SHRI RASHMIN RAMNIKLAL VORA,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-1(2)(5),, AHMEDABAD

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

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.

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

In the result, the appeal of the assessee is dismissed.