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Income Tax Appellate Tribunal, AHMEDABAD “SMC” BENCH
Before: Shri Rajpal Yadav & Shri Amarjit Singh
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH Before: Shri Rajpal Yadav, Judicial Member And Shri Amarjit Singh, Accountant Member ITA No. 1066/Ahd/2017 Assessment Year 2013-14
Shri Rashmin Ramniklal The ITO, Vora 2/3, Karmyog Flats, Ward-1(2)(5), St. Xaviours College Vs Ahmedabad corner, Ellisbridge, (Respondent) Ahmedabad PAN: AALPV6701G (Appellant)
Revenue by: Shri Virendra Singh, Sr. D.R. Assessee by: Shreekant S. Shah, A.R. Date of hearing : 13-06-2019 Date of pronouncement : 18-06-2019 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:- This assessee’s appeal for A.Y. 2013-14, arises from order of the CIT(A)-10, Ahmedabad dated 21-02-2017, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
The assessee has raised following grounds of appeal:- “1. The order of the Commissioner of Income-Tax (Appeals)-IO referred to as "the Commissioner (Appeals)" is bad in law and erroneous as to fact. 2. The Commissioner (Appeals) erred in confirming loss of Rs.2,94,917/- in place of loss of Rs.14,97,969/- returned. " 3. The Commissioner (Appeals) ought to have appreciated that assessee is a partner in M/s. Sweetoo Apparels in which he is 40% partner and for huge future expansion of the firm he had to invest and bring
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proportionate capital by own or borrowed funds by paying interest, and that because of huge expansion of the firm, it had made loss on account of bank interest and depreciation which turned his capital in a negative balance. 4. The Commissioner (Appeals) ought to have observed from the details on record that there is a huge potentiality of higher income. 5. The Commissioner (Appeals) ought to have followed ratio of Hon'ble Supreme Court in the case of CIT v/s Rajendraprasad Mody, Calcutta 115 ITR 519 (SC) that "It is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(Hi) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earned of income. Section 57(iii) does not require that purpose must be fulfilled in order to qualify the expenditure for deduction.” 6. The Commissioner (Appeals) ought to have followed the ratio of Apex Court in the case of Sheth R. Dalmia v/s CIT (1977) 110 ITR 644 laying down that the dominant purpose of the expenditure incurred must be to earn income. The connection between the expenditure and the earning of income need not be direct even on indirect connection should prove the nexus between the expenditure incurred and the income. 7. The Commissioner (Appeals) erred in observing that interest paid is a capital expenditure. 8. The Commissioner (Appeals) ought to have restricted the disallowance of interest only on the opening balance in the capital account.”
The grounds of appeal filed by the assessee are interconnected to the common issue of disallowance of interest u/s. 57(iii) of the act in respect of unsecured loan obtained for investment in the partnership firm.
The fact in brief is that return of income declaring loss of Rs. 14,97,969/- was filed on 27th Sep, 2013. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 3rd Sep, 2014. During the course of assessment on verification of computation of total income filed by the assessee, the assessing officer has noticed that assessee shown income of Rs. 810 from interest earned on saving bank account. Against the aforesaid income, the assessee has claimed deduction of Rs. 12,03,052/- on account of interest paid on unsecured loan invested as capital in the partnership firm. The assessee explained that borrowed money was invested as capital in the partnership firm M/s. Sweeto Apparels. The firm had made capital investment in the purchase of new shops. The assessee has stated that future potentiality of earning income by way of profit and remuneration from the partnership firm has been increased because of
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contribution to the capital account in the partnership firm. The assessing officer has rejected the claim of the assessee stating that deduction of interest expenses of Rs. 12,03,052/- was not covered by section 57(iii) of the act.
Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. Relevant part of the decision of ld. CIT(A) is reproduced as under:- “5.2 The submissions filed by the appellant were perused. It has clearly been brought on record by the A.O that the opening balance of the appellant in the books of accounts of the firm M/s. Sweetoo Apparels was opening debit balance of Rs. 32,60,328/- in the partners capital account of the appellant and the closing debit balance was of Rs. 108,07,884/-. Therefore, there is a clear debit balance in the partners capital account of the appellant in this firm. Even before the investment of Rs. 25 crore in the immovable property of this firm during the year, the opening debit balance of the appellant was Rs. 32,60,328/-. Since there is a debit balance in the partners capital account, the argument that the money has been borrowed for investing in the firm does not hold good on the facts of the case. If the money has indeed been invested in the partnership firm of the appellant, the appellant would not have an opening debit balance in the partners capital account. The AO has prepared a chart starting from F.Y.2003-04 till F.Y.2012-13listing'the amount of interest paid, the total income and the break up of such income. On perusal of the same it is seen that till F.Y. 2011-12 the appellant has earned more in terms of the profit in the partnership firm, remuneration and interest from partnership firm than the interest paid. In F.Y. 2011-12 the interest income from the partnership firm was Rs. 12,51,918/- out of which Rs. 9,67,218/- were claimed as interest deduction. Therefore, there is no reason as to why the partners capital account would have an opening debit balance as the appellant was a partner of this firm and has earned interest of Rs. 12,51,918/- in F.Y.2011-12 relevant to A.Y-2012-13. However, in the current year due to debit balance in the opening capital account of the appellant, the appellant has paid net interest to the firm to the extent of Rs. 3,29,327/-. This clearly shows that the appellant has withdrawn more money from the firm than actually invested and therefore, the appellant had to pay net interest to the partnership firm/firms during the year. In view of this, there is no basis in claim of the appellant that the money, borrowed has been utilised for investment in the partnership firm. The appellant has also argued that the shop which was purchased for Rs. 25 crores as a market value of Rs. 40 crores has no relevance to the claim of interest u/s. 57(iii). The argument of the appellant that it is not necessary to have income under the head income from other sources to claim deduction u/s.57(iii) of the Act is correct but it needs to be seen whether the appellant would be getting any income, may be in future which would be assessable as income from other sources. The appellant has interest income/share in the profit/remuneration which is assessable as per the provisions of the Act under the head "Profits and gains from business or profession". Therefore, there is no income being earned by the appellant either in this assessment year or in future years which would be assessable under the head income from other sources. This argument of the appellant fails on the factual basis as has been held in the earlier part of this order, as the appellant in this order has paid interest on the debit balance on the capital account with the partnership firm. Even on this ground the argument of the appellant are not tenable.
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5.3 The reliance on the judgment of Hon'ble Supreme Court in the case of CIT vs Rajendra Prasad Moody, is also not applicable to the facts of the case of the appellant as the issue before Hon'ble Supreme Court was whether interest on borrowed funds which have been invested by the appellant for purchase of shares would be, deductible, if the appellant has not received any dividend from the investeVcompames, , jft may be pointed out here that at that point of time, income from dividend was /assessable as income from other sources u/s'56 of the Act and therefore, in that context the Hon'ble Supreme Court has held that it is not relevant or immaterial whether the appellant had actually earned income during the assessment year in question or not. The fact that if there is an income which would be assessable under the head income from other sources is good enough for claiming deduction u/s.57 of the Act. However, subsequently, the Income-Tax Act has been amended and dividend income is no more taxable in the hands of the recipient. Therefore, in the facts of the present case the decision of Hon'ble Supreme Court is not applicable. 5.4 Moreover, even if the appellant has any income from the partnership firm, the same would be assessable under the head profits and gains of business. Therefore, the deduction for interest expenses cannot be claimed u/s.57 of the Act. The language of the Act is very clear which requires that the interest expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning such income. There is no income either being made or earned by the appellant in this case. It would be assessable under the head income from other sources. Therefore, the argument of the appellant are not accepted and rejected. The grounds of appeal are accordingly dismissed.”
We have heard the rival contention and perused the material on record. It is undisputed fact that assessee has obtained unsecured loan for investing in the partnership firm as contribution to his capital account. It is very clear as elaborated in the finding of the ld. CIT(A) that there was debit balance of assessee’s capital account in the partnership firm as the opening debit balance was of Rs. 32,60,328/- and closing debit balance was of Rs. 1,08,07,884/-. The ld. CIT(A) has clearly demonstrated in his finding that due to the aforesaid debit balance in the capital account, the assessee has paid net interest to the partnership firm to the amount of Rs. 3,29,327/-. The aforesaid facts indicate that assessee has withdrawn more money from the partnership firm than actually invested in the partnership firm. Apart from the above, earning of interest income/share in the profit/remuneration from the partnership firm is assessed under the head profit and gains from business or profession and the assessee could not substantiate that how the income for making investment in the partnership firm would be assessable
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under the head income from other sources. We have further noticed that judicial pronouncement referred by the ld. counsel in the case of CIT vs. Rajendraprasad Moody 1979 AIR 373 of the Hon’ble Supreme Court is distinguishable from the case of the assessee as in the referred judgment, the issue was pertained to receiving of dividend income on account of investment made in the companies which was assessable as income from other sources u/s. 56 of the act whereas the issue in the case of assessee is contribution made by the assessee in his capital account in the partnership firm and income from the partnership firm would be assessable under the head profit and gains of business. The ld. counsel has also failed to explain how the other judicial pronouncements (1) Eastern Investments Ltd vs. Commissioner Of Income -Tax, West... on 4 May, 1951 Equivalent citations: 1951 AIR 278, 1951 SCR 594 (2) Hamendra Singh vs. Commissioner of Income Tax, Laws(RAJ) - 1987 - 7 – 67 (3) Jashvidyaben C. Mehta vs. Commissioner Of Income - Tax on 29 September, 1987 Equivalent citations: 1988 172 ITR 680 Guj and (4) R. Dalmia vs C.I.T., Delhi, New Delhi on 21 September, 1977 Equivalent citations: 1977 AIR 2394, 1978 SCR (1) 537 are applicable as the facts of the case of the assessee are distinguishable from the facts of the judicial pronouncements referred by the ld. counsel. In the light of the above facts and finding, we observe that as per specific provision of section 28(v) of IT Act any interest, salary etc. earned by a partner from a partnership firm is taxable under the head profit and gains of business or profession and there is no question of categorizing it under the head income from other sources. Therefore, we do not find any merit in the claim of the assessee for deduction u/s 57(iii) since there was no scope for treating such income
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earned from partnership firm as falling under the head income from other sources. We consider that eligibility for deduction u/s. 57(iii) arises only if expenditure is lead out wholly and exclusively for purpose of earning income which is chargeable under the head income other sources, therefore, in the light of the above facts and circumstances, we do not find infirmity in the decision of ld. CIT(A). Accordingly, the appeal of the assessee is dismissed.
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 18-06-2019
Sd/- Sd/- (RAJPAL YADAV) (AMARJIT SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad : Dated 18/06/2019 आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, अहमदाबाद