Shri. S. P. Hombanna Vs. Income-tax Officer (ITAT Bangalore)
Ld. AR has submitted that the assessee is a partner in Soundarya Constructions and has filed the return of income claiming the deduction of interest paid on loan amount of 11,45,607/-. It was also the case of the assessee that in the previous years the AOs have allowed the deduction of interest paid on loan amounts. However in the present assessment year, the AO has declined this amount. It was submitted that this is required to be allowed in view of the conjoint reading of Section 10(2A) r.w.s. 28 (v) and section 36(1)(iii) of the Act. It was the contention of the Ld. AR that as per section 36, the amount of interest paid in respect of capital borrowed for profession / business is required to be allowed. It was submitted that the assessee’s income from the firm is required to be taxed as income u/s. 28 as income from business profit for earning salary / remuneration by the partner. As assessee has made the capital contribution to the firm therefore the assessee is entitled to deduction for the interest paid by the assessee.
On the other hand the Ld. DR relied upon the CIT (A)’s order and submitted that this interest payment cannot be permitted to be deducted against the remuneration earned by the assessee. It was submitted that the assessee was a working partner of the firm and the income earned by the assessee has no correlation with the capital contribution made by the assessee.
08. We have heard the rival contentions and perused the material on record. In the present assessment year the assessee had received a sum of Rs. 14,40,512/- and remuneration of Rs. 9,87,295/-. Clause (5) of the partnership deed date 06.10.1994 provides for the remuneration of the partners. The same is reproduced herein below :
Remuneration to Pareners :
All the partners shall be working partners of the firm being actively engaged in the conduct of the business of the firm and they shall be paid remuneration for the same. The total remuneration payable to all the partners put together shall be the aggregate of the amounts mentioned under A, B & C below :
|On the first Rs. 75,000/- of the book profits of the firm or in the case of loss||Rs. 50,000/- or at the rate of 90% of the book profit whichever is more|
|Next Rs. 75,000/- of the book profits||60%|
|Balance of book profits||40%|
Book Profits : The term book profits means net profits in the profit and loss account of the firm computed in the manner laid down in chapter 4D of the Income Tax Act 1961 as increased by the amount of remuneration paid / payable to the partners actually charged to the profit and loss account of the firm.
Clause (6) of the partnership deed which provides for interest on capital reads as under :
Interest on capital : The partners will be entitled to interest on their capital at the rate of 18% p.a.
The income received by the assessee as remuneration from the firm was only Rs. 9,87,295/-, which was in terms of clause (5) of the partnership deed. Reading of clause 5 make it clear the the income of the partner, i.e., the assessee before us, was not dependent upon the capital brought in by the partner in the firm. If the partner is bringing in capital, the partner is entitled to interest at the rate of 18% p.a on the capital so brought in, thus bringing more capital will not automatically lead to increase in income. Thus there was no justification and correlation between the income earned by the partner as remuneration under clause (5) of the partnership deed, with the capital contribution made by the assessee in the firm. As there is no correlation or nexus between the capital contribution and the remuneration, it cannot be said that the assessee is entitled for the deduction u/s. 36 of the Act. For the purposes of invoking Section 36, it is essential that the amount of interest paid was in respect of the capital borrowed for the purpose of business or profession. Further interest-earning clause for the capital contribution is different from the remuneration of the partners. Hence it cannot be said that the partnership income had been earned only on account of capital contribution made by the partner or it was dependent upon capital contribution by the partners. In view thereof the order passed by the CIT (A) is in accordance with law and does not call for interference by us.
11. The reliance placed by the asses see on the decisions of the ITAT, Mumbai bench in the case of Santosh Kumar Agrawal v. ACIT [72 TTJ453] and Sudhir Dattaram Patil v. DCIT [2 SOT 678], are not applicable to the facts of the assessee. In the said two decisions the facts are not similar to the present case. The terms and condition of the partnership deed in the present case were the guiding factors for determining whether the deduction claimed u/s. 36 were relatable to the remuneration received by the partner of a firm from such firm. In our considered opinion, if the relevant clauses of the partnership deed provides for payment of remuneration which is independent and separable from the capital contribution made by the partners in the firm and the partnership deed provides for the payment of interest on such contribution, in that eventuality the deduction u/s. 36 against the remuneration received by the partners cannot be permitted. The deduction of interest paid can only be permitted if the assessee is receiving the interest income from the capital contribution made by him. In view thereof, we find that the ground raised by the assessee for allowing the deduction of Rs. 9,87,295/- is without any merit. Accordingly, we dismiss this ground.