If money exchanged between partners and partnership firm,provisions of section 269SS would not be violated.

Case: Commissioner of Income-tax vs. Muthoot Financiers

Facts:  

The assessee being a firm was engaged in the business of banking. It was registered under the Kerala Money Lending Act. Notice under Section 148 of the Act was issued to the assessee. During the assessment proceedings, it was found that the firm had accepted payments from the partners in cash.

The AO was of view that the partners and the firm being two distinct and separate entities/persons and therefore, Section 269-SS of the Act has been violated. Thus, he imposed penalty under section 271D.

The Commissioner (Appeals) upheld the order of the Assessing Officer.

The Tribunal viewed that the amount brought by the partner to the firm cannot be said to be a loan. It is also not in dispute that the amount taken is capital of the firm in view of the language of the Section 269-SS. Thus, the amount brought by the partner to the firm in these circumstances, be it in cash cannot be said to have violated the terms of statute.

Held:

The High Court observed whether the a transaction between the firm and the partner the provision of section 269SS would be attracted and if section 269SS was attracted and therefore violated. The Court said that it is clear that any interest, salary, bonus, commission or remuneration paid by a firm to any of its partners should be regarded as a mode of adjusting the amount that must have been taken to have been contributed to the partnership assets by a partner.

Applying this principle, it is opined that the transaction effected in these cases cannot partake the colour of loan or deposit and as such, section 269SS nor section 271D would come into play. The transaction was bona fide and not aimed to avoid any tax liability.

In view of aforesaid, it is held that the appeal filed by the revenue is devoid of any merit and, same is accordingly dismissed.

Thus, partners introducing capital in the firm shall not be deemed as loan.

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