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Income Tax Appellate Tribunal, “A” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 05-10-2016 घोषणा क" तार"ख /Date of Pronouncement :15-12-2016 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
1. This appeal, filed by the assessee, being 19th July 2012 passed by learned Commissioner of Income Tax (Appeals)- 9, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2006-07, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 19th August, 2010 passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) r.w.s. 147 of the Income-tax Act,1961 (Hereinafter called “the Act”).
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2. The grounds of appeal
raised by the assessee in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
1. Ground No-1 The H'ble Commissioner of Income-tax (Appeals)-9 Mumbai [,CIT (A)'] has erred in confirming the addition of interest of Rs. 33,23,178/- without considering the fact that the appellant has neither received any real income nor said interest is materialized in subsequent year from the partnership firm, in which appellant was a partner.
2. Ground No-2 The CIT (A) has erred in considering part of the information and ignored the fact that the partnership firm has not claimed any interest expenses of Rs. 33,23,178/- in its Profit & Loss account. The interest has been capitalized and added to the Work In Progress, which has been reversed in books in the subsequent year.
3. Ground No-3 The CIT (A) has erred in not considering the fact that reversal of entries in the books of the partnership firm in the subsequent year does not result in real income.
4. Ground No-4 The CIT (A) has erred in ignoring the fact that the partnership firm has not claimed deduction in respect of the interest of Rs. 33,23,178/- and in absence of any claim of the interest expenses by the partnership firm, the same cannot be considered as part of income of the appellant, which would result in the double taxation.
The Brief facts of the case are that the assessee is engaged in the construction industry as a real estate developer. The assessee did not carry out any business activity during the year under instant appeal. The assessee has raised an amount of Rs. 7.12 crores by issue of shares at premium, out of which Rs. 7.10 crores was invested in the capital of partnership firm, M/s ITA 6157/Mum/2012 3 Kamlashri Builders . At the time of original assessment, the assessee filed zerox copy of partnership deed dated 25th August, 2005 , whereby it contained the following provision in respect of capital, interest and profit/loss sharing:-
“ “Capital” : The parties shall contribute the initial capital of the firm of Rs. 5,00,000/- (Five lakhs only) in proportion to their respective shares in the profit and losses of the firm as hereinafter mentioned. The parties shall contribute such further amounts towards the capital of the firm, as may be required from time to time as mutually agreed upon by the partners.”
"Interest" : The partners shall be entitled to interest at the rate of 12% on amount standing to the credit of the capital deposit, loan, advance and/or current account of the partners and reduced by permitted withdrawals, if any. The said rate of interest can be increased or decreased to such other maximum rate allowable as deduction under the Income-tax Act, 1961 as mutually agreed upon by the parties from time to time and recorded in writing.
Profit/loss Sharing : The net profit and loss of the partnership business after the payment of all expenses, interest to partners and other outgoings, including capital losses if any shall be shared by and between the parties hereto in the following proportion. *** ***”
On verification of the return of income filed by the assessee, it was observed by the AO that the assessee company has not shown any interest income. The assessee was called upon to furnish the audit report of the partnership firm Kamlashri Builders for the assessment year 2006-07 whereby it was noticed that the partnership firm has credited/debited the interest @ 12% on credit/debit balance of partners capital. The capital of the partnership firm plus interest as on 31st March, 2006 were as under:-
ITA 6157/Mum/2012 4 Sr Name of the Capital Withdrawal Int. on Share capital No partners introduced capital in partnership firm 1 Somnath Project 7,10,00,000 - 33,23,178 7,43,23,178 Org. P. Ltd. 2 Ketan A Shah 1,65,000 1,55,000 427 10,427 3 Ramesh C Shah -- 4,00,000 19,587 4,19,857 (debit balance) 4 Jitendra R Jain 1,36,61,000 80,00,000 56,181 57,17,181 The assessee was show caused as to why interest @ 12% amounting to Rs. 33,23,178/- credited by the partnership firm Kamlashri Builders as per clause of the partnership deed should not be added to the total income of the assessee.
The assessee in response submitted that the assessee is partner in M/s Kamlashri Builders. The original partnership deed contained the interest payment clause to the partners but the same was amended on 18th January, 2006 w.e.f. the original deed and as per the amended partnership deed the interest was not liable to be paid to partners . As the assessee had not earned any interest income and hence the same was not offered for taxation. It was submitted that at the time of finalization of accounts of the partnership firm, by mistake interest was credited to the partners capital account which was only a journal entry in the books of account which mistake was reversed on 1st April, 2007. Neither interest was given to partners nor recovered as both were only journal entry in the books of the firm. This mistake was on the part of the firm and not the assessee. The firm has never intended to evade tax as the project was running in work in progress and no profit was earned. It was submitted that there was no intentional mistake and there was no evasion of tax on the part of either partner or partnership firm. Even otherwise, if there is any mala-fide intention was found, it is on the part of the firm and not the ITA 6157/Mum/2012 5 partner and hence the assessee cannot be penalized for the fault of the partnership firm namely “Kamlashri Builders”.
The A.O. after considering the submissions of the assessee held that during the original assessment proceedings u/s 143(3) of the Act, the assessee has furnished partnership deed on 10th September, 2008 but has not furnished revised partnership deed along with original partnership deed. The revised partnership deed was submitted only after issue of show cause notice and not even at the first instance i.e. immediate after the reasons for reopening of assessment was provided on 11.12.2009, thus it was observed by the AO that it is an afterthought by the partners and the firm to save themselves from the tax liability under the provisions of the Act. The revised partnership deed was executed on 18th January, 2006. The partnership firm Kamlashri Builders had filed its return for assessment year 2006-07 on 30th October, 2006 and the assessee has filed its return for assessment year 2006-07 on 2nd November, 2006 , thus it was observed by the AO that both have filed their return of income after 18th January, 2006. It was stated by the assessee that reversed entries were made on 1st April, 2007 that means the mistake was corrected on 1st April, 2007. Thus, the A.O. noticed that though there was ample time i.e. up to 31st March, 2008 to revise the return of partnership firm for the impugned assessment year, but the same was not revised by the partnership firm. It was submitted by the assessee that only journal entry for interest were passed in the books of the partnership firm and no actual payment was made for the interest expenses. The partners have also not revised the return of income of the partnership firm but have passed only reverse journal entries in the books of accounts of the next year. According to the assessee, there is no change in the income returned of partnership firm and it will only increase in the value of the work-in-progress, as no expenses were claimed for the interest expenditure provided in the books of the partnership firm ‘Kamlashri Builders’ but the same were added to the closing ITA 6157/Mum/2012 6 WIP. The AO observed that passing of the entries in the next year is not proper way to rectify the mistake or given the effect of revised partnership deed. The A.O. observed that the audit report of the year under consideration requires to be amended , particularly amount of share capital and work-in- progress. It was also observed that if the assessee invested fund not in the partnership firm but elsewhere , then it would have earned interest. If the partnership firm will earn profit from its business activity even though the assessee company will not get much more than its profit sharing ratio. It was observed that the assessee company has introduced more than 90% of capital as against profit sharing ratio of 27.5% . Thus the A.O. concluded that this is an afterthought action of the partnership firm run by its partners whereby they revised partnership deed to save themselves from the provisions of the Act and accordingly the A.O. added an amount of Rs. 33,23,178/- towards the amount of interest accrued on the capital introduced which was added to the total income of the assessee by the AO vide assessment order dated 19.08.2010 passed by the AO u/s 143(3) r.w.s. 147 of the Act .
Aggrieved by the assessment order dated 19.08.2010 passed by the A.O. u/s 143(3) r.w.s. 147 of the Act, the assessee filed its first appeal before the ld. CIT(A).
Before the ld. CIT(A) the assessee argued that the assessee has entered into partnership with nine other partners and formed a partnership firm namely "Kamlashri Builders” on 25th August 2005 where the assessee was sharing 27.50% of the net profit/(loss) of the firm and it has contributed Rs. 7.1 crores towards partner's capital contribution during the year. As per the original partnership deed dated 25th August 2005, interest to the partners was payable @ 12% p.a. on their capital contribution, however, the said interest clause was deleted by amending the partnership deed on 18th January 2006 w.e.f. 25-08-2005 , hence the assessee has not considered any ITA 6157/Mum/2012 7 interest income on the capital introduced in said partnerships firm as partner's contribution. Thus, it was submitted by the assessee that the assessee has finalized its books of account for the year ended 31st March 2006 as per the amended partnership deed dated 18-01-2006. However, by mistake the said partnership firm had finalized its accounts for the year ended 31st March 2006 as per the original partnership deed dated 25-08- 2005 and accordingly, interest payable to partners was recognized in the books of account as part of the closing work-in-progress along-with other expenses. Thereafter, the partnership firm has realized the mistake and had reversed the provision for interest on 1st day of the next financial year i.e. on 1st April 2006. The assessee had submitted all the information and records which were required by the A.O. while framing the original assessment order and the A.O. completed the assessment u/s 143(3) of the Act vide assessment order dated 28th November 2008 which was subsequently reopened u/s 148 of the Act on the ground that the income had escaped assessment to the tune of Rs. 31.90 lakhs being interest @12% on the capital of Rs. 7.10 crores which was introduced by the assessee in the said partnership firm. The assessee submitted that the said partnership firm has not claimed any interest expenses in its profit and loss account and the interest has been capitalized and added to the closing work in progress which was reversed in subsequent year hence the addition of interest of Rs. 31.90 lacs as made by the AO in the assessment order dated 19.08.2010 passed by the A.O. u/s 143(3) r.w.s. 147 of the Act, should be deleted. It was further submitted , without prejudice, that if it is to be treated as income of the assessee, then the said interest income should not be considered as real income of the assessee , as the same has not been realized or received by the assessee nor the same was materialized subsequently . Thus, it was submitted that the said income should not be taxed in the hands of the assessee. It was submitted that reversal of entries in the subsequent year does not result in real income/expenses. In support, the assessee relied on the following cases:-
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1. CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144,148 (SC) 2. State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) 3. CIT v. Kerala State Drugs and Pharmaceuticals Ltd. (1991) (192)- ITR -0001 - 4. CIT v. Bokaro Steels Ltd. [(1999) 2361TR 315,323-24 (SC)], 5. DCIT v. Reliance Petroleum Ltd. 2006-(100)-TTJ -0565 -TBOM / Thus, it was submitted that it was not real income earned by the assessee with respect to the partners capital. The ld. CIT(A) after considering the submissions of the assessee rejected the same and observed that the assessee has entered into a partnership with nine other partners and formed a partnership namely M/s Kamlashri Builders on 25th August, 2005. The assessee has contributed Rs. 7.10 crores towards partners capital contribution. As per the original partnership dated 25th August, 2005, the interest to the partners on their capital contribution was payable @ 12% per annum. M/s. Kamlashri Builders had finalized their books of accounts for the year 31st March, 2006 in accordance with the original partnership deed dated 25th August, 2005 and as a result, interest of Rs.31.90 lacs was provided by the said M/s Kamlashri Builders to the assessee in their books of accounts. The ld.CIT(A) observed that the concept of real income cannot be so used as to make accrued income non-income because after the event of accrual the assessee reverses the entry in the next year or the partnership deed is amended subsequently, the effect of which is given in the next accounting year. The ld. CIT(A) relied on the following cases:-
1. Decision of Hon'ble Supreme court in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC) 2. Decision of Hon'ble Bombay High Court in the case of Western India Oil Distributing Co. Ltd. v. CIT (1994) 206 ITR 359 (Bom).
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3. Decision in the case of Calcutta Co. Ltd v. CIT (1959) 37 ITR 1 (SC).
Thus, the ld. CIT(A) confirmed the addition made by the A.O vide appellate orders dated 19.07.2012 .
Aggrieved by the appellate order dated 19.07.2012 of the ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. Counsel for the assessee submitted that the assessee is engaged in the business of construction industry as a real estate developer and has entered into partnership with nine other partners and formed a partnership firm namely "Kamlashri Builders” on 25th August 2005 where the assessee share in profit was 27.50% of the net profit/(loss) of the firm while it has contributed Rs. 7.1 crores towards partner's capital contribution during the year. The case was reopened u/s 147 of the Act while the original assessment was framed u/s 143(3) of the Act. The assessee’s case was reopened on 6th November, 2009 which is within 4 years from the end of the assessment year. The ld. Counsel submitted that in the original partnership deed the interest to the partners on their capital contribution was stipulated @ 12% per annum on the capital introduced by the partner. The said interest clause was deleted by amending the partnership deed on 18th January 2006 , hence the assessee has not considered any interest income on the capital introduced in said partnerships firm as partner's contribution in its return of income filed with the Revenue and hence the same was not recognised as income, copy of the revised partnership deed was placed at paper book page 23 to 27. It is submitted that the assessee had finalized its books for the year ended 31st March, 2006, however, interest payable to partners was recognized by mistake in the books of account as part of the closing work-in-progress along with other expenses. It is submitted that on 1st April, 2006 the entries were ITA 6157/Mum/2012 10 reversed by correcting the afore-stated mistake, hence, there were no real income and it cannot be brought to tax as assessee has not earned any income from the said firm. It is submitted that no enquiry has been made by the A.O. by issuing summons etc. to the firm or its partners , and without recording any incriminating information, additions have been made by the A.O. . It is submitted that without hearing the parties no addition can be made as no income is accrued. It was submitted that only real income can be brought to tax and no hypothetical income can be brought to tax is settled proposition of tax-laws. It is submitted that amendment in partnership deed dated 18-01-2006 cannot be ignored. It was submitted that before accrual of the interest being payable on capital contributed by partners , partnership deed were amended on 18-01-2006 and no inteerst was accrued. The ld. Counsel relied on the following cases:-
Godhra Electricity Co. Ltd. V. CIT [1997] 225 ITR 746 (SC)/ CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).
Alison Singh & Co. v. CIT [2013] 358 ITR 458 (All) HC 3. D.S. Bist & Sons v. CIT [1984] 149 ITR 276 (Del) HC 4. Shin Satellite Public Co. Ltd. V. Jain Studios Ltd. [2006] 2 SCC 628 5. CIT v. Bokaro Steel Ltd. [1999] 236 ITR 315 (SC)
It is submitted that no interest has been received or realised by the assessee till date hence it cannot be brought to tax. It is submitted that partnership deed has reversed the entry in the immediately succeeding year on 01-04- 2006 itself . It cannot be an afterthought but as there was an error committed by the partnership firm, the same was corrected by the firm on realising the mistake. It is submitted that the assesse company has introduced more than 90% of capital as against profit sharing ratio of 27.5%. It is submitted that before accrual of interest, the partners entered into fresh ITA 6157/Mum/2012 11 partnership deed to provide that no interest is payable on capital contributed by the partners vide revised partnership deed dated 18.01.2006 wherein original partnership deed was amended to provide that no interest is payable on partners capital, hence, the interest cannot be said to have accrued to the assessee. Mere journal entries passed in books of accounts cannot lead to accrual of income if actually the income has not materialised , received or realised . The ld. Counsel distinguished the decision of Hon’ble Bombay High Court in the case of Western India Oil distributing Co. v. CIT, 206 ITR 359 relied upon by the ld. CIT(A). The ld. Counsel relied upon the decision of Hon’ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. and contended that reversal of entries in subsequent year implied only hypothetical income in the current year and not real income. The ld. Counsel also distinguished the decision of Hon’ble Supreme Court in the case of State Bank of Travancore v. CIT, (1986)158 ITR 102(SC) relied upon by the ld. CIT(A).
The ld. D.R. submitted that interest accrued to the assessee on the date of entering of partnership deed. Interest was debited by the firm although it is debited to the closing WIP. Further, the ld. D.R. supported the orders of the ld. CIT(A).
We have considered the rival contentions and also perused the material available on record. We have observed that assessee is engaged in the construction industry as a real estate developer and has raised an amount of Rs. 7.12 crores by issue of shares , out of which Rs. 7.10 crores was invested in the capital of partnership firm Kamlashri Builders during the year. As per the original partnership deed entered on 25th August, 2005 there is clause which stipulated that interest on capital shall be payable to the partners @ 12% per annum which deed was amended on 18th January 2006 which stipulates that no interest shall be payable on the interest on capital provided ITA 6157/Mum/2012 12 by the partners and shall be applicable from the date of original partnership deed entered into i.e. 25th August, 2005. In the original assessment passed u/s 143(3) of the Act, the assessee has not submitted amended partnership deed dated 18.01.2006 . Even after the supply of reasons for reopening of the assessment , the assessee did not submit the amended partnership deed dated 18.01.2006 . The Revenue has doubted the amended partnership deed dated 18.01.2006. We have observed that the assessee has placed on record the original partnership deed dated 25.08.2005 as well as amended partnership deed dated 18.01.2006. The interest payable on capital contributed by partners was debited to the closing WIP by the partnership firm and no expense was claimed per se while computing the income for the assessment year 2006-07 by the partnership firm. The said interest payable on the capital of the partners @ 12% which was provided by the firm M/s ‘Kamlashri Builders’ was reversed on the next day i.e. 1st April, 2006 by the said partnership firm by reducing the WIP which is prior to the issue of the reopening notice dated 06.11.2009 u/s 148 of the Act. Notice has been issued on 6th November, 2009 which clearly indicates that the action has been taken by the said firm of reversing interest expenditure before it was detected by the Revenue. Keeping in view peculiar facts and circumstances of the assessee , since the assessee has not received or realized any interest, it has not accrued to the assesee. The assessee has not offered the said interest for taxation in the return of income filed with the Revenue. Only real income can be brought to tax and not hypothetical income is a well settled proposition of tax-laws. In our considered view, there was a mistake committed by partnership while finalizing its return of income filed with Revenue which was corrected by the said assessee on the very next day i.e. On 1st April, 2006 and no expenditure was claimed. Hence, in our considered view keeping in view peculiar facts and circumstances of this appeal, this interest income cannot be brought to tax in the hands of the assessee as it is not a real income but a hypothetical income. No prejudice is ITA 6157/Mum/2012 13 caused to the Revenue as the said partnership firm did not claimed any expenditure in its return of income towards interest expenditure payable on capital contributed by partners but the same was added to the closing WIP.In any case it is reversed on 01-04-2006 by the firm by reducing WIP. We further find that the A.O. has not made any enquiry with the said firm to bring on record any incriminating material to disprove the contentions and the submissions of the assessee. The addition of interest expenditure of Rs.33,23,178/- to the income of the assessee is in our considered view is not sustainable in the eyes of law and is hereby ordered to be deleted. We order accordingly.
In the result, the appeal filed by the assessee in 2006-07 is allowed.