MR.RAJENDRA KUMAR JAIN vs. THE INCOME TAX OFFICER

TCA.No.744 of 2019 In the High Court of Judicature at Madras Dated : 05.10.2020 Coram : The Honourable Mr.Justice T.S.SIVAGNANAM and The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal No.744 of 2019 Mr.Rajendra Kumar Jain ...Appellant Vs The Income Tax Officer, Non Corporate Ward 2(3), Chennai-34. ...Respondent APPEAL under Section 260A of the Income Tax Act, 1961 against the order dated 22.12.2016 made in ITA.No.2110/Mds/2016 on the file of the Income Tax Appellate Tribunal, Chennai 'A' (SMC) Bench for the assessment year 2011-12. For Appellant: Ms.V.Logheswari for Mr.V.Raghavachari For Respondent: Mrs.R.Hemalatha, SSC Judgment was delivered by

T.S.Sivagnanam,J

We have heard Ms.V.Logheswari, learned counsel appearing for Mr.V.Raghavachari, learned counsel on record for the appellant – 1/9 http://www.judis.nic.in TCA.No.744 of 2019 assessee and Mrs.R.Hemalatha, learned Senior Standing Counsel appearing for the respondent – Revenue. 2. This appeal, filed by the assessee under Section 260A of the Income Tax Act, 1961 (for short, the Act) is directed against the order dated 22.12.2016 made in ITA.No.2110/Mds/2016 on the file of the Income Tax Appellate Tribunal, Chennai 'A' (SMC) Bench (for brevity, the Tribunal) for the assessment year 2011-12. 3. The assessee filed this appeal by raising the following substantial questions of law : “i. Whether, in the facts and circumstances of the case, the interest expense of the assessee on such moneys borrowed be disallowed under Section 57(iii) of the Income Tax Act, 1961 merely because of the Assessing Officer's claim that the assessee is financially sound ? ii. Whether, in the facts and circumstances of the case, the Assessing Officer's action in disallowing the assessee's claim of interest deduction under Section 57(iii) amounts to a review of accepted views by the Department in the earlier years? And 2/9 http://www.judis.nic.in TCA.No.744 of 2019 iii. Whether, in the facts and circumstances of the case, the interest expense claimed under Section 57(iii), not being a capital expense and having corresponding income offered under the income from other sources, be disallowed by the Assessing Officer on the ground of commercial expediency of loans obtained by the assessee?” 4. The assessee is an individual and is said to be a partner in five family run partnership firms, which were established in 1980s. The assessee filed the return of income for the assessment year under consideration namely AY 2011-12 on 27.6.2012 admitting a total income of Rs.11,82,660/-. The case was selected for scrutiny and a notice under Section 143(2) of the Act was issued. The assessee sent a reply giving details as to the five partnership firms, in which he was a partner and also the names of persons, from whom, he availed loan. 5. The case of the assessee is that those persons, who had lent money to the assessee, were also income tax assessees and that the interest paid to them by the assessee were duly accounted for in their respective return of income filed by them. The Assessing Officer, while 3/9 http://www.judis.nic.in TCA.No.744 of 2019 completing the assessment, vide order dated 24.3.2014 under Section 143(3) of the Act, found that the assessee did not furnish the details of dates of receipt of loans, copies of agreements, modes of receipt of loans and other details. Apart from that, the Assessing Officer observed that the financial position and liquidity ratio of the assessee appeared to be sound. Accordingly, the deduction claimed to the extent of Rs.7,36,579/- was disallowed and the assessment was completed. 6. Aggrieved by the same, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) -2, Chennai-34 [for short, the CIT(A)]. Among other things, the assessee contended that the amounts of loan were received through proper banking channels and from family members, that therefore, the necessity of obtaining the promissory note did not arise, that the persons, from whom monies were borrowed, were assessed to income tax and they filed income tax returns regularly and that the interest paid to them had been offered to tax. The CIT(A), on considering the facts noted by the Assessing Officer, dismissed the appeal primarily on the ground that the assessee failed to produce necessary evidence to establish his claim for interest payment to the relatives nor made out any case for 4/9 http://www.judis.nic.in TCA.No.744 of 2019 deduction of such interest under Section 57(iii) of the Act. 7. As against the order passed by the CIT(A), the assessee preferred further appeal before the Tribunal by contending that the interest paid were all loans, which were borrowed in the prior years and which had been allowed as deduction year on year and the CIT(A) had not considered the statement of confirmations given evidencing that no new loan was taken during the financial year relevant to the assessment year under consideration. The assessee further contended that the CIT(A) erred in not allowing the interest expense even though the assessee was following mercantile system of accounting. Without prejudice to the above submissions, the assessee also contended that the interest receipts on loan given had to be set off with the interest payments before disallowing the interest payments. 8. However, the Tribunal dismissed the appeal filed by the assessee by the impugned order and in doing so, proceeded on a totally different basis by observing that the assessee borrowed the amount for the purpose of investment in other firms as capital of the assessee and therefore, it could not be allowed as deduction and in this regard, followed the decision of the Kerala High Court in the case 5/9 http://www.judis.nic.in TCA.No.744 of 2019 of CIT Vs. Popular Vehicles and Services Ltd. [reported in (2010) 325 ITR 523]. Further, with regard to earlier assessments, the Tribunal held that those assessments were accepted by intimation given under Section 143(1) of the Act and none of them was scrutiny assessment. The assessee is before us by way of this appeal challenging the order passed by the Tribunal.