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Income Tax Appellate Tribunal, H BENCH, MUMBAI
Date of conclusion of hearing : 14.02.2022 Date of pronouncement of order : 28.04.2022 & 6865/Mum/2019 Assessment Year: 2013-14 O R D E R Per Rahul Chaudhary, Judicial Member: 1. These are cross appeals pertaining to the Assessment Year 2013-14 arising from order dated 13.09.2019 passed by the Ld. Commissioner of Income Tax (Appeals)-11, Pune [hereinafter referred to as „CIT(A)‟], whereby appeal filed by the Assessee against the Assessment Order, dated 28.03.2016, passed under Section 143(3) of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟] was partly allowed.
(Assessment Year 2013-14) (Department‟s Appeal)
The Revenue has raised the following grounds of appeal:
(1) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is justified in directing the A.O. to verify facts as per directions of ITAT Mumbai and determine if the interest on partners capital has been claimed as deduction by the partnership firm for the year under consideration i.e. AY 2013-14 as well, instead of calling for remand report from the A.O. (2) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in directing the A.O. to verify facts as per directions of ITAT Mumbai and determine if the interest on partners capital has been claimed as deduction by the partnership firm for the year under consideration i.e. AY 2013-14 as well, without appreciating the fact that such direction tantamount to setting aside the order of the A.O. without any authority and thereby exceeded his jurisdiction u/s 250/251 of the Act
(3) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not considering the fact that the decision of the Hon‟ble ITAT, Mumbai vide order dated 28.02.2018 for A.Ys.2010-11, 2011-12 & 2012-13, in assessee‟s own case on similar issue, was challenged before Hon‟ble Bombay High Court, which is still pending for adjudication & 6865/Mum/2019 Assessment Year: 2013-14 (4) The appellant prays that the order of Ld. CIT (A) on the above grounds be reversed and that of the Assessing officer be restored.
The Assessee, a resident individual, was a partner in M/s Akshar Developers - a partnership firm, having 50% share in profits. The Assessee filed return of income for Assessment Year 2013-14 electronically on 29.03.2014 declaring total income at INR 8,26,040/-. The case of Assessee was selected for scrutiny and notices under Section 143(2) and 142(1) of the Act were issued. During the assessment proceedings, the AO noticed that the Assessee is one of the partners of M/s Akshar Developers, a partnership firm, which had debited an amount of INR 3,19,68,965/- to its Profit and Loss Account as interest paid to partner. The capital account of the Assessee was credited with INR 1,72,37,020/-. However, this amount was not offered to tax by the Assessee during the relevant previous year. Since the interest due to or received by partner from a firm is taxable as profit and gains of business under Section 28(b) of the Act, a show cause notice was issued to the Assessee. In reply to the same vide, letter dated 19.01.2016, the Assessee submitted that Interest amounting to INR 1,72,37,020/- was debited to work-in-progress account of Decorium Projects. The Assessee also filed copy of Addendum to Partnership Deed, dated 31.03.2009 and submitted that the interest on capital would become payable to the partners only after completion of this Project. The Assessee also filed a copy of separate account maintained by M/s Akshar Developers in respect of such interest and submitted that M/s Akshar Developers did not claim this interest as revenue expense as the same was capitalized as work-in-progress as on 31.03.2013. However, the AO not being satisfied with the submissions/explanations provided by the Appellant, made addition of INR 1,72,37,020/- to the returned income. Assessee carried this issue in appeal before CIT(A). The CIT(A) granted relief to the Assessee following decision of the Tribunal in Assessee‟s own case holding as under: & 6865/Mum/2019 Assessment Year: 2013-14 “7. During the course of the appeal proceedings, on behalf of the appellant it is stated that the above said issue was a matter of appeal for AY 2010-11, 2011-12 & 2012-13 as well and that the issue stands settled by the order dtd 28/2/2018 passed by the Hon'ble ITAT Mumbai, wherein the addition on account of interest income „accrued‟ but not „due‟ from partnership firm was deleted. The following extract of the ITAT order dtd. 28/2/2018 was reproduced for ready reference: “We are of the considered view that the issue needs to be reexamined by the AO in the light of contradictory facts and if the AO finds that the partnership firm has claimed interest on capital against from profits then certainly, the assessee cannot exclude interest on capital in its return of income. If the firm has not claimed interest on capital against its profits and reversed interest on capital by reducing it from work in progress, then certainly exclusion made by the partners in their individual hands in revised return is in accordance with law. Therefore, we direct the AO to verify theses facts and take an appropriate decision in the light of our observation above. Hence, the ground raised
by the assessee for the A.Y's. 2010-11, 2011-12 & 2012-13 in both the assessee‟s case are set aside to the file of the AO”.
8. It is further claimed that the said decision of ITAT, Mumbai has also been accepted by the AO and the orders giving effect to this are also passed for AY. 2010-11, 2011-12 & 2012-13, accepting the assessee‟s claims. Accordingly, it is requested that orders deleting the said addition on account of interest „accrued‟ but not „due‟ amounting to Rs.1,72,37,020/- may be passed for this year also.
9. As the issue involved for the current-year is similar to the issue for A.Yrs. 2010-11 to 2012-13, the direction of the ITAT, Mumbai in its order dated 28.2.2018, in the case of the appellant for the above said assessment year, shall also have to be followed by the AO for the year under consideration. It is seen from the orders of the AO u/s 143(3) r.w.s. 254 dtd. 30.4.2018, in the case of the appellant for A.Yrs 2010-11, 2011-12 & 2012- 13 giving effect to the directions of the ITAT, Mumbai that the AO has found the claim of the assessee as correct that the & 6865/Mum/2019 Assessment Year: 2013-14 interest on partners capital account has not been claimed as deduction by the partnership firm. Accordingly, the AO is directed to verify the facts as per the direction of the ITAT, Mumbai and determine if the interest on the partners capital has been claimed as deduction by the partnership firm for the year under consideration i.e. A.Y. 2013-14 as well.
4. Being aggrieved, the Revenue is in appeal before us and has raised 4 grounds of appeal challenging the relief granted by CIT(A). The Ld. Departmental Representative submitted that CIT(A) has failed to consider the fact that the decision of the Tribunal, dated 28.02.2018, in the case of the Assessee for the Assessment Year 2010-11, 2011-12 and 2012-13, which has been followed by CIT(A), has been challenged before the Hon‟ble Bombay High Court. The claim of the Assessee that Akshar Developers has not claimed deduction of interest paid to partners as a Revenue expense for the Assessment Year 2013-14 is incorrect. The Ld. Departmental Representative further submitted that, in effect, the CIT(A) has set aside the order passed by Assessing Officer in violation of provisions of Section 250/251 of the Act. The CIT(A) could have called for a remand report instead of directing the Assessing Officer to verify the facts as per the directions of the Tribunal. He relied upon the assessment order to contend that addendum to partnership deed dated 31.03.2009 is only on afterthought and interest income had accrued to the Assessee as per Deed of Admission Cum Partnership Deed, dated 01.04.2007. In response the Ld. Authorised Representative of the Assessee submitted that the Tribunal has, in the case of the Assessee for the Assessment Years 2010-11, 2011-12 and 2012-13, vide order dated 28.02.2018, has decided identical issue in the favour of the Assessee. The CIT(A) has rightly followed aforesaid decision of the Tribunal. She submitted that the M/s Akshar Developers has not claimed deduction of interest on partner‟s capital as Revenue expense for the Assessment Year 2013-14. She referred to Assessment Order for the Assessment Years 2010-11, 2011-12 and 2012-13, passed on 30.04.2018 and 04.05.2018, under Section 143(3) read with Section 254 of the Act, wherein pursuant to the directions of the Tribunal, the Assessing Officer 5 & 6865/Mum/2019 Assessment Year: 2013-14 has verified the records and returned a finding that the Ms/s Akshar Developer has not claimed deduction for interest on partner‟s capital. The Ld. Authorised Representative also placed reliance on copy of document (placed at page 78 of the paper-book filed by the Assessee) titled “Addendum to Partnership Deed of Akshar Developers”, dated 22.04.2015 to contend that Interest on Partner Capital was not charged as revenue expense by Akshar Developers for the relevant Assessment Year. Even the provision for Interest on Partners Capital created in earlier years was reversed by Akshar Developers by reducing work-in- progress of the Project „Decorium‟.
We have considered the rival submissions and perused the record. As per Addendum to Partnership Deed, dated 31.03.2009, Clause 5 – „Interest on Capital‟ of the Deed of Admission Cum Partnership Deed, dated 01.01.2017, was amended to provide that interest aggregated shall become enforceable date only in the year in which Akshar Developer is in a position correctly determined and record profits on the projects in its books of account after completion and sale of the project and after providing for all contingent expenses. None of the partners were entitled to claim interest on capital in the intervening period. „Addendum to Partnership Deed of Akshar Developers‟, dated 22.04.2015, relied upon by the Authorised Representative of the Assessee provides that with effect from 01.04.2015 Akshar Developers shall not provide for interests on capital balance of partners, and that the provision for Interest on Partners Capital of INR 15,48,38,970/- created in earlier years shall be reversed by reducing work-in-progress of the Project „Decorium‟. The Tribunal has, vide order dated 28.02.2018, remanded the issue to the file of AO with the directions to verify the record and take appropriate decision in the light of the observations made in paragraph 43 of the aforesaid order which reads as under:
“43. Having heard both the sides, we find that the issue of taxability of interest on capital has to be seen in the light of whether such interest has been really accrued to the assessee in & 6865/Mum/2019 Assessment Year: 2013-14 the light of real income theory. The question whether real income has materialized has to be examined in the context of commercial and business realities in the circumstances in which the assessee is placed and not with reference to system of accounting. The accrual of income does not depend upon the accounts of the assessee. Whatever position of accounts, income would have to be referred back to the chargeable accounting period during which such profits or gains are actually arisen/accrued and the assessee would be liable to be taxed in respect of the same. In this case, it is an admitted fact that the assessee has included interest on capital in original returns, whereas the same has been excluded in revised return for which the assessee has filed necessary evidence and also explanations. No doubt, the taxability of interest on partners‟ capital u/s 28 of the Income tax Act, 1961 depends upon the method of accounting followed by the partnership firm, further supported by clauses in partnership deed for payment of interest subject to certain conditions specified u/s 40(b) of the Act. If the partnership firm debits interest on capital to partners‟ and claims interest on capital as deduction u/s 40(b) then certainly interest on capital is taxable in the hands of partners whether or not such interest In this case, it is the claim of the interest has been paid to the partners. In this case, it is the claim of the assessee that interest on capital is credited to partners‟ capital account and debited to work-in-progress without treating it as revenue expenditure. The assessee further claims that such interest has been reversed in the financial year 2016 and simultaneously reducing it from work-in-progress. If the claim of the assessee is found to be correct, then there is no question of taxing interest on „capital in the hands of the partners, because such interest has not been claimed as deduction in the partnership firm‟s profits. But, facts are totally different. The Ld.CIT(A) observed that for the AY 2011-12, the partnership firm Akshar Developers has claimed interest on capital u/s 40(b) against profits in the statement of total Income in original return filed u/s 139(1) and in a return filed in response to notice u/s 153A, the position remains same. The facts are contradictory to each other. f Therefore, we are of the considered view that the issue needs to be re-examined by the AO in the light of contradictory facts and if the AO finds that the partnership firm has claimed interest on capital against from profits then certainly, 7 & 6865/Mum/2019 Assessment Year: 2013-14 the assessee cannot excluded interest on capital in its return of income, the firm has not claimed interest on capital against its profits and reversed interest on capital by reducing it from work- in-progress, then certainly, exclusion made by the partners in their individual hands in revised return is in accordance with law. Therefore, we direct the AO to verify these facts and take an appropriate decision in the light of our observation above. Hence, the ground raised by the assessees for the AYs 2010-11 to 2012- 13 in both the assessee‟s case are Set aside to the file of the AO.”
The CIT(A) took note of the fact that the AO has, after verifying the record as per the directions of the Tribunal, found the claim of the Assessee to be correct for the A.Y. 2010-11, 2011-12 and 2012-13. The CIT(A), following the aforesaid order of the Tribunal, dated 28.02.2018, directed the AO to verify the records and passed appropriate order for the Assessment Year 2013-14. Though, the contention of the Revenue that the CIT(A) could have called for remand report from the Assessing Officer, and adjudicated upon the issue himself in light of such remand report has some merit, however, in the facts of the present case, it would serve no purpose to set aside the order of the CIT(A) and remand the issue back to the file of CIT(A) instead of AO, solely on the basis of this ground. In our considered view this is not a case where the issue has been simply set aside to the file of AO by the CIT(A). The CIT(A) has followed the order of the Tribunal for the immediately preceding assessment years and given directions. Though, the Revenue has challenged the aforesaid order of the Tribunal before the Hon‟ble Bombay High Court, the operation of the order has not been stayed. It is not the case of Revenue that there is any change in the facts and circumstances of the case which may persuade the Tribunal to take a view different from what has been taken by the Tribunal vide order dated 28.02.2018 for the Assessment Years 2010-11, 2011-12 and 2012- 13. Accordingly, respectfully following the aforesaid order of the Tribunal in Assessee‟s own case, we confirm the order passed by the CIT(A) on this issue. Accordingly, Ground Nos. 1 to 4 raised by the Revenue are dismissed. 8 & 6865/Mum/2019 Assessment Year: 2013-14
In result, appeal filed by the Revenue is dismissed. (Assessment Year 2013-14) (Assessee‟s Appeal)
Brief facts relevant to the present appeal are that the Assessee has claimed deduction for interest expenses amounting to INR 1,00,92,110/- in the return of income. During the assessment proceedings the AO noticed that the Assessee has earned following exempt income aggregating to INR 3,93,77,932/-:
(a) Share in profits of partnership firm exempt under Section 10(2A) of the Act amounting to INR 11,38,194/-
(b) Capital gains income exempt under Section 10(38) of the Act amounting to INR 3,82,39,519/-.
(c) Dividend income exempt under Section 10(34) of the Act amounting to INR 219/-
Since, the Assessee has earned the abovesaid exempt income, the Assessee was asked to show cause why interest expenses of INR 1,00,92,110/- should not be disallowed under Section 14A of the Act. In response to the same, the Assessee filed reply vide letter, dated 29.09.2016. However, the AO not being satisfied with the explanation/submission of the Assessee, invoked provision of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 to make a disallowance of INR 12,11,828/- under Section 14A of the Act.
Being aggrieved, the Assessee carried this issue in appeal before the CIT(A) who confirmed the order of the AO on this issue. Now, the Assessee is in appeal before us and has raised following grounds of appeal: & 6865/Mum/2019 Assessment Year: 2013-14 “1. Because, the CIT(A) has erred in law and on facts in confirming the disallowance u/s 14A r.w. Rule 8D amounting to Rs. 12,11,828/-.
2. Because, the CIT(A) has erred in law and on facts in confirming the AO‟s action in invoking section 14A on account of exempt income from partnership firm u/s 10(2A) of the Act although the income has already suffered tax in the hands of the firms.
3. Because, the CIT(A) has erred in law and on facts in confirming the AO‟s action in invoking section 14A on account of exempt income u/s 10(38) of the Act, although the investment in that case was made out of Appellant‟s interest free funds.
4. Without prejudice, the computation of disallowance of Rs. 12,11,828/- u/s 14A as per Rule 8D is erroneous.”
The Ld. Authorised Representative of the Assessee appearing before us stated under instructions that she would not be pressing Ground No. 2 of the appeal. As regards, Ground No. 1, 3 and 4, the Ld. Authorised Representative submitted that the Assessee had, both, interest free and interest-bearing funds, and therefore, it must be assumed that interest free funds were used to make tax-free investments. She relied upon the decision in the case of CIT vs. HDFC Bank (2014) 366 ITR 505 (Bom) and Reliance Utilities and Power Ltd. reported in (1) TMI 4 (Bom). Ld. Authorised Representative further submitted that during the year under consideration, the Appellant had earned long term capital gain amount to INR 382,39,519/- exempt under section 10(38) on sale of shares of Yuvraj Hygiene which were purchased by the Appellant from interest free fund received from M/s. Akshar Developers, a partnership firm in which the Appellant is a partner. Thus, no disallowance can be made u/s14A of the Act in respect of the same.
The Ld. Departmental Representative, per contra, submitted that the Assessee has earned exempt income to the tune of INR 3,93,77,932/- and had incurred interest expenses of INR 1,00,92,110/-, therefore, the provisions of section 14A read with Rule 8D are attracted in the case of & 6865/Mum/2019 Assessment Year: 2013-14 the Assessee. He relied upon the orders passed by the lower authorities to support his case that interest bearing funds were applied for making investments and that the contentions of the Assessee that the aggregated of own funds and interest-bearing funds of the Assessee were in excess of investment was factually incorrect.
We have heard the rival contentions and perused the record. Both, the Assessing Officer and CIT(A) have, taking note of the fact that the Assessee had net borrowed funds of INR 13,30,36,215/- as on 31.03.2014, returned concurrent findings that interest bearing funds have been used to make investment in Investments yielding exempt income. While the Assessee has placed reliance on the decisions in the case of HDFC Bank (supra) and Reliance Utilities and Power Ltd (supra), the Assessee has failed to show that the aggregate of own funds and interest free funds were sufficient to make investment in the investments yielding exempt income. Admittedly, the capital account balance of the Assessee as on 31.03.2013 was INR 13,14,99,245/- whereas investment in firms as on 31.03.2013 stood at INR 24,19,82,802/-. Further, the contention of the Assessee that interest-free funds were used to purchase of shares of Yuvraj Hygiene cannot be accepted. The Assessee has made contribution to the capital of M/s Akshar Developers and has taken stand that no interest income has been earned on the same. The AO and the CIT(A) have returned the finding that interest bearing funds were advanced by the Assessee to M/s Akshar Developers which were received back by the Assessee from M/s Akshar Developers. As against exempt income of INR 3,93,77,932/- a disallowance of INR 12,11,828/- has been made under Section 14A of the Act out of total interest expenses of INR 1,00,92,110/-. We do not find merits in the contentions raised by the Assessee and decline to interfere in the order passed by CIT(A) on this issue. Accordingly, Ground No. 1, 3 and 4 are dismissed. Ground No. 2 is disposed-off as not pressed. & 6865/Mum/2019 Assessment Year: 2013-14 13. In result, the appeal filed by the Assessee is dismissed.
Order pronounced on 28.04.2022.