Ishwar Pulp and Paper Mill, Jalgaon V. Income-tax Officer, Jalgaon

ITA 1076/PUN/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 1655 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 28-06-2018
• Assessment Year: 2013-2014
• Appeal Filed On: 28-04-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Opportunity of being heard; Principle of natural justice
• Section: 32

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE . , , BEFORE SHRI D.KARUNAKARA RAO, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.1076/PUN/2017 / ASSESSMENT YEAR : 2013-14 ISHWAR PULP & PAPER MILL, GAT NO.104/2, POST UMALA, JALGAON-425003 PAN : AAOFM2941G . /APPELLANT VS. ITO, WARD-1(3), JALGAON . / RESPONDENT ASSESSEE BY : SHRI PRAMOD SHINGTE REVENUE BY : SHRI ACHAL SHARMA / DATE OF HEARING : 25.07.2018 / DATE OF PRONOUNCEMENT: 31.08.2018 / ORDER PER D. KARUNAKARA RAO, AM : THIS IS THE APPEAL FILED BY THE ASSESSEE AGAINST THE ORDE R OF CIT(A)-2, NASHIK, DATED 07-02-2017 FOR THE ASSESSMENT YEAR 2013-14. 2. GROUNDS RAISED BY THE ASSESSEE ARE EXTRACTED AS UNDER : 1. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN UPHO LDING DISALLOWANCE OF INTEREST PAID TO PARTNERS AMOUNTING TO RS.19,98,768 /- U/S.40(B) OF THE ACT. HE SPECIFICALLY ERRED IN LAW IN RECONSTRUCTING CAPITAL ACCOUNTS OF THE PARTNERS ON ACCOUNT OF NON-PROVISION OF DEPRECIATION IN BOOKS O F ACCOUNT. 2. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN UPHOL DING DISALLOWANCE OF INTEREST PAID TO BANKS AMOUNTING TO RS.6,89,920/- U /S.36(1)(III) OF THE ACT ON ACCOUNT OF ALLEGED DIVERSION OF FUNDS TO PARTNERS. HE SPECIFICALLY ERRED IN LAW IN RECONSTRUCTING CAPITAL ACCOUNTS OF THE PARTNERS TO ARRIVE AT THE SO CALLED DIVERSION OF FUNDS. 3. THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN UPHO LDING DISALLOWANCE OF RS.6,41,482/- BEING 10% OF THE EXPENSES ON ACCOUNT OF REPAIRS & MAINTENANCE, CARRIAGE INWARD, FACTORY SALARY & WAGE S AND QUALITY REBATE. ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 2 4. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN UPHOL DING DISALLOWANCE OF RS.2,374/- BEING 5% OF THE EXPENSES ON ACCOUNT OF T ELEPHONE EXPENSES. 5. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, DELETE OR SUBSTITUTE ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 3. BRIEFLY STATED RELEVANT FACTS OF THE CASE ARE THA T THE ASSESSEE IS A FIRM ENGAGED IN THE MANUFACTURING OF PULP AND PAPER . ASSESSEE FILED THE RETURN/REVISED OF INCOME DECLARING BROUGHT FORW ARD LOSSES AT RS.12,94,343/-. IN THE ASSESSMENT, AO MADE VARIOUS ADDITIONS, THE DETAILS OF WHICH ARE EXTRACTED HERE AS UNDER : TOTAL INCOME AS PER RETURN RS. NIL ADDITION/DISALLOWANCES : 1. OUT OF INTEREST TO PARTNERS U/S.40(B) 19,85,768/- 2. OUT OF INTEREST PAYMENT TO BANK DISALLOWED DUE TO DEBIT BALANCE IN TWO PARTNERS CASES RS.6,89,920/- 3. OUT OF EXPENSES IN MFG. A/C. RS.6,41,482/- 4. OUT OF EXPENSES IN P&L ACCOUNT RS.1,89,258/- 5. DIFFERENCES IN PARTYS ACCOUNT RS. 5,681/- ---------------------- RS.35,12,109/- ----------------------- THUS, THE AO MADE THE ASSESSMENT ON THE TOTAL INCOM E OF RS.35,12,110/-. IN THE FIRST APPELLATE PROCEEDINGS , THE CIT(A) CONFIRMED MOST OF THE ADDITIONS AND THE APPEAL OF T HE ASSESSEE WAS PARTLY ALLOWED. WITH THESE BRIEF FACTS, WE PROCEED TO ADJUDICATE THE GROUND-WISE ADJUDICATION IN THE SUCCEEDING PARAGRAP HS. 4. BEFORE US, AT THE OUTSET, LD.COUNSEL FOR THE ASS ESSEE DID NOT PRESS GROUND NO.4. ACCORDINGLY, THE SAID GROUND IS DISMIS SED AS NOT PRESSED. GROUND NO.5 IS GENERAL IN NATURE AND THE REFORE, THE SAME IS DISMISSED AS SUCH. THAT LEAVES GROUND NOS. 1 TO 3 RAISED BY THE ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 3 ASSESSEE FOR ADJUDICATION. GROUND-WISE ADJUDICATIO N IS GIVEN IN THE SUCCEEDING PARAGRAPHS. 5. GROUND NO.1 RELATES TO DISALLOWANCE OF INTEREST PAID TO THE PARTNERS AMOUNTING TO RS.19,85,768/-. THIS PART OF THE INTEREST PAID TO THE PARTNERS OF THE FIRM U/S.40(B) OF THE ACT. THE CALCULATIONS LEADING TO THE SAID FIGURE OF RS.19,85,768/- IS GIVEN IN PA RA NO.5 OF THE ORDER OF CIT(A) AND THE SAID PARA IS EXTRACTED HERE AS UNDER : FROM THE ABOVE TABLE, IT IS EVIDENT THAT THE ASSESS EE CLAIMED THE TOTAL EXPENDITURE U/S.40(B) OF THE ACT AMOUNTING TO RS.24 ,13,333/-. AO ALLOWED THE SUM OF RS.4,27,565/- AND DISALLOWED THE BALANCE OF RS.19,85,768/-. THE CORE REASON GIVEN BY THE AO IN SUPPORT OF THE SAID DISALLOWANCE RELATES TO THE ENHANCED BOOK PROFITS B Y WAY OF NOT DISALLOWING THE DEPRECIATION U/S.32 OF THE ACT. CO MING TO THE FACTS, AO NOTICED THAT THE ASSESSEE DID NOT CLAIM THE DEPRECI ATION U/S.32 OF THE ACT AT THE TIME OF DETERMINING THE BOOK PROFITS AND THE NET PROFITS. HOWEVER, ASSESSEE CLAIMED THE SAME IN THE COMPUTATI ON OF INCOME. ON THESE FACTS, THE AO REASONED BY NOT CLAIMING DUE DEP RECIATION OF THE SR. NO. NAME OF THE PARTNER AMOUNT OF INTEREST PAID AS PER BOOKS OF ACCOUNT AMOUNT OF INTEREST PAYABLE AS PER RECASTED CAPITAL A/C. AM OUNT OF EXCESS INTEREST PAID (3)-(4) (1) (2) (3) (4) (5) 1 SHRI BHAWANJI VISHRAM PATEL 2,88,660/ - 0 2,88,660/ - 2 SHRI CHANDULAL VISHRAM PATEL 6,16,449/ - 2,00,295/ - 4,16,154/ - 3 SHRI DEORAM VISHRAM PATEL 1,59,632/ - 0 1,59,632/ - 4 SHRI MAGANLAL VASTA RAM PATEL 2,43,145/ - 0 2,43,145/ - 5 SHRI NARAYANJI VASTARAM PATEL 2,73,417/ - 0 2,73,417/ - 6 SHRI VASANT LAVJI PATEL 2,40,479/ - 45,226/ - 1,05,253/ - 7 SHRI VINOD KESHVLAL PATEL 3,43,093/ - 1,82,044/ - 1,61,049/ - 8 SHRI YASHWANT VISHRAM PATEL 2,48,458/ - 0 2,48,438/ - TOTAL 24,13,333/- 4,27,565/- 19,85,768/- ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 4 FIRM, THE BOOK PROFITS STAND INFLATED THEREBY MORE PROFITS ARE AVAILABLE TO THE ASSESSEE FIRM FOR DISTRIBUTION AMONG THE PAR TNERS OF THE FIRM. AO DISCUSSED THIS ISSUE IN PAGE 3 TO 22 OF HIS ORDER. IN THESE PARAGRAPHS, THE AO EXTRACTED THE SUBMISSION/EXPLANATION OF THE ASSESSEE AND VARIOUS CASE LAWS (1) ACIT VS. SANT SHOE STORE 88 I TD 0524 (CHANDIGARH TRIBUNAL) (SMC); (2) SWARAJ ENTERPRISES VS. ITO 140 TTJ 0360 (VISAKHAPATNAM TRIBUNAL)/(10 TAXMANNCOM 270) A ND (3) DEVAL UTENSILS FACTORY VS. DCIT 98 TTJ 0501 (PUNE TRIBUNA L) AND DISTINGUISHED THEM AS SEEN FROM THE CONTENTS OF PAR A NO.7.4.1 TO 7.4.3 OF HIS ORDER. HE FURTHER RELIED HEAVILY ON THE COU PLE OF DECISIONS, I.E. (1) DECISION OF JAIPUR BENCH OF THE TRIBUNAL IN THE CAS E OF M.K. ENTERPRISES VS. ITO, DATED 06-11-2015 AND (2) JUDGMENT OF HONB LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ASHOKA OIL MILLS VS. CIT ITA NO.484/2005, DATED 01-09-2014. WHILE THE CASE OF M .K. ENTERPRISES (SUPRA) RELATES TO SIMILAR ALLEGATION OF INFLATION OF BOOK PROFITS BY NOT DEBITING THE DEPRECIATION, THE CASE OF ASHOKA OIL M ILLS (SUPRA) IS ON THE ALLEGATION OF INFLATION OF BOOK PROFITS BY NOT DEBIT ING THE INTEREST EXPENDITURE. IN BOTH THESE CASES, AS PER THE AO, T HE DECISIONS WAS IN FAVOUR OF THE REVENUE. FURTHER, THE ASSESSEE ALSO RELIED ON THE DECISION OF VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF ARTHI NURSING HOME VS. ITO 119 TTJ 415 (VISAKHAPATNAM) (SMC). FU RTHER, REFERRING TO THE ALLOWING OF SIMILAR CLAIM IN THE PAST, THE A O MENTIONED IN PARA NO.22 THAT THERE IS NO ESTOPPELS OR RES JUDICATA IN INCOME-TAX MATTERS. EVENTUALLY, THE AO DECIDED THIS ISSUE AGAINST THE AS SESSEE AS PER THE FINDING GIVEN IN PARA NO.25 AND THE SAME IS EXTRACT ED AS UNDER : 25. IN THE LIGHT OF THE ABOVE DISCUSSION, IT IS EMI NENTLY CLEAR THAT THE ASSESSEE FIRM HAS NOT CHARGED DEPRECIATION TO THE P & L ACCO UNT ONLY WITH THE INTENTION TO INCREASE THE CAPITAL BALANCE OF THE PARTNERS SO AS TO PROVIDE THEM HIGHER AMOUNT OF INTEREST. AS COMMUNICATED TO THE ASSESSEE VIDE THIS OFFICE LETTER ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 5 DTD.15.02.2016, THE RE-CASTED CAPITAL ACCOUNT AND T HUS ARRIVED AT EXCESS INTEREST PAID TO THE PARTNERS AMOUNTING TO RS.19,85 ,768/- IS DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE FIRM. PEN ALTY PROCEEDINGS U/S. 271(1)(C) ARE SEPARATELY INITIATED. 6. IN THE FIRST APPELLATE PROCEEDINGS, THE ASSESSEE QUESTIONED THE RE- WRITING OF THE CAPITAL ACCOUNTS OF THE PARTNERS ACC OUNT OF THE ASSESSEE AS WELL AS DISALLOWANCE OF INTEREST AMOUNTING TO RS .19,85,768/- PAID TO THE PARTNERS AND RELIED ON THE WRITTEN SUBMISSIONS MADE BEFORE THE AO. ON CONSIDERING THE SAME, IN PARA NO.5.2 OF THE APPE LLATE ORDER, THE CIT(A) DISCUSSED THE PROVISIONS OF EXPLANATION (3) TO SECTION 40(B) OF THE ACT AND CONCLUDED THAT THE BOOK PROFITS MEANS NET P ROFIT AS SHOWN IN THE PROFIT AND LOSS ACCOUNT AND COMPUTED IN THE MAN NER LAID DOWN IN CHAPTER IV-D. AS PER THE CIT(A), DEPRECIATION IS T O BE COMPULSORILY CONSIDERED WHILE COMPUTING THE SAID BOOK PROFITS/NE T PROFITS WHETHER ASSESSEE CLAIMS THE SAME OR NOT AND RELIED ON THE C ONTENTS OF EXPLANATION 5 TO SECTION 32 OF THE ACT. HE HELD TH AT THE SAME IS APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATI ON. FINALLY, HE JUSTIFIED THE RECASTING OF THE CAPITAL ACCOUNTS OF THE PARTNERS AND CONFIRMED THE DISALLOWANCE MADE BY THE AO. AGGRIEV ED WITH THE SAME, THE ASSESSEE IS IN APPEAL BEFORE US. 7. ON THIS ISSUE, LD. COUNSEL FOR THE ASSESSEE EXPL AINED THE ABOVE FACTS OF THE CASE AND ONCE AGAIN RELIED ON THE DECI SIONS (1) ACIT VS. SANT SHOE STORE 88 ITD 0524 (CHANDIGARH TRIBUNAL) ( SMC); (2) SWARAJ ENTERPRISES VS. ITO 140 TTJ 0360 (VISAKHAPATNAM TRI BUNAL)/(10 TAXMANN.COM 270) AND (3) DEVAL UTENSILS FACTORY VS. DCIT 98 TTJ 0501 (PUNE TRIBUNAL). BRINGING OUR ATTENTION TO TH E DECISION OF VISAKHAPATNAM SMC BENCH OF THE TRIBUNAL IN THE CASE OF SWARAJ ENTERPRISES (SUPRA), LD. COUNSEL MENTIONED THAT THE FACTS OF THE SAID ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 6 CASE ARE DIRECTLY APPLICABLE TO THE PRESENT CASE BUT FOR THE ASSESSMENT YEARS. THIS CASE DEALS WITH A.Y. 1999-2000 AND OTHE RS. LD. COUNSEL ALSO RELIED ON THE DECISION OF PUNE BENCH OF THE TR IBUNAL IN THE CASE OF DEVAL UTENSILS FACTORY AND DCIT (SUPRA) AND FAIRLY S UBMITTED THAT THE SAME RELATES TO THE MANNER OF CALCULATING THE INTER EST ON THE REDUCING BALANCE ON DAY-TO-DAY BASIS AND CERTAINLY NOT IN THE CONTEXT OF ALLOWABILITY OF DEPRECIATION BEFORE WORKING OUT THE DIVISIBLE BOOK PROFITS AMONG THE PARTNERS. FURTHER, LD. COUNSEL BROUGHT O UR ATTENTION TO THE JUDGMENT OF MADRAS HIGH COURT IN THE CASE OF SRI VE NKATESWARA PHOT STUDIO VS. ACIT 256 CTR 95 (MAD) AND MENTIONED THE SAID JUDGMENT IS DELIVERED IN THE CONTEXT OF SUB CLAUSE (IV) OF CLAU SE (B) OF SECTION 40 OF THE ACT. THE CONCLUSION OF THE SAID JUDGMENT READS THAT WHEN THERE IS NO SPECIFIC REFERENCE TO BOOK PROFIT AS A BASIS ON WHICH INTEREST HAS TO BE PAID, UNLIKE IN THE CASE OF SALARY, THE REVENUE C ANNOT INSIST ON DEDUCTION OF DEPRECIATION BEFORE CREDITING ANY INTER EST ON THE CAPITAL OF THE ASSESSEE FIRM FOR THE PURPOSE OF DEDUCTION U/S. 40(B)(IV). LD. COUNSEL FAIRLY SUBMITTED THAT CLAUSE (IV) DEALS WITH REFERENCE TO ANY PAYMENT OF INTEREST TO PARTNERS WHICH IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF PARTNERSHIP DEED AND RELATED TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED.... .. FURTHER, HE SUBMITTED THAT PARA NO.15 OF THE PARTNERSHIP DEED D ATED 30-03-2007 IS RELEVANT FOR THE INTEREST PAYABLE TO THE PARTNERS. FURTHER, LD. COUNSEL REFERRED TO PAGE 6 TO 12 OF THE PAPER BOOK AND SUBM ITTED THE SAME CONSTITUTES THE COPY OF THE PARTNERSHIP DEED MADE ON 01-04-2015 AND THE SAME MAINLY DEALS WITH THE PARTNERS CAPITAL INT EREST BOOK PROFITS, SEC 40(B) OF THE ACT ETC. ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 7 8. ON THE OTHER HAND, LD. DR FOR THE REVENUE RELIED HEAVILY ON THE ORDERS OF THE AO/CIT(A). REFERRING TO CLAUSE 15 OF THE PARTNERSHIP DEED, LD. DR SUBMITTED THAT THE ALLOWABILITY OF DEPRECIATI ON IS MANDATED BY THE INCOME-TAX PROVISIONS AT THE TIME OF COMPUTATIO N OF BOOK PROFITS. THEREFORE, BY VIRTUE OF THIS CLAUSE (15) ASSESSEE IS UNDER OBLIGATION TO DECIDE THE QUANTUM OF PROFITS AS PER INDIAN PARTNER SHIP ACT, 1932 OR BY ANY OF DISTINCT ENACTMENT IN FORCE FOR THE TIME BEIN G, I.E. INCOME TAX ACT, 1961 AS AMENDED BY THE FINANCE ACT, 2001. HE A LSO SUBMITTED THAT THERE ARE NUMBER OF BINDING DECISIONS TO SUGGE ST THRUSTING OF DEPRECIATION ON THE ASSESSEE IN MATTERS OF COMPUTAT ION OF THE BUSINESS PROFITS. LD. DR ALSO RELIED ON THE AMENDED PROVISI ONS OF EXPLANATION (5) TO SECTION 32 OF THE ACT DIRECTING THE ASSESSEE TO MANDATORILY CLAIM THE DEPRECIATION W.E.F. A.Y. 2002-03 AND SUBSEQUENT ASS ESSMENT YEARS. FURTHER, BRINGING OUR ATTENTION TO THE SMC DECISION OF THE CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF SANT SHOE STOR ES (SUPRA) AND SUBMITTED THAT INFLATION OF BOOK PROFITS BY WAY OF RE VALUATION OF BUILDING WAS HELD TO BE NOT ALLOWABLE FOR THE PURPOSE OF SEC TION 40(B)(IV) OF THE ACT. FURTHER, LD. DR RELIED ON THE DECISION SMC OF VISAKHAPATNAM BENCH OF THE TRIBUNAL IN THE CASE OF ARTHI NURSING HOME VS. ITO (SUPRA) AND SUBMITTED THAT THE DECISION IS AGAINST THE ASSE SSEE. FURTHER, HE SUBMITTED THAT SMC MADE A REFERENCE TO THE OTHER DE CISION OF VISAKHPATNAM TRIBUNAL IN THE CASE OF SWARAJ ENTERPR ISES (SUPRA). RELYING ON THEM, LD. DR SUBMITTED THAT THE DEPRECI ATION NEEDS TO BE CHARGED TO THE PROFITS BEFORE COMPUTING THE ALLOWAB LE INTEREST TO THE PARTNERS. 9. WE HEARD BOTH THE PARTIES ON THIS ISSUE OF INTER PRETING THE MEANING OF THE EXPRESSION BOOK PROFITS QUA THE AL LOWING OF THE ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 8 DEPRECIATION BEFORE QUANTIFYING THE PAYMENT OF INTER EST TO THE PARTNERS RAISED IN GROUND NO.1 OF THE APPEAL. WE HAVE ALSO PERUSED THE ORDERS OF THE REVENUE AND THE DECISIONS CITED BY BOTH THE S IDES. ON FACTS, THERE IS NO DISPUTE BETWEEN THE PARTIES. HOWEVER, THE DISPUTE IS WITH REGARD TO THE INTERPRETATION OF THE EXPRESSION BOO K PROFITS WITHIN THE MEANING OF SECTION 40(B) R.W. EXPLANATION (3). ON THIS ISSUE, THE DECISIONS IN THE CASE OF ARTHI NURSING HOME (SUPRA) , SWARAJ ENTERPRISES (SUPRA), AND SRI VENKATESWARA PHOTO STUDIO (SUPRA) ARE DIRECTLY RELEVANT AND OTHERS DO NOT RELATE TO THE ISSUE OF DEPRECIATI ON AND ALLOWABILITY OF INTEREST. WHILE THE VISAKHAPATNAM BENCH DECISIONS ARE NOT AGREEING ON THIS ISSUE WITH EACH OTHER, THE MADRAS HIGH COURT J UDGMENT IN THE CASE OF SRI VENKATESWARA PHOTO STUDIO (SUPRA) WAS NOT CO NSIDERED BY THE SMC BENCH DECISIONS ALTHOUGH THE SAME EXISTED AS ON 12-06-2007, I.E. ON THE DATE OF MAKING AN ORDER IN THE CASE OF ARTHI NURSING HOME (SUPRA). THIS JUDGMENT OF MADRAS HIGH COURT IS FIL ED FOR THE FIRST TIME BEFORE US ASKING FOR DIRECTION TO THE AO TO ALLOW P AYMENT OF INTEREST TO THE PARTNERS WITHOUT CLAIMING DEPRECIATION. THE MA DRAS HIGH COURT JUDGMENT IN THE CASE OF SRI VENKATESWARA PHOTO STUD IO (SUPRA) BEING DATED 24-04-2012 WAS NOT CONSIDERED AT THE TIME OF MAKING BOTH THE ASSESSMENT ORDER DATED 29-03-2016 AS WELL AS FIRST APPELLATE ORDER DATED 07-02-2017. 9.1 IN THE SAID JUDGMENT, THE HONBLE HIGH COURT DI SCUSSED THE PROVISIONS OF EXPLANATION (3) WHICH DEFINED THE BO OK PROFITS AND DIRECTED THE REVENUE NOT TO REDUCE THE GROSS PROFIT TO THE EXTENT OF DEPRECIATION IN THE ABSENCE OF ANY SPECIFIC REFEREN CE TO THE BOOK PROFITS IN SUB CLAUSE (VI) OF SECTION 40(B) OF THE ACT. REFERENCE TO THE BOOK PROFITS IS RELEVANT WHEN IT COMES TO SAID SUB- CLAUSE (V) WITH ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 9 REFERENCE TO OTHER PAYMENTS LIKE REMUNERATION. FOR THE SAKE OF REFERENCE, SUB-CLAUSE (VI) IS EXTRACTED HERE AS UND ER : ANY PAYMENT OF INTEREST TO ANY PARTNER WHICH IS AU THORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP D EED IN SO FAR AS SUCH AMOUNT EXCEEDS THE AMOUNT CALCULATED AT THE RATE OF [TWELVE] PER CENT SIMPLE INTEREST PER ANNUM; OR. THE ABOVE EXPLANATION (3) WHICH DEFINED BOOK PROFI TS APPEARED TO BE RELEVANT TO THE INTEREST PAYMENT REFERRED TO IN SUB-CLAUSE (IV) OF SECTION 40(B) OF THE ACT. THIS ASPECT IS COMPLETEL Y IGNORED IN OTHER DECISIONS OF THE TRIBUNAL WHICH IS RELEVANT BEFORE DECIDING THE GROUND IN QUESTION. 9.2 FURTHER, REGARDING THE AVAILABILITY OF ANOTHER P ARTNERSHIP DEED DATED 01-04-2015, WE FIND THERE IS A CATEGORICAL RE FERENCE TO THE MANNER OF COMPUTATION OF INTEREST PAYABLE TO THE PA RTNERS ON THE CAPITAL BALANCES AS WELL AS LOANS ADVANCED TO THE F IRM. CLAUSE (5) OF THE SAID PARTNERSHIP DEED IS RELEVANT IN THIS REGARD. THE SAME WAS NOT DISCUSSED BY BOTH THE AUTHORITIES BELOW WHILE ADJUDI CATING THE ISSUE UNDER CONSIDERATION. THUS, THE NEW PARTNERSHIP DEE D DATED 01-04- 2015 ON ONE SIDE AND THE MADRAS HIGH COURT JUDGMENT ON THE OTHER CONSTITUTES SIGNIFICANT INFORMATION WHICH IS REQUIR ED TO BE CONSIDERED BY THE CIT(A) AFRESH. FOR THIS PURPOSE, GROUND NO.1 IS ALLOWED TO BE REMANDED TO THE FILE OF CIT(A) FOR FRESH ADJUDICATI ON. CIT(A) SHALL GRANT REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSE E IN ACCORDANCE WITH THE SET PRINCIPLES OF NATURAL JUSTICE. CIT(A) IS DIRECTED TO PASS A SPEAKING ORDER CONSIDERING THE ENTIRE LEGAL PROPOSI TIONS EXISTING ON THIS ISSUE AND THE PROVISIONS OF SECTION 40(B) WITH RELE VANT SUB-CLAUSE AND EXPLANATIONS. ASSESSEE IS ALSO DIRECTED TO FURNISH THESE DOCUMENTS ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 10 AND THE DETAILS NECESSARY FOR ADJUDICATION OF THE IS SUE BEFORE THE CIT(A). ACCORDINGLY, THE GROUND NO.1 IS ALLOWED FOR STATISTI CAL PURPOSES. 10. GROUND NO.2 RELATES TO DISALLOWANCE OF INTEREST PAID TO BANKS AMOUNTING TO RS.6,89,920/- U/S.36(1)(III) OF THE AC T ON THE GROUND THAT THE INTEREST BEARING FUNDS ARE DIVERTED TO THE PART NERS. 11. AT THE OUTSET, ON THIS ISSUE, LD. COUNSEL FOR T HE ASSESSEE BROUGHT OUR ATTENTION TO THE CONTENTS OF PARA NO.26 OF THE ASSESSMENT ORDER AND SUBMITTED THAT ASSESSEE PAID INTEREST OF RS.25,31,6 45/- ON CASH CREDIT ACCOUNT OPENED WITH JALGAON JANATA SAHAKARI BANK LT D. CONSEQUENT TO THE RECONSTRUCTION OF THE CAPITAL BALANCES OF THE P ARTNERS, AS DISCUSSED IN THE CONTEXT OF GROUND NO.1, IN CASES OF TWO PART NERS, I.E. (1) SHRI MAGANLAL V. PATEL AND SHRI NARAYANJI V. PATEL, THE INTEREST BEARING FUNDS WERE FOUND DIVERTED TO THEIR ACCOUNTS AMOUNTI NG TO RS.30 LAKHS AND RS.28 LAKHS RESPECTIVELY. THE TOTAL DIVERTED IN TEREST BEARING FUNDS FROM THE CASH CREDIT ACCOUNT WORKS OUT TO RS.58 LAK HS. THE RELATABLE INTEREST PAID BY THE FIRM TO THE BANK ON THIS RS.58 LAKHS WORKS OUT TO RS.6,89,920/-. IN THIS REGARD, THE AO RELIED ON T HE JUDGMENT OF SUPREME COURT IN THE CASE OF CIT VS. MEER MOHD. ALI 53 ITR 165 (SC) AND HELD THAT WITHDRAWING THE FUNDS FROM THE CASH C REDIT ACCOUNT ATTRACTS THE DISALLOWANCE OF RELATABLE INTEREST. C IT(A) CONFIRMED THE CONCLUSIONS OF THE AO ON THIS ISSUE. 11.1 IT IS THE SUBMISSION OF THE ASSESSEE THAT THE SAID AMOUNT CONSTITUTES SHARE FROM THE PROFITS OF THE FIRM AND THEREFORE, IT IS THE RIGHT TO HAVE THESE FUNDS DRAWN FROM THE FIRM WHETH ER THEY ARE INTEREST BEARING OR OTHERWISE. IN THAT CASE, THE SAID DISAL LOWANCE IS UNCALLED FOR. FURTHER, LD. COUNSEL SUBMITTED THAT THIS ISSU E BECOMES ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 11 CONSEQUENTIAL IN NATURE TO THE OUTCOME OF THE DECIS ION IN GROUND NO.1. IF THE SHARE OF PROFITS FROM THE ACCUMULATED AS WEL L AS CURRENT YEAR PROFITS OF THE FIRM BECOMES A RIGHT OF THE ASSESSEE . IN THAT CASE, THE WITHDRAWALS BY THE PARTNERS DO NOT NEED RE-COMPUTATI ON SO FAR AS ALLOWABLE INTEREST IS CONCERNED. THEREFORE, IT IS THE OPINION OF THE LD. COUNSEL THAT THIS ISSUE SHOULD ALSO RE-VISIT TO THE FILE OF CIT(A) FOR THE COORDINATED DECISION ON GROUND NOS. 1 AND 2. 12. WE AGREE WITH THE ARGUMENTS OF THE LD. COUNSEL ON THIS ISSUE AND THE SAME STANDS REMANDED TO THE FILE OF CIT(A) WITH SIMILAR DIRECTIONS AS GIVEN IN GROUND NO.1 ABOVE. 13. GROUND NO.3 RELATES TO DISALLOWANCE OF RS.6,41, 482/- BEING 10% OF THE EXPENSES ON ACCOUNT OF REPAIRS AND MAINTENAN CE, CARRIAGE INWARD, FACTORY SALARY & WAGES AND QUALITY REBATE ETC . 14. RELEVANT FACTS ON THIS ISSUE ARE DISCUSSED IN P ARA NO.27 OF THE ASSESSMENT ORDER AND THE SAME INCLUDE THAT THE ASSE SSEE DEBITED SUM OF RS.85,65,831/- IN THE MANUFACTURING ACCOUNT TOWA RDS DIRECT EXPENSES. OUT OF THE SAME, RS.64,14,823/- WAS INCU RRED ON VARIOUS ACCOUNTS ENLISTED ABOVE WERE EXAMINED DURING THE AS SESSMENT PROCEEDINGS. CONSIDERING THE FACT THAT MOST OF THE SE EXPENSES ARE SELF- VOUCHED AND THE CORRECTNESS OF EXPENDITURE WAS NOT VERIFIABLE, THE AO CALLED FOR DETAILED EVIDENCES IN SUPPORT OF THE CLA IM. ASSESSEE FAILED TO DO SO. RELYING ON THE JUDGMENT OF BOMBAY HIGH COURT IN THE CASE OF RAMANAND SAGAR VS. DCIT 256 ITR 134, THE AO HELD TH AT THE ASSESSEE FAILED TO DISCHARGE THE ONUS. IT IS THE ARGUMENT O F THE AO THAT WHEN A DEDUCTION IS CLAIMED, ASSESSEE HAS TO EXPLAIN WITH EVIDENCES AND GENUINENESS OF THE EXPENDITURE. AO ALSO RELIED ON VARIOUS OTHER ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 12 DECISIONS DISCUSSED IN PARA NO.28 AND HELD THAT ASS ESSEE FAILED TO PROVE THE SAID EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS. RELEVANT LINES FROM THIS PARA GRAPH IS EXTRACTED ARE AS UNDER : 28.. .IN THE CASE OF THE PRESENT ASSESSEE FIRM, I T IS STATED THAT THE ASSESSEE HAS MAINTAINED MUSTER AND SALARY, WAGES RE GISTER IS NOT SUFFICIENT PARTICULARLY THE SAME WAS NOT PRODUCED FOR VERIFICA TION. FURTHER, IT IS STATED THAT THE SAME IS LOST FOR WHICH FIR HAS BEEN LAUNCH ED AND COPY OF SUCH COMPLAINT IS ENCLOSED IS ALSO TOTALLY FALSE AND MIS LEADING. NO SUCH ENCLOSURE IS FILED BY THE ASSESSEE FIRM. WITH REGARD TO REPA IRS TO PLANT AND MACHINERY, IT IS STATED THAT SEPARATE SHEET ALONGWITH COPIES OF B ILLS IS ATTACHED IS ALSO FALSE AS NOTHING HAS BEEN ENCLOSED WITH THIS LETTER. THE ASSESSEE HAS NOT PROVED THAT THE ABOVE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. CONSIDERI NG ALL THESE FACTS AND IN ABSENCE OF ANY DOCUMENTARY EVIDENCES, 10% OUT OF TH E ABOVE EXPENSES ARE DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE FIRM, WHICH WORKS OUT TO RS.6,41,482/-. THUS, THE AO DISALLOWED 10% OF THE ABOVE EXPENDITUR E ON ADHOC BASIS WORKS OUT TO RS.6,41,482/-. 15. IN THE FIRST APPELLATE PROCEEDINGS, THE CIT(A) DISCUSSED THIS ISSUE IN PARA NO.7 OF HIS ORDER AND EXTRACTED THE SUBMISS IONS OF THE ASSESSEE IN SUB-PARA 7.1. BARRING BALD CLAIMS STATING THAT THE ENTIRE EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSES AND ALSO STATING THAT ENTIRE EXPENDITURE IS GENUINE EXPENDITURE, THE ASSESSEE DI D NOT FURNISH EVIDENCES AS DEMANDED BY THE AO. ACCORDINGLY, THE CI T(A) DISMISSED THE GROUND RAISED BY THE ASSESSEE IN THIS REGARD AN D CONFIRMED THE ADDITION MADE BY THE AO IN PARA NO.7.2 AND THE SAME READS AS UNDER : 7.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND RIVAL CONTENTIONS. ON PERUSAL OF THE SAME IT HAS BEEN NO TICED THAT THE APPELLANT HAS NOT REBUTTED THE CONTENTIONS OF THE A O AND REASONS MENTIONED BY THE AO FOR DISALLOWING THE EXPENSES TO THE EXTENT OF 10%. THE ONUS OF PROVING THE EXPENDITURE CLAIMED IS ON T HE ASSESSEE AND IN VIEW OF THE ABOVE FACTS THE APPELLANT HAS FAILED TO DISCHARGE THE ONUS. THE AO IS THEREFORE JUSTIFIED IN MAKING THE ADDITIO N OF RS.6,41,482/- ON ACCOUNT OF DISALLOWANCE OF EXPENDITURE AND HENCE TH E SAME IS CONFIRMED. GROUND NO.3 IS DISMISSED. ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 13 16. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THE ENTIRE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR T HE BUSINESS PURPOSES OF THE ASSESSEE. REFERRING TO CERTAIN EXP ENSES LIKE WAGES, CARRIAGE INWARD, REPAIRS AND MAINTENANCE ETC., LD. COUNSEL SUBMITTED THAT IT IS PRACTICALLY NOT POSSIBLE TO MAIN THIRD PA RTY VOUCHERS CAPABLE OF SCRUTINY OF THE AUTHORITIES. FURTHER, HE SUBMITT ED THAT WHEN THE INCOME IS EARNED AND THE GOODS ARE MANUFACTURED UND ISPUTEDLY, THE EXPENDITURE MENTIONED IN PARA NO.27 OF THE ASSESSME NT ORDER ARE NECESSARY FOR THE BUSINESS PURPOSES. 17. LD. DR FOR THE REVENUE RELIED ON THE ORDERS OF THE AO AND CIT(A) AND SUBMITTED THAT IN MATTERS OF CLAIMS U/S.37(1) OF THE ACT, THE ONUS IS HEAVILY ON THE ASSESSEE AND THE ASSESSEE FAILED T O DO SO IN THE PRESENT CASE. THEREFORE, LD. DR PRAYED FOR CONFIRM ING THE CONCLUSIONS OF AO/CIT(A). 18. WE HEARD BOTH THE BOTH THE PARTIES ON THIS ISSU E AND PERUSED THE ORDERS OF THE REVENUE AS WELL AS THE PAPER BOOK FIL ED BEFORE US. WE HAVE ALSO GONE THROUGH THE CONTENTS OF PAGES 22 TO 35 OF THE PAPER BOOK AND THEY RELATE TO THE ABOVE REFERRED EXPENDITURE AM OUNTING TO RS.64,14,823/-. THESE DOCUMENTS CONSTITUTE THE LED GER EXTRACTS FROM THE BOOKS OF ACCOUNT OF THE ASSESSEE. FURTHER, WE FIND FROM THE ORDERS OF THE REVENUE THAT THE AO MERELY DISALLOWED 10% OF THE ENTIRE EXPENDITURE WHICH INDICATES ACCEPTING THE GENUINENE SS OF THE EXPENDITURE. AO MERELY DOUBTED THE QUANTUM OF EXPEN DITURE WITHOUT HAVING ANY BASIS OR EVIDENCE IN HIS POSSESSION. IT IS NOT THE CASE OF THE REVENUE THAT THE AO VERIFIED THE CLAIM OF THE EXPEN DITURE AND FOUND THEY ARE FALSE OR OTHERWISE. FURTHER ALSO, WE FIND A O DID NOT BRING ANY ITA NO.1076/PUN/2017 ISHWAR PULP AND PAPER MILL 14 EVIDENCE TO DEMONSTRATE 10% ADOPTED BY HIM HAS SUSTA INABLE BASIS. THEREFORE, WE ARE OF THE OPINION THAT THE PERCENTAG E LINKED DISALLOWANCE IS NOT LEGALLY SUSTAINABLE. ON THE OTHER HAND, ASSE SSEE FAILED TO PRODUCE THE EVIDENCES AND DISCHARGED THE ONUS IN DE MONSTRATING THE CORRECTNESS OF THE CLAIM WITH EVIDENCES. FURTHER, T O PLUG THE DEFICIENCIES FROM ASSESSEES SIDE, WE ARE OF THE OP INION THAT DISALLOWANCE OF SOME PORTION OF IT, I.E. A ROUND-SU M OF RS.5 LAKHS SHOULD MEET THE ENDS OF JUSTICE. ACCORDINGLY, AO IS DIRECTED TO RESTRICT THE DISALLOWANCE TO RS.5 LAKHS INSTEAD OF RS.6,41,4 82/- (10% OF RS.64,14,823/-. ACCORDINGLY, GROUND NO.3 IS PARTLY A LLOWED. 19. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON 31 ST DAY OF AUGUST, 2018. SD/- SD/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) /JUDICIAL MEMBER / ACCOUNTANT MEMBER PUNE; DATED : 31 ST AUGUST, 2018 / COPY OF THE ORDER FORWARDED TO : / BY ORDER, //TRUE COPY// SENIOR PRI VATE SECRETARY , / ITAT, PUNE 1. / THE APPELLANT 2. / THE RESPONDENT 3. THE CIT(A)-2, NASHIK 4. THE PR.CIT-1, NASHIK 5. , , SMC BENCH PUNE; 6. / GUARD FILE.