Sri Sairam Builders, Hyd, Hyderabad V. ACIT, Circle-6(1), Hyd, Hyderabad

ITA 1264/HYD/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2341 (ITAT-HYDERABAD)
• Duration Of Justice: 9 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-07-2017
• Assessment Year: 2007-2008
• Appeal Filed On: 28-09-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: L R AMJI RAO
• Assessee Lawyers: K C DEVADAS
• Keywords: Rectification of order; Proportionate interest
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ITA NO. 1263/HYD/2016 ASSESSMENT YEAR: 2007-08 & ITA NO. 1264/HYD/2016 ASSESSMENT YEAR: 2007-08 M/S. SRI SAIRAM BUILDERS, HYDERABAD. PAN AALFS6568C VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 6(1), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.C. DEVADAS REVENUE BY : SHRI L. RAMJI RAO DATE OF HEARING : 05-07-2017 DATE OF PRONOUNCEMENT : 12-07-2017 ORDER PER D.S. SUNDER SINGH, A.M: THESE APPEALS FILED BY THE ASSESSEE FOR THE A.Y 2007- 08. ITA NO.1263/H/16 IS AGAINST THE ORDER PASSED UNDER SECTION 143(3) AND THE ITA NO.1264/H/2016 IS FILED AGAINST THE ORDER PASSED U/S154 FOR THE A.Y.2007-08.SINCE BOTH THE APPEALS ARE INTERRELATED BOTH OF THEM ARE CLUBBED, HEARD TOGETHER AND DISPOSED OF IN THIS CONSOLIDATED ORDER AS UNDER: ITA NO. 1263/HYD/2016: 2. ALL THE GROUNDS RAISED IN THIS APPEAL ARE RELATED TO THE DISALLOWANCE OF INTEREST ON LOANS GIVEN TO THE PARTIES. THE ASSESSEE IS A PARTNERSHIP FIRM CARRYING ON CONSTRUCTION 2 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. ACTIVITY. FOR THE A.Y 2007-08, THE ASSESSEE FILED THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 36,78,980/-. DURING THE ASSESSMENT PROCEEDINGS, THE A.O FOUND THAT THE ASSESSEE HAS CHARGED INTEREST ON PARTNERS CAPITAL ACCOUNT @ 8% AS PERMITTED BY THE PARTNERSHIP DEED AND CLAIMED THE SAME AS DEDUCTION. THE ASSESSEE HAD ADVANCED SUM OF RS. 1,47,00,000/- TO ITS PARTNERS VIZ., SMT. MAHESWARI AND SHRI SATYANARAYANA REDDY INTEREST FREE LOAN. THEREFORE, THE A.O DISALLOWED THE PROPORTIONATE INTEREST ON THE LOANS OF THE PARTNERS WHICH WAS WORKED OUT TO RS. 11,76,000/- AND ADDED BACK TO THE INCOME. AGGRIEVED BY THE ORDER OF THE A.O THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A). 3. ON APPEAL THE LD. CIT(A) ENHANCED THE ADDITION TO RS1764000/-. WHILE ENHANCING THE ADDITION THE LD. CIT(A)IN PARA NO. 6.2 OF HER ORDER STATED AS UNDER: 06.2 THE A.O S ACTION IN DISALLOWING INTEREST IS CORRECT IN PRINCIPLE. IT IS HOWEVER SEEN THAT THE A.O INSTEAD OF DISALLOWING THE INTEREST CREDITED TO PARTNERS ACCOUNTS HAS FIRST CALCULATED INTEREST ON THE TOT AL DEBIT BALANCE AND DISALLOWED THE SAME. THE EFFECT OF THE ACT IS THAT HE HAS ALSO DISALLOWED OTHER INTEREST EXPENDITURE, TREATING THE EXCESS WITHDRAWAL BY THE PARTNERS AS COMING OUT OF INTEREST BEARING FUNDS BORROWED FROM OTHER PARTIES. SINCE, THERE IS NO DISCUSSION OF THIS ISSUE IN THE ASSESSMENT ORDER AND THERE IS NOTHING ON RECORD TO SUGGEST THAT INTEREST BEARING FUNDS HAD BEEN DIVERTED BY THE APPELLANT, SUCH ADDITIONAL DISALLOWANCE IS NOT JUSTIFIED. THE QUANTUM OF DISALLOWANCE IS LIMITED TO ACTUAL INTEREST DEBITED TO PARTNERS CAPITAL ACCOUNT, I.E RS. 13,52,343/-. IN THE ASSESSMENT ORDER, THE A.O APPLIED INTEREST @ 8%. HAVING REALIZED THAT THE ASSESSEE HAD ACTUALLY CREDITED THE PARTNERS CAPITAL ACCOUNT @ 12%, HE LATER RECTIFIED THE ASSESSMENT ORDER U/S 154 OF THE ACT AND ENHANCED THE DISALLOWANCE BY APPLYING THE INTEREST RATE OF 12%. THUS, THE DISALLOWANCE WAS INCREASED FROM RS. 11,75,000/- TO RS. 17,64,000/-. IN VIEW OF THE FOREGOING DISCUSSION, IT IS HELD THAT THE RATE OF DISALLOWANCE OF 12% IS CORRECT BUT THE QUANTUM OF DISALLOWANCE IS TO BE LIMITED AT RS. 13,52,343/-. 3 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. 3.1 AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 4. DURING THE APPEAL HEARING, LD SR. COUNSEL APPEARING FOR THE ASSESSEE, ARGUED THAT THE ASSESSE HAS GIVEN THE LOANS TO THE PARTNERS IN THE PREVIOUS YEAR RELEVANT TO THE A.Y 2006-07 AND HAS NOT BORROWED ANY FUNDS IN THE RELEVANT PREVIOUS YEAR. THE LD. A.R FURTHER ARGUED THAT THE AMOUNTS WERE ADVANCED OUT OF INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE FIRM AND REFERRING THE PAPER BOOK THE A.R STATED THAT THE LOANS ARE ADVANCED TO THE PARTNERS ON 18- 03-2006, RELEVANT TO THE A.Y 2006-07. THE LD. AR ALSO ARGUED THAT IT IS FOR THE ASSESSEE TO DECIDE WHETHER TO CHARGE INTEREST OR NOT ON THE ADVANCES GIVEN TO THE PARTNERS IN VIEW OF BUSINESS EXPEDIENCY. THE A.R FURTHER SUBMITTED THAT THE DISALLOWANCE OF INTEREST IS PERMITTED U/S 36 (1)(III) OF THE INCOME TAX ACT, FOR DIVERSION OF INTEREST BEARING FUNDS TO NON-BUSINESS PURPOSES AND IN THE INSTANT CASE THERE IS NO DIVERSION OF FUNDS AND HENCE THE QUESTION OF CHARGING OF INTEREST ON LOANS TO THE PARTNERS DOES NOT ARISE. 5. ON THE OTHER HAND, THE LD. DR ARGUED THAT THE ASSESSEE IS THE PARTNERSHIP FIRM CARRYING ON THE BUSINESS OF REAL-ESTATE AND CONSTRUCTION. AS PER THE PARTNERSHIP DEED, THE INTEREST ON PARTNERS CAPITAL IS CHARGED @ 12% AND CLAIMED AS DEDUCTION U/S 40(B) OF THE IT ACT . THE A.O WRONGLY CHARGED THE INTEREST ON THE LOANS ADVANCED TO THE PARTNERS INSTEAD OF ALLOWING THE INTEREST ON NET CAPITAL BALANCES IN THE CAPITAL ACCOUNT AFTER REDUCING THE LOANS FROM OPENING CAPITAL ACCOUNTS OF THE PARTNERS. THIS DEFECT 4 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. WAS RECTIFIED BY THE LD. CIT(A) IN HER ORDER IN PARA NO. 6.2 WHICH IS EXTRACTED IN PARA NO.3 OF THIS ORDER HENCE THE DR ARGUED THAT NO INTERFERENCE IS CALLED FOR IN THE CIT(A) ORDER. 6. ACCORDING TO THE LD. DR, THE CORRECT METHOD IS TO ALLOW THE INTEREST ON THE PARTNERS CAPITAL ACCOUNT IS ON NET BALANCES I.E AFTER MAKING ADJUSTMENTS FOR ADDITIONS AND DELETIONS TO THE OPENING BALANCES. A.O SHOULD CALCULATE AND ALLOW THE INTEREST U/S 40(B) OF THE INCOME TAX ACT AFTER ADDING THE INTRODUCTION OF CAPITAL INTRODUCED DURING THE YEAR AND REDUCING THE WITHDRAWALS MADE FROM THE CAPITAL ACCOUNTS. IN THIS CASE, ACCORDING TO THE LD. DR, THE LOAN AMOUNTS GIVEN TO THE PARTNERS SHOULD BE REDUCED FROM THE CAPITAL ACCOUNTS AND NET BALANCE SHOULD BE ARRIVED AT AND ON SUCH NET BALANCE, THE A.O SHOULD ALLOW THE INTEREST FOR DEDUCTION U/S 40(B) OF THE INCOME TAX ACT. 7. THE LD. DR ALSO RELIED ON THE DECISION IN 261 ITR 1 AND 92 ITD 479 AND ALSO THE ITAT DELHI SMC BENCH DECISION IN THE CASE OF ADMAN ADVERTISING VS ACIT IN ITA NO. 796/DEL/2016. 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE IS CARRYING ON THE BUSINESS OF CONSTRUCTION AND IT IS A PARTNERSHIP FIRM CONSISTING OF THREE PARTNERS. DURING THE A.Y 2006-07, THE ASSESSEE FIRM MADE ADVANCE A SUM OF RS. 1,80,00,000/- TO TWO PARTNERS I.E (I) SMT. MAHESWARI AND (II) SATYANARAYA REDDY. THE ASSESSEE HAS MAINTAINED TWO DIFFERENT ACCOUNTS ONE IS CAPITAL ACCOUNT AND THE OTHER ONE IS LOAN ACCOUNT. ACCORDING TO THE LD. AR, THE ASSESSEE IS CLAIMING 5 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. THE INTEREST ON THE PARTNERS CAPITAL ACCOUNT BALANCES WITHOUT SETTING OFF OR REDUCING THE AMOUNTS ADVANCED TO THE PARTNERS. AS PER THE PARTNERSHIP DEED, THE ASSESSEE IS ENTITLED FOR INTEREST ON THE CAPITAL CONTRIBUTED BY THE PARTNERS. CAPITAL CONTRIBUTED BY THE PARTNER SHOULD BE WORKED OUT BY ADDING THE INTRODUCTION OF CAPITAL DURING THE YEAR AND REDUCING THE AMOUNTS WITHDRAWN OR LOANS GIVEN TO THE PARTNER TO THE OPENING CAPITAL BALANCE. FOR EXAMPLE FOR THE A.Y 2006-07 THE OPENING CAPITAL OF PARTNERS AS ON 01- 04-2005 IS RS. 100/- AND DURING THE YEAR PARTNERS HAS INTRODUCED A CAPITAL OF RS. 30/- AND MADE WITHDRAWALS AND GIVEN LOAN TO THE PARTNER AMOUNTING TO RS. 60/-, THE NET BALANCE FOR THE PURPOSE COMPUTATION OF INTEREST SHOULD BE WORKED OUT AS UNDER: OPENING CAPITAL BALANCE AS AT THE 100.00 BEGINNING OF THE YEAR ADD: FRESH CAPITAL INTRODUCED 30.00 DURING THE YEAR 130.00 LESS: WITHDRAWAL FROM THE CAPITAL ACCOUNT /LOANS ADVANCED DURING THE YEAR 60.00 NET BALANCE: 70.00 8.1 INTEREST SHOULD BE CALCULATED ON NET BALANCE OF RS. 70/- AS PERMITTED BY THE PARTNERSHIP DEED, SUBJECT TO THE RESTRICTIONS PLACED UNDER SECTION 40(B) OF I.T. ACT. THIS VIEW IS SUPPORTED BY THE JURISDICTIONAL TRIBUNAL ORDER IN ARCHITECTURAL ASSOCIATES V . ASSISTANT COMMISSIONER OF INCOME-TAX REPORTED IN [2005] 92 ITD 479 (HYD.). IN THE CITED DECISION WITH REGARD TO THE INTEREST THIS TRIBUNAL HELD THAT THE INTEREST HAS TO BE CALCULATED ON THE CREDIT BALANCE 6 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. STANDING IN THE NAME OF EACH PARTNER AFTER DEDUCTING THE WITHDRAWALS. THIS VIEW IS ALSO SUPPORTED BY THE DECISION RELIED UPON THE BY THE LD. DR IN ADMAN ADVERTISING (SUPRA) ALSO. IN THIS CASE, WHILE CHARGING INTEREST ON CAPITAL BALANCES, THE ASSESSEE HAS NOT REDUCED THE LOANS GIVEN TO THE PARTNERS. THE INTEREST REQUIRED TO BE ALLOWED AFTER REDUCING THE DRAWINGS/OR LOANS GIVEN TO PARTNERS FROM THE OPENING BALANCE OF THE CAPITAL ACCOUNT EVERY YEAR AND ARRIVE AT THE NET BALANCE FOR COMPUTING THE INTEREST ALLOWABLE ON PARTNERS CAPITAL ACCOUNT. NON DISALLOWANCE OF INTEREST IN THE 2006-07 CANNOT GIVE UNDUE RIGHT TO THE ASSESSEE TO MAKE THE INCORRECT CLAIM YEAR AFTER YEAR AND WE DO NOT ALLOW THE MISTAKE TO CONTINUE EVEN AFTER DETECTION. THE ASSESSING OFFICER IS DUTY BOUND TO ALLOW THE CORRECT AMOUNT OF INTEREST FOLLOWING THE CORRECT METHOD. WE DO NOT FIND ANY MERIT IN THE ARGUMENT OF THE LD.A.R THAT THE DISALLOWANCE CANNOT BE MADE IN THE YEAR UNDER CONSIDERATION SINCE IT WAS NOT DISALLOWED IN 2006-07. THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND THE SAME IS UPHELD. THE APPEAL OF THE ASSESSEE IS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DISMISSED. ITA NO. 1264/HYD/2016: 10. ALL THE GROUNDS OF THE APPEAL ARE RELATED TO THE CHARGING OF INTEREST ON THE PARTNERS CAPITAL ACCOUNT @ 12%. IN THE ASSESSMENT YEAR UNDER CONSIDERATION, THE A.O DISALLOWED THE INTEREST ON THE PARTNERS LOAN ACCOUNT @ 8% INSTEAD OF 12%. SUBSEQUENTLY, THE A.O, NOTICED THAT THE 7 ITA NOS. 1263 & 1264/HYD/2016 M/S SRI SAIRAM BUILDERS., HYDERABAD. ASSESSEE HAS CHARGED THE INTEREST @ 12% ON CAPITAL ACCOUNTS AND HENCE PASSED THE RECTIFICATION ORDER U/S 154 OF THE IT ACT, DATED 16 MARCH 2011 AND THE SAME WAS UPHELD BY THE CIT (A), AGAINST WHICH THE ASSESSEE FILED THE APPEAL BEFORE US. 11. THE FACTS AND CIRCUMSTANCES OF THIS CASE ARE DISCUSSED IN DETAIL IN ITA NO. 1263/HYD/2016, IT WAS HELD BY US THAT THE INTEREST IS REQUIRED TO BE ALLOWED @ 12% ON NET CAPITAL BALANCE OF THE PARTNERS CAPITAL BALANCES AS PERMITTED BY THE PARTNERSHIP DEED. THEREFORE, THE ISSUE RAISED IN THIS APPEAL IS SQUARELY COVERED BY OUR ORDER IN APPEAL ITA NO. 1263/HYD/2016 (SUPRA) AND HENCE NO SEPARATE ADJUDICATION IS NECESSARY ON THIS APPEAL. CONSIDERING THE SAME, THE APPEAL OF THE ASSESSEE IS DISMISSED. 12. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 12 TH JULY, 2017. SD/- SD/- (V. DURGA RAO) (D.S. SUNDER SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED: 12 TH JULY , 2017. KRK 1 M/S SRI SAIRAM BUILDERS C/O B. NARSING RAO & CO CAS, PLOT NO. 554, ROAD NO.92, JUBILEE HILLS, HYD 96. 2 ACIT, CIRCLE 6(1), HYDERABAD. 3 CIT(A)-6, HYDERABAD. 4 THE PR. COMMISSIONER OF INCOME TAX, RANGE-6, HYDERABAD. 5 THE DR, ITAT HYDERABAD 6 GUARD FILE