Hon’ble ITAT Mumbai in case of Ishwardas Satyanarayan Gupta Vs ITO (ITAT Mumbai) ITA No. 2058/MUM/2023 Date of Order: 15-09-2023held that the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital u/s. 67(3) of the Act.
15. On the other hand, Ld. DR relied on the orders of the lower authorities, particularly Page No. 9 of the Appellate Order where the Ld.CIT(A) has questioned the genuineness of the loan taken by the assessee from the various creditors.
16. Considered the rival submissions and material placed on record, we observe that assessee has paid interest of ₹.31,55,304/- to the various loan creditors and only source of income was remuneration from the partnership firm and it is observed that assessee has introduced capital in the partnership firms by the name M/s. Sri Jagannath Steel Co. and M/s.Gurunanak Metal Works. The main source of income is only from these firms and income from other sources. The assessee has also brought to our notice the funds received from loan creditors and also transferring the same amount to the partnership firm. Since the main source of income to the assessee is only the remuneration and profit earned from the partnership firm and whatever the capital borrowed by the assessee was directly introduced in the partnership firm. By looking at the balance sheet, submitted before us, we observe that assessee has own capital and borrowings from family members which is equivalent to the property owned by the assessee. There is direct link with the loan creditors and the capital introduced in the partnership firm. Therefore, it establishes that the funds borrowed by the assessee is directly introduced in the partnership firm.
17. The next issue is whether the assessee can claim the interest expenditure against the remuneration received from the firm. In this regard, we observe that the Coordinate Bench in the case of Santosh Kumar Agrawal v. ACIT (supra) held as under: –
“2. From the asst. yr. 1993-94, a new scheme of taxation of the firm and partners was introduced and briefly stated according to the new scheme, the firm itself was taxed at the maximum marginal rate and the partners were taxed in respect of their share income. However, the interest and remuneration paid by the firm to its partners which were allowed as a deduction in computing the firm’s taxable income were assessed in the hands of the partners who were in receipt of the same. Sec. 28(v) which was also introduced w.e.f. the asst. yr. 1993-94 provided that any remuneration due or received by a partner of a firm from the firm shall be chargeable to income-tax under the head profits and gains of business or profession’. When the statute has, by fiction, provided that the remuneration received by the partner from the firm is to be assessed under the head ‘business’, any interest paid by the partner for the purpose of earning the remuneration must also be deducted. A fiction must be extended to its logical conclusion and one’s mind shall not boggle down when it comes to the extension of the fiction to all its logical consequences. The objection raised by the Revenue authorities is that the interest is not paid for the purpose of earning the remuneration. The answer to this objection is that strictly speaking, there cannot be a contract of service in law, between a firm and its partners. The firm is not a legal person even though it is recognised as a unit of assessment for the purpose of IT Act. Any payment of salary to a partner is only a mode of sharing the profits.
The salary paid to a partner retains the same character of the income of the firm. These principles have been laid down by the Supreme Court in the case of CIT vs. R.M. Chidambaram Pillal Etc. 1977 CTR (SC) 71: (1977) 106 ITR 292 (SC). It has been held in this decision, that the salary of a partner is only an alias for the return by way of profits for the human capital-sweat, skill and toil–which the partner has brought in for the common benefit. The immediate reason for payment of salary may be the service contract, but the causa causans is the partnership. The Supreme Court held that when an arrangement is made by which a partner works and receives amounts as wages for services rendered, the agreement should in truth be recorded as a mode of adjusting the amount, that must be taken to have been contributed to the partnership’s assets by a partner, who has made what is really a contribution in kind, instead of contribution in money. On this reasoning, the Supreme Court held that what has been paid as salary by the firm to a partner is really the share of profits paid to him. It would appear that the legislature has recognised this principle by enacting a fiction in s. 28(v). If really the remuneration has to be treated as a return of the share of profits by the firm to the partner. It follows that the partner should be entitled to all the deductions which he was hitherto entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital under s. 67(3). Sec. 36(1)(iii) of the Act enacts the same principle. The assessee in the present case is, therefore, entitled to the deduction of the interest paid on monies borrowed for investment in the firm in which he is a partner, against the amount received by him from the firm as remuneration and assessed under the head ‘business’. I direct accordingly and allow the appeals.”
18. From the above, it was held that, salary or remuneration received from the firm is no doubt compensation for the services rendered but it is considered as income from business otherwise as a return of share of profits to the partners of the firm. Therefore, the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital u/s. 67(3) of the Act. Respectfully following the above said decision, even in this case, assessee has introduced the capital in the firm by borrowing funds from various loan creditors, it has direct nexus with the remuneration and other profits earned by the partners. In this case, assessee has earned only remuneration income from the firm and incurred interest expenditure, therefore should be allowed to claim the interest expenditure. Further, we observe that Ld.CIT(A) has not addressed the issue under consideration and took it to a different dimension questioning the genuineness of the loan borrowed by the assessee. However, no concrete findings were given by the Ld.CIT(A) on the borrowings and also did not proceeded to make proper investigation to reach a logical conclusion, rather he proceeded to confirm the additions made by the Assessing Officer. Whereas, the issue raised by the Assessing Officer is only whether the assessee is allowed to claim the interest expenditure against the remuneration received from the firm. In view of our above findings on the issue, we are inclined to allow the appeal filed by the assessee.
19. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 15th September, 2023
