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Income Tax Appellate Tribunal, VISAKHAPATNAM BENCH, VISAKHAPATNAM
Before: SHRI V. DURGA RAO& SHRI D.S. SUNDER SINGH
PER D.S. SUNDER SINGH, Accountant Member: This appeal is filed by the assessee against the order of the Commissioner of Income Tax(Appeals) [CIT(A)], Vijayawada vide I.T.A.No.459/CIT(A)/VJA/2014-15 dated 02.03.2016 for the assessment year 2012-13.
2 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada 2. The assessee is a partner in M/s ABC Engineering Works. For the assessment year 2012-13, the assessee filed return of income admitting the loss of Rs.9,24,278/-. During the year under consideration, the assessee received the income from the following sources : (i) Income from house property Rs.1,26,000 (ii) Loss from business Rs.82,94,468 (iii) Income from long term capital gains Rs.72,44,190 The loss admitted by the assessee was business loss relating to interest charged by the Partnership firm on overdrawals from the current account/capital account of the partnership firm. During the assessment proceedings, the Assessing Officer (AO) found that the assessee’s current account/capital account of the partnership firm has shown debit balance of Rs.1,77,10,778/- as on 31.03.2006 which was increased to Rs.7,04,16,001/- as on 31.03.2012. The AO verified the withdrawals made by the assessee and observed that the assessee has withdrawn huge amounts from the current account/capital account for personal / domestic purpose, other than for the purpose of the business. The AO furnished some instances of the application of funds from the withdrawals as under : F.Y.2006-07 Withdrawal for investment in Rameshwar Steel and Power Limited – Rs.1,80-,36,440/- F.Y.2007-08 Transferred to her personal account – Rs.2,50,000 Transferred to her husband’s current account –
3 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada Rs.2,40,560/- And numerous withdrawals towards domestic affairs and repayments of loans; cash withdrawals of Rs.50,00,000/- F.Y.2008-09 Transfers to Andhra Bank accounts, OBC, Chennai, drawings towards housing loan, drawings towards personal loans, drawings towards her son’s education purpose. F.Y.2009-10 Purchases of Volvo tippers, transfer for clearing of loans, withdrawals in cash for personal purposes F.Y.2010-11 Withdrawals for housing loans and gold loans F.Y.2011-12 Withdrawals for repayment of loans and transfers to various bank accounts.
2.1. After considering the utilization of funds, the AO observed that the assessee has neither carried on any business nor used the funds for the purpose of business and found that the entire withdrawals were used for personal and domestic purpose other than business purposes. Therefore, the AO was of the view that the assessee is disentitled to claim the business loss from the other sources of income declared by the assessee such as income from house property and the capital gains. The AO reworked the interest, taking the net of debit and credit balances which worked out to @Rs.33,94,786/- to be payable to the firm. Finally, the AO held that since, there is no business carried on by the assessee and the assessee being partner of the firm, the interest and the losses takes the character of the
4 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada share income from the firm which is exempt u/s 10(2A) of the Act for taxation and accordingly held that the loss or interest relatable on such share of loss is also exempt and cannot be included in total income. Accordingly the AO did not allow the assessee’s claim of interest and recomputed the income rejecting the set off of business loss.
Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) observed that the assessee had invested a sum of Rs.1,80,36,440/- from the withdrawals from the capital account of the firm in equity share capital of Rameshwar Steel and Power Limited during the year 2006-07 and has not received any dividend or interest from the said company. The said amount was outstanding in the impugned assessment year also. The Ld.CIT(A) further observed from the books of accounts of the ABC Engineering Works, that the borrowings were used for personal purposes of the assessee but not for business purposes. The Ld.CIT(A) observed that the purpose of charging interest to the assessee by the firm is to reduce the total income in the hands of the assessee with an object of avoidance or reduction of tax liability. The Ld.CIT(A) held that the interest on debit balance in capital account in assessee’s case is not allowable deduction since the withdrawals made by the assessee were used
5 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada for the personal purposes. Accordingly, confirmed the addition made by the AO and dismissed the appeal of the assessee.
Aggrieved by the order of the Ld.CIT(A), the assessee has carried the matter to the Tribunal. During the appeal hearing, the Ld.AR argued that the interest paid by the assessee on debit balance on capital account is an allowable business expenditure and the finding of the Ld.CIT(A) as well as the AO with regard to the application of withdrawals towards non business purposes is against the facts of the case. During the year under consideration, the firm has charged the interest on debit balances which amounted to Rs.82,94,468/- and the same n was claimed by the assessee as loss from business and eligible for set off against the long term capital gains. The assessee has sold the residential property on 01.07.2011 and the withdrawals were used for the purpose of renovation of the house, therefore eligible for set off of loss against the capital gains income. Thus the Ld.AR requested to set aside the order of the Ld.CIT(A) and allow the appeal of the assessee.
On the other hand, the Ld.DR supported the orders of the lower authorities.
6 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada 6. We have heard both the parties and perused the material placed on record. For the assessment year 2012-13, the assessee filed the return of income declaring total loss of Rs.9,24,278/-. The assessee derived the income from house property of Rs.1,26,000/-and the income from capital gains on sale of property of Rs.72,44,190/- and claimed the set off of business loss relating to the interest charged on debit balances by M/s ABC Engineering Works amounting to Rs.82,94,468/- and arrived at the Nil income. The issue involved in this appeal is the business loss claimed by the assessee amounting to Rs.82,94,468/- is allowable to set off against income from capital gains or not. From the perusal of the return of income filed by the assessee, it is clear that the assessee has not carried on any business during the year under consideration. As observed by the AO, the debit balance in the partnership firm as on 31.03.2006 was at Rs.1,77,10,778/- and it rose to Rs.7,04,16,001/- as on 31.03.2012. 6.1. The assessee has sold the property which was acquired in 2004-05 and subsequent to the acquisition of the property, the assessee had incurred the expenses to the extent of Rs.43,66,846/- during the financial year 2005-06 and Rs.2,52,300/- during the financial year 2006-07 for improvements which was claimed as deduction with cost index in capital gains. The allowable deductions for computing the capital gains is the
7 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada indexed cost of acquisition and the expenses incurred for the purpose of transfer of the property or for the improvement of the property as per section 48 of the act. No other deductions are allowed while computing the capital gains. Interest if any on the borrowed funds for construction of the house is allowed under the head income from the property. The loss claimed by the assessee towards the interest payment to the firm is neither business loss nor the loss incurred for acquiring the property and not allowable deduction as per section 48 of the Act. 6.2. To allow the set off business loss against the current years income, the assessee has to establish that she has incurred the loss during the course of business. The AO as well as the Ld.CIT(A) have given finding that the borrowals were used for investment or for personal purposes but not for any business purposes. Further, the assessee has not furnished the details of withdrawals made from the current account of the partnership firm and matching utilisation of the funds with relevant statements of bank account. The assessee neither produced the details before the AO nor before the Ld.CIT(A) regarding the application of withdrawals made from the current account/capital account with tangible evidence such as relevant bank account copies etc. During the appeal hearing before us also, the Ld.AR could not place any evidence. The assessee did not furnish the
8 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada statement of affairs or the balance sheet from the date of first overdrawal till date to demonstrate the application of funds. In the absence of any evidence, we do not find any reason to differ with the finding given by the AO as well as the Ld.CIT(A) that the withdrawals made from capital account or current account with M/s ABC Engineering Works were mainly used for personal purposes and the funds were not used for any business purposes. Therefore, we hold that the AO has rightly disallowed the claim made by the assessee which was upheld by the Ld.CIT(A). Hence, we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. 6.3. The Ld.AR during the appeal hearing submitted that there was an error in calculation of interest made by the AO of Rs.33,94,786/-.We direct the AO to recompute the interest payable by the assessee to the firm, however, recomputation of interest does not in any way affect the computation of income made by the AO, since we have upheld the order of the Ld.CIT(A) and held that the assessee is not entitled to claim set off interest from the capital gains or income from the property, accordingly, the appeal of the assessee is dismissed.
In the result, the appeal of the assessee is dismissed.
9 I.T.A. No.351 /Viz/2016 Smt. T.V.Padmavathi, Vijayawada The above order was pronounced in the open court on 10th October, 2018.
Sd/- Sd/- (िी.दुगाा राि) (धड.एस. सुन्दर ससह) (V. DURGA RAO) (D.S. SUNDER SINGH) न्याधयक सदस्य/JUDICIAL MEMBER लेखा सदस्य/ACCOUNTANT MEMBER धिशाखापटणम /Visakhapatnam ददिांक /Dated : 10.10.2018 L.Rama, SPS
आदेश की प्रधिधलधप अग्रेधर्ि/Copy of the order forwarded to:- 1. अपीलधथी / The Appellant – Smt.T.V.Padmavathi, 40-15-11, Flat No.3 Sudha Apartments, Greenland Hotel Road, Vijayawada – 520 010 2. प्रत्यार्थी / The Respondent–ITO, Ward-2(2), Vijayawada 3. The Pr.Commissioner of Income Tax, Vijayawada 4. The Commissioner of Income Tax (Appeals), Vijayawada 5. धिभागीयप्रधिधिधि, आयकरअपीलीयअधिकरण, धिशाखापटणम /DR, ITAT, Visakhapatnam 6. गाडाफ़ाईल / Guard file
आदेशािुसार / BY ORDER // True Copy //
Sr. Private Secretary ITAT, VISAKHAPATNAM