Aawishkar Developers, Pune V. Dy. Comm. of Income-tax, Circle-2, Pune

ITA 1212/PUN/2011

• Counselvise Citation: 121224514 RSA 2011
• Duration Of Justice: 2 year(s) 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-02-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 26-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P L PATHADE
• Keywords: Proportionate interest
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO.1212/PN/2011 (ASST.YEAR: 2007-08) AAWISHKAR DEVELOPERS, GODOWN NO.1, GIRNAR CO-OP HOUSING SOCIETY LTD., 473/21-B, GULTEKADI, PUNE 411037 .. APPELLANT PAN NO.AAKFA4571A VS. DY.CIT, CIRCLE-2, PUNE .. RESPONDENT ASSESSEE BY : SMT. DEEPA KHARE REVENUE BY : SHRI P.L. PATHADE DATE OF HEARING : 15-05-2014 DATE OF PRONOUNCEMENT : 30-05-2014 ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 21-07-2011 OF THE CIT(A)-II, PUNE RELAT ING TO ASSESSMENT YEAR 2007-08. 2. THIS APPEAL WAS EARLIER DISMISSED BY THE TRIBUNA L FOR NON- APPEARANCE BEFORE THE TRIBUNAL ON THE DATE OF HEARI NG. SUBSEQUENTLY, THE TRIBUNAL VIDE ORDER DATED 26-08-2 013 RECALLED THE EARLIER ORDER DISMISSING THE APPEAL. HENCE, TH IS IS A RECALLED MATTER. 3. GROUNDS OF APPEAL NO.1 & 2 BY THE ASSESSEE ARE A S UNDER : 1. THE LD.CIT(A) HAS ERRED IN CONFIRMING CHARGING O F INTEREST ON DRAWINGS BY DCIT & THEREBY DISALLOWING RS.8,93,190/ - CHARGED BY THE FIRM AS INTEREST ON CAPITAL & CREDITED TO THE PARTNERS CAPITAL ACCOUNTS. 2 2. THE LD.CIT(A) HAS GONE BEYOND THE PROVISIONS OF INC OME TAX ACT, 1961 IN CONFIRMING THE ACT OF THE LD. DCIT WHO HAS STRETCHED THE PROVISIONS OF SECTION 40(B)(IV) OF THE IN COME TAX ACT, 1961 FOR CREDITING INTEREST ON CAPITAL TO PARTN ERS. THE SAID PROVISIONS DO NOT SPEAK OF ANYTHING ABOUT CHARGING OF INTEREST ON DRAWINGS MADE BY THE PARTNERS DURING THE YEAR. 3.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF BUILDER AND DEVELOPER. DURING THE COURSE OF ASSESSMENT PROCEED INGS THE ASSESSING OFFICER OBSERVED FROM THE DETAILS FILED T HAT THE PARTNERS OF THE FIRM HAVE CHARGED INTEREST ON THEIR CAPITAL @12% AND TOTAL OF SUCH INTEREST CHARGED BY THE PARTNERS IS RS.16,7 2,809/-. HE OBSERVED THAT ALTHOUGH THE PARTNERS HAVE WITHDRAWN MONEY FROM THE FIRM, HOWEVER, THEY HAVE NOT PAID ANY INTEREST TO THE FIRM ON EXCESS WITHDRAWAL FOR WHICH THE TAXABLE PROFIT OF T HE ASSESSEE FIRM HAS BEEN REDUCED TO THAT EXTENT. THE ASSESSING OFF ICER ANALYSED THE DETAILS OF INTEREST PAID TO PARTNERS OF THE FIR M WHICH ARE AS UNDER : PARTICULARS SANJAY BOOB - RS. AMIN - RS RAHUL NAHATA -RS BY BALANCE B / F 23 , 59 , 324.57 28 , 11 , 319.00 28 , 95 , 724.97 INTRODUCTION 50 , 31 , 321.33 39 , 32 , 121.33 25 , 52 , 121.34 INTEREST ON CAPITAL SALARY TO PARTNERS 6 , 22 , 576.05 5 , 88 , 825.63 4 , 61 , 408.62 BALANCE C/F 17 , 66 , 825.68 6 , 47 , 781.67 16 , 15 , 792.67 TOTAL 1 , 31 , 16 , 164.00 1 , 13 , 16 , 164.01 1 , 08 , 61 , 163.99 TO DRAWINGS 1 , 27 , 27 , 000.00 1 , 09 , 27 , 000.00 1 , 04 , 72 , 000.00 TOTAL NET 1 , 31 , 16 , 164.00 1 , 13 , 16 , 16 4.01 1 , 08 , 61 , 163.99 HE, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY IT SHOULD NOT BE CONSIDERED AS DIVERSION OF BORROWED FUNDS FOR NO N-BUSINESS PURPOSES AND ACCORDINGLY INTEREST IN PROPORTION TO THE FUNDS DIVERTED FOR NON-BUSINESS PURPOSES BE DISALLOWED. 3 3.2 IT WAS SUBMITTED THAT THE PARTNERSHIP DEED AUTH ORISES THE PARTNERS TO CHARGE INTEREST ON THE CAPITAL OF THE P ARTNERS. THERE IS NO SPECIFIC PROVISION IN THE ACT TO CHARGE INTEREST ON THE WITHDRAWALS BY THE PARTNERS. RELYING ON THE DECISI ON OF THE HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES C ORPORATION VS. CIT REPORTED IN (2008) 298 ITR 298 IT WAS SUBMI TTED THAT NO DISALLOWANCE IS CALLED FOR UNDER THE FACTS AND CIRC UMSTANCES OF THE CASE. IT WAS ALSO SUBMITTED THAT THE FIRM AS WELL AS THE PARTNERS ARE FALLING UNDER THE HIGHEST TAX SLAB AND THEREFORE TH ERE IS NO LOSS TO THE REVENUE. 3.3 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THA T THE PROVISIONS OF SECTION 40(B) OF THE I.T. ACT WERE IN TRODUCED IN THE I.T. ACT, 1961 TO RESTRICT THE EXCESS CLAIM OF INTE REST ON THE CAPITAL BY THE PARTNERS AND THEY ARE NOT RELEVANT WHEN THE ISSUE OF DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOS ES IS CONSIDERED. FURTHER, AS PER THE PROVISIONS OF SECT ION 36(I)(III), THE PAYMENT OF INTEREST IS ALLOWED ONLY WHEN THE FUNDS HAVE BEEN UTILISED FOR BUSINESS PURPOSES. HOWEVER, IN THE IN STANT CASE, THE ASSESSEE HAS PAID INTEREST @12% ON THE CREDIT BALAN CE OF THE PARTNERS WHILE NO INTEREST HAS BEEN CHARGED ON THE DEBIT BALANCES. THEREFORE, HE HELD THAT IT IS A CLEAR CASE OF DIVER SION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSES. HE ACCORDINGLY DI SALLOWED THE AMOUNT OF RS.8,93,190/- BEING INTEREST ON PROPORTIO N TO THE FUNDS DIVERTED FOR NON-BUSINESS PURPOSES. 4 4. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE DEDU CTION OF INTEREST SHOULD HAVE BEEN CONSIDERED AS THE PARTNER S OF THE ASSESSEE FIRM MAINTAIN SEPARATE ACCOUNTS OF CAPITAL AND SEPARATE ACCOUNTS OF DRAWINGS. IT WAS SUBMITTED THAT THE PA YMENT OF INTEREST IS AS PER PARTNERSHIP DEED OF THE FIRM AND SUCH INTEREST SHOULD HAVE BEEN ALLOWED U/S.40(B)(IV). IT WAS REI TERATED THAT THE FIRM AND THE PARTNERS ARE FALLING UNDER THE HIGHEST TAX SLAB, I.E. @30%. 4.1 HOWEVER, THE CIT(A) WAS ALSO NOT CONVINCED WITH THE ARGUMENTS ADVANCED BY THE ASSESSEE. RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF KESHAVJI R AVJI AND CO. LTD. VS. CIT REPORTED IN 183 ITR 1 (SC) WHEREIN IT HAS BEEN HELD THAT IT IS POSSIBLE TO SET OFF INTEREST PAID BY THE PARTNER TO THE FIRM AGAINST THE INTEREST RECEIVABLE, HE UPHELD THE DISA LLOWANCE MADE BY THE ASSESSING OFFICER. WHILE UPHOLDING THE ACTI ON OF THE ASSESSING OFFICER HE ALSO DISTINGUISHED THE VARIOUS DECISIONS CITED BEFORE HIM. 4.2 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 5. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SAME ARGUMENTS AS MADE BEFORE THE ASSESSING OFFICER AND THE CIT(A). SHE SUBMITTED THAT THE FIRM HAD SUFFICIENT NON-INTE REST BEARING FUNDS, THEREFORE, THERE WAS NO JUSTIFICATION ON THE PART OF THE ASSESSING OFFICER TO DISALLOW THE PART OF THE INTER EST ON THE AMOUNTS WITHDRAWN BY THE PARTNERS. SHE ALSO FILED THE FUND FLOW STATEMENT AND MONTHLY WORKING CAPITAL STATEMENT FOR THE F.Y. 5 2006-07 TO SUBSTANTIATE THAT THERE WAS SUFFICIENT F UNDS AVAILABLE IN THE HANDS OF THE FIRM AND THAT NO BORROWED FUND HAS BEEN DIVERTED TOWARDS DRAWINGS OF THE PARTNERS. 5.1 RELYING ON THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT VS. BOMBAY SAMACHAR LTD. REPORTE D IN 74 ITR 723 SHE DREW THE ATTENTION OF THE BENCH TO THE FOLL OWING OBSERVATION OF THE HONBLE HIGH COURT : 5. AS WE HAVE ALREADY POINTED OUT, IT IS UNDISPUTED T HAT THE AMOUNTS BORROWED FROM OUTSIDERS ON WHICH INTEREST HAS B EEN PAID HAVE BEEN USED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IT APPEARS TO HAVE BEEN THE VIEW OF THE INCOME TAX OFFICER THAT IF THE ASSESSEE HAD COLLECTED THE OUTSTAND INGS WHICH WERE DUE TO IT FROM OTHERS, IT WOULD HAVE BEEN ABLE TO REDUCE ITS INDEBTEDNESS AND THUS SAVE A PART OF THE INTEREST WHICH IT HAD TO PAY ON ITS OWN BORROWINGS. THE ASSESSEE, THEREFORE, WAS NOT JUSTIFIED IN ALLOWING ITS OUTSTANDINGS TO REMAIN WITHO UT CHARGING ANY INTEREST THEREON WHILE IT WAS PAYING INTEREST ON T HE AMOUNTS BORROWED BY IT. TO THE EXTENT, THEREFORE, TO WHICH IT WOULD HAVE BEEN IN A POSITION TO COLLECT INTEREST ON THE OUTSTAND INGS DUE TO IT FROM OTHERS, IT COULD NOT BE PERMITTED TO CLAIM INTE REST PAID BY IT TO OUTSIDERS. IN OUR OPINION THE VIEW TAKEN BY THE IN COME TAX OFFICER IS CLEARLY UNSUSTAINABLE. AS HAS BEEN POINTED O UT BY THE MADHYA PRADESH HIGH COURT IN RAM KISHAN OIL MILLS V. COMMISSIONER OF INCOME TAX THE ONLY CONDITIONS REQUIRE D TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDU CTION IN RESPECT OF THE INTEREST UNDER SECTION 10(2)(III) ARE, FIRSTLY, THAT MONEY MUST HAVE BEEN BORROWED BY THE ASSESSEE ; SECONDLY, IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS AND, THIRDLY, THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT IS NOT THE REQUIREM ENT OF THE PROVISION THAT THE ASSESSEE MUST FURTHER SHOW THAT THE B ORROWING OF THE CAPITAL WAS NECESSARY FOR THE BUSINESS SO THAT IF AT THE TIME OF BORROWING THE ASSESSEE HAD SUFFICIENT AMOUNT OF ITS O WN, THE DEDUCTION COULD NOT BE ALLOWED. SIMILARLY, THE MADR AS HIGH COURT IN AMNA BAI HAJEE ISSA V. COMMISSIONER OF INCOME TAX H AS HELD THAT IN DECIDING WHETHER A CLAIM FOR INTEREST ON BOR ROWING CAN BE ALLOWED THE FACT THAT THE ASSESSEE HAD AMPLE RESOURCES AT ITS DISPOSAL AND NEED NOT HAVE BORROWED, IS NOT A RELEVANT MATTER FOR CONSIDERATION. THE MATTER TO BE DECIDED IS WHETHER TH E AMOUNT OF INTEREST WAS PAID IN FACT IN RESPECT OF THE CAPITAL BO RROWED FOR BUSINESS. SHE ACCORDINGLY SUBMITTED THAT THE LD.CIT(A) WAS NO T JUSTIFIED IN HOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER. 6 6. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICE R AND THE CIT(A). HE SUBMITTED THAT SINCE THE ASSESSEE HAS N OT CHARGED ANY INTEREST ON THE HUGE WITHDRAWALS, THEREFORE, THE LD .CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 7. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THE ONLY DISPUTE TO BE ADJUDICATED IN THE IMPUGNED GROUND IS REGARDI NG THE DISALLOWANCE OF INTEREST OF RS.8,93,190/-. WE FIND THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST U/S.36(1) (III) ON THE GROUND THAT WHILE THE ASSESSEE FIRM HAS PAID INTERE ST ON THE CAPITAL OF THE PARTNERS IT HAS NOT CHARGED INTEREST ON THE HUGE DRAWINGS BY THE PARTNERS. IT IS THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT THE FIRM HAS SUFFICIENT INTEREST FREE FUNDS IN THE SHAPE OF SUNDRY CREDITORS AND ADVANCES FROM CUSTOMERS. IT I S ALSO THE SUBMISSION OF LD. COUNSEL FOR THE ASSESSEE THAT THE PARTNERS SALARY WAS CREDITED TO THEIR RESPECTIVE CAPITAL ACC OUNTS AT THE END OF THE YEAR. THE LD. COUNSEL FOR THE ASSESSEE ALSO FILED FUND FLOW STATEMENT AND MONTHLY WORKING CAPITAL FOR F.Y. 2006 -07 TO SUBSTANTIATE THAT THERE WAS SUFFICIENT INTEREST FRE E FUNDS AVAILABLE WITH THE FIRM OUT OF WHICH THE PARTNERS HAD WITHDRA WN AND NO INTEREST BEARING FUND HAS BEEN DIVERTED TO PARTNERS FOR NON- BUSINESS PURPOSE. THE ABOVE ASPECT WAS NEITHER ARG UED NOR 7 EXAMINED BY THE ASSESSING OFFICER. THE CASH FLOW STATEMENTS/FUND FLOW STATEMENTS WERE ALSO NOT EXAMI NED BY THE ASSESSING OFFICER. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE AND IN THE INTEREST OF JUSTICE WE DEEM IT PROPER TO RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTI ON TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIATE TH AT NO INTEREST BEARING FUNDS HAVE BEEN DIVERTED BY THE FIRM TO ITS PARTNERS. THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THE GRO UNDS BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PU RPOSES. 8. GROUNDS OF APPEAL NO.3 BY THE ASSESSEE READS AS UNDER : 3. THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ADDITI ON MADE BY THE LD. DCIT WHO HAS MADE AN ADDITION ON ACCOUNT OF NON- DEDUCTION OF TDS FROM PAYMENT TO CONTRACTOR, IT WAS A HUMAN ERROR BY THE STAFF OF THE APPELLANT FIRM & THEREFORE TDS ON AMOUNT OF RS.3,69,080/- PAID TO MMI CONSTRUCTION HAS REMAINED TO BE DEDUCTED & UNPAID IN GOVERNMENT TREASURY. 8.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVE D THAT IN THE NOTE TO ACCOUNT (POINT NO. 11) OF FORM 3CD THE AUDI TOR OF THE FIRM HAS REPORTED THAT NO TDS HAS BEEN DEDUCTED ON THE A BOVE AMOUNT DEBITED IN THE PROFIT AND LOSS ACCOUNT WHICH WAS A DEFAULT U/S 40(A)(IA). AN EXPLANATION WAS CALLED FOR IN THIS RE GARD. THE A.R. SUBMITTED THAT THE PAYMENT MADE WAS AN ADVANCE AND THEREFORE NO TDS WAS DEDUCTED THEREON. NO BILL WAS RAISED BY HIM TILL 31.03.2007 AGAINST HIS PAYMENT NOR ANY WORK WAS DON E, THEREFORE, TDS WAS NOT DEDUCTED. THIS EXPLANATION WAS NOT ACCE PTABLE BY THE 8 A.O. BECAUSE THE AUDITOR OF THE FIRM AFTER EXAMINAT ION OF THE BOOKS OF ACCOUNT ETC. HAD OBSERVED THAT THERE WAS A DEBIT OF THIS AMOUNT OF RS.3,69,080/- ON WHICH TDS WAS NOT DEDUCT ED. THIS AUDIT REPORT WAS ALSO SIGNED BY THE PARTNERS. THE A .O., THEREFORE, DISALLOWED THIS AMOUNT U/S 40(A)(IA) AND ADDED IT B ACK TO THE INCOME OF THE ASSESSEE. 8.2 IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF TH E ASSESSING OFFICER BY OBSERVING AS UNDER : 4.1 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT IN RESPECT OF THIS GROUND AND MATERIAL AVAILABLE ON REC ORD. THE APPELLANT IN HIS SUBMISSION HAS ONLY STATED THAT THOUGH T HE CONTRACTOR MMI CONSTRUCTION HAD RAISED THE BILL FOR T HE WORK EXECUTED DURING THE YEAR AND THE AMOUNT WAS ALSO PAID TO HIM THOUGH TDS WAS NOT DEDUCTED. THE APPELLANT HAS CONCED ED IT TO BE A HUMAN ERROR AND, THEREFORE, THE TDS COULD NOT BE DEPOSITED. SUCH ARGUMENTS ARE UNTENABLE AS PER LAW SINCE THE PROV ISION AS PER SECTION 40(A)(IA) IS VERY CLEAR. THE GROUND OF A PPEAL RAISED BY THE APPELLANT IS, THEREFORE, NOT LIABLE FOR ANY CON SIDERATION. THE DISALLOWANCE MADE BY THE AO IS CONFIRMED AND THE GROU ND OF APPEAL RAISED IS DISMISSED. 8.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE AS SESSEE IS IN APPEAL BEFORE US. 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES BEFORE US. THERE IS NO DISPUTE TO THE FACT T HAT THE ASSESSEE HAS NOT DEDUCTED ANY TAX FROM THE PAYMENT MADE TO M MI CONSTRUCTION, THEREFORE, THIS IS A CLEAR VIOLATION OF PROVISIONS OF SECTION 194C AND THEREFORE THE ASSESSING OFFICER WA S FULLY JUSTIFIED IN MAKING THE DISALLOWANCE U/S.40(A)(IA). WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A ) UPHOLDING THE DISALLOWANCE. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 9 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 30-05-2014. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE DATED : 30 TH MAY, 2014. COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-II, PUNE 4. CIT-II, PUNE 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY , ITAT, PUNE BENCHES, PUNE