Tex Designers, Ludhiana V. ITO, Ludhiana

ITA 1235/CHANDI/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77152 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 04-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 21-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJAY SHARMA
• Assessee Lawyers: S K MUKHI
• Keywords: Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI T.R.SOOD ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 1235/CHD/2011 ASSESSMENT YEAR : 2007-08 TEX DESIGNERS, VS THE INCOME TAX OFFICER, 1101/1, SATSANG ROAD, RANGE-VII (2), CIVIL LINES, LUDHIANA. LUDHIANA. PAN : AABFT6894N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.K.MUKHI RESPONDENT BY : SHRI AJAY SHARMA, DR DATE OF HEARING : 09.06.2014 DATE OF PRONOUNCEMENT : 19.06.2014 O R D E R PER SUSHMA CHOWLA, JM THE APPEAL BY THE ASSESSEE IS AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, LUDHIANA D ATED 17.10.2011 AGAINST THE ORDER PASSED UNDER SECTION 143(3) OF TH E INCOME-TAX ACT, 1961 ( 'THE ACT' FOR SHORT). 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL : 1. THE ID. COMMISSIONER OF INCOME TAX (APPEALS) -II , LUDHIANA HAS ERRED IN LAW AND FACTS IN CONFIRMING THE ACTION OF LD. AO IN DISALLOWING THE INTEREST PAID TO BANK ON NOTIONAL BASIS AMOUNTI NG TO RS. 10,16,397.00 BEING THE AMOUNT USED BY ONE OF THE PA RTNERS IGNORING A) THE PARTNERS CAPITAL ACCOUNT IN TOTALITY AND T ERM AND CONDITIONS OF THE PARTNERSHIP DEED, THE BASIC DOCUM ENTS FOR FORMING THE PARTNERSHIP FIRM. B) AND ALSO WITHOUT ESTABLISHING ANY NEXUS BETWEEN THE WITHDRAWALS BY PARTNER AND USAGE OF BORROWED FUNDS C) AND ALSO TREATING THE PARTNER OF THE FIRM AS AN IND EPENDENT ENTITY. 2 2. MOREOVER, THE ID. COMMISSIONER OF INCOME TAX ( APPEALS) -II, LUDHIANA HAS ERRED IN LAW AND FACTS IN CONFIRMING T HE ACTION OF LD. AO IN CALCULATING THE NOTIONAL INTEREST ON ARBITRAR Y BASIS IGNORING THE % RATE ACTUALLY PAID TO THE BANK. 3. THE ASSESSEE IS AGGRIEVED BY THE ADDITION OF RS. 10,16,397/-. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT ONE OF THE PARTNER SHRI KNAWAL KHURANA HAD A NEGATIVE CAPITAL OF RS. 94,12,693/- THE ASSESSING OFFICER NOTED THAT SHRI KANWAL KHURAN A HAD USED BORROWED FUNDS FOR HIS PERSONAL USE BY WITHDRAWING CAPITAL FROM FIRMS FUNDS. THE INTEREST ON THE SAID BORROWED CA PITAL USED FOR PERSONAL PURPOSE BY WAY OF WITHDRAWAL BY SHRI KANWA L KHURANA, PARTNER WAS DISALLOWED BY ASSESSING OFFICER RESULTI NG IN ADDITION OF RS. 10,15,397/-. 4. THE COMMISSIONER OF INCOME TAX (APPEALS) UPHELD THE ORDER OF ASSESSING OFFICER. THE LD. AR FOR THE ASSESSEE POI NTED OUT THAT SIMILAR ISSUE AROSE BEFORE THE TRIBUNAL IN THE PREC EDING YEAR AND THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE. 5. THE LD. DR FOR THE REVENUE POINTED OUT THAT THE RATIO LAID DOWN BY THE TRIBUNAL IN THE EARLIER YEAR IS NOT APPLICAB LE TO THE FACTS OF THE PRESENT CASE AS THE AGGREGATE CAPITAL BALANCE OF AL L THE PARTNERS WAS IN NEGATIVE AND CONSEQUENTLY THE DISALLOWANCE OF INTER EST EXPENDITURE WAS WARRANTED IN THE HANDS OF THE ASSESSEE. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE WAS A PARTNERSHIP CONCERN AND CONSTITUTED OF THREE PARTNERS AS DETAILED IN THE PARTNERS CAPITAL ACCOUNT PLACED AT PAGE 4 OF THE PAPER BOOK. ONE OF THE PARTNER SHRI KANWAL KHURANA HAD A NET DEBIT BALANCE OF RS. 94,12,693/- AT THE CLOSE OF THE YEAR AS AGAINST WHICH THE OTHER TWO PARTNERS SHRI MOHINDER MOHAN KHURANA AND SHRI SURINDER 3 LAL KHURANA HAD CREDIT BALANCES OF RS. 38,44,234/- AND RS. 52,41,884/- RESPECTIVELY. THE NET CAPITAL BALANCE OF THE PARTNERS WAS DEBIT RS. 3,26,575/-. DURING THE YEAR UNDER CONSID ERATION, THE ASSESSEE HAD CLAIMED INTEREST EXPENDITURE TO BANK A T RS. 792,226/- AND INTEREST ON LOANS AT RS. 753,804/-. THE CASE OF TH E REVENUE WAS THAT THE INTEREST BEARING FUNDS WERE USED BY THE ASSESSE E TO ADVANCE INTEREST FREE FUNDS TO ONE OF THE PARTNERS WHO IN-T URN HAD UTILIZED THE SAME FOR PERSONAL PURPOSES. CONSEQUENTLY, THE INTE REST RELATED TO SUCH BORROWED CAPITAL BY THE PARTNER SHRI KANWAL KHURANA WAS TO BE DISALLOWED IN THE HANDS OF THE ASSESSEE AT RS. 10,1 6,397/-. 7. THE TRIBUNAL VIDE ORDER IN ITA NO. NO. 198/CHD/2 010 DATED 30.08.2010 HAD CONSIDERED THE DISPUTE ARISING IN AS SESSMENT YEAR 2005-06 WHEREIN ONE OF THE PARTNER HAD OVERDRAWN HI S CAPITAL AND UTILIZED THE SAME FOR NON-BUSINESS PURPOSES BUT DEB IT BALANCE OF THE PARTNER WAS LESS THAN THE COMBINED CREDIT BALANCES OF THE OTHER TWO PARTNERS I.E. THE CUMULATED CAPITAL ACCOUNT OF ALL THE PARTNERS WAS CREDIT BALANCE. THE TRIBUNAL IN VIEW OF THE SAME I N-TURN FOLLOWING THE RATIO LAID DOWN BY THE CHANDIGARH BENCH OF TRIBUNAL IN THE CASE OF M/S ANSYSCO IN ITA NO. NO. 883/CHD/2008 VIDE ORDER DATED 17.09.2009 APPLIED THE RATIO AND HELD THAT SINCE TH E COMBINED BALANCE OUTSTANDING IN THE PARTNERS CAPITAL ACCOUNT WAS IN CREDIT, IT COULD NOT BE SAID TO BE A CASE OF DIVERSION OF FUNDS FOR NON- BUSINESS PURPOSES. 8. NOW COMING TO THE FACTS OF THE PRESENT CASE, THE CUMULATIVE CAPITAL BALANCE OF THE PARTNER IS NEGATIVE FIGURE. CONSEQUENTLY, THE PRECEDENT RELIED UPON BY THE LD. AR FOR THE ASSESSE E IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE WHERE ONE OF THE P ARTNER HAS OVERDRAWN HIS CAPITAL WHICH IS OVER AND ABOVE THE CUMULATIVE CAPITAL BALANCE (CREDIT) OF THE OTHER PARTNERS AND WHERE THE ASSESS EE HAD BORROWED 4 INTEREST BEARING FUNDS, THEN IT CANNOT BE HELD THAT THERE WAS NO DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSES. IN V IEW THEREOF, WE HOLD THAT THE INTEREST RELATABLE TO SUCH CAPITAL BA LANCES OVER DRAWN BY THE PARTNER SHRI KANWAL KHURANA IS TO BE CONSIDERED FOR COMPUTING THE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO RECOMPUTE THE INTEREST EXPENDITURE RELATABLE TO SUCH AMOUNTS BY TAKING THE DAY TO DAY BALANCE OF ALL THE THREE PARTNERS AND ALSO BY IGNORING THE PROFITS CRE DITED TO THE PARTNERS CAPITAL ACCOUNT AT THE CLOSE OF THE YEAR. THE ASSE SSING OFFICER SHALL AFFORD REASONABLE OPPORTUNITY OF HEARING TO THE ASS ESSEE AND RECOMPUTE THE DISALLOWANCE IN THE HANDS OF THE ASSE SSEE IN ACCORDANCE WITH OUR DIRECTIONS. THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 9. THE ASSESSEE BY WAY OF GROUND NO. 2 HAS RAISED T HE ISSUE AGAINST PERCENTAGE RATE TO BE APPLIED FOR CALCULATING THE N OTIONAL INTEREST. HOWEVER, LD. AR FOR THE ASSESSEE DURING THE COURSE OF HEARING HAD NOT PUT FORWARD ANY SUBMISSIONS AGAINST THE SAID GROUND OF APPEAL AND HENCE, THE SAME IS DISMISSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH JUNE, 2014. SD/- SD/- ( T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 19 TH JUNE, 2014 POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR. ASSISTANT REGISTRAR ITAT,CHD.