Income Tax Appellate Tribunal - Hyderabad
Architechtural Associates vs The Acit on 3 November, 2004
Equivalent citations: [2005]92ITD479(HYD), [2005]277ITR35(HYD), (2005)92TTJ(HYD)1074
ORDER
D. Manmohan, Judicial Member
1. This appeal by the assessee is directed against the order of CIT(A)-VI, Hyderabad and it pertains to the assessment year 1998-99.
2. As per the partnership deed, the partners are entitled to interest at the rate not exceeding 18% per annum on the capital and other credit balances, Section 40(b) permits deduction of such interest. The assesses claimed deductions of Rs. 80,857/- and Rs. 77,126/- towards interest paid to Sri Anand Sagar and Sri Subhash Narain respectively, partners of the assessee-firm. It may be noticed that the balance standing to the credit of each partner is Rs. 4,87,894/- and Rs. 4,62,362/- as against which they have withdrawn sums of Rs. 3,37,249 and Rs. 3,47,500/- respectively but the interest was calculated on the amount standing to the credit of each partner before deducting the sums withdrawn. Since the interest thereon, as per the working of the assessee, works out to less than 18%, the assesses claimed deduction of-entire interest Under Section 40(b) of the Act. The AO observed that in order to work out the credit balance the withdrawals during the year should be taken into consideration and thus only on the net balance standing to the credit of each, partner interest at 18% was worked out and disallowed excess interest claimed. CIT(A) affirmed the action of the AO and thus the assessee is in appeal before us. The case of the learned counsel is that the remuneration, interest and share of profit which accrued from day to day was withdrawn by the partners, leaving the credit balance intact and thus the AO was not justified deducting the amount of withdrawals from the credit balance in the account of each partner. Learned counsel filed written submissions in support of his contention that so long as the partnership deed authorizes payment of interest and the payment is in accordance with the terms of the deed, disallowance should not be made by adopting hyper technical or legalistic approach. In the alternative, it was contended that the withdrawals spread over the year and sum of digits method should be followed to arrive at the net credit balance of interest thereon whereas the AO followed arithmetically incorrect method in calculation of interest by deducting total withdrawals on one day. It was also contended that the interest disallowed in the hands of firm suffered double tax inasmuch as it was offered to tax in the hands of partners and also taxed in the hands of firm. Interest to partners is nothing but port of the profit of the firm unlike interest to outsiders.
On the other hand, learned DR submitted that even as per the partnership deed the amounts standing to the credit of the partners' capital account should be taken into consideration and not the future, profits etc. Since the partners are entitled to profit etc., at the end of the year when the accounts are finalized, amounts can only be said to have been withdrawn against the balance standing to the credit of each credit of each partner in which event there would be depletion in the credit balance and the assesses having paid interest at less than 18%, only that percentage of interest referable to the net credit balance is allowable as deduction. He thus strongly relied upon the orders of the authorities below.
4. We have carefully considered the rival submissions and perused the record. The following chart shows the capital of each partner and the withdrawals.
Anand Sagar Subash Narain Capital as on 1-4-97 Rs. 4,98,648 Rs. 4,73,107 Amount of withdrawals Rs. 3,37,249 Rs. 3,47,500 Remuneration, interest And share of profit Rs. 3,80,386 Rs. 3,76,654
According to the assessee, withdrawals are from the share of profit, remuneration and interest. It may be noticed that the share of profit is Rs. 1,50,528 per partner. The normal practice in a partnership firm is to prepare the accounts at the end of the year. Even otherwise on each day's transaction it is difficult to arrive at a profit or loss since the profit as understood would be the profit at the end of the year. In the case of Ashokbhai Chimanbhai (56 ITR 42) the Apex Court observed that a partner will not have a right receive profit on the date on which it is actually received or became receivable and such dormant profit or loss cannot be equated to profits charged to tax under the Income-tax Act, by analyzing the concept of accrual of profits of business with reference to method of accounting followed. The Court further observed that profits do not accrue form day to day or even from month to month and unless the right to profit comes into existence, there is no accrual of profits i.e., till the accounts are prepared at the end of the term as agreed. It is not the case of the assessee that as per the partnership deed the partners have agreed to share the profits from day to day or even from month to month basis. In fact there is no calculation provided to the Bench in this regard. The learned counsel merely adopted the final share of profit to explain the withdrawals as though the share of profit was withdrawn by the partners leaving the capital untouched. There is no working as to the date of withdrawals and the date on which the amount of remuneration, interest or profit is accrued to the partners so as to claim that the withdrawals are against the share of profit/remuneration/interest, alleged to have accrued to the partners. The conduct of the assessee not crediting the partners' accounts with the aforementioned amounts on a daily/monthly basis also indicate that as per the partnership agreement the partners have no right to claim share of profit etc., on day to day basis. In such an event of the matter, it would be difficult to hold that the withdrawals are out of share of profit etc., that accrued to the partners. Even with regard to the remuneration the facts placed before us do not indicate as to whether the to whether the partnership deed authorizes the partners to receive remuneration at a percentage of book profit which requires to be worked out at the end of the year or a fixed monthly sum or at least a minimum guaranteed sum. If the remuneration has to be worked out on the book profit which has to be calculated at the end of the year, it cannot be said that remuneration accrued on day-to-day or month to month basis. Similarly, it is not spelt out that interest accrued & receivable on day to day basis. If that be the case, the assesses would become entitled to interest on interest inasmuch as the interest accrued on each day has to be added to the credit balance of each partner's a/c & such credit balance interest has to be paid. Certainly such exercise was not done by the assesses. Under these, circumstances, we are of the view that the interest has to be calculated on the credit balance standing in the name of each partner after deducting the withdrawals. However, the approach of the AO in deducting the entire withdrawals from the opening credit balance is not in conformity with the standard method followed under similar situation, it appears that Banks follow a standard system of calculating interest which could have been adopted by the AO. With these observations we set aside the matter to the file of the AO to work out the eligible interest. With regard to the interest disallowed and taxed in the hands of the firm if the partners feel that it is not taxable in their hands, a suitable claim has to be made before the AO in the case of partners but it cannot be adjudicated in this appeal. Needless to observe that the AO would bear in mind the Fact that no tax can be levied without the authority of low (see Article 265 of the COI) and examine the assessments of the individual partners in that perspective.
5. The appeal filed by the assessee is partly allowed.