Does loan transaction between a firm and its partner attract provisions of section 269SS?
The question was raised as to whether a loan transaction between a firm and its partner attracts the provision of Section 269SS of the Income Tax Act.
The Delhi High Court in the case of Commissioner of Income Tax vs. M/s Muthoot Financiers on 3rd February, 2015 passed the judgment to the above effect.
The High Court held that a transaction between a firm and its partners cannot take the color of a loan transaction or that of a deposit and as such, Section 269SS or Section 271D of the Act is not applicable to such situations.
Earlier precedents dealing with similar issues:
Different High Courts such as the Madras High Court in the case of 354 ITR 9 (2013) and the Rajasthan High Court in the case of Commissioner of Income Tax vs. V. Sivakumar, (2008) 304 ITR 172, have held that Section 269SS could not be applied when money is exchanged between a firm and its partners though it is an admitted fact that a partnership firm and individual partners are separate assessees.
The Punjab and Haryana High Court also expressed similar view in the case of the Commissioner of Income Tax vs. Lokhpat Film Exchange (Cinema), (2005) 277 ITR 420 (P&H) and in the case of Commissioner of Income Tax Vs. Saini Medical Store, stating that Section 269SS could not be applied.
The judgment:
The Delhi High Court appreciated that the opposite view was possible. But the view of the three different High Courts including the judgment of the Madras High Court were taken into consideration as the facts were similar to the facts in the present case and the same line of reasoning of the Madras High Court in the case of V. Sivakumar (2013) 354 ITR 9, was followed.
It was evident that any salary, bonus or commission paid by a firm to its partners should be considered as a way of adjusting the amount that must have been contributed to the assets of the partnership firm by such partners.
Applying such principle, the Delhi High Court held that the transaction effected between a firm and its partners cannot take the color of loan and as such, Section 269-SS or Section 271D of the Act does not apply to it.
Provisions contained in section 269SS of the Act:
Section 269SS of the Income Tax Act provides that no person shall take from any other person any loan or deposit otherwise than by an account payee cheque or draft if the amount of such loan or deposit is Rs.20, 000/- or more, or, any due loan or deposit accepted earlier by such person from the depositor amounting to Rs.20, 000/- or more as on the date of taking such loan or deposit.
The provisions do not apply to any loan or deposit taken or accepted from or by, the Government or any banking company, post office or cooperative bank, any corporation formed by any central or state Act or any government company.
