RIKHABCHAND V. MEHTA,MUMBAI vs. ACIT RG 15(2), MUMBAI

आदेश / O R D E R PER AMARJIT SINGH, JM:

Assessment Year: 2009-10 3. The facts of the case are that the appellant took loan of Rs.112.50 Lakhs from Kotak Mahindra Bank Limited against the security of the property which was co owned by the appellant in equal shares along with three other owners namely Shri Pinakin L. Shah, Shri Girish L. Shah and Shri Sanjay Ramniklal Shah. Out of the said loan an amount of Rs.68,75,000/- was transferred to the account of Shri. Rikhab Mehta on 15.01.2007 which has been reflected in the bank statement of Shri Pinakin L. Shah. The said amount was given as capital contribution to the Metal Gems on 16.01.2007 by the appellant and entries of credit and debit has been reflected in the bank statement. Interest of Rs.11,49,403/- was paid against the said loan being the share of appellant. The proportionate interest paid by the appellant for capital contribution to Metal Gems was Rs.7,02,413/-. Therefore, the appellant is entitled to allow the deduction upon the said interest u/s. 36(1)(iii) of the Income Tax Act, 1961( in short “the Act”). The said claim of the appellant has wrongly been confirmed by the learned CIT(A) therefore feeling aggrieved, the present appeal has been filed.

Assessment Year: 2009-10 “I have considered the submissions made for the appellants and the assessment order. On careful consideration of the facts of the case and the provisions of the Act, I agree with the appellant that the provisions of section 14A are not applicable in the present case. The appellant had raised interest bearing loan from Reliance Capital Ltd. The said Loan had been utilized by the appellant 'for the purchase of shares and also for making capital contribution to M/s Shreenath Enterprises in which the appellant was a partner. Thus, to the extent the interest bearing loan has been used for making contribution, there is a direct nexus between the loan obtained from Reliance Capital Ltd. and contribution made to the partnership firm. In other words, there is a direct nexus between the amount taken and loan given in respect of funds borrowed from Reliance Capital to the appellant had incurred an interest expenditure of Rs. 10,41,51,584/- against which the appellant has received interest of Rs.10,38,04,143/- from Shreenath Enterprises in respect of its capital contribution. Thus, there is a direct connection or nexus between the interest paid by the appellant and the interest received by the appellant. The only issue of dispute raised by the assessing officer is that the appellant has received income in two forms from M/s. Shreenath Enterprises viz., interest on contribution and share of profit. White the interest income is subject to the share of profit from the firm is exempt u/s. 10(2A) of the Act. According to the Assessing Officer the interest expenditure incurred by the appellant has resulted into taxable as well as tax free income and hence that portion of the interest expenditure which relates to the share of profit is Liable to be disallowed in terms of section 14A of the Income Tax Act, 1961. The Assessing Officer has given the details of capital contributed by all the three partners including the appellant in order to substantiate his contention that the share of profit received by the partner is directly in proportion to the capital contributed by the partners. On the other hand, the appellant is of the view that there is no connection between the funds contributed by the appellant and the share of profit received from the partnership firm. M/s. Shreenath Enterprises, being a partnership firm, is governed by the Indian Partnership Act, 1932. There is no provision in the said Act as regards the contribution of capital by the partners. In other words, the Act does not contemplate or stipulate capital contribution by the partner as one of the conditions for a partnership firm. Section 4 of the Indian Partnership Act defines partnership to mean the relation between the persons Assessment Year: 2009-10 who have agreed to share profit of business carried on by all or any of them acting for all Therefore, the sharing of profit or losses is the determinative factor for the existence of the partnership firm. M/s. Shreenath Enterprises was formed as a Partnership firm vide Partnership Deed dated 24th July, 2000 and the appellant was admitted as a partner in the said partnership firm vide admission agreement dated 1 January, 2004. Clause (5) of the admission agreement sets out the profit sharing ratio amongst the partners including the appellant. Nowhere in the said clause has it been stated that contribution of money towards capital or loan were the conditions of admittance of the new partners for sharing of profits by the partners Alt the partners, including the appellant, are entitled to the profit sharing as per the partnership deed and the same was not dependent on contribution of funds made by the partners. Clause (8) of the partnership deed deals with the, capita/loans introduced by the partners to the firm. It clearly states that the partners may introduce capital and or give Loan to the firm which shall carry interest @ annum or any other rate has been mutually agreed upon” The co-ordinate bench was agreed with finding given by the learned CIT(A) and uphold the order of learned CIT(A) in the question in the said case. We have gone through the said findings and found nowhere any ground to differ with the same therefore, by relying upon the order dated 13.06.2012 by the co-ordinate bench of Mumbai. We are of the view that the disallowance of interest in respect of contribution made by the appellant as capital in the partnership firm M/s. Metal Gems is liable to be allowed in view of the provisions contended u/s. 36(1)(iii) of the Act. Accordingly we allow this appeal and direct the Assessing Officer to reassess the matter in view of the observations made above.