners by these firms.
AO noted that a firm and its partners are separate entities for the purpose of taxation; and therefore, regardless of an amount being offered as income in the hands of partners, an expenditure not allowable in the hands of the firm has to be disallowed.
AO held that interest expenditure of Rs 4,80,00,000/- was not allowable, under section 37(1) or section 36(1)(iii), as expenditure was not laid out wholly and exclusively for the purpose of business.
Conclusion- We are of the opinion that since the amount has been taxed in the hands of partners u/s 28(v) of the Act same to be allowed in the hands of the assessee u/s 40(b) of the Act, otherwise it amounts to double taxation.
In the present case, it is not the case of either of the parties’ interest payment is not exceeding the limit provided in section 40(b) of the Act. Hence, we direct the AO to allow the deduction to the extent of limit prescribed in section 40(b) of the Act. It is needless to mention herein that what is allowed in the hands of these assessees u/s 40(b)(iv) of the Act as a deduction, same to be taxed in the hands of the respective partners u/s 28(v) of the Act. In view of the above, we allow the grounds of appeals raised by both the assessees. Ordered accordingly.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
These appeals by above two assessees for the assessment years 2013-14 to 2015-16 are directed against different orders of CIT(A) wherein issues in both the appeals are common in nature. Hence, they are clubbed together, heard together and disposed of by this common order for the sake of convenience.
1.1 For brevity, we consider grounds in ITA No.1073/Bang/2022 for the AY 2013-14, where there is only change in figures in other appeals, which are reproduced below:
1. The ld. CIT(A) has erred in confirming the action of Assessing Officer in making the disallowance of Rs.4,80,00,000/- on account of interest on capital paid to the partner.
2. The Assessing Officer and the ld. CIT(A) have failed to appreciate that the expenditure on interest payment is for the purpose of business and has been incurred on account of commercial expediency.
3. The Assessing Officer and the ld. CIT(A) should have appreciated that the revaluation of assets and consequent credit to the accounts of the retiring partners, as also the payment of interest on capital of the existing partner is in accordance with the accounting principles and in terms of the Partnership Deed.
4. The appellant craves leave to add, alter, substitute or delete 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:
