SUSHIL KUMAR BENIPRASAD GOENKA, MUMBAI V. ITO 14(2)(2), MUMBAI

ITA 1430/MUM/2014

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2077 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 23-08-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 28-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: POOJA SWAROOP
• Assessee Lawyers: RISHABH CHATURVEDI
• Keywords: Business income; Business expenditure; Salary income; Opportunity of being heard; Principle of natural justice
• Section: 143(3); 14A; 148; 10

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO.1430 /MUM/2014 ( / ASSESSMENT YEAR : 2010-11) SUSHIL KUMAR BENIPRASAD GOENKA, PLOT NO. 6, F-11/12, WICEL, OPP SEEPZ, MIDC, ANDHERI (E), MUMBAI 400 093. / V. INCOME TAX OFFICER 14(2)(2), MUMBAI. ./ PAN : AADPG 0850 B ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY SHRI RISHABH CHATURVEDI REVENUE BY : MS. POOJA SWAROOP (D.R.) / DATE OF HEARING : 23-08-2016 / DATE OF PRONOUNCEMENT : 11-11-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE ASSESSEE, BEING ITA NO. 1430/MUM/2014, IS DIRECTED AGAINST THE APPELLATE ORDER DATED 7 TH OCTOBER, 2013 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 25, M UMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2010- 11, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 17 TH DECEMBER, 2012 PASSED BY THE LEARNED ASSESSING OFF ICER (HEREINAFTER CALLED THE AO) U/S 143(3) R.W.S. 147 OF THE INCOME-TAX ACT,1961 (HEREINAFTER CALLED THE ACT). ITA 1430/MUM/2014 2 2. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THE MEMO OF APPEAL FILED WITH THE INCOME TAX APPELLATE TRIBUNAL, MUMBA I (HEREINAFTER CALLED THE TRIBUNAL) READ AS UNDER:- 1. LEARNED COMMISSIONER OF INCOME TAX (APPEAL)-25, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, HAS ERRED I N DISALLOWING INTEREST EXPENSE OF RS. 10,27,507/-. THE APPELLANT RESPECTFULLY SUBMITS THAT CIT(A) OUGHT TO H AVE CONSIDERED THAT INTEREST EXPENSE WAS INCURRED TO EARN INTEREST INCOME ON CAPITAL BALANCE IN THE FIRM WHICH IS TAXABLE AS BU SINESS INCOME AND OUGHT TO HAVE IGNORED APPELLANT'S MISTAKE OF CLAIMING I NTEREST EXPENSE AS LOSS UNDER THE HEAD 'INCOME FROM OTHER SOURCES' I NSTEAD OF 'BUSINESS LOSS' AS THERE IS NO ESTOPPEL AGAINST LAW, P ARTICULARLY WHEN THE TOTAL INCOME, AS RETURNED, REMAINS THE SAME. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 19,63,290/- WAS FILED BY THE ASSESSEE ON 14 TH OCTOBER, 2010 WHICH WAS PROCESSED U/S 143(1) OF THE ACT. THE CAS E WAS REOPENED U/S 148 OF THE ACT FOR THE REASONS RECORDED AS UNDER:- ON PERUSAL OF THE CASE RECORDS, IT IS SEEN THAT AS SESSEE HAS SHOWN SALARY INCOME OF RS.30,00,000/- AFTER CLAIMIN G DEDUCTION U/S 10 AND INTEREST INCOME OF RS. 1,08,297/-, THE A SSESSEE CLAIMED DEDUCTION OF RS.10,27,507/- ON ACCOUNT OF I NTEREST PAYMENT AGAINST THE SALARY INCOME AND INTEREST INCO ME. IT MAY BE NOTED THAT THE ONLY ALLOWABLE DEDUCTION O UT OF SALARY INCOME ARE PROFESSIONAL TAX AND ENTERTAINMEN T ALLOWANCES. THE DEDUCTION OF INTEREST PAYMENT CLAIMED BY THE AS SESSEE OUT OF THE SALARY INCOME IS NOT ALLOWABLE UNDER THE INCOME TAX ACT AND INTEREST PAYMENT CLAIMED AGAINST THE INTEREST INCOM E ARE ALLOWABLE ONLY IF THE SAID EXPENSES ARE INCURRED FO R THE PURPOSE OF MAKING OR EARNING SUCH INCOME AS PER THE SECTION U/ S 57 OF THE I.T. ACT, 1961'. ITA 1430/MUM/2014 3 NOTICE U/S 148 OF THE ACT WAS ISSUED AND SERVED ON THE ASSESSEE AND IN REPLY THE ASSESSEE STATED THAT THE ORIGINAL RETURN OF INC OME FILED MAY BE TREATED AS HAVING FILED IN RESPONSE TO NOTICE U/S 148 OF THE A CT. THE CASE WAS REOPENED TO DISALLOW THE CLAIM OF DEDUCTION OF RS. 10,27,507 /- ON ACCOUNT OF INTEREST PAYMENT TO LIC OF INDIA AGAINST SALARY INCOME AND I NTEREST INCOME AND THE ASSESSEE HAS SUBMITTED AS UNDER:- 1. I HAVE BORROWED FROM LIC AND HAVE PAID INTEREST OF RS. 10,27,507/- DURING THE YEAR ENDED 31.3.2010. 2. ABOVE BORROWED FUNDS HAVE BEEN UTILIZED BY ME IN INVESTING IN SYSTEMATIC EXPORTS, A FIRM IN WHICH I AM A PARTNER. 3. THE PURPOSE OF GIVING ABOVE LOAN WAS TO EARN INT EREST. HOWEVER, UNFORTUNATELY, DUE TO LOSSES, SYSTEMATIC EXPORTS HA S BEEN UNABLE TO PAY ANY INTEREST. 4. IF SYSTEMATIC EXPORTS HAD EARNED PROFITS AND WAS IN A POSITION TO PAY INTEREST TO ME, I WOULD HAVE SHOWN THE SAME AS MY BUSINESS INCOME AS PER 28(V) OF THE SAID ACT. THE INTEREST P AID BY ME ON BORROWINGS UTILIZED WITH THE PURPOSE OF EARNING INT EREST IS A DEDUCTIBLE BUSINESS EXPENDITURE UNDER SECTION 36,37 AND OTHER RELEVANT PROVISIONS OF THE SAID ACT. 5. I HAVE, BY MISTAKE, CLAIMED THE SAID INTEREST AS DEDUCTION FROM INCOME FROM OTHER SOURCES. BY THIS LETTER, I WISH T O CORRECT THIS MISTAKE AND CLAIM THE ABOVE INTEREST EXPENSE AS A BUSINESS EXPENDITURE. 6. AS A RESULT, DUE TO INTEREST EXPENSE AND NO CORR ESPONDING INTEREST INCOME WHICH WOULD HAVE BEEN LIABLE TO TAX AS BUSIN ESS INCOME (INVESTMENT AS CAPITAL IN PARTNERSHIP FIRM TO EARN INTEREST U/S 28(IV)), I HAVE INCURRED THE LOSS OF RS.10,27,507/- UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION. 7. MY INCOME FROM OTHER SOURCES STAND CORRECTED TO RS. 1,08,297/- INSTEAD OF' LOSS OF RS. 9,19,210/-. ITA 1430/MUM/2014 4 8. AFTER SETTING OFF OF BUSINESS LOSS AGAINST INCOM E FROM OTHER HEADS, VIZ; SALARY INCOME, INCOME FROM CAPITAL GAIN AND IN COME FROM OTHER SOURCES, MY TOTAL INCOME SHALL REMAIN SAME AS MY RE TURNED INCOME. IT WAS OBSERVED BY THE A.O. THAT THE ASSESSEE HAS T AKEN LOAN TO INVEST IN PARTNERSHIP FIRM. THE SHARE OF PROFIT FROM THE PART NERSHIP IS EXEMPT U/S 10(2A) OF THE ACT. THE ASSESSEES CONTENTION THAT T HE LOAN AMOUNT WAS INVESTED IN THE PARTNERSHIP FIRM WITH THE INTENTION OF EARNING INTEREST WAS NOT ACCEPTABLE TO THE A.O. THE A.O. OBSERVED THAT SHARE OF PROFIT FROM CAPITAL CONTRIBUTION IN THE PARTNERSHIP FIRM IS EXEMPT FROM TAX U/S 10(2A) OF THE ACT . HENCE, THE CONTENTION OF THE ASSESSEE THAT HAD THER E BEEN PROFIT IN THE PARTNERSHIP FIRM, THE ASSESSEE WOULD HAVE RECEIVED INTEREST WAS NOT ACCEPTABLE/TENEBLE. THE DISALLOWANCE U/S 14A OF THE ACT WAS NOT WORKED OUT BY THE ASSESSEE AS OBSERVED BY THE AO. THE ASSESSEE HAD MADE INVESTMENT IN THE CAPITAL OF PARTNERSHIP FIRM OUT OF LOAN RECEIVE D FROM LIC AND THE ASSESSEE HAS NOT PAID THE INTEREST ON LOAN TAKEN FOR THE PUR POSES OF EARNING INTEREST AS NO INTEREST WAS RECEIVED FROM PARTNERSHIP FIRM. THE A.O. ACCORDINGLY COMPUTED THE INCOME OF THE ASSESSEE BY DISALLOWING THE INTEREST PAID TO LIC AMOUNTING TO RS. 10,27,507/- VIDE ASSESSMENT ORDER DATED 17 TH DECEMBER, 2012 PASSED U/S 143(3) R.W.S. 147 OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 17.12.20 12 PASSED BY THE A.O. U/S 143(3) OF THE ACT READ WITH SECTION 147 OF THE ACT, THE ASSESSEE FILED FIRST APPEAL BEFORE THE LD. CIT(A). 5. BEFORE THE LD. CIT(A) , THE ASSESSEE REITERATED THE SUBMISSION WHAT WERE MADE BEFORE THE A.O. AND SUBMITTED THAT HE HAD BORR OWED FUNDS FROM LIC AND PAID INTEREST OF RS. 10,27,507/- DURING THE YEA R AND THIS MONEY HAD BEEN UTILIZED FOR INVESTING IN THE CAPITAL OF SYSTEMATIC EXPORTS IN WHICH THE ASSESSEE IS A PARTNER. THE ASSESSEE CREDITED THIS BORROWED FUND IN HIS CAPITAL ACCOUNT IN THE BOOKS OF THE FIRM AND INTEREST IS AL LOWABLE TO PARTNERS IN TERMS ITA 1430/MUM/2014 5 OF PARTNERSHIP DEED OF THE FIRM. THE ASSESSEE SUBM ITTED COPY OF BANK BOOK, BANK STATEMENTS, CAPITAL ACCOUNT, PARTNERSHIP DEED, BALANCE SHEET AND INCOME TAX RETURN OF THE FIRM ETC. BEFORE THE LEARN ED CIT(A). THE LEARNED CIT(A) OBSERVED THAT THE ASSESSEE HAS AVAILED LOAN FROM LIC ON WHICH INTEREST OF RS. 10,27,507/- WAS PAID BY THE ASSESSEE WHICH W AS SET OFF AGAINST INCOME FROM OTHER SOURCES AND SALARY INCOME. THE ASSESSEE HAD CLAIMED TO HAVE INVESTED LOAN PROCEEDS FROM LIC IN THE CAPITAL OF T HE FIRM M/S SYSTEMATIC EXPORTS FOR THE PURPOSES OF EARNING INTEREST AS PER CONTENTIONS OF THE ASSESSEE. THE LEARNED CIT(A) OBSERVED FROM THE BALA NCE SHEET OF THE FIRM M/S SYSTEMATIC EXPORTS THAT THE ASSESSEE HAD OPENING OU TSTANDING CAPITAL AT RS. 4,82,079/-, ADDITIONS MADE DURING THE YEAR AT RS.67 ,786/-, WITHDRAWALS DURING THE YEAR AT RS.5,33,834/-, SHARE OF LOSS AT RS. 5,29,619/-, AND CLOSING BALANCE IN NEGATIVE AT RS. 5,13,588/-. THE ASSESSEE WAS ENTITLED TO 15% SHARE IN THE CAPITAL OF FIRM AND HIS CAPITAL AT THE END O F YEAR WAS NEGATIVE, AS AGAINST TOTAL CAPITAL OF THE FIRM AT RS.346.05 LAKH S. THE LD. CIT(A) REFERRED TO CLAUSE 8 OF PARTNERSHIP DEED WHICH READS AS UNDER:- 'THE CAPITAL OF THE PARTNERSHIP SHALL BE BROUGHT IN BY THE PARTNERS AS AND WHEN REQUIRED FOR THE BUSINESS IN THE MANNER AS MUTUALLY AGREED 'UPON BETWEEN THE PARTIES REFERRED HERETO, A ND THE PARTNERS MAY BE PAID INTEREST, AT A RATE, ON THEIR CAPITAL A S MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME.' THUS, IT WAS OBSERVED BY THE LD. CIT(A) THAT THE IN TENTION OF THE ASSESSEE IN TAKING LOAN FROM LIC WAS NOT TO INVEST IN CAPITAL O F THE FIRM WITH THE SOLE INTENTION OF EARNING INTEREST FROM THE FIRM. THE LE ARNED CIT(A) OBSERVED THAT THE ASSESSEE FAILED TO SHOW ANY NEXUS WITH THE LOAN S TAKEN AND PAYMENTS MADE TO THE FIRM EXCEPT A STRAY INCIDENT INSTANCE W HICH IS NOT SUFFICIENT TO JUSTIFY THE INTEREST PAYMENT OF AN AMOUNT AS HIGH A S RS.10,27,507/- ON SUCH LOANS TAKEN. THERE IS NO EVIDENCE TO PROVE THAT THE ASSESSEES SOLE INTENTION WAS TO EARN INTEREST ON CAPITAL EMPLOYED IN THE FIR M AS AGAINST SHARE IN PROFITS WHICH IS EXEMPTED U/S 10(2A) OF THE ACT. TH E CAPITAL OF THE ASSESSEE ITA 1430/MUM/2014 6 WAS NOT JUST SUFFICIENT EVEN FOR HIS 15% SHARE IN T HE FIRM AND IS IN NEGATIVE WAS THE OBSERVATION OF LEARNED CIT(A). THE LD. CIT( A) ACCORDINGLY CONCLUDED THAT THE ASSESSEE HAS GROSSLY FAILED TO JUSTIFY THA T THE INTEREST PAID OF RS. 10,27,507/- HAD NEXUS WITH ANY BUSINESS PURPOSES OF THE ASSESSEE AND IT IS AN AFTERTHOUGHT JUST TO AVOID THE PAYMENT OF TAXES. THUS, THE LD. CIT(A) UPHELD THE ORDER OF THE A.O. VIDE APPELLATE ORDER D ATED 07-10-20113 PASSED BY LEARNED CIT(A). 6. AGGRIEVED BY THE APPELLATE ORDER DATED 07-10-201 3 PASSED BY THE LD. CIT(A), THE ASSESSEE FILED APPEAL BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS AVAILED LIC LOAN AND INTEREST IS PAID ON THE SAID L OAN. THE ASSESSEE HAS INVESTED THE SAID LOAN IN PARTNERSHIP FIRM SYSTEMAT IC EXPORTS IN WHICH THE ASSESSEE IS PARTNER AND THE ASSESSEE WOULD HAVE EAR NED INTEREST HAD THERE BEEN PROFITS , BY RELYING ON CLAUSE 8 OF THE PARTNE RSHIP DEEED. THE ASSESSEE HAS CLAIMED THE INTEREST PAID OF RS. 10,27,507/- BY SETTING OFF AGAINST INCOME FROM OTHER SOURCES AND SALARY INCOME. 8. THE LD. D.R. SUBMITTED THAT THE A.O. HAS INVOKED THE PROVISIONS OF SECTION 14A OF THE ACT. THE INTEREST PAID BY THE AS SESSEE ON LIC LOAN WHICH WAS INVESTED IN PARTNERSHIP FIRM WAS RIGHTLY DISALL OWED BY THE A.O. AS THE SHARE OF PROFIT FROM PARTNERSHIP FIRM IS EXEMPT FRO M TAX U/S 10(2A) OF THE ACT. THE LEARNED DR RELIED ON THE ORDERS OF THE LEARNED CIT(A). 9. IN THE REJOINDER, THE LD. COUNSEL SUBMITTED THAT INTEREST INCOME ON CAPITAL OF PARTNERSHIP FIRM IS TAXABLE U/S 28(V) OF THE ACT AND HENCE INTEREST SHOULD BE ALLOWED AS DEDUCTION / SET OFF AGAINST IN COME FROM OTHER SOURCES AND SALARY. IT WAS SUBMITTED THAT HAD THERE BEEN PR OFITS, THE PARTNERSHIP FIRM ITA 1430/MUM/2014 7 SYSTEMATIC EXPORTS IN WHICH THE ASSESSEE WAS PARTNE R WOULD HAVE GIVEN INTEREST ON THE INVESTMENT IN THE CAPITAL BY THE AS SESSEE. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND ALSO PE RUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT THE ASSE SSEE IS PARTNER IN FIRM M/S SYSTEMATIC EXPORTS. THE ASSESSEE HAS AVAILED LO AN FROM LIC AND PAID INTEREST OF RS.10,27,507/- WHICH WAS CLAIMED AS AN EXPENSE UNDER THE HEAD PROFIT AND GAIN FROM BUSINESS OR PROFESSION. THE ASSESSEE HAS SET OFF THE SAID INTEREST PAID TO LIC AGAINST INCOME FROM OTHER SOUR CES AND SALARY INCOME. THE ASSESSEE HAS INCOME FROM OTHER SOURCES TO THE T UNE OF RS. 1,18,297/- AND SALARY INCOME OF RS. 9,19,210/-. BEFORE PROCEED ING FURTHER, WE WOULD LIKE TO STATE THAT LOSSES UNDER THE HEAD PROFIT AND GAI N FROM BUSINESS OR PROFESSION ARE NOT ALLOWED TO BE SET OFF AGAINST S ALARY INCOME IN VIEW OF PROVISIONS OF SECTION 71(2A) OF THE ACT WHICH WAS I NSERTED BY FINANCE ACT, 2004, W.E.F. 01-04-2005. THE ASSESSEE HAS STATED TO HAVE INVESTED LIC LOAN IN THE CAPITAL OF THE PARTNERSHIP FIRM M/S SYSTEMAT IC EXPORTS BUT ON CAREFUL PERUSAL OF THE LEDGER EXTRACTS SUBMITTED BY THE ASS ESSEE IN THE PAPER BOOK FILED BEFORE THE TRIBUNAL, WE HAVE OBSERVED THAT TH E ASSESSEE HAS INVESTED ONLY RS. 10,00,000/- IN THE CAPITAL OF PARTNERSHIP FIRM SYSTEMATIC EXPORTS ON 17/10/2008 (PB/PAGE 4 & 11) , WHILE THE TOTAL LOAN FROM LIC OUTSTANDING IN THE BOOKS OF THE ASSESSEE AS ON 31-03-2009 WAS RS. 1,19,11,688.68 (PB/PAGE 7 ) WHICH WAS RAISED IN FINANCIAL YEAR 2008-09, INC LUDING INTEREST FOR FINANCIAL YEAR 2008-09. WE HAVE OBSERVED FROM PERUSAL OF CAN ARA BANK BOOK SUBMITTED BY THE ASSESSEE VIDE PAPER BOOK/PAGE 4 TH AT THE ASSESSEE HAS MADE PAYMENT OF RS. 25,00,000/- ON 10-10-2008 TO CI TY APPARELS VIDE CHEQUE NO. 153747 , RS. 43,00,000/- TO CITY APPAREL S VIDE CHEQUE NO. 153748 DATED 14-10-2008, RS.15,00,000/- TO SUSHIL G OENKA HUF VIDE CHEQUE 153751 ON 15-10-2008, RS. 20,00,000/- TO CIT Y APPARELS VIDE CHEQUE NO. 153752 ON 17-10-2008 AND ALSO PAYMENT OF RS. 10 ,00,000/- TO SYSTEMATIC EXPORTS VIDE CHEQUE NO. 153753 DATED 17- 10-2008. THUS, THE ITA 1430/MUM/2014 8 ASSESSEE HAS INVESTED ONLY RS. 10 LACS IN THE FIRM SYSTEMATIC EXPORTS OUT OF RS.1.19 CRORE OF LIC LOAN (INCLUSIVE OF INTEREST FO R FINANCIAL YEAR 2008-09) OUTSTANDING AS AT 31-03-2009. THUS, THERE IS A PERV ERSITY IN CONTENTION OF THE ASSESSEE AND FINDINGS OF THE AUTHORITIES BELOW AS T HE ASSESSEE HAS NOT INVESTED THE ENTIRE PROCEEDS OF THE LIC LOAN OF RS. 1.19 CRORES (INCLUSIVE OF INTEREST FOR 2008-09) IN THE FIRM SYSTEMATIC EXPORT S BUT FOR RS. 10.0 LACS AS SET OUT ABOVE. THE CAPITAL ACCOUNT OF THE ASSESSEE IN BOOKS OF SYSTEMATIC EXPORTS ALSO CONFIRMS THE SAME. THE BALANCE OUTSTAN DING IN THE CAPITAL ACCOUNT OF THE ASSESSEE WITH SYSTEMATIC EXPORTS IS NEGATIVE AS BROUGHT OUT IN THE LEARNED CIT(A) ORDERS FROM THE BALANCE SHEET OF THE FIRM M/S SYSTEMATIC EXPORTS THAT THE ASSESSEE HAD OPENING OUTSTANDING C APITAL AT RS. 4,82,079/-, ADDITIONS MADE DURING THE YEAR AT RS.67,786/-, WITH DRAWALS DURING THE YEAR AT RS.5,33,834/-, SHARE OF LOSS AT RS. 5,29,619/-, AND CLOSING BALANCE IN NEGATIVE AT RS. 5,13,588/-. THE ASSESSEE WAS ENTITL ED TO 15% SHARE IN THE CAPITAL OF FIRM AND HIS CAPITAL AT THE END OF YEAR WAS NEGATIVE, AS AGAINST TOTAL CAPITAL OF THE FIRM AT RS.346.05 LAKHS. THE ASSESSE E COULD NOT REBUT SAID FINDINGS BEFORE THE TRIBUNAL RATHER THE AUDITED FIN ANCIAL STATEMENTS OF SYSTEMATIC EXPORTS CONFIRMS THE FINDING OF LEARNED CIT(A) PAGE 21/PAPER BOOK FILED WITH THE TRIBUNAL. THERE IS NO BINDING STIPU LATION IN THE PARTNERSHIP DEED W.R.T. PAYMENT OF INTEREST ON CAPITAL CONTRIBU TED BY PARTNERS RATHER THERE IS A GENERAL CLAUSE IN PARTNERSHIP DEED VIDE CLAUSE 8 WHICH READS AS UNDER : 'THE CAPITAL OF THE PARTNERSHIP SHALL BE BROUGHT IN BY THE PARTNERS AS AND WHEN REQUIRED FOR THE BUSINESS IN THE MANNER AS MUTUALLY AGREED UPON BETWEEN THE PARTIES REFERRED HERETO, AN D THE PARTNERS MAY BE PAID INTEREST, AT A RATE, ON THEIR CAPITAL A S MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME.' THERE IS A GENERAL CLAUSE IN THE PARTNERSHIP DEED V IDE CLAUSE 8 OF PARTNERSHIP DEED THAT THE INTEREST MAY BE PAID TO THE PARTNERS ON THE CAPITAL CONTRIBUTED TO THE PARTNERSHIP FIRM BY THE PARTNERS AS MUTUALLY AGREED BY THE PARTNERS. ITA 1430/MUM/2014 9 NO DOUBT, THE INTEREST DUE TO OR RECEIVED BY PARTNE R ON CAPITAL CONTRIBUTED BY PARTNERS IN PARTNERSHIP FIRM IS ASSESSED TO TAX AS BUSINESS INCOME U/S 28(V) OF THE ACT IN THE HANDS OF THE PARTNER BUT THE ASSE SSEE COULD NOT SHOW THAT THE PARTNERS HAVE IN-FACT AGREED TO PAY INTEREST ON THEIR CAPITAL CONTRIBUTED IN THE PARTNERSHIP FIRM M/S SYSTEMATIC EXPORTS DURING THE IMPUGNED ASSESSMENT YEAR AND A VALID AND LEGAL BINDING OBLIG ATION IS CAST ON THE PARTNERSHIP FIRM M/S SYSTEMATIC EXPORTS TO PAY INTE REST ON CAPITAL SPECIFICALLY TO THE PARTNERS IN PRESENTI DURING THE IMPUGNED ASSESSMENT YEAR . THE ASSESSEES HAD TAKEN A CONTENTION THAT HAD THER E BEEN ANY PROFITS IN SYSTEMATIC EXPORT, THE ASSESSEE WOULD HAVE RECEIVED INTEREST FROM THE PARTNERSHIP FIRM NEED VERIFICATION FROM THE ACTUAL CONDUCT OF SYSTEMATIC EXPORTS OVER THE YEARS TO PROVE THAT THE FIRM SYS TEMATIC EXPORTS IN FACT PAID INTEREST ON CAPITAL CONTRIBUTED BY THE PARTNERS WHE N THERE WERE PROFITS IN THE SAID FIRM . THE SHARE OF PROFITS ON THE CAPITAL C ONTRIBUTED BY THE ASSESSEE WITH THE PARTNERSHIP FIRM M/S SYSTEMATIC EXPORTS , ARE EXEMPT FROM TAX U/S. 10(2A) OF THE ACT. THUS, NECESSARILY THE EXPENSES I NCURRED IN RELATION TO EARNING OF THE INCOME WHICH DOES NOT FORM PART OF T OTAL INCOME, HAS TO BE DISALLOWED AS PER PROVISIONS AND MANDATE OF SECTION 14A OF THE ACT UNLESS IT IS SHOWN THAT THE INTEREST IS PAID / PAYABLE ON THE CAPITAL CONTRIBUTED BY THE PARTNER IN THE FIRM SYSTEMATIC EXPORTS WHICH INTERE ST IS CHARGEABLE TO TAX U/S 28(V) OF THE ACT . CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE, INTEREST OF JUSTICE WILL BE BEST SERVED IF TH E MATTER IS SET ASIDE AND RESTORED TO THE FILE OF THE AO FOR FRESH DETERMINAT ION OF THE ISSUE ON MERITS IN ACCORDANCE WITH LAW WHILE ALSO KEEPING IN VIEW OUR ABOVE STATED OBSERVATIONS IN THIS ORDER. THE ASSESSEE SHALL BE ALLOWED TO FIL E RELEVANT EVIDENCES / EXPLANATIONS IN HIS DEFENSE. NEEDLESS TO SAY PROPER AND ADEQUATE OPPORTUNITY OF BEING HEARD SHALL BE GRANTED TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE. THE APPEAL OF THE ASSESSEE IS A LLOWED FOR STATISTICAL PURPOSES. WE ORDER ACCORDINGLY. ITA 1430/MUM/2014 10 9. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN I TA NO. 1430/MUM/2014 FOR THE ASSESSMENT YEAR 2010-11 IS ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11 TH NOVEMBER , 2016. # $% &' 11-11-2016 ( ) SD/- SD/- (C.N. PRASAD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 11-11-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI E BENCH 6. (BC / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI