Dy. CIT, CIRCLE - 2(1), Vijayawada V. Sri Maganti Bhaskara Murthy, Vijayawada

ITA 117/VIZ/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 0250 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 15-09-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 25-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: B BABU RAO
• Keywords: Rejection of books of accounts; Business income; Depreciation; Business expenditure; Earning of tax free income; Fair market value; Notional interest
• Section: 143(3); 142(1); 14A

Judgement Text

ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . . . . , ,, , . . . . , , , , % % % % BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER . .. ./ // / I.T.A.NO. 117/VIZAG/2013 ( / ASSESSMENT YEAR : 2008-09 ) DCIT CIRCLE - 2(1) VIJAYAWADA VS. SRI MAGANTI BHASKARA MURTHY VIJAYAWADA [ PAN:ADPPM 9408A ] (, , , , / APPELLANT) (-., -., -., -., / RESPONDENT ) , / / APPELLANT BY : SHRI C. SUBRAHMANYAM, AR -., / / RESPONDENT BY : SHRI B. BABU RAO, DR / 3 / DATE OF HEARING : 15.09.2015 / 3 / DATE OF PRONOUNCEMENT : 30.09.2015 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF LD. CIT(A), VIJAYAWADA, DATED 11.12.2012 AND IT PER TAINS TO THE ASSESSMENT YEAR 2008-09. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF TRADING IN WRIST WATCHES , UNDER THE NAME AND STYLE OF M/S. MADHURI TIMES AND ALSO DERIVING I NCOME FROM HOUSE PROPERTY, SALARY AND CAPITAL GAINS. THE ASSESSEE H AS FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09 ON 26.3.2009 , DECLARING A TOTAL INCOME OF RS.53,85,799/-. THE RETURN OF INCOME WAS PROCESSED U/S 143(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REF ERRED TO AS THE ACT) ON 21.3.2010. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY THROUGH CASS (COMPUTER ASSISTED SELECTION SYSTEM) AND NOTIC E U/S 143(2) OF THE ACT DATED 18.8.2009 WAS ISSUED AND DULY SERVED ON 2 7.8.2009. IN RESPONSE TO THE NOTICE ISSUED U/S 143(2) & 142(1) O F THE ACT, THE ASSESSEES AUTHORISED REPRESENTATIVE SHRI PRABHAKAR RAO AND ASSESSEE SHRI BHASKAR MURTHY APPEARED FROM TIME TO TIME AND PRODUCED THE BOOKS OF ACCOUNTS, BILLS & VOUCHERS AND OTHER RELEV ANT MATERIAL BEFORE THE ASSESSING OFFICER. THE A.O., AFTER CONSIDERING THE DETAILS SUBMITTED BY THE ASSESSEE HAS PASSED THE ASSESSMENT ORDER U/S 143(3) OF THE ACT BY MAKING THE FOLLOWING ADDITIONS: I. INTEREST PAID TO HDFC BANK RS.7,10,543/- II. INTEREST PAID ON HOUSING LOAN AND DISALLOWANCE OF STATUTORY DEDUCTION U/S 24 RS.2,81,179/- III. ESTIMATED INCOME ON HOUSE PROPERTY RS.2,38,816/- ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 3 IV. DISALLOWANCE OF CLAIM OF LOSS OF ASSETS RS.5,02,449 /- V. ADVERTISEMENT CHARGES PAID RS.23,974/- VI. DISALLOWANCE OF CLAIM OF DEPRECIATION ON BUILDING USED FOR THE PURPOSE OF BUSINESS RS.45,503/- VII. NOTIONAL INTEREST ON INVESTMENTS RS.26,02,952/- VIII. NOTIONAL INTEREST ON INVESTMENTS RS.41,25,000/- 3. THE ASSESSEE CHALLENGED THE ASSESSING OFFICERS ORDER BEFORE THE CIT(A). THE LD. CIT(A), AFTER CONSIDERING THE EXPL ANATIONS OFFERED BY THE ASSESSEE, DELETED THE FOLLOWING ADDITIONS AND C ONFIRMED THE REST OF THE ADDITIONS: I. INTEREST PAID TO HDFC BANK RS.7,10,543/- II. INTEREST PAID ON HOUSING LOAN AND DISALLOWANCE OF STATUTORY DEDUCTION U/S 24 RS.2,81,179/- III. ESTIMATED INCOME ON HOUSE PROPERTY RS.2,38,816/- IV. ADVERTISEMENT CHARGES PAID RS.23,974/- V. NOTIONAL INTEREST ON INVESTMENTS RS.26,02,952/- VI. NOTIONAL INTEREST ON INVESTMENTS RS.41,25,000/- 4. AGGRIEVED BY THE CIT(A)S ORDER, THE REVENUE IS IN APPEAL BEFORE US AND RAISED THE FOLLOWING GROUNDS:- A. THE ID. CIT(A) ERRED BOTH IN LAW AND IN FACTS OF THE CASE. B. THE ID. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE REMUNERATION RECEIVED BY THE ASSESSEE FROM THE FIRM IS FOR THE S ERVICES RENDERED BY THE ASSESSEE AND THE SHARE INCOME FROM THE FIRM IS EXEM PT U/S. 10(2A) AND EXPENDITURE INCURRED ON EXEMPT INCOME IS NOT ALLOWA BLE AS PER THE PROVISIONS OF SECTION 14A OF THE I.T ACT. C. THE ID. CIT(A) FAILED TO NOTE THAT THE ASSESSEE WAS NOT IN RECEIPT OF INTEREST ON THE CAPITAL BALANCE OF RS.1,96,02,44 4/- FROM THE FIRM ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 4 M/S.THE MITRA AGENCIES IN WHICH THE ASSESSEE HAS IN VESTED THE BORROWED FUNDS. HENCE, THE CIT(A) OUGHT TO HAVE CON FIRMED THE DISALLOWANCE OF INTEREST OF RS7,10,543/-. D. RELIANCE IS PLACED ON THE FOLLOWING JUDICIAL PRO NOUNCEMENTS WHEREIN IT WAS HELD THAT INTEREST ON LOAN IS NOT ALLOWABLE AS THE ASSESSEE WAS NOT ENTITLED TO ANY INTEREST ON HIS CAPITAL BALANCE AS PER PARTNERSHIP DEED, AND WHATEVER REMUNERATION WAS EARNED BY HIM, WAS ON ACC OUNT OF SERVICES RENDERED BY HIM FOR THE FIRM. I. D.J.MEHTA VS ITO (ITAT MUMBAL) 104 LTD 527 II. CIT VS POPULAR VECHICLES & SERVICES LTD. (KER) 325 ITR 523 E. THE ID. CIT(A) OUGHT TO HAVE HELD THE INCOME FRO M PROPERTY AT HIMAYAT NAGAR AS INCOME UNDER THE HEAD 'INCOME F ROM OTHER SOURCES' CONSIDERING THE PLINTH AREA OF THE BUILDING IN THE SITE AND AS THE RENT IS BEING PAID FOR USING THE VACANT SITE. THE STATUTORY DEDUCTION CLAIMED U/S.24(A) IS NOT ALLOWABLE UNDER THE HEAD OTHER SOU RCES. F. THE ID. CIT(A) ERRED IN AGREE IN G WITH THE CONTENTIONS OF THE ASSESSEE THAT THE PROPERTY IS 40 YEARS OLD AND DOES NOT FETC H MUCH RENT SINCE THE ASSESSEE HAS NOT PUT FORTH THESE FACTS BEFORE T HE AO. THE CJT(A) OUGHT TO HAVE GIVEN AN OPPORTUNITY TO THE AD. G. THE ID. CIT(A) OUGHT TO HAVE UPHELD THE ADDITION OF RS.23,974/- AS THE DECISION OF THE SPECIAL BENCH: VIZAG IN THE CAS E OF MERYLIN SHIPPING CORPORATION HAS BEEN KEPT UNDER INTERIM SUSPENSION' BY THE HON'BLE HIGH COURT OF A.P. VIDE ORDER DT.08/10/2012. H. THE ID. CIT(A) OUGHT TO HAVE CONFIRMED THE ADDIT IONS OF RS.26,02,952/- AND RS41,25,000/- TOWARDS NOTIONAL I NTEREST CHARGED ON THE INVESTMENTS MADE SINCE THE ASSESSEE IS NOT OFFE RING ANY, INCOME BUT INCURRING HUGE EXPENDITURE TOWARDS INTER EST. I. ANY OTHER GROUND THAT MAY BE URGED AT THE TIME O F HEARING. 5. FROM THE ABOVE GROUNDS OF APPEAL, THE REVENUE HA S AGITATED THE FOLLOWING ISSUES FOR OUR CONSIDERATION. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 5 A) WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS RIGHT IN DELETING THE FOLLOWING ADDITIONS MADE BY T HE ASSESSING OFFICER? I. INTEREST PAID TO HDFC BANK OF RS.7,10,543/- II. STANDARD DEDUCTION AND INTEREST PAID ON BORROWED CA PITAL OF RS.2,81,979/- CLAIMED U/S 24 OF THE ACT. III. ESTIMATION OF GROSS ANNUAL VALUE FROM LET OUT PROPE RTY OF RS.2,38,816/- IV. DISALLOWANCE OF ADVERTISEMENT EXPENDITURE U/S 40A(I A) OF THE ACT OF RS.23,974/-. V. NOTIONAL INTEREST ON INVESTMENTS IN FIRMS AND COMPA NIES OF RS.26,02,952/- VI. NOTIONAL INTEREST ON INVESTMENTS AND IN FIRMS AND C OMPANIES OF RS.41,25,000/-. INTEREST PAID TO HDFC BANK: 6. THE ASSESSEE HAS BORROWED RS.50 LAKHS FROM HDFC BANK AND IN TURN INVESTED THE SAME AMOUNT IN THE PARTNERSHIP FI RM M/S. MITHRA AGENCIES, WHEREIN HE HAS A PARTNER HAVING 60% SHARE OF PROFITS. THE ASSESSEE HAS CLAIMED INTEREST PAID ON LOAN AMOUNT O F RS.7,10,543/- AS BUSINESS EXPENDITURE. THE ASSESSING OFFICER DISALL OWED THE INTEREST PAID TO HDFC BANK BY STATING THAT THE APPELLANT HAS CLAI MED THE DEDUCTION ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 6 WITHOUT DERIVING ANY TAXABLE INCOME. THE CIT(A) DE LETED ADDITION MADE BY THE ASSESSING OFFICER, BY HOLDING THAT THE ASSES SEE HAS RECEIVED REMUNERATION OF RS.6 LAKHS FROM THE PARTNERSHIP FIR M WHICH IS TAXABLE UNDER THE HEAD INCOME FROM BUSINESS U/S 28(V) OF TH E ACT AND HE HAS ALSO RECEIVED SHARE INCOME OF RS.32,48,000/- WHICH WAS NOT INCLUDED IN THIS TOTAL INCOME IN VIEW OF THE PROVISIONS OF SECT ION 10(2A) OF THE ACT AS IT HAS ALREADY BEEN TAXED IN THE HANDS OF THE FIRM. THEREFORE, THE CIT(A) WAS OF THE OPINION THAT THE ASSESSEE HAS EAR NED RS.6 LAKHS REMUNERATION FROM FIRM AND RS.32,48,000/- SHARE OF PROFIT AS A RESULT OF INVESTMENT IN THE FIRM FROM THE BORROWED FUNDS. TH EREFORE, THE CIT(A), DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 7. THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS CLA IMED THE INTEREST AGAINST EXEMPT INCOME, THEREFORE, IT CANNOT BE ALLO WED AS A DEDUCTION AS A BUSINESS EXPENDITURE. THE LD. D.R. FURTHER SU BMITTED THAT THOUGH ASSESSEE EARNS REMUNERATION OF RS.6 LAKHS AND SHARE OF INCOME OF RS.32,48,000/- FROM THE FIRM, THE REMUNERATION IS P AID TO THE PARTNER FOR SERVICES RENDERED BY HIM IN THE CAPACITY OF AN INDI VIDUAL AND THE SHARE OF PROFIT IS AN EXEMPT INCOME. THEREFORE, INTEREST PAID ON BORROWED FUNDS AGAINST THESE TWO ITEMS OF INCOME CANNOT BE A LLOWED. IN SUPPORT OF ITS CONTENTIONS, THE LD. D.R. RELIED ON THE FOLL OWING TWO JUDGMENTS: ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 7 1. D.J. MEHTA VS. ITO REPORTED IN 104 ITD 527 ITAT MUM BAI. 2. CIT VS. POPULAR VEHICLES & SERVICES LTD. (KER) 3 25 ITR 523. 8. THE LD. A.R. ON THE OTHER HAND, STRONGLY SUPPORT ED THE ORDER OF THE CIT(A). THE LD. A.R. FURTHER SUBMITTED THAT TH E ASSESSE, HAS INVESTED AMOUNT IN THE SHARE CAPITAL OF FIRM, AS A RESULT OF WHICH HE HAS EARNED RS.6 LAKHS REMUNERATION WHICH IS TAXABLE U/S 28(V) OF THE ACT AND ALSO SHARE OF INCOME OF RS.32,48,000/- WHICH IS EXEMPT U/S 10(2A) OF THE ACT. UNLESS, THE FUNDS ARE INVESTED IN THE PARTNERSHIP FIRM, ASSESSEE WOULD NOT HAVE EARNED THIS INCOME. THOUGH , THE SHARE OF PROFIT IS EXEMPT IN THE HANDS OF THE ASSESSEE, IT H AS ALREADY SUFFERED TAX IN THE HANDS OF THE FIRM. THEREFORE, EVEN ASSUMING THAT THE INTEREST IS PAID ON PARTNERS CAPITAL ACCOUNT WHICH IS TAXABLE IN THE HANDS OF ASSESSEE, THE SAME AMOUNT IS DEDUCTIBLE AS BUSINESS EXPENDITURE IN THE HANDS OF THE FIRM. THEREFORE, THE LEGITIMATE TAXES PAYABLE TO THE EXCHEQUER OF THE GOVERNMENT IS ALREADY PAID BY THE FIRM AND BALANCE AMOUNT IS DISTRIBUTED AMONG THE PARTNERS WHICH IS B EING EXEMPT U/S 10(2A) OF THE ACT. THE ASSESSEE HAS RIGHTLY CLAIME D THE INTEREST PAID ON BORROWED FUNDS AGAINST THE BUSINESS INCOME. THEREF ORE, THE A.R., URGED TO CONFIRM THE ORDER OF THE CIT(A). 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MA TERIALS AVAILABLE ON RECORD AND ALSO CONSIDERED THE CASE LA WS CITED BY THE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 8 REVENUE. IT IS UNDISPUTED FACT THAT THE ASSESSEE H AS INVESTED RS.50 LAKHS IN THE PARTNERSHIP FIRM AND AS A RESULT OF TH IS INVESTMENT, IT HAS EARNED REMUNERATION OF RS.6 LAKHS AND SHARE OF INCO ME OF RS.32,48,000/- FROM THE FIRM. UNLESS THIS INVESTME NT IS BEING MADE, THE ASSESSEE WOULD NOT HAVE EARNED THESE TWO INCOMES. THE A.O. DISALLOWED THE INTEREST PAID ON LOAN ON THE SOLE GR OUND THAT THE INCOME FROM THE PARTNERSHIP FIRM IS EXEMPT IN THE HANDS OF THE ASSESSEE AND THE REMUNERATION RECEIVED FROM THE FIRM IS FOR THE SERVICES RENDERED BY HIM TO THE FIRM. THEREFORE, THERE IS NO NEXUS BETW EEN INVESTMENTS AND INCOME EARNED FROM THE FIRM. WE DO NOT AGREE WITH THE STAND OF THE A.O., FOR THE SIMPLE REASON THAT THERE IS A NEXUS B ETWEEN INVESTMENT AND INCOME EARNED. AS A RESULT OF INVESTMENT IN TH E FIRM, THE ASSESSEE HAS EARNED THESE TWO INCOMES, I.E. RS. 6,00,000/- R EMUNERATION, WHICH IS TAXABLE IN THE HANDS OF THE ASSESSE AND ALSO SHA RE OF PROFIT OF RS. 32.48 LACS, WHICH IS EXEMPT, AS IT HAS ALREADY SUFF ERED TAX IN THE HANDS OF THE FIRM. THEREFORE, EXPENDITURE INCURRED ON TH E BORROWED FUNDS FOR INVESTMENTS IN SHARE CAPITAL OF FIRM SHOULD BE ALLO WED AS BUSINESS EXPENDITURE. 10. THE REVENUE HAS RELIED ON HONBLE KERALA HIGH C OURT JUDGMENT IN THE CASE OF CIT VS. POPULAR VEHICLES AND SERVICES L TD. (2010) 325 ITR ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 9 523. WE HAVE EXAMINED THE HONBLE KERALA HIGH COURT JUDGEMENT IN THE LIGHT OF THE FACTS OF THE PRESENT CASE. THE CASE BE FORE THE HONBLE KERALA HIGH COURT IS THAT THE ASSESSEE ADVANCED LOAN TO PA RTNERSHIP FIRM FROM THE FUNDS BORROWED AND CLAIMED INTEREST PAID ON SUC H LOAN. IN THE PRESENT CASE, THE ASSESSEE HAS MADE INVESTMENTS IN THE SHARE CAPITAL OF THE FIRM AND AS A RESULT OF WHICH, HE HAD EARNED RE MUNERATION WHICH IS TAXABLE IN THE HANDS OF ASSESSEE AND ALSO SHARE OF PROFIT WHICH IS EXEMPT. SIMILARLY THE DR RELIED ON THE CO-ORDINATE BENCH DECISION IN THE CASE OF D.J. MEHTA VS. INCOME TAX OFFICER, (2007) 1 04 ITD 527, WHEREIN, THE BENCH HELD THAT THERE IS NO PROVISION IN THE PARTNERSHIP DEED FOR PAYMENT OF INTEREST TO THE PARTNERS ON THE FUNDS ADVANCED BY PARTNERS. THEREFORE, THE FINDINGS OF THE BENCH IS T HAT WHEN INTEREST PAID ON BORROWED FUNDS WITH NO POSSIBILITY OF GENERATING INTEREST WHEN THE SAID FUND IS ADVANCED AS LOAN TO FIRM, INTEREST PAI D IS DISALLOWABLE. THEREFORE, THE TWO JUDGMENTS RELIED ON BY THE REVEN UE ARE ON DIFFERENT FACTS AND HENCE, NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THEREFORE, FOR THE REASONS STATED ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). A CCORDINGLY, WE UPHELD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAIS ED BY THE REVENUE. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 10 DISALLOWANCE OF STANDARD DEDUCTION AND INTEREST PAI D ON HOUSING LOAN. 11. THE ASSESSEE OWNED A PROPERTY AT HIMAYATNAGAR, HYDERABAD CONSISTING OF LAND ADMEASURING 380 SQ.YDS. AND A BU ILDING CONSISTING OF 307 SQ.FT. THE PROPERTY WAS LET OUT TO PARTNERSHIP FIRM M/S. THE MITHRA AGENCIES FOR PARKING AND MAKING READY FOR PDI OF MA RUTI VEHICLES AND THE INCOME FROM THE SAID PROPERTY WAS OFFERED UNDER THE HEAD INCOME FROM HOUSE PROPERTY. DURING THE COURSE OF ASSESSME NT, THE ASSESSING OFFICER ASSESSED THE INCOME FROM SAID PROPERTY UNDE R THE HEAD INCOME FROM OTHER SOURCES AND DISALLOWED THE STANDARD DEDU CTION AND INTEREST PAID ON BORROWED CAPITAL U/S 24 OF THE ACT OF RS.34 ,200/- AND RS.2,46,949/- RESPECTIVELY. DURING THE APPELLATE P ROCEEDINGS, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE AND HELD T HAT INCOME FROM THE SAID PROPERTY IS ASSESSABLE UNDER THE HEAD INCOME F ROM HOUSE PROPERTY. 12. THE LD. D.R. SUBMITTED THAT THE ASSESSEE OWNS A PROPERTY AD MEASURING 380 SQ.YDS. OF LAND AND BUILT A SMALL POR TION OF BUILDING OF 307 SQ.FT. THE PROPERTY LET OUT TO FIRM WAS A VACA NT LAND THEREFORE, THE ANNUAL RENTAL INCOME FROM THE SAID PROPERTY SHOULD BE ASSESSABLE UNDER THE HEAD INCOME FROM OTHER SOURCES AND DEDUCTIONS C LAIMED U/S 24 OF THE ACT BEING STANDARD DEDUCTION AND INTEREST PAID ON BORROWED CAPITAL CANNOT BE ALLOWED AS A DEDUCTION. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 11 13. THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE O N THE OTHER HAND, SUBMITTED THAT THE PROPERTY LET OUT WAS CONSISTING OF LAND AND BUILDING WHICH WAS LET OUT TO A PARTNERSHIP FIRM FOR AN ANNU AL RENT OF RS.1,14,000/-. THE A.R. FURTHER SUBMITTED THAT THE SAID PROPERTY WAS ACQUIRED BY THE ASSESSEE IN THE YEAR 2004 FROM THE BORROWED FUNDS OF ORIENTAL BANK OF COMMERCE AND RIGHT FROM THE ASSESS MENT YEAR 2004- 05, HE HAS OFFERED THE INCOME UNDER THE HEAD INCOME FROM THE HOUSE PROPERTY. THEREFORE, HE STRONGLY SUPPORTED THE ORD ER OF THE CIT(A) AND URGED TO CONFIRM THE CIT(A)S ORDER. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. ADMITTEDLY, THE PROPERTY SO L ET OUT IS CONSISTING OF LAND AND BUILDING. THE ASSESSEE HAS ACQUIRED THE S AID PROPERTY IN THE YEAR 2004 BY BORROWING A LOAN FROM COMMERCIAL BANK AND ASSESSED THE INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY RI GHT FROM THE BEGINNING. THE DEPARTMENT ACCEPTS THE STAND OF THE ASSESSEE IN THE EARLIER YEARS, CANNOT DISPUTE NOW UNDER THE SAME SE T OF FACTS. THE AO WAS OF THE VIEW THAT THE PROPERTY WAS PREDOMINANTLY WAS A VACANT SITE AND HAVING A SMALL BUILDING CANNOT BE CONSIDERED AS A HOUSE PROPERTY TO ASSESS THE INCOME FROM SAID PROPERTY UNDER INCOME F ROM HOUSE PROPERTY. WE DO NOT AGREE WITH THE CONTENTION OF THE ASSESSING OFFICER, ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 12 FOR THE REASON THAT THE ANNUAL VALE OF ANY BUILDING S OR LAND APPURTENANT THERETO OF WHICH THE ASSESSEE IS A OWNER, INCOME FR OM SUCH PROPERTY IS CHARGEABLE UNDER THE HEAD INCOME FROM HOUSE PROPERT Y. FURTHER, ONCE THE INCOME IS ASSESSABLE UNDER THE HEAD HOUSE PROPE RTY, CONSEQUENT DEDUCTIONS BEING STANDARD DEDUCTION U/S 24(A) AND I NTEREST PAID ON BORROWED CAPITAL U/S 24(B) SHOULD BE ALLOWED WHILE COMPUTING THE INCOME FROM HOUSE PROPERTY. THE CIT(A), HAS RIGHTL Y DELETED THE ADDITIONS MADE BY THE ASSESSING OFFICER. THEREFORE, FOR THE REASONS STATED ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE O RDER PASSED BY THE CIT(A) AND ACCORDINGLY THE REVENUES GROUND IS DISM ISSED. ESTIMATED INCOME FROM THE HOUSE PROPERTY 15. THE ASSESSEE OWNED A HOUSE PROPERTY SITUATED AT NEW NALLAKUNTA, HYDERABAD. THE HOUSE WAS LET OUT FOR AN ANNUAL REN T OF RS.96,000/- AND OFFERED THE INCOME UNDER THE HEAD INCOME FROM H OUSE PROPERTY. DURING THE COURSE OF ASSESSMENT, THE A.O. NOTICED T HAT THE ASSESSEE PAYING RENT OF RS.1,08,000/- TO HIS WIFE FOR A HOUS E PROPERTY WHICH IS MEASURING 650 SQ.FT. THEREFORE, THE A.O. APPLIED T HE AVERAGE RATE OF RENT FROM ASSESSEE WIFE PROPERTY TO THE ASSESSEES PROPERTY AND ESTIMATED THE GROSS ANNUAL RENTAL VALUE OF RS.4,78, 308/- AND AFTER ALLOWING 30% REBATE U/S 24 OF THE ACT COMPUTED THE INCOME FROM HOUSE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 13 PROPERTY AT RS.2,38,816/- AS AGAINST THE ASSESSEES DECLARATION OF RS.96,000/-. THE CIT(A), AFTER CONSIDERING THE SUB MISSIONS MADE BY THE ASSESSEE, DELETED THE ADDITIONS MADE BY THE A.O., B Y HOLDING THAT THE SAID BUILDING IS 40 YEARS OLD SITUATED IN A RESIDEN TIAL LOCALITY AND CANNOT BE COMPARED TO THE ANOTHER BUILDING BELONGING TO AS SESSEES WIFE WHICH IS SITUATED IN A COMMERCIAL LOCALITY. 16. THE LD. D.R. SUBMITTED THAT THE PLINTH AREA OF THE PROPERTY LET OUT WAS 2880 SQ.FT. AND THE RENT OFFERED TO SUCH BUILDI NG SEEMS TO BE VERY LOW. THE D.R, FURTHER, SUBMITTED THAT THE ASSESSEE IS PAYING A RENT OF RS.1,08,000/- ON LEASED PREMISES TO HIS WIFE WHICH IS CONSISTING OF 650 SQ.FT. WHICH WORKS OUT TO RS.13.84PS. PER SQ.FT. T HEREFORE, KEEPING IN VIEW OF THE LOCALITY, FAIR MARKET VALUE AND THE AVE RAGE RENT PAID ON LEASED PREMISES TO HIS WIFE, THE AVERAGE RENT PAID TO WIFE PROPERTY, SHALL BE ADOPTED TO THE LET OUT PROPERTY IN THE HANDS OF THE ASSESSEE. 17. ON THE OTHER HAND, THE AUTHORISED REPRESENTATIV E OF THE ASSESSEE, STRONGLY SUPPORTED THE ORDERS OF THE CIT(A) AND REQ UESTED TO CONFIRM THE CIT(A)S ORDER. THE A.R., FURTHER SUBMITTED THA T THE MUNICIPAL TAXES PAID FOR THE SUBJECT PROPERTY IS OF RS. 2636/-, WHI CH GIVES A MUNICIPAL VALUATION OF RS. 10,544/-, AS AGAINST WHICH THE ASS ESSEE OFFERED A ANNUAL VALUE OF RS. 96,000/-. THE A.R. FURTHER, SUB MITTED THAT THE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 14 MUNICIPAL VALUATION IS A STRONG PIECE OF EVIDENCE F OR DETERMINING THE ANNUAL VALUE OF THE PROPERTY. SINCE, THE ANNUAL VA LUE DECLARED BY THE ASSESSEE IS MORE THAN THE MUNICIPAL VALUE, THE A.O. OUGHT TO HAVE ACCEPTED THE INCOME DECLARED BY THE ASSESSEE. THE A .R., FURTHER, SUBMITTED THAT THE PROPERTIES, CONSIDERED FOR COMPA RISON BY THE A.O. ARE DIFFERENT IN CHARACTER AND SITUATED IN DIFFERENT LO CALITIES. THEREFORE, HE URGED TO CONFIRM THE CIT(A) ORDER. 18. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE ASSESSEE OWNED A PROPERTY AT NALLAK UNTA, HYDERABAD WHICH WAS LET OUT FOR AN ANNUAL VALUE OF RS.96,000/ -. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT, ESTIMATED A GROSS ANNUAL VALUE OF RS.4,78,308/- BY COMPARING THE RENT OF ANOTHER P ROPERTY OWNED BY THE ASSESSEES WIFE WHICH IS SITUATED AT HIMAYATNAG AR. THE ASSESSEES CONTENTION IS THAT THE PROPERTY LET OUT WAS A RESID ENTIAL PROPERTY WHICH WAS SITUATED AT NALLAKUNTA IS 40 YEARS OLD, WHEREAS THE ASSESSEES WIFE PROPERTY SITUATED AT HIMAYATNAGAR IS A POSH COMMERC IAL PROPERTY CANNOT BE COMPARED. THE ASSESSEE, FURTHER CLAIMED THAT TH E PROPERTY WAS ASSESSED IN THE MUNICIPAL RECORDS AS A RESIDENTIAL PROPERTY AND HE HAS PAID A MUNICIPAL TAX OF RS.2,636/- WHICH GIVES A MU NICIPAL VALUATION OF RS.10,544/- AS AGAINST THIS ITS ANNUAL VALUE OF RS. 96,000/-, WHICH COULD ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 15 BE CONSIDERED AS FAIR AND REASONABLE. THE A.O., ON THE OTHER HAND, ESTIMATED THE ANNUAL VALUE BY COMPARING ANOTHER PRO PERTY OWNED BY ASSESSEE WIFE WHICH IS SITUATED AT DIFFERENT LOCALI TY. WE DO NOT AGREE WITH THE STAND OF THE A.O. FOR THE REASON THAT THE TWO PROPERTIES WERE SITUATED IN DIFFERENT LOCALITIES AND THE CHARACTERI STICS OF THE TWO PROPERTIES ARE DIFFERENT IN THE SENSE THAT ASSESSEE S PROPERTY IS A RESIDENTIAL PROPERTY SITUATED IN A RESIDENTIAL LOCA LITY OF NALLAKUNTA AREA, HYDERABAD, WHEREAS ASSESSEE WIFE PROPERTY WHICH IS SITUATED AT HIMAYATNAGAR, A POSH COMMERCIAL LOCALITY. TO ARRIV E AT AN ANNUAL VALUE ONE HAS TO REFER TO SECTION 22 OF THE ACT. THE SAI D SECTION PRESCRIBES THE MODE OF COMPUTATION OF ANNUAL VALUE WHICH IS TH E HIGHER OF THE GROSS ANNUAL VALUE RECEIVED BY THE ASSESSEE, MUNICI PAL VALUATION AND FAIR MARKET VALUE OF THE PROPERTY. IN THE PRESENT CASE, THE MUNICIPAL VALUATION OF THE SAID PROPERTY AS PER THE ASSESSEE S CLAIM IS RS.10,544/- AND THE ASSESSEE HAS RECEIVED ANNUAL RENT OF RS.96, 000/-. FURTHER, THE FAIR MARKET VALUE OF THE PROPERTY CANNOT BE ASCERTA INED FROM THE SAME LOCALITY AS THE RELEVANT MATERIALS ARE NOT AVAILABL E ON RECORD. SO, FROM THE ABOVE, IT IS VERY CLEAR THAT THE GROSS RENT REC EIVED BY THE ASSESSEE IS HIGHER OF THESE THREE. THE ASSESSEE HAS RIGHTLY ADO PTED THE GROSS ANNUAL VALUE OF RS.96,000/-, WHEREAS THE ASSESSING OFFICE R WITHOUT BRINGING ON RECORD ANY COMPARABLE CASES, SIMPLY COMPARED THE PR OPERTY, WHICH IS ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 16 SITUATED IN A DIFFERENT LOCALITY AND ESTIMATED THE INCOME. THE CIT(A), AFTER EXAMINING THE DETAILS OF THE PROPERTY DELETED THE ADDITIONS MADE BY THE A.O. THEREFORE, FOR THE REASONS STATED ABOV E, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND ACCORDINGL Y DELETE THE ADDITIONS MADE BY THE A.O. AND DISMISS THE GROUND RAISED BY T HE REVENUE. DISALLOWANCE OF ADVERTISEMENT CHARGES U/S 40A(IA): 19. THE ASSESSEE HAS PAID ADVERTISEMENT EXPENDITURE OF RS.23,974/- WITHOUT DEDUCTING TAX AT SOURCE. DURING THE COURSE OF ASSESSMENT, THE A.O. OBSERVED THAT THE ADVERTISEMENT CHARGES ARE LI ABLE FOR TAX DEDUCTION AT SOURCE. SINCE, ASSESSEE FAILED TO DEDU CT TAX AT SOURCE ON ADVERTISEMENT CHARGES, THE A.O., DISALLOWED THE AMO UNT OF RS.23,974/- U/S 40A(IA) OF THE ACT. ON APPEAL, THE LD. CIT(A), RELYING ON THE COORDINATE BENCH DECISION IN THE CASE OF MERYLIN SH IPPING & TRANSPORT VS. ACIT IN ITA NO.477/VIZAG/2008 DELETED THE ADDIT IONS MADE BY THE A.O. 20. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS AND ALSO THE CO-ORDINATE BENCH ORDER AVAILABLE ON RECOR D. THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THIS COORDINATE BENCH IN THE CASE OF MERILYN SHIPPING & TRANSPORT VS. ACIT (SUPRA). BY RESPECTFULLY FOLLOWING THE DECISION CI TED SUPRA, WE DELETE THE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 17 ADDITIONS MADE BY THE ASSESSING OFFICER AND ACCORDI NGLY GROUND RAISED BY THE REVENUE IS DISMISSED. NOTIONAL INTEREST ON INVESTMENT IN FIRMS 21. THE ASSESSEE IS A PARTNER IN M/S. THE MITHRA AG ENCIES AND ALSO M/S. DASARATH MOTORS. THE ASSESSEE HAS INVESTED RS .1.96 CRORES IN M/S. THE MITHRA AGENCIES AND RS.35,04,000/- IN M/S. DASA RATH MOTORS. DURING THE COURSE OF ASSESSMENT, THE A.O. POINTED O UT THAT THE ASSESSEE HAS NOT OFFERED INTEREST ON THESE INVESTMENTS, THER EFORE ESTIMATED THE NOTIONAL INTEREST OF RS.21,82,472/- @ 12% ON THE CA PITAL BALANCE OF RS.1,96,00,000/- AND ALSO RS.4,20,480/- ON CAPITAL BALANCE OF RS.35,04,000/- BY HOLDING THAT SINCE, THE ASSESSEE OFFERED INTEREST FOR THE ADVANCE AMOUNT GIVEN TO M/S. ACHYUTA AUTOMOBILE S, HE SHOULD HAVE DONE SO EVEN FOR THE ABOVE TWO CASES. THEREFORE, A .O. ADOPTED THE SAME POLICY IN RESPECT OF THE ABOVE FUNDS AND ESTIM ATED NOTIONAL INTEREST. ON APPEAL BEFORE THE CIT(A), THE LD. CIT (A), DELETED THE ADDITIONS MADE BY THE ASSESSING OFFICER BY HOLDING THAT THERE IS NO PROVISION IN THE ACT TO ASSESS INCOME WHICH IS NEIT HER ACCRUED NOR RECEIVED BY THE APPELLANT DURING THE YEAR. THE CIT (A), FURTHER HELD THAT IT IS TO BE APPRECIATED THAT AMOUNT CAN ACCRUE OR A RISE TO THE APPELLANT IF HE GETS A LEGAL RIGHT TO RECEIVE THE INCOME. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 18 22. THE LD. D.R. SUBMITTED THAT THE ASSESSEE HAS AD MITTED INTEREST INCOME OF RS.8,17,617/- FOR THE ASSESSMENT YEAR 200 6-07 ON THE SAME AMOUNT ADVANCED TO M/S. THE MITHRA AGENCIES AND ALS O HE HAD OFFERED RS.3,76,216/- AS INTEREST INCOME FROM INVESTMENT OF RS.34,24,682/- FROM THE FIRM M/S. ACHYUTA AUTOMOBILES. BY APPLYING THE SAME PRINCIPLES, HE SHOULD HAVE RECEIVED THE INTEREST FR OM THESE TWO INVESTMENTS. THE LD. D.R. FURTHER SUBMITTED THAT T HE ASSESSEE IS PAYING INTEREST ON BORROWED FUNDS FOR INVESTING IN THESE F IRMS. THEREFORE, HE SHOULD HAVE ESTIMATED THE INTEREST INCOME@ 12% ON I NVESTMENT IN FIRM. 23. ON THE OTHER HAND, THE AUTHORISED REPRESENTATIV E OF THE ASSESSEE, SUBMITTED THAT THE ASSESSEE IS A PARTNER IN M/S. TH E MITHRA AGENCIES AND THE INVESTMENT IN THE FIRM REPRESENT HIS SHARE CAPITAL AS A PARTNER. NO INTEREST WAS ADMITTED BECAUSE THE PARTNERSHIP DE ED DOES NOT PROVIDE FOR INTEREST IN THE FIRM. HE FURTHER, SUBMITTED TH AT WHEN THE FIRM HAS NOT PAID INTEREST NOR PROVIDED IN ITS BOOKS OF ACCO UNTS, THE ASSESSING OFFICER CANNOT ESTIMATE THE INCOME FROM THESE TWO I NVESTMENTS. HE FURTHER, ARGUED THAT THERE IS NO PROVISION UNDER TH E INCOME TAX ACT TO ESTIMATE NOTIONAL INTEREST ON CAPITAL ACCOUNT OF TH E PARTNERSHIP FIRMS. THE A.R. FURTHER, SUBMITTED THAT THE ASSESSEE HAS I NVESTED FUNDS IN M/S. DASARATH MOTORS WITH AN INTENTION TO JOIN THE PARTN ERSHIP FIRM, HOWEVER, ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 19 THIS WAS NOT HAPPENED DUE TO VARIOUS REASONS. THOU GH, ASSESSEE BORROWED FUNDS FROM M/S. RELIANCE CAPITAL LIMITED T O MAKE INVESTMENT IN THIS FIRM, THE INTEREST OF RS.3,52,853/- PAID TO M/S. RELIANCE CAPITAL LIMITED WAS NOT CLAIMED BY IT AS ITS BUSINESS EXPEN DITURE. THE A.R. RELIED ON THE FOLLOWING JUDGMENTS IN SUPPORT OF HIS CASE. 1. HIGHWAYS CONSTRUCTION CO. PVT. LTD. VS. CIT 199 ITR 702 (GAU) 2. B&A PLANTATIONS & INDUSTRIES LTD. VS. CIT 242 IT R 22 (GAU) 3. SHAHIBAG ENTREPRENEURS PVT. LTD. VS. ITO IN ITAT AHMEDABAD A BENCH 50 ITD 113 4. CIT VS. SHOORJI VALLABHDAS & CO.46 ITR 144 (SC) 4. ACIT VS. TRAVANCORE TITANIUM PRODUCTS LTD. IN IT AT COCHIN THIRD MEMBER BENCH 121 ITD 513 5. CIT VS. P.R.S. OBEROI 183 ITR 103 (CAL) 6. MOHAN SINGH OBEROI VS. ITO & ORS.294 ITR 302 (CA L) 7. RAVINDER SINGH VS. CIT 205 ITR 353 (DEL) 8. 3F INDUSTRIES LTD. VS. JCIT IN ITA NO.6/VIZAG/20 12 24. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. WE ALSO CONSIDERED THE CASE LA WS CITED BY THE PARTIES. ADMITTEDLY, THE ASSESSEE IS A PARTNER IN M/S. THE MITHRA AGENCIES AND INVESTED AN AMOUNT OF RS.1,96,00,000/- WHICH CONSIST OF HIS BASIC INVESTMENT PLUS INCOME EARNED FROM THE PA RTNERSHIP FIRM OVER A PERIOD OF TIME WHICH IS EVIDENT FROM THE CAPITAL ACCOUNT COPY AVAILABLE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 20 ON RECORDS. THE ASSESSEE ARGUES THAT THE PARTNERSH IP DEED DOES NOT PROVIDE FOR INTEREST ON PARTNERS CAPITAL AND AS A RESULT, THE FIRM NEITHER PROVIDED NOR PAID ANY INTEREST ON CAPITAL DURING TH E YEAR UNDER CONSIDERATION. WHEN THE INTEREST IS NEITHER PAID N OR ACCRUED, THE QUESTION OF ADMITTING INTEREST ON SHARE CAPITAL DOE S NOT ARISE. ON THE OTHER HAND, THE A.O. WAS OF THE OPINION THAT DURING THE EARLIER YEAR, THE ASSESSEE HAS ADMITTED INTEREST INCOME FROM PARTNERS HIP, BY APPLYING THE SAME ANALOGY THE ASSESSE SHOULD HAVE OFFERED THE IN TEREST INCOME FROM SAID CAPITAL ACCOUNT. THE LOGIC THAT SEEMS TO HAVE BEEN APPLIED BY THE ASSESSING OFFICER IS THAT NO PRUDENT BUSINESSMAN WO ULD LEND MONEY WITHOUT ANY INTEREST. WE DO NOT AGREE WITH THE ASSES SING OFFICERS STAND FOR THE REASON THAT THERE IS NO PROVISION IN THE IN COME-TAX ACT TO ESTIMATE INCOME ON PARTNERS CAPITAL ACCOUNT IN THE FIRM, UNLESS THE PARTNERSHIP DEED PROVIDES FOR INTEREST ON PARTNERS CAPITAL ACCOUNT. ADMITTEDLY, IN THE PRESENT CASE, THE PARTNERSHIP DE ED DOES NOT PROVIDE FOR INTEREST ON CAPITAL. THE ASSESSE HAS EARNED SHA RE OF INCOME AND REMUNERATION FROM THE PARTNERSHIP FIRM, AS A RESULT OF THESE INVESTMENTS IN THE FIRM. THE FINDING OF THE ASSESSING OFFICER IS THAT THE ASSESSEE OUGHT TO HAVE COLLECTED THE INTEREST. IF THE ASSES SEE HAD NOT BARGAINED FOR INTEREST OR HAD NOT COLLECTED ANY INTEREST, THE INCOME-TAX AUTHORITIES COULD NOT FIX A NOTIONAL INTEREST AS DUE OR AS COLL ECTED BY THE ASSESSEE. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 21 THERE WAS NO PROVISION IN THE INCOME-TAX ACT, TO AU THORISE THE ASSESSING OFFICER TO INCLUDE THE INCOME WHICH IS NO T DUE OR NOT COLLECTED. THE A.O. HAS NOT GIVEN ANY COGENT REASON TO ESTABLI SH THAT SUCH LEGAL RIGHT TO RECEIVE THE INCOME HAS ARISEN TO THE ASSES SEE. THERE IS NO EVIDENCE WITH THE A.O., TO SHOW THAT THE ASSESSE HA S RECEIVED ANY INTEREST INCOME. 25. IT IS PERTINENT TO MENTION HERE THAT THE HONBL E DELHI HIGH COURTS DECISION IN THE CASE OF SHIVNANDAN BUILDCON PVT. LT D. VS. CIT & ANR. (2015) 93 CCH 46, WHEREIN HONBLE HIGH COURT HELD A S FOLLOWS: ON GOING THROUGH THE REASONING ADOPTED BY THE COMM ISSIONER OF INCOME TAX, IT APPEARS THAT THE ONLY REASON WHY THE ADDITION WAS MADE WAS ON ACCOUNT OF THE FACT THAT NO EXPLANATION HAS ALLEGEDLY BEEN GIVEN BY THE ASSESSEE AS TO WHY THE LOAN/ADVAN CE WAS GIVEN TO SMART TOURIST PRIVATE LIMITED. IT WAS ALSO NOTED TH AT THE IDENTITY OF SMART TOURIST PRIVATE LIMITED WAS NOT KNOWN. THE LOGIC TH AT SEEMS TO HAVE BEEN APPLIED BY THE REVENUE AUTHORITIES IS THA T THE PETITIONER WAS A BUSINESSMAN AND IT WOULD BE IMPRUDENT FOR A B USINESSMAN TO ADVANCE A SUM OF RS.1.6 CRORES AS IN THE CASE OF W. P.(C) 6265/2013 TO SMART TOURIST PRIVATE LIMITED AND TO NOT CHARGE ANYTHING IN RETURN. THE EXPLANATION SOUGHT TO BE GIVEN BY THE PETITIONE R IN BOTH THESE CASES WAS THAT THE ADVANCES WERE MADE IN THE COURSE OF THEIR BUSINESS AND IT IS NOT AT ALL NECESSARY THAT AN ADV ANCE GIVEN BY A BUSINESSMAN AT ALL TIMES MUST HAVE AN ELEMENT OF INTEREST ALSO. THERE ARE VARIOUS OTHER CONSIDERATIONS WHICH COME INTO TH E CALCULATIONS WHEN A BUSINESSMAN ADVANCES MONEY TO ANOTHER. IT IS NOT AT ALL NECESSARY THAT INTEREST MUST BE CHARGED. IT WAS FURTHER SUBMITTED BY THE LEARNED SENIOR COUNSEL APPEARING ON BEHALF OF THE PETITIONE RS THAT THERE IS NO FINDING IN THE ASSESSMENT ORDERS OR IN THE ORDER OF THE COMMISSIONER OF INCOME TAX THAT THE PETITIONERS HAD , IN FACT, RECEIVED SOME AMOUNT BY WAY OF INTEREST AND THAT SU CH AMOUNT WAS NOT SHOWN IN THE ACCOUNTS. IT IS ALSO CONTENDED THAT TH E REVENUE AUTHORITIES HAVE NOT REJECTED THE BOOKS OF ACCOUNTS OF THE PETITIONER. IT WAS, THEREFORE, SUBMITTED THAT UNLESS AND UNTIL THERE WAS A CONCRETE FINDING THAT SOMETHING WAS RECEIVED BY THE PETITIONER FROM ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 22 THE SAID SMART TOURIST PRIVATE LIMITED AND OTHER PE RSONS SIMILARLY SITUATED, NOTHING CAN BE ADDED BY WAY OF NOTIONAL I NCOME. A REFERENCE WAS MADE TO THE DECISION OF THE GUWAHATI HIGH COURT IN B AND A PLANTATIONS AND INDUSTRIES LTD. V COMMISSIONER OF I NCOME - TAX: 242 HR 22. THE RELEVANT PORTION OF THAT DECISION READS AS UNDE R:- '4. AS REGARDS THE ADDITION OF NOTIONAL INTEREST TH E ASSESSEE MADE AN INTEREST FREE ADVANCE OF RS. 19,58,256 TO J ORHAT INVESTMENTS LTD., WHICH IS A SISTER CONCERN. THE CA SE OF THE ASSESSEE IS THAT THEY DID NOT CHARGE INTEREST ON TH AT ADVANCE AND IN CONSIDERATION OF THE SAME THE ASSESSEE GOT THE P REMISES AT A VERY LOW RENT OF RUPEES TWO PER SQ. FEET IN A PRIME LOCALITY OF CALCUTTA. 15. THE ASSESSING OFFICER ADDED A NOTIONAL INTEREST OF 18 PER CENT. ON THE ADVANCE AMOUNT AND ADDED THE INCOME AS THE AMOUNT OF INTEREST. THE SAID ADDITION WAS APPROVED BY THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE TRIBUN AL. 16. IN THIS CASE THERE IS NO FINDING WHEN THE ASSESSEE HAD IN FACT RECEIVED THE INTEREST OR THAT THE JORHAT INVES TMENTS LTD., HAD IN FACT PAID THE INTEREST TO THE ASSESSEE AND T HE INTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE FINDING IS T HAT THE ASSESSEE OUGHT TO HAVE CHARGED INTEREST. 17. THE FACTS IN THE INSTANT CASE ARE MORE OR LESS IDEN TICAL WITH THE CASE OF HIGHWAYS CONSTRUCTION CO... PVT. L TD. V CIT [1993] 199 ITR 702, WHEREIN THIS COURT HELD (PAGE 7 08) 'THERE IS NO FINDING OF FACT TO THE EFFECT THAT ACT UALLY THE LOAN HAD BEEN GRANTED TO THE MANAGING DIRECTOR OR ANY OTHER PERSON ON INTEREST, OR THAT INTEREST HAD ACTUALLY BEEN COLLECTED AND THE COLLECTION OF THE I NTEREST WAS NOT REFLECTED IN THE ACCOUNTS. THE FINDING OF T HE INCOME TAX OFFICER IS THAT THE ASSESSEE OUGHT TO HA VE COLLECTED INTEREST. IN OTHER WORDS, THE VIEW OF THE INCOME TAX OFFICER, WHICH HAS BEEN ACCEPTED BY THE TRIBUNA L, WAS THAT THE ASSESSEE, AS A GOOD BUSINESS CONCERN, SHOU LD NOT HAVE GRANTED INTEREST-FREE LOAN, OR SHOULD HAVE INSISTED ON PAYMENT OF INTEREST. IF THE ASSESSEE HA D NOT BARGAINED FOR INTEREST, OR HAD NOT COLLECTED INTERE ST, WE FAIL TO SEE HOW THE INCOME TAX AUTHORITIES CAN FIX A NOTIONAL INTEREST AS DUE, OR COLLECTED BY THE ASSES SEE. OUR ATTENTION HAS NOT BEEN INVITED TO ANY PROVISION OF THE INCOME TAX ACT EMPOWERING THE INCOME TAX AUTHOR ITIES TO INCLUDE IN THE INCOME, INTEREST WHICH WAS NOT DU E OR NOT COLLECTED. IN THIS VIEW, WE ANSWER QUESTION NO. (II) IN THE NEGATIVE, THAT IS, IN FAVOUR OF THE ASSESSEE AN D AGAINST THE REVENUE.' ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 23 5. ON GOING THROUGH THE SAID DECISION, IT CAN BE DI SCERNED THAT THE GUWAHATI HIGH COURT HELD THAT THERE WAS NOTHING TO SHOW THAT THE ASSESSEE HAD, IN FACT, RECEIVED INTEREST O R THAT THE COMPANY TO WHOM THE LOAN WAS GIVEN HAD, IN FACT, PA ID INTEREST TO THE ASSESSEE. THERE WAS ALSO NOTHING ON RECORD T O SHOW THAT THE ALLEGED INTEREST WAS NOT REFLECTED IN THE ACCOU NTS. THE ONLY FINDING RECORDED WAS THAT THE ASSESSEE 'OUGHT TO' H AVE CHARGED INTEREST. REFERRING TO AN EARLIER DECISION OF THE G UWAHATI HIGH COURT, IN HIGHWAYS CONSTRUCTION CO. PRIVATE LIMITED V. CIT [1993] 199 ITR 702, THE COURT OBSERVED THAT THEIR ATTENTION HAD NOT BEEN INVITED TO ANY PROVISION OF THE INCOME-TAX ACT EMPOWERING THE INCOME-TAX AUTHORITIES TO INCLUDE IN THE INCOME, INTEREST WHICH WAS NOT DUE OR NOT COLLECTED. 26. A SIMILAR ISSUE, CAME BEFORE THE COORDINATE BEN CH OF THE VISAKHAPATNAM IN THE CASE OF 3F INDUSTRIES LTD. VS. JCIT IN IT(TP) 1/VIZAG/2014, WHEREIN, THE BENCH AFTER CONSIDERING THE GUWAHATI HIGH COURT IN THE CASE OF HIGHWAY CONTRACTS COMPANY PVT. LTD. VS. CIT 199 ITR 702 HELD THAT THERE WAS NO PROVISION IN THE INC OME-TAX ACT EMPOWERING THE INCOME-TAX AUTHORITIES TO INCLUDE TH E INTEREST INCOME WHICH WAS NOT DUE OR NOT COLLECTED. 27. APPLYING THE PROPOSITIONS LAID DOWN BY THE ABOV E JUDGEMENTS, WE HAVE NO OTHER ALTERNATIVE BUT TO DELETE THE ADDITIO NS MADE ON ACCOUNT OF NOTIONAL INTEREST ESTIMATED BY THE ASSESSING OFFICE R. THEREFORE, WE UPHOLD THE CIT(A)S ORDER AND DISMISS THE REVENUES GROUNDS. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 24 NOTIONAL INTEREST OF INVESTMENTS IN COMPANY: 28. THE ASSESSEE HAS INVESTED AN AMOUNT OF RS.3,43, 75,000/- IN M/S. BHANU AUTO AGENCIES (I) PVT. LTD., IN WHICH HE IS A SHAREHOLDER AND DIRECTOR. THE ASSESSEE HAS MADE THIS INVESTMENT OU T OF THE AMOUNT BORROWED FROM M/S ACHYUTHA AUTOMOBILES. THE ASSESSE E IS ONE OF THE PROMOTERS OF THE COMPANY. THE COMPANY DID NOT COMME NCE ITS COMMERCIAL OPERATIONS FOR THE FINANCIAL YEAR. THER EFORE, IT WAS DECIDED NOT TO CHARGE ANY INTEREST ON THE INVESTMENT, HENCE NO INCOME WAS ADMITTED ON THIS INVESTMENT. DURING THE COURSE OF ASSESSMENT, THE ASSESSING OFFICER HAS ESTIMATED NOTIONAL INTEREST O F RS. 41,25,000/- @12% ON THE ADVANCE OF RS.3,43,75,000/- AND BROUGHT TO TAX. THE ASSESSEE CARRIED THE MATTER TO THE CIT(A). DURING THE COURSE OF APPELLATE PROCEEDINGS, THE CIT(A) DELETED THE ADDIT IONS MADE BY THE A.O. BY HOLDING THAT WITHOUT ESTABLISHING THAT EITH ER INTEREST WAS ACCRUED OR RECEIVED AS REQUIRED UNDER THE PROVISION S OF THE SECTION 5 OF THE ACT, THE A.O. CANNOT MAKE ANY ADDITIONS. AGGRIE VED BY THE CIT(A) ORDER, THE REVENUE IS IN APPEAL. 29. THE LD. D.R., SUBMITTED THAT THE ASSESSEE HAS B ORROWED RS.3 CRORES FROM M/S. ACHYUTA AUTOMOBILES AND THE LENDER HAS CHARGED INTEREST ON THE MONEY BORROWED BY THE ASSESSEE. TH EREFORE, WHETHER ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 25 THE ASSESSEE CLAIMS IT AS A DEDUCTION OR NOT, ONCE THE INTEREST BEARING FUNDS UTILIZED FOR MAKING INVESTMENT IN ANOTHER FIR M, THE INTEREST SHOULD BE BROUGHT TO TAX. 30. ON THE OTHER HAND, THE A.R. SUBMITTED THAT THE ASSESSEE HAS ADVANCED FUNDS TO M/S BHANU AUTO AGENCIES PVT LTD., OUT OF THE FUNDS BORROWED FROM ITS SISTER CONCERN M/S ACHYUTH AUTOMO BILES. THOUGH, THE LENDER HAS CHARGED INTEREST, THE ASSESSEE DID NOT C LAIM THE INTEREST AS DEDUCTION FROM ITS BUSINESS INCOME, THEREFORE ESTIM ATION OF NOTIONAL INCOME ON INVESTMENT IS NOT CORRECT. THE A.R. FURT HER, SUBMITTED THAT THE ASSESSEE IS ONE OF THE PROMOTER OF THE COMPANY AND THE COMPANY DID NOT COMMENCED ITS COMMERCIAL OPERATIONS DURING THE PERIOD UNDER CONSIDERATION, HENCE IT WAS DECIDED NOT TO CHARGE I NTEREST. THE A.R, FURTHER SUBMITTED THAT, THERE IS NO CONDITION AS TO CHARGE INTEREST ON FUNDS. UNLESS, THERE IS CONTRACTUAL OBLIGATION TO C HARGE INTEREST, THE QUESTION OF INCOME ACCRUE OR ARISE DOES NOT ARISE. THE A.R., FURTHER ARGUED THAT, THE A.O., CANNOT SIT IN THE PLACE OF A BUSINESSMAN AND DECIDE HOW TO CONDUCT BUSINESS. EVERY BUSINESSMAN MAKES INVESTMENT WITH A INTENTION TO EARN INCOME, BUT IT IS THE FACT THAT ALL INVESTMENTS MAY NOT YIELD INCOME. THEREFORE, HE URGED TO CONFIR M THE CIT(A) ORDER AND DELETE THE ADDITION MADE BY THE A.O. ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 26 31. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. IT IS TO BE NOTED THAT IT IS ALSO A CASE OF NOTIONAL INTEREST. THE A.O., ESTIMATED NOTIONAL INTEREST OF RS. 41,25,000/- @ 12% ON ADVANCE AMOUNT OF RS. 3,43,75,000/-. THE A.O ., WAS OF THE VIEW THAT THE ASSESSEE OUGHT TO HAVE ESTIMATED THE INCOME. THE ASSESSEE, CONTENTION IS THAT NEITHER INTEREST IS RE CEIVED NOR ACCRUED TO HIM FOR THE PERIOD UNDER CONSIDERATION. WE DO NOT AG REE WITH THE A.O., CONTENTION FOR THE REASON THAT THE ASSESSEE HAS NOT RECEIVED ANY INTEREST ON INVESTMENT. THE ASSESSEE CONTENDED THAT HE HAS NOT CHARGED ANY INTEREST ON THE INVESTMENTS FOR THE REASON THAT THE COMPANY DID NOT COMMENCED ITS COMMERCIAL OPERATIONS FOR THE PERIOD UNDER CONSIDERATION. THE ASSESSEE, FURTHER CONTENDED THAT HE DID NOT CLAIMED DEDUCTION ON INTEREST PAID ON MONEY BORROWED TO MAK E THE INVESTMENTS. UNDER THE CIRCUMSTANCES, THE A.O., IS NOT CORRECT IN ESTIMATING NOTIONAL INTEREST. THE A.O., CANNOT ESTI MATE NOTIONAL INTEREST WITHOUT ESTABLISHING THAT EITHER INTEREST IS RECEIV ED OR ACCRUED TO THE ASSESSEE. UNLESS, THERE IS CONTRACTUAL OBLIGATION T O CHARGE INTEREST, THE QUESTION OF INCOME ACCRUE OR ARISE DOES NOT ARISE. THE A.O., CANNOT SIT IN THE PLACE OF A BUSINESSMAN AND DECIDE HOW TO CON DUCT BUSINESS. EVERY PRUDENT BUSINESSMAN MAKES INVESTMENT WITH THE INTENTION TO EARN INCOME. BUT, THE FACT IS THAT ALL INVESTMENTS MAY N OT YIELD INCOME. THE ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 27 A.O. HAS NOT GIVEN ANY COGENT REASON TO ESTABLISH T HAT SUCH LEGAL RIGHT TO RECEIVE THE INCOME HAS ARISEN TO THE ASSESSEE. T HERE IS NO EVIDENCE WITH THE A.O., TO SHOW THAT THE ASSESSEE HAS RECEIV ED ANY INTEREST INCOME. THEREFORE, THE A.O., IS NOT CORRECT IN ESTI MATING THE INCOME. THE CIT(A), RIGHTLY DELETED THE ADDITION AFTER CONSIDER ING THE FACTS. 32. THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTA NCES OF THE CASE AND ALSO RELYING UPON THE JUDGMENTS OF HONBLE DELHI HI GH COURTS DECISION IN THE CASE OF SHIVNANDAN BUILDCON PVT. LTD. VS. CIT & ANR. (2015) 93 CCH 46 AND GUWAHATI HIGH COURT, IN HIGHWAYS CONSTRUCTIO N CO. PRIVATE LIMITED V. CIT [1993] 199 ITR 702 , WE ARE OF THE OPINION THAT THE CIT(A), RIGHTLY DELETED THE ADDITION AND HIS ORDER NEEDS NO INTERFERENCE. ACCORDINGLY WE DISMISS THE REVENUES GROUND. 33. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 30 TH SEPT15. SD/- SD/- ( (( ( . .. . ) ) ) ) ( (( ( . . . . ) ) ) ) ( (( ( V. DURGA RAO ) )) ) ( (( ( G. MANJUNATHA) / // / JUDICIAL MEMBER / // / ACCOUNTANT MEMBER /VISAKHAPATNAM: 6 / DATED : 30.9.2015 VG/SPS ITA NO117/VIZAG/2013 SRI MAGANTI BHASKARA MURTHY, VIJAYAWADA 28 / - 7 / COPY OF THE ORDER FORWARDED TO :8 1. , / THE APPELLANT THE DCIT, CIRCLE-2(1), VIJAYAWADA 2. -., / THE RESPONDENT SRI MAGANTI BHASAKARA MURTHY, 27-33-46, GUDAVALLIVARI STREET, GOVERNORPET, VIJAYAWADA. 3. ; () / THE CIT(A), VIJAYAWADA 4. -, , / // / DR, ITAT, VISAKHAPATNAM 5 . . . . / GUARD FILE / BY ORDER // TRUE COPY // @A ( SR.PRIVATE SECRETARY ) , / // / ITAT, VISAKHAPATNAM