Muthoot Bankers Vs ITO (ITAT Cochin)
Income Tax Appellate Tribunal (ITAT), Cochin Bench, has ruled in favor of Muthoot Bankers, a finance and money lending firm, allowing a deduction of Rs. 5,00,000 for interest paid to its partners for the Assessment Year 2006-07. The Tribunal’s decision, pronounced on June 13, 2025, sets aside the previous orders of the Assessing Officer (AO) and the Commissioner of Income-tax (Appeals) [CIT(A)], who had disallowed the interest payment.
The appeal originated from an order dated November 25, 2024, issued by the CIT(A), Chennai, which had upheld the AO’s disallowance.
Case Background
Muthoot Bankers filed its income tax return for Assessment Year 2006-07, declaring a total income of Rs. 4,62,590. This return was processed, and a refund was issued. However, the Assessing Officer later observed that the firm’s balance sheet did not show any amount under “partners’ capital account” but indicated a significant credit balance in the “partner’s current account.” The AO concluded that an interest payment of Rs. 5,00,000 to a partner was not allowable as it was deemed unrelated to the income derived by the assessee. Consequently, the assessment was reopened under Section 147 of the Income-tax Act, 1961.
During the subsequent scrutiny proceedings, Muthoot Bankers submitted its partnership deed and an agreement with M/s. Muthoot Fincorp Ltd. The firm clarified that it followed the cash system of accounting, where expenses are claimed only upon actual payment. It was stated that while Rs. 52.82 lakhs was due to the partner at 12% per annum as per the deed, only Rs. 5,00,000 was paid due to liquidity constraints. The assessee cited the Mumbai Bench of the Tribunal’s decision in ITO vs. MM Textiles (31 SOT 207) to support its position.
