Interest paid to deceased partner can’t be disallowed if book entry passed on year end.

Interest paid to legal heirs of deceased partner cannot be disallowed merely on ground of passing book entry on year end – ITAT

ABCAUS Case Law Citation
ABCAUS 3637 (2023) (01) ITAT

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance of interest paid to the legal heirs of the deceased partners.

The assessee was a partnership firm. One of the partners of the firm died during the relevant Assessment Year.

The firm treated the credit balance in the capital account of the deceased partner as loan by passing the book entry as on 31^st March and paid interest on such loan which was claimed as deduction.

Though the Assessing Officer (AO) accepted the fact that amount on which interest is claimed will become borrowed fund, but was of the view that since the transfer entry in books of account has been passed on the year end, the interest will be allowed in subsequent year and not in the year under consideration.

The CIT(A) observed in the impugned order that the payment of interest to the legal heirs does not fall under section 40(b)(iv) of the Income Tax Act and it can be considered under section 36(1)(iii)  or section 37 of the Income Tax Act. However, the CIT(A) directed the AO to consider the claim as per law.

The Tribunal observed that though the CT(A) had noted that the mere date of passing of entry will not change the character as the amount was never withdrawn from the firm.

The Tribunal observed that the CIT(A) has no jurisdiction to remand  the matter therefore, the impugned order of the CIT(A) qua this issue was not inconformity with provisions of section 250 and 251 of the Act.

The Tribunal opined that after the death of the partner of the firm this amount ceases to be the credit in the capital account of the partner and consequently takes the character of loan from the deceased partner / legal heirs of the deceased partner.

The Tribunal further stated that the capital introduced by a partner of the partnership firm is always for business purposes and it is not an amount which is kept with the partnership firm only for earning the interest because it was also the need of the partnership firm for doing the business by utilizing the said amount.

The Tribunal further observed that the claim of interest paid to the legal heirs which was in the nature of loan and the interest was already subjected to TDS under section 194A of the Act,  therefore the same cannot be disallowed merely on the ground of passing an entry on year end or on the ground that it was not an loan amount.

Accordingly, the impugned order of the CIT(A) was modified and the matter was remanded to the Assessing Officer for re-adjudication of this issue as per law.

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