Interest paid by firm on debit balance of partner’s current a/c allowed as deduction
Relevant Extract of Order is given below:
7. We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. Before us, Ld. DR for the Revenue has vehemently submitted that Assessing officer in para 3 of the assessment order has discussed the terms of the partnership deed entered into between the partners and has analyzed the same. After reciting the terms of the partnership deed at page 3 of the assessment order in the first para he has reached to the conclusions that the partners cannot go beyond shares mentioned in the agreement and withdraw any benefit from the existing assets and liabilities of the firm. The ld DR pointed out that assessing officer also referred to clause 14 and 16 of the partnership deed and has reached to his conclusion that the partners are not entitled to withdraw money more than their respective shares. The Ld DR further stated that interest on money`s borrowed by the firm and advanced by it in turn to its partners should be inadmissible, therefore, interest earned @ 12% should be charged against the average debit balance of the partner and hence AO has rightly added back of Rs.3,54,24,205/- to the income of the assessee firm, therefore order of the AO must be sustained. On the other hand, ld Counsel submitted before us that as per the partnership Act, 1952, the partners can carry on any business jointly and can also act upon in the manner as they deem fit in the interse relationship between themselves. The partnership deed at no stage lays down that any interest will be payable either on their capital account or on their current account. Once the firm is not paying any interest to the partners on the credit balance as appearing in the partner’s capital account and their current account, there arises no occasion of imputing any interest on the debit balance in any of the partner’s capital account more particularly when overall capital in current account of the partners show a credit balance. Then ld Counsel took us through clause No.10 of the partnership deed which reads as follows:
Clause 10:“No interest will be charged or paid to the partners in respect of balances standing to the debit or credit of their capital account”.
As regards withdrawal/Capital contribution, ld Counsel submitted that once there was no stipulation of charging any interest and then until and unless the partners overall current and capital account combined together does not show a debit balance, no adverse inference should have been called for. The Ld. Counsel further stated that the assessee had filled summary of partner’s capital account for the current year as well as preceding three years before the assessing officer which go on to show that no withdrawals have been effected by the partners who had debit balance in their account rather yearly profits were being credited to the account and the debit balance was reduced from year to year. Moreover, the debit balance in one of the partner’s current account i.e. M/s Calton Hotel Pvt. Ltd is appearing for last several years and the case of the assessee has been under scrutiny and in none of the earlier years any such hypothetical income was taxed in the hands of the assessee firm. Therefore, ld Counsel prayed the Bench that order of ld CIT(A) should be upheld.
8. We note that as per clause 10 of the Partnership Deed, no interest was to be charged or paid to the partners in respect of balances standing to the debit or credit of their capital account. As per Partnership Act, 1952, the partners can carry on any business jointly and can also act upon in the manner as they deem fit in the inter se relationship between them. We note that the debit balance in one of the partner’s current account i.e, Carlton Hotel (P) Ltd, is appearing for last several years and the case of the assessee has been under scrutiny and in none of the earlier years any such hypothetical income has been subjected to tax in the hands of the assessee and therefore, following the principle of consistency, there being no change in the facts and circumstances during the year under consideration, there is no justification of the AO in imputing interest income on the debit balance of the said partner and subjecting the same to tax in the hands of the assessee.
We note that it is a well settled legal position that factual matters which permeate through more than one assessment year, if the Revenue has accepted a particular’s view or proposition in the past, it is not open for the Revenue to take an entirely contrary or different stand in a later year on the same issue, involving identical facts unless and until a cogent case is made out by the Assessing Officer on the basis of change in facts. For that we rely on the order of the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein it was held as follows:
“We are aware of the fact that, strictly speaking, res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter – and, if there was no change, it was in support of the assessee – we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of lncome-tax in the earlier proceedings, a different and contradictory stand should have been taken.”
We are of the view that the above cited precedents on principle of consistency are squarely applicable to the assessee under consideration.
9. We note that Ld CIT(A) has deleted the addition made by AO observing the followings;
“4.3.4. With regard to point (d) on the matter of bringing to tax a notional income, the contention of the assessee’s AR seems to hold much water in as much as the provision of section 5 of the Act does not provide any room for bringing to tax any income by way of notional income.
With regard to point (f) on the matter of debit balance of one of the partners, I find that the impugned debit balance is not a new finding by the AO, rather it has been carried forward from the past several years and there were no additions made on this count by the AO in those years. No doubt the principle of Res Judicata does not apply to lncome Tax proceedings but however, the principle of Consistency has to be adopted when there is no change in the material facts and circumstances of the assessee’s case.
With regard to point (g), the matter has already been dealt with in para 4.3.3.
5. On analyzing the entire gamut of the issue with respect to the material facts on record along with the legal aspects involved and my findings as in the foregoing, ultimately, I find that bringing to tax an amount which is of notional in nature and which was never earned by the assessee cannot stand the test of jurisprudence in the tax regime. Considering the entire facts and circumstances, I do not find any justification in the action of the AO on both facts and law and hence, the addition made on this count is directed to be deleted.”
We have gone through the order of ld CIT(A) and we note that the conclusions arrived at by the CIT(A) are, correct and admit no interference by us. We, approve and confirm the order of the CIT(A).
Tags : Judgement, Appellant Tribunal, Income Tax
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