SHAHANSHAH DAL MILL,BHOPAL vs. ITO-5(3), BHOPAL, BHOPAL
Facts
The assessee, M/s Shahanshah Dal Mill (a partnership firm formed on 15.06.2014), appealed against the disallowance of Rs. 4,33,857/- in interest expenditure by the Assessing Officer (AO) for the period 01.04.2014 to 14.06.2014. The AO and subsequently the CIT(A) held that the firm was not in existence during this period and therefore could not claim the expenditure. The appeal to the ITAT was filed with a significant delay of 739 days, for which condonation was sought citing reasons like the death of the previous proprietor, reconstitution of the firm, and the death of the counsel.
Held
The tribunal first condoned the delay in filing the appeal, acknowledging the "sufficient cause" presented by the assessee including deaths and reconstitution, in line with Section 253(5) of the Act and the principle of "substantial justice." On the merits, the tribunal upheld the disallowance, ruling that a partnership firm, being a distinct taxable entity, cannot claim interest expenditure for a period when it was not in existence and was instead operating as a proprietorship concern. The AO's action was found to be correct and in line with the Income Tax Act.
Key Issues
1. Whether delay in filing an appeal can be condoned by the ITAT due to circumstances like death of proprietor and counsel. 2. Whether a partnership firm can claim interest expenditure incurred during a period when it was not in existence, but operated as a proprietorship.
Sections Cited
147, 143(3), 40A(2)(b), 253(5), 271(1)(c)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, INDORE BENCH, INDORE
Before: SHRI B.M. BIYANI & SHRI PARESH M. JOSHI
आदेश/ O R D E R
Per B.M. Biyani, A.M.:
Feeling aggrieved by order of first-appeal dated 30.01.2023 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 25.09.2017 passed by learned ITO-5(3), Bhopal [“AO”] u/s 147 r.w.s. 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2015-16, the assessee has filed this appeal on following grounds:
“1. That the Ld. AO erred in law and on facts in making an addition of Rs. 4,33,857/- to the total returned income of the appellant.
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That the Ld. AO erred on facts and in law in making a disallowance of Rs. 4,33,857/-being interest paid pertains to period up to 14.06.2014, ignoring the explanation and circumstances in which such payments were made and also ignoring the genuineness of such transactions. 3. That the appellant reserves the right to add, alter or amend the grounds of appeal before the appeal is decided.” 2. The background facts leading to present appeal are as under:
(i) The assessee “M/s Shahanshah Dal Mill” is a partnership firm. For
AY 2015-16 under consideration, the assessee filed return declaring a
total income of Rs. 30,690/-. The case of assessee was selected for
limited scrutiny to examine the payments made to related persons u/s
40A(2)(b) and claim of high interest expenditure. The AO issued
notices u/s 143(2)/142(1) which were complied by assessee. During
assessment-proceeding, the AO found that the assessee-firm came
into existence w.e.f. 15.06.2014. Originally, a proprietorship concern
with same name of “M/s Shahanshah Dal Mill” was owned and
carried by “Shri Somamal Waswani”. However, “Shri Somamal
Waswani” expired on 14.06.2014 and in terms of will executed by him,
his son “Shri Shyam Sundar Waswani” became owner of
proprietorship concern. However, “Shri Shyam Sunder Waswani”
converted proprietorship concern into a partnership firm w.e.f.
15.06.2014 by adding his wife and son. Thus, the present assessee-
firm came into existence from 15.06.2014.
(ii) During assessment-proceedings, the AO issued a show-cause notice
dated 12.09.2017 and raised following query among others:
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“3. All the expenses have been claimed by you in the account of firm after 15.06.14, but you have claimed interest of Rs 21,11,436/- on unsecured loan received from various 9 parties for the period of 01.04.14 to 31.03.15. Hence, the amount of interest up to the period of 14.06.14 that comes to Rs 4,33,857/- (21,11,436*75/365), is liable to be disallowed and proposed to be added in your income. Please Explain.” (iii) The assessee filed following reply to the query raised by AO:
“3. In reference to this we hereby submit that no interest has been paid in respect to earlier period of the year under consideration i.e. from “1st April 2014 - 16 June 2014”. Rate of Interest has been increases after firm was established and consequently rate has been proportionally taken on the basis of number of days for which Interest has been paid. Interest to the firm cannot be disallowed for the reason that interest has not been paid in the earlier period. Further, whatever Interest was debited in profit and loss account was actually paid and interest was offered by the recipient for tax. Even if the rate of interest may not be 12% on calculation yet the interest payment made by the assessee was income in hands of recipient of interest and assessee have also filed form 26A before your honour and have paid interest from the day on which interest was credited in its book and actual filing of return by the recipient.” (iv) The AO, however, rejected assessee’s reply and disallowed
proportionate deduction of interest for the period from 01.04.2014 to
14.06.2014 i.e. for the period during which the present assessee-firm
was not in existence. The order passed by AO in this regard is re-
produced below:
“7. The assessee has claimed interest of Rs 21,11,436/- on unsecured loan received from various 9 parties for the period of 01.04.14 to 31.03.15. In Third Para of his reply the assessee submitted that - "no interest has been paid in respect to earlier period of the year under consideration i.e. from "1st April 2014 - 16 June 2014". It is important to mention here that the assessee himself has submitted in his reply that Late Shri Somamal Waswani in his registered will dated 09.02.11, had decided to give ownership of M/s Shahnshah Dal Mill to Shri Shyam Sundar Waswani as a going concern, consequently, the ownership of M/s Shahnshah Dal Mill devolved to shri Shyam Sundar Waswani immediately after his death. On 15.06.14 immediately after death of Shri Somamal waswani, Shri Shyam Sundar Waswani after becoming owner by devolution from his father had decided that M/s Shahanshah Dal Mill to be converted to a partnership business, by
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adding two more partners his wife and son and the running business of Shahanshah Dal Mill was converted to partnership business on 15.06.14. It is clear that on conversion all the liabilities had been taken over by the firm and the loans outstanding in the business of individual transferred to the firm. The assessee has also submitted the copy of Audit Report of late Shri Somamal Waswani and it was noticed that all the loans were outstanding from 01.04.14 and it cannot be said that the interest amount was not payable from 01.04.14. The assessee has also paid the interest amount against loan from bank and against car loan. In both the cases the assessee has computed interest amount separately, paid for the period for 01.04.14 to 14.06.14 and for the period of 15.06.14 to 31.03.15. The assessee has submitted this fact in his reply dated 09.07.17 and the same is evident from the perusal of Audit Report of late Shri Somamal Waswani. There is no reason to accept the contention of the assessee that he has not paid the interest amount from 01.04.14 to 14.06.14. The assessee itself submitted in his reply dated 09.07.17 that the interest has been paid for the period of 01.04.14 to 31.03.15. The loan amount was outstanding from 01.04.14 and the assessee himself submitted the ledger copy of Interest to Others which shows the period 01.04.14 to 31.03.15. There is also no ground available that the interest amount for the period of 01.04.14 to 14.06.14, was not charged. The assessee further submitted that whatever interest was debited in profit and loss account was actually paid and interest was offered by the recipient for tax. Even if the rate of interest may not be 12% on calculation yet the interest payment made by the assessee was income in hands of recipient of interest and assessee have also filed form 26A before your honour and have paid interest from the day on which interest was credited in its book and actual filing of return by the recipient. Offering income by the recipients has no connection with this default of the assessee. The ground taken by the assessee is related with TDS default and the point has already been considered in earlier Para. All the expenses have been claimed by the assessee in the account of firm after 15.06.14, but the assessee has claimed interest of Rs. 21,11,436/- on unsecured loan received from various 9 parties for the period of 01.04.14 to 31.03.15. Hence, the amount of interest up to the period of 14.06.14 that comes to Rs 4,33,857/- (21,11,436*75/365), is liable to be disallowed, hence, added in the income of the assessee. As the assessee has furnished inaccurate particular of his income the penalty u/s 271(1)(c) is hereby initiated.” (v) Aggrieved, the assessee carried matter in first-appeal but did not file
any response to the notices of hearing issued by CIT(A). The CIT(A),
vide order dated 31.01.2023, dismissed assessee’s appeal and upheld
the disallowance made by AO.
(vi) Still aggrieved, the assessee has come in next appeal before us.
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The registry has informed that the present appeal had been filed by
assessee on 08.04.2025 against impugned order dated 31.01.2023 passed
by CIT(A) and hence the appeal is time-barred by 739 days. Ld. AR for
assessee submitted that the assessee has filed an application for
condonation of delay supported by an affidavit. The application filed by
assessee is scanned and re-produced below:
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The Para No. 1 and 2 of the above application gives background
relating to constitution of present assessee-firm w.e.f. 15.06.2014.
Thereafter, in Para 3 of application, it is submitted that all details of
assessee-firm were in the knowledge of “Shri Shyam Sunder Waswani” but
unfortunately, he too expired on 06.03.2018. After his demise, the firm was
re-constituted by “Shri Narendra Waswani” son of late “Shri Shyam Sunder
Waswani” but “Shri Narendra Waswani” remained unaware of the appeal
pending before CIT(A) [the appeal before CIT(A) was filed on 03.11.2017
against assessment-order dated 25.09.2017]. That apart, the counsel of
assessee, CA M.K. Sharma, also expired on 13.12.2020 during Covid-19
pandemic. Therefore, due to such onerous circumstances one after other,
neither there could be participation in the hearings given by CIT(A) nor the
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present appeal could be filed in time before ITAT. Ld. AR submitted that
there is “sufficient cause” for delay and hence the delay should be condoned.
Ld. DR for Revenue left the matter to the wisdom of Bench without raising
any objection. We have considered the explanation advanced by assessee
and in absence of any contrary fact or material on record, the assessee is
found to have a “sufficient cause” for delay in filing present appeal. We find
that section 253(5) of the Act empowers the ITAT to admit an appeal after
expiry of prescribed time, if there is a “sufficient cause” for not presenting
appeal within prescribed time. It is also a settled position by Hon’ble
Supreme Court in Collector, Land Acquisition Vs Mst. Katiji and others
1987 AIR 1353, 1987 2 SCC 387 that whenever “substantial justice” and
“technical considerations” are opposed to each other, the cause of
“substantial justice” must be preferred by adopting a justice-oriented
approach. Thus, taking into account the facts of case, the provision of
section 253(5) and the decision of Hon’ble Supreme Court, we take a
judicious view, condone delay, admit appeal and proceed with hearing.
On merit of case, it is very much clear that the assessee-firm has
come into existence w.e.f. 15.06.2014 but claimed deduction of interest for
the entire financial year 2014-15 in computing total income. Thus, the
assessee has claimed deduction of interest even for the period prior to its
existence i.e. for the period from 01.04.2014 to 14.06.2014. It also emerged
during hearing that the assessee-firm has offered income and claimed all
other expenses for the period after its existence i.e. w.e.f. 15.06.2014. Thus,
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the AO is very correct in disallowing proportionate interest for the period
upto 14.06.2014 (i.e. before existence of assessee-firm). Ld. AR for assessee,
though tried to advance assessee’s case to serve his professional duty but,
however, could not convince us as to how such interest for the period prior
to 15.06.2014 can be allowed to assessee-firm when it was not in existence
during that period? Ld. DR for revenue made a serious objection to the claim
of assessee and submitted that the disallowance made by AO is perfectly
correct according to the law and this bench cannot upset the same. We need
not make any elaborate narration of the submission of parties when the
issue as well as underlying facts are very clear. Nobody can dispute the
statutory scheme of the Income-tax Act according to which every “person” is
a separate and distinct taxable entity. In present case, the assessee-firm
which is a “person” came into existence w.e.f. 15.06.2014 and prior to that,
it was a proprietorship concern carried on by late Shri Somamal Waswani.
Therefore, the assessee-firm can claim deduction of expenditure incurred
during its own period of existence. Being so, we find no infirmity in the
action of the AO as confirmed by Ld. CIT(A), in disallowing the proportionate
interest for the period prior to 15.06.2014. Accordingly, the grounds raised
by the assessee lack merit and stand dismissed. The assessee fails in this
appeal.
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Resultantly, this appeal is dismissed.
Order pronounced in open court on 27/02/2026
Sd/- Sd/-
(PARESH M. JOSHI) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore िदनांक/Dated : 27/02/2026 Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order UE COPYSr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore
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