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Income Tax Appellate Tribunal, JAIPUR BENCH-A, JAIPUR
Before: SHRI SANDEEP GOSAIN, JM &DR. M.L. MEENA, AM vk;djvihy la-@ITA No. 130/JP/2022
आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCH-A, JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ,oa MkWa- ,e- ,y- ehuk] ys[kk lnL; ds le{k BEFORE: SHRI SANDEEP GOSAIN, JM &DR. M.L. MEENA, AM vk;djvihy la-@ITA No. 130/JP/2022 fu/kZkj.ko"kZ@Assessment Year : 2017-18
cuke M/s Manglam Land Bank Company The PCIT, 6th Floor, Apex Mall, Tonk Road, Vs. Jaipur-2, Lal Kothi, Jaipur. Jaipur. LFkk;hys[kk la-@thvkbZvkj la-@PAN No.: AAOFM 5179 Q vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksjls@Assessee by : Shri P.C. Parwal (C.A..) jktLo dh vksj ls@Revenue by : Shri Avdhesh Kumar (CIT) lquokbZ dh rkjh[k@Date of Hearing : 31.05.2022. ?kks"k.kk dh rkjh[k@Date of Pronouncement: 10.08.2022.
vkns'k@ORDER PER DR. MITHA LAL MEENA, A.M.
This is an appeal filed by the assessee against the order of learned Principal Commissioner of Income Tax [hereinafter referred to the (PCIT)], Jaipur-2 dated 29.03.2022 for the assessment year 2017- 18. The assessee has raised the following grounds of appeal:-
“1. Under the facts and circumstances of the case, order passed by the Ld. PCIT is illegal & bad in law and the same be quashed. 2. The Ld. PCIT has erred on facts and in law in holding that the order passed by AO is erroneous and prejudicial to the interest of revenue on the ground that AO has not examined that interest paid by assessee firm to its
2 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
partner on their capital balance relating to the period both before retirement and after retirement without deduction of tax at source is disallowable u/s 40(a)(ia) of the Act ignoring the fact that:- (a) record for the purpose of section 263 includes all record relating to any proceeding under this Act available at the time of examination by the PCIT and therefore, the details filed before her in these proceedings ought to have been considered by her (b) no tax is required to be deducted on capital balance of the partner prior to retirement (c) in view of first proviso to section 201(1), no tax is required to be deducted on the interest paid/ credited on the outstanding balance of partners post retirement in as much as they have included such interest in the income and thus assessee is not deemed to be assessee in default and hence section 40(a)(ia) is not applicable (d) interest so credited in the account of these persons is not claimed as expenditure in the P&L A/c and thus section 40(a)(ia) is not applicable. 4. The appellant craves to alter, amend and modify any ground of appeal. 4. Necessary cost be awarded to the assessee.”
The brief facts of the case are that the assessee appellant firm
engaged in real estate activity was constituted vide partnership deed
dated 17.05.2007. Three partners namely Shri Sanjay Gupta, Shri
Vinod Goyal & Shri Rambabu Agarwal retired from the firm vide deed
dated 12.09.2016. As per para 2 of this deed, it has been agreed
amongst the retiring partners and continuing partners that continuing
partners will make the payment of capital to retiring partners. However
since capital of retiring partners was not repaid, assessee firm credited
interest to their account as under:-
3 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
Name of Partner Interest Amount Period for which interest is credited Shri Ram Babu Agarwal Rs.5,13,511/- 01.04.2016 to 31.03.2017 Shri Sanjay Gupta Rs.9,26,313/- ---------do---------- Shri Vinod Goyal Rs.20,67,413/- ---------do---------- Total Rs.35,07,237/-
The Ld. PCIT vide notice u/s 263 dated 19.02.2022 notedthatorder passed
by AO u/s 143(3) dated 28.12.2019 is erroneous in so far as prejudicial to the
interest of revenue for the reason that assessee firm has paid interest of
Rs.35,07,236/- on unsecured loan of 3 ex-partners but not deducted TDS on the
interest amount so paid as per provision of section 194A of the Act and therefore
the AO was required to make disallowance @ 30% of the interest payment of
Rs.35,07,236/- i.e. Rs.10,52,171/- u/s 40(a)(ia) of the Act.
The Ld. PCIT after considering the submission of assessee, has stated at Pg.
6 of the order that assessee has not submitted any reply on the issue of interest
paid to retired partners on 12.09.2016 and therefore, interest so paid, in the
absence of deduction of tax at source is liable to be disallowed u/s 40(a)(ia) of the
Act. Thereafter at Para 11 & 12 of the order it is held that the AO failed to
consider/apply his mind to the information available on record with regard to
deduction of tax u/s 40(a)(ia) of the Act on interest paid on unsecured loan. Thus,
order passed by AO u/s 143(3) is erroneous in so far as it is prejudicial to the
interest of revenue as the said order has been passed by the AO in a routine and
perfunctory manner without considering/ applying his mind to the information
available on record. The order of AO is therefore liable to be revised under clause
(a) & (b) of Explanation (2) to section 263 of the Income Tax Act. The observation
of PCIT is reproduced hereunder:
4 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
“1.Since this was interest on unsecured loans, the assessee was liable to deduct tax on this amount u/s 194A of the Act but no TDS was made by the assessee. During the assessment proceedings assessee has claimed that it was interest to partners on their capital while from 12.09.2016, these were retiring partners and the amount of their capital was converted into unsecured loans. On perusal of their ledger accountit is noticed they have advanced other amounts as unsecured loan to the firm. Interest was credited in their account on 31.03.2017 and on that date, these retiring partners, were not partner of the firm. Therefore, the interest paid/credited to their accounts was not interest to partner, but was to the creditor of the firm. Further, it was obligatory on the part of the firm to deduct tax u/s 194A of the Act on such payment/credit of interest. Since no tax has been deducted by the firm, therefore, disallowance ©30% of the payment, was required to be made u/s 40(a)(ia) of the Act. 2. Therefore, it is factually clear that the A.O. has not properly addressed the issue while completing the assessment. In view of this position, it appears that the assessment order passed u/s 143(3) of the I.T. act 1961 for A.Y. 2017-18 on 28.12.2019 is erroneous in so far as it is prejudicial to the interest of the revenue. 1. Considering the above facts, a show-cause notice u/s 263 of the I.T. Act, 1961was issued to the assessee vide this office letter No. ITBA/REV/F/REV1/2021-22/1039927565(1) dated 19.02.2022to explain as to why the assessment order passed by the ITO Ward-4(5), Jaipur on 28.12.2019 may not be revised u/s 263 and may not be treated as erroneous and prejudicial to the interest of the revenue as the assessment order was passed mechanically without application of mind for the reason mentioned in the notice. 1. The submissions put forth by the assessee firm have been considered but not found tenable for the reasons:-
5 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
The firm has submitted that interest prior to 12.09.2016 have been paid to the partners as interest on capital, but has not submitted any reply on the issue of interest paid to these retiring partners post 12.09.2016. As per the deed of retirement, the new partners of the firm had admitted that the retiring partners shall be paid their capital on retiring from business. Since the capital was not paid to the retiring partners, this amount was converted as unsecured loan on which interest was payable for the period 13.09.2016 to 31.03.2017. Thus, the amount of unsecured loan on which interest was payable was liable for deduction of tax u/s 194A of the Act, and no deduction of tax was made by the firm on the interest paid therefore, as per provisions of section 40(a)(ia) of the Act, the amount of interest on which no deduction of tax was made was liable to the disallowed. Therefore, the submission put forth by the firm are rejected. 1. I have gone through the assessment order and case records and in the facts and circumstances of the case I find that the revisionary powers can be exercised by the PCIT/CIT where he/she finds that AO has passed any order which is erroneous and prejudicial to the interest of revenue. ln reaching the above conclusion that action u/s 263 is justified in this case, I am aided by the following judicial rulings:- (i) The Hon’ble Supreme Court in the case of Malabar Industrial Limited v/s CIT 243 ITR wherein it has held as under-
“"An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind".
The ld. Counsel for the assessee has filed written submissions to support its
contention raised during the course of hearing which reads as under:-
6 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
At the outset it is submitted that in the assessment proceedings assessee has furnished the supplementary partnership deed dt. 12.09.2016 as also the capital account of all the partners including the retiring partners as is evident from Pg 2 of the assessment order. After considering the same the AO made certain disallowance u/s 40(a)(ia) of the Act. This fact is also evident from the order passed by Ld. PCIT u/s 263 of the Act where it is categorically admitted that the material is available on record but AO has failed to apply his mind to the information available. Thus, when the AO has passed the order after examining the information available on record, his order cannot be held to be erroneous in so far as it is prejudicial to the interest of revenue.
It is submitted that provision to section 194A(3)(iv) of the Act provides that no TDS is required to be deducted at source on interest income credited or paid by a firm to a partner of the firm. Since all these three persons were partner of the firm and interest is paid by the firm on the capital contribution made by them during their partnership, hence interest so paid falls within the scope of section 194A(3)(iv) of the Act and therefore there is no requirement to deduct tax at source at least on the interest relatable to the period 01.04.2016 to 12.09.2016 i.e.upto the date of retirement.
It may be noted that second proviso to section 40(a)(ia) of the Act provides that where an assessee fails to deduct whole or any part of the tax in accordance with the provision of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub section (1) of section 201, then for the purpose of this sub clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the payee referred to in the said proviso. First proviso to section 201(1) reads as under:- “Provided that any person, including the principal officer of a company who fails to deduct whole or any part of tax in accordance with the provision of this chapter on the sum paid to a payee or on the sum credited to the account of a payee shall not be deemed to be an assessee in default in respect of such tax if such payee:- i) Has furnished return of income under section 139 ii) Has taken into account such sum for computing income in such return of income, and iii) Has paid the tax due on the income declared by him in such return of income
7 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
And the person furnishes a certificate to this effect from an accountant in such form as may be prescribed.” It is submitted that in the present case, assessee firm has credited interest to the account of Shri Ram Babu Agarwal, Shri Sanjay Gupta & Shri Vinod Goyal.All the three persons have filed their return of income, considered the interest income in the return of income and has paid due taxes as per their return of income(PB 12-20). Certificate of Chartered Accountant in Form 26A in this regard is at PB 21-26. Therefore, assessee is not deemed to be assessee in default u/s 201(1) and consequently section 40(a)(ia) is not applicable. Hence, no amount is liable for disallowance u/s 40(a)(ia) of the Act. 4. It may also be noted that assessee has not claimed interest credited to the account of these persons in the profit & loss account but has capitalised it to the cost of land which is carried as inventory in the Balance Sheet. Thus when the interest so credited in the account of these persons is not claimed as an expenditure, section 40(a)(ia) is not applicable.
It is a settled law that for invoking revisionary power u/s 263 of the Act, twin conditions being the order passed by AO is erroneous as well as prejudicial to the interest of revenue are to be satisfied. Hon’ble Supreme Court in case of Malabar Industrial Co. Ltd. Vs. CIT 243 ITR 83 at para 7 of the order held as under:-
“7. A bare reading of this provision makes it clear that the prerequisite to the exercise of jurisdiction by the Commissioner suomotu under it, is that the order of the ITO is erroneous in so far as it is prejudicial to the interests of the Revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the AO sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the Revenue. If one of them is absent-if the order of the ITO is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue-recourse cannot be had to s. 263(1) of the Act.”
From the submission made above, it can be noted that order passed by AO cannot be held to be prejudicial to the interest of revenue as there is no loss to the revenue on account of non-deduction of tax at source on interest credited to the account of these persons post retirement.Thus, the order passed by the PCIT u/s 263 is not sustainable.
8 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
The Ld. PCIT at Pg 6 of the order has held thatthe amount of interest on which no deduction of tax was made is liable to be disallowed and therefore, the submission put forth by the assessee is rejected but at the same time has set aside the assessment order by holding it to be erroneous so far as prejudicial to the interest of revenue under clause (a) & (b) of Explanation 2 to section 263. It may be noted that both these clauses are not applicable in the facts of the present case in as much as assessee has furnished the certificate of CA under first proviso to section 201(1) of the Act which is a part of the record and therefore, section 40(a)(ia) is not applicable. Further assessee has not claimed any expenditure on account of interest payment but has capitalised it to the cost of inventory. Thus, when no expenditure is claimed in P&L A/c, section 40(a)(ia) is not applicable.
In view of above, order passed by Ld. PCIT u/s 263 is illegal & bad in law and the same be quashed.”
Per contra, the ld. CIT D/R supported the impugned order. The ld. D/R has
submitted that the assessee has failed to furnish corroborative documentary
evidences in support of the income before the ld. PCIT.
We have heard the rival contentions, perused the material available on
record, assessment order and impugned order and the case laws cited before us.
Admittedly, the capital amount to be paid to the retiring partners, were converted as
unsecured loan on 13.09.2016 and therefore, interest was payable for the period
13.09.2016 to 31.03.2017. Thus, the amount of unsecured loan on which interest
was payable was liable for deduction of tax u/s 194A of the Act, and since there was
no Tax deducted by the appellant firm on these interest payments, as per provisions
of section 194A of the Act. In our view, the appellant assessee was required to
deduct TDS on the amount of interest payment made.
9 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company
The Ld. AR admitted the fact that the Ld. PCIT has observed that the amount
of interest on which no deduction of tax was made is liable to be disallowed and
therefore, the submission put forth by the assessee is rightly rejected by the Ld.
PCIT. However, he objectedthe decision of set a siding the passement the
assessment order by holding it to be erroneous so far as prejudicial to the interest of
revenue under clause (a) & (b) of Explanation 2 to section 263 as being not
applicable to the facts of the present case in as much as assessee has furnished the
certificate of CA under first proviso to section 201(1) of the Act which is a part of the
record and therefore, section 40(a)(ia) is not convincing primarily, it was not before
either the AO or the Ld. PCIT and secondly in the revision proceedings, the assessee
shall get an opportunity to produce the material documentary evidence with
certification of third parties if any required including CA’s certificate which would not
cause any prejudice to the assessee.
The assessee in proceedings before learned CIT u/s 263 of the Act and also
before us, failed to demonstrate that all the facts were before the AO and how the
AO has taken a conscious decision on merits which is a plausible decision which does
not warrant interference u/s 263 of the Act to revise concluded assessment. We
have also considered all the replies given by the assessee on merits before AO and
CIT as well before us. We find that the assessee has failed to demonstrate on merits
that the view taken by the AO before passing assessment order was a plausible view
asbeing taken after due enquiries on the issue under consideration. Thus, we uphold
the finding of the PCITin categorizing the assessment as erroneous so far as
10 ITA No. 130/JP/2022 M/S Manglam Lank Bank Company prejudicial to the interest of the Revenue andas such order of the ld. PCIT passed u/s 263 of the act is sustained.
In the result, appeal of the assessee is dismissed.
Order pronounced in the open court on 10/08/2022.
Sd/- Sd/- ¼lanhi xkslkbZ½ ¼MkWa- ,e- ,y- ehuk ½ (Sandeep Gosain) (Dr. M.L. Meena) U;kf;dlnL;@Judicial Member ys[kk lnL;@Accountant Member Tk;iqj@Jaipur fnukad@Dated:- 10/08/2022. Santosh/ आदेश की प्रतिलिपिअग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant- M/s Manglam Land Bank Company, Jaipur. 2. izR;FkhZ@The Respondent-The PCIT, Jaipur-2,Jaipur. 3. vk;djvk;qDr@CIT 4. vk;djvk;qDr@CIT(A) 5. विभागीय प्रतिनिधि] आयकरअपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZQkbZy@Guard File {ITA No. 130/JP/2022} vkns'kkuqlkj@By order,
सहायकपंजीकार@Aेेज. त्महपेजतंत