SUSHIL KUMAR BENIPRASAD GOENKA,MUMBAI vs. ITO 14(2)(2), MUMBAI

सुनवाई क" तार"ख /Date of Hearing : 23-08-2016 घोषणा क" तार"ख /Date of Pronouncement : 11-11-2016 आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

ITA 1430/Mum/2014 2

1. Learned Commissioner of Income Tax (Appeal)-25, on the facts and circumstances of the case and in law, has erred in disallowing interest expense of Rs. 10,27,507/-. The Appellant respectfully submits that CIT(A) ought to have considered that interest expense was incurred to earn interest income on capital balance in the firm which is taxable as business income and ought to have ignored Appellant's mistake of claiming interest expense as loss under the head Income from other sources" instead of "Business Loss" as there is no estoppel against law, particularly when the total income, as returned, remains the same.”

“On perusal of the case records, it is seen that assessee has shown salary income of Rs.30,00,000/- after claiming deduction u/s 10 and interest income of Rs. 1,08,297/-, the assessee claimed deduction of Rs.10,27,507/- on account of interest payment against the salary income and interest income.

It may be noted that the only allowable deduction out of salary income are professional tax and entertainment allowances. The deduction of interest payment claimed by the assessee out of the salary income is not allowable under the Income tax Act and interest payment claimed against the interest income are allowable only if the said expenses are incurred for the purpose of making or earning such income as per the section u/s 57 of the I.T. Act, 1961".

ITA 1430/Mum/2014 3 Notice u/s 148 of the Act was issued and served on the assessee and in reply the assessee stated that the original return of income filed may be treated as having filed in response to notice u/s 148 of the Act. The case was reopened to disallow the claim of deduction of Rs. 10,27,507/- on account of interest payment to LIC of India against salary income and interest income and the assessee has submitted as under:-

“1. I have borrowed from LIC and have paid interest of Rs. 10,27,507/- during the year ended 31.3.2010. 2. Above borrowed funds have been utilized by me in investing in Systematic Exports, a firm in which I am a partner.

3. The purpose of giving above loan was to earn interest. However, unfortunately, due to losses, Systematic Exports has been unable to pay any interest.

7. My income from other sources stand corrected to Rs. 1,08,297/- instead of' loss of Rs. 9,19,210/-.

ITA 1430/Mum/2014 4

It was observed by the A.O. that the assessee has taken loan to invest in partnership firm. The share of profit from the partnership is exempt u/s 10(2A) of the Act. The assessee’s contention that the loan amount was invested in the partnership firm with the intention of earning interest was not acceptable to the A.O. The A.O. observed that share of profit from capital contribution in the partnership firm is exempt from tax u/s 10(2A) of the Act . Hence, the contention of the assessee that had there been profit in the partnership firm, the assessee would have received interest was not acceptable/teneble. The disallowance u/s 14A of the Act was not worked out by the assessee as observed by the AO. The assessee had made investment in the capital of partnership firm out of loan received from LIC and the assessee has not paid the interest on loan taken for the purposes of earning interest as no interest was received from partnership firm. The A.O. accordingly computed the income of the assessee by disallowing the interest paid to LIC amounting to Rs. 10,27,507/- vide assessment order dated 17th December, 2012 passed u/s 143(3) r.w.s. 147 of the Act.

4. Aggrieved by the assessment order dated 17.12.2012 passed by the A.O. u/s 143(3) of the Act read with Section 147 of the Act, the assessee filed first appeal before the ld. CIT(A).

5. Before the ld. CIT(A) , the assessee reiterated the submission what were made before the A.O. and submitted that he had borrowed funds from LIC and paid interest of Rs. 10,27,507/- during the year and this money had been utilized for investing in the capital of Systematic Exports in which the assessee is a partner. The assessee credited this borrowed fund in his capital account in the books of the firm and interest is allowable to partners in terms ITA 1430/Mum/2014 5 of partnership deed of the firm. The assessee submitted copy of bank book, bank statements, capital account, partnership deed, balance sheet and income tax return of the firm etc. before the learned CIT(A). The learned CIT(A) observed that the assessee has availed loan from LIC on which interest of Rs. 10,27,507/- was paid by the assessee which was set off against income from other sources and salary income. The assessee had claimed to have invested loan proceeds from LIC in the capital of the firm M/s Systematic Exports for the purposes of earning interest as per contentions of the assessee. The learned CIT(A) observed from the balance sheet of the firm M/s Systematic Exports that the assessee had opening outstanding capital at Rs. 4,82,079/-, additions made during the year at Rs.67,786/-, withdrawals during the year at Rs.5,33,834/-, share of loss at Rs. 5,29,619/-, and closing balance in negative at Rs. 5,13,588/-. The assessee was entitled to 15% share in the capital of firm and his capital at the end of year was negative, as against total capital of the firm at Rs.346.05 lakhs. The ld. CIT(A) referred to Clause 8 of Partnership Deed which reads as under:-

The capital of the partnership shall be brought in by the partners as and when required for the business in the manner as mutually agreed 'upon between the parties referred hereto, and the partners may be paid interest, at a rate, on their Capital as may be mutually agreed upon from time to time.

Thus, it was observed by the ld. CIT(A) that the intention of the assessee in taking loan from LIC was not to invest in capital of the firm with the sole intention of earning interest from the firm. The learned CIT(A) observed that the assessee failed to show any nexus with the loans taken and payments made to the firm except a stray incident instance which is not sufficient to justify the interest payment of an amount as high as Rs.10,27,507/- on such loans taken. There is no evidence to prove that the assessee’s sole intention was to earn interest on capital employed in the firm as against share in profits which is exempted u/s 10(2A) of the Act. The capital of the assessee ITA 1430/Mum/2014 6 was not just sufficient even for his 15% share in the firm and is in negative was the observation of learned CIT(A). The ld. CIT(A) accordingly concluded that the assessee has grossly failed to justify that the interest paid of Rs. 10,27,507/- had nexus with any business purposes of the assessee and it is an afterthought just to avoid the payment of taxes. Thus, the ld. CIT(A) upheld the order of the A.O. vide appellate order dated 07-10-20113 passed by learned CIT(A).

6. Aggrieved by the appellate order dated 07-10-2013 passed by the ld. CIT(A), the assessee filed appeal before the Tribunal.

8. The ld. D.R. submitted that the A.O. has invoked the provisions of section 14A of the Act. The interest paid by the assessee on LIC loan which was invested in partnership firm was rightly disallowed by the A.O. as the share of profit from partnership firm is exempt from tax u/s 10(2A) of the Act. The learned DR relied on the orders of the learned CIT(A).

9. In the rejoinder, the ld. Counsel submitted that interest income on capital of partnership firm is taxable u/s 28(v) of the Act and hence interest should be allowed as deduction / set off against income from other sources and salary. It was submitted that had there been profits, the partnership firm ITA 1430/Mum/2014 7 Systematic Exports in which the assessee was partner would have given interest on the investment in the capital by the assessee.

There is a general clause in the partnership deed vide clause 8 of partnership deed that the interest may be paid to the partners on the capital contributed to the partnership firm by the partners as mutually agreed by the partners.

ITA 1430/Mum/2014 9 No doubt, the interest due to or received by partner on capital contributed by partners in partnership firm is assessed to tax as business income u/s 28(v) of the Act in the hands of the partner but the assessee could not show that the partners have in-fact agreed to pay interest on their capital contributed in the partnership firm M/s Systematic Exports during the impugned assessment year and a valid and legal binding obligation is cast on the partnership firm M/s Systematic Exports to pay interest on capital specifically to the partners in presenti during the impugned assessment year . The assessee’s had taken a contention that had there been any profits in Systematic Export, the assessee would have received interest from the partnership firm need verification from the actual conduct of Systematic Exports over the years to prove that the firm Systematic Exports in fact paid interest on capital contributed by the partners when there were profits in the said firm . The share of profits on the capital contributed by the assessee with the partnership firm M/s Systematic Exports , are exempt from tax u/s. 10(2A) of the Act. Thus, necessarily the expenses incurred in relation to earning of the income which does not form part of total income, has to be disallowed as per provisions and mandate of Section 14A of the Act unless it is shown that the interest is paid / payable on the capital contributed by the partner in the firm Systematic Exports which interest is chargeable to tax u/s 28(v) of the Act . Considering the peculiar facts and circumstances of the case, interest of justice will be best served if the matter is set aside and restored to the file of the AO for fresh determination of the issue on merits in accordance with law while also keeping in view our above stated observations in this order. The assessee shall be allowed to file relevant evidences / explanations in his defense. Needless to say proper and adequate opportunity of being heard shall be granted to the assessee in accordance with principles of natural justice. The appeal of the assessee is allowed for statistical purposes. We order accordingly.

ITA 1430/Mum/2014 10