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Income Tax Appellate Tribunal, C/“SMC” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal is filed by the assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-5, Chennai dated 10.11.2016 pertaining to assessment year 2013-14.
The assessee raised the following grounds for adjudication.
1. For that the order of the Commissioner of Income Tax (Appeals) “CIT (A)” was passed without fully considering the facts and circumstances involved in the case.
2. The CIT (A) failed to appreciate that the appellant received the income from Business in which the borrowed monies were invested by wrongly applying the section 71(1) of the Income Tax act 1961.
3. The CIT (A) failed to appreciate that the appellant had wrongly filed the ITR 3 by adjusting the interest paid against the Income from other sources was not considered while disposing the appeal.
4. The CIT (A) failed to appreciate that the Memo of total income was erroneously presented and the nexus between the sources of borrowings were only invested into asset represented as capital investment in the Partnership firm and was disregarded at the time of confirming the additions by the Ld. AO.
5. Without prejudice to the above, the CIT (A) failed to appreciate that the appellant had submitted the requirements to establish the borrowings meant for investment into business interests.
6. Without prejudice to the above, the CIT (A) failed to appreciate that disregarding the claim of interest paid which should have been allowed under section 37 as against the section 57 which was wrongly claimed under ITR 3 by the appellant was involuntary.
The brief facts of the case are that the assessee is an individual deriving income from salary and income from other sources. During the assessment proceedings, it is seen from the statement of total income that the assessee has received income from salary and income from other sources. The assessee paid interest of `5,02,628/-. Details for which shown as under, under the head income from other sources: Income from other sources: ` i) Interest from Saving Bank A/c 14,746/- ii) Interest from parties 19,857/- iii) Total 34,603/- iv) Less: Interest Paid (-)5,02,628/- v) Balance 4,68,025/- The AO asked to substantiate the claim of `5,02,628/- u/s.57 against the income from other sources with documentary evidences. In response, the assessee submitted that the assessee had paid interest of `5,02,628/- to the loan creditor which was set off from the income of same income group i.e. income from other sources and balance `4,68,025/- was set off against the income from business and profession. The assessee is the partner of M/s.Primaa Marketing Corporation and earned income of `7,06,905/- from the business.
U/s.71(1) of the Act loss under any source falling under any head of income other than “capital gain” is to be set off against income from any other sources any other head of income in the same assessment year. The AO observed that for earning interest of `34,603/- [(i) + (ii)
)] the assessee has claimed deduction u/s.57(iii) of Rs.5,02,628/-, which is not commensurate. In the absence of substantial evidence for claiming such huge deduction, the AO disallowed the deduction claimed u/s.57(iii) of the Act. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A).
3.1 During the first appellate proceedings, the assessee submitted that the AO disallowed the interest of `5,02,628/- to loan creditors. The assessee borrowed the funds to invest in firm, Primaa Marketing Corporation where he is a partner. On contrary, the AO has presumed that the loan was taken to earn the income from ‘income from other sources’. The assessee had produced confirmations from loan creditors before the AO, which was not considered as evidence of payment of interest. The assessee had set off `34,603/- from income from other sources and balance `4,68,025/- from income from business and profession. Further, ld.A.R submitted before Ld.CIT(A) that U/s.71(1) of the Act, the net result for any assessment year in respect of any source falling under any head of income, other than “capital gains”, is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from any other source under the same head.
3.2 Ld.CIT(A), after perusing the contention of ld.A.R and material on record, observed that the assessee borrowed the funds to invest in firm, Primaa Marketing Corporation where he is a partner.
On contrary, the AO has presumed that the loan was taken to earn the income from “income from other sources”. However, in the return of income under the head “income from other sources”, the assessee disclosed income totaling to `34,603/- (interest from SB A/c `14,746/- + Interest from parties `19,857/- ) and claimed expenditure of `5,02,628/- as interest paid. According to Ld.CIT(A), the assessee did not file any evidence to prove that what was disclosed in the return of income was not correct. Therefore, Ld.CIT(A) rejected the claim of assessee. Against the order of Ld.CIT(A), now the Revenue/Assessee is in appeal before us.
Before us, the ld.A.R submitted that the assessee borrowed a sum of `46,26,796/- from various parties and invested an amount of `28,96,389/- in Primaa Marketing Corporation and paid interest of `5,02,628/-. It is also submitted that the assessee paid interest of `5,02,628/- to those parties, who is lending money to the assessee.
`2,06,950/- The assessee received from Primaa Marketing Corporation as interest on capital of `7,06,950/-. According to him, the borrowal of funds from the various parties is for the purpose of business and such interest expenditure is to be allowed while computing the income under the head “Business”.
On the other hand, ld.D.R submitted that the income of the firm is not taxable, it is exempted u/s.10(2A) of the Act. Hence, Sec.14A is applicable as expenditure is not relating to earning of taxable income.
I have heard both the parties and perused the material on record. The contention of the ld.A.R is that the assessee has made investments in the partnership firm out of borrowing money from the various parties and Sec.14A cannot be applied to the facts of the present case. It is also submitted that the assessee, in addition to share of profit from the firm, also received interest on capital from the firm and also salary from the firm, which were taxable under the head “income from Business”. Being so, the interest paid by the assessee to be set off against the interest and salary received from the firm.
Admittedly interest received from the firm on capital is taxable in the hands of assessee under the head “income from business or profession”. Hence, interest paid by the assessee on borrowings used for investments in the firm as capital to be allowed u/s.36(1)(iii) of the Act. For this purpose, we place reliance on the decision of Delite Enterprises (P.) Ltd., Vs. Income Tax Officer in [2008] 22 SOT 245 (ITAT[Mum]) wherein held that the interest paid by the partners on funds borrowed for investments in firm is allowable u/s.36(1)(iii) of the Act, since the interest received from firm is taxable as bas income u/s.28(v) of the Act. However, it cannot be set off out of salary received from firm is with regard to skill and workman exercised by the assessee. I placed reliance in the Order of Tribunal, special Bench in the case of Dharmasingh M. Popat Vs. ACIT in [2010] 2 ITR (Trib) 586 (ITAT[Mum]) wherein held that salary by a partner from firm, which is allowed as deduction in the hands of the firm has to be taxed as business income of the partner. Sec.10(2A) provided for an exclusion of share of partnership firm from the total income in the hands of the partner, but salary issued by the partner from the firm is to be assessed as deemed business income in the hands of such partners. In view of the specific provision of Sec.28(v) of the Act, it is taxable. Thus, the nature of salary vis-à-vis share of profit is of no significance. Hence, in my opinion, if the assessee is able to establish the nexus between borrowed capital and investment in partnership firm, the claim of assessee to the extent to be allowed, as held by the Tribunal in the case of D.J. MEHTA Vs. Income Tax Officer in [2007] 104 ITD 527 (ITAT[Mum]. Accordingly, we remit the issue in dispute to the file of ld. Assessing Officer with a direction to the assessee to establish the nexus between borrowings and investment towards capital and also assessee has to show the receipt of interest on capital employed by the assessee in the firm and to that extent of interest, the claim of deduction of payment of interest to be allowed. Accordingly, this issue is remitted to file of ld. Assessing Officer for fresh consideration.