M/s. Pratham Realty Pvt.Ltd., Baroda V. The ACIT, Circle-4, Vadodara

ITA 1449/AHD/2015

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1202 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 12-07-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 21-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Revenue expenditure; Capital expenditure
• Section: 14A; 37

Judgement Text

, D IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER ./ ITA NO.1449/AHD/2015 / ASSTT. YEAR: 2011-2012 M/S.PRATHAM REALITY PVT.LTD. PRATHAM, MAKRAND DESAI ROAD GOTRI, BARODA 390 007. PAN : AACCP 4084 A VS ACIT, CIR.4 VADODARA. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE BY : SHRI MILIN MEHTA, AR REVENUE BY : SHRI SANJAY KUMAR, SR.DR / DATE OF HEARING : 12/07/2016 / DATE OF PRONOUNCEMENT: 12/07/2016 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: (ORAL) PRESENT APPEAL IS DIRECTED AT THE INSTANCE OF THE ASSESSEE AGAINST THE ORDER OF THE LD.CIT(A)-2, VADODARA DATED 27.2.2 015 PASSED FOR THE ASSTT.YEAR 2011-12. 2. THE GROUNDS OF APPEAL TAKEN BY THE ASSESSEE ARE NOT IN CONSONANCE WITH RULE 8 OF THE INCOME TAX (APPELLATE TRIBUNAL) RULES, 1963 - THEY ARE DESCRIPTIVE AND ARGUMENTATIVE IN NA TURE. 3. THE FIRST FOLD OF GRIEVANCE HAS BEEN PROJECTED I N GROUND NO.1. THE ASSESSEE HAS PLEADED THAT THE LD.CIT(A) HAS ERRED I N CONFIRMING THE DISALLOWANCE OF RS.2,60,507/- WHICH WAS MADE BY THE LD.AO OUT OF EXPENSES INCURRED ON SOLAR POWER PROJECT. ITA NO.1449/AHD/2015 2 4. BRIEF FACTS OF THE CASE OF THE ASSESSEE ARE THAT ASSESSEE IS A PARTNERSHIP FIRM. IT HAS FILED ITS RETURN OF INCOM E ON 29.9.2011 DECLARING LOSS OF RS.21,88,941/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE UNDER SECTION 14 3(2) OF THE ACT WAS ISSUED AND SERVED UPON THE ASSESSEE. THE LD.AO HAS DETERMINED THE TAXABLE INCOME OF THE ASSESSEE AT RS.70,731/- AS AG AINST THE LOSS OF RS.21,88,941/-. THE LD.AO HAS BASICALLY DISALLOWED A SUM OF RS.21,54,672/- UNDER SECTION 14A AND RS.1,05,000/- UNDER SECTION 40(A)(IA) OF THE INCOME TAX ACT. HOWEVER, WHEN THE SE ISSUES WERE TAKEN TO THE LD.CIT(A), DIFFERENT COLOUR HAS COME O N THESE ADDITIONS. 5. AS FAR AS FIRST ADDITION CONFIRMED BY THE LD.CIT (A) IS CONCERNED, IT EMERGES FROM THE RECORD THAT THE ASSESSEE HAS INCUR RED AN EXPENDITURE OF RS.2,60,057/- IN RESPECT OF SOLAR POWER PROJECT OF NTPC. THE LD.FIRST APPELLATE AUTHORITY HAS CONFIRMED THIS ADDITION ON THE GROUND THAT IT IS A NEW LINE OF BUSINESS WHICH ULTIMATELY COULD NOT B E MATERIALIZED, AND THEREFORE, THE EXPENDITURE INCURRED ARE TO BE TREAT ED AS CAPITAL IN NATURE AND NOT ALLOWABLE AS DEDUCTION. IN ORDER TO BUTTRESS HIS FINDING, THE LD.FIRST APPELLATE AUTHORITY HAS RELIED UPON TH E DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SAURASHTR A CEMENT AND CHEMICAL INDUSTRIES LTD., 196 ITR 0237 (GUJ). THE D ISCUSSION MADE BY THE LD.CIT(A) ON THIS ISSUE READS AS UNDER: 4.3.3 THE APPELLANT HAS ALSO CLAIMED THAT CERTAIN EXPENDITURES HAVE BEEN INCURRED FOR SPECIFIC BUSINESS PURPOSES. IT HAS BEEN CLAIMED THAT AN AMOUNT OF RS.2,60,075/- HAS BEEN IN CURRED FOR SOLAR POWER PROJECT OF NTPC. FROM THE DOCUMENTS FIL ED BY THE APPELLANT, IT IS SEEN THAT THE APPELLANT MADE A BID FOR THIS PROJECT BUT THE BID WAS NOT SUCCESSFUL AND HENCE THE PROJEC T DID NOT MATERIALIZE. THIS PROJECT WAS IN TOTALLY NEW LINE O F BUSINESS OF THE APPELLANT AS THE EARLIER BUSINESS OF THE APPELLANT WAS CONSTRUCTION ACTIVITY. WHEN ASKED/ THE APPELLANT HAS ONLY SUBMIT TED THAT CONSTRUCTION OF POWER PLANT IS A PART OF ITS MEMORA NDUM AND IT WAS UNDERTAKEN .UNDER THE SAME MANAGEMENT AND CONTR OL. HENCE, THE DEDUCTION WAS CORRECTLY CLAIMED. BUT, TH IS EXPENDITURE HAS BEEN INCURRED BY THE APPELLANT FOR A NEW PROJEC T WHICH COULD NOT MATERIALIZE. UNDER SUCH CIRCUMSTANCES, THE EXPE NSES ON SUCH ITA NO.1449/AHD/2015 3 PROJECT HAS TO BE TREATED AS CAPITAL EXPENDITURE IN NATURE AND CANNOT BE ALLOWED AS A DEDUCTION IN COMPUTATION OF INCOME OF THE APPELLANT. FOR THIS PURPOSE, RELIANCE IS PLACED UPO N THE DECISION OF THE JURISDICTION HIGH COURT IN THE CASE OF SURASTRA ISSUE AND CHEMICAL INDUSTRIES LTD 196 TTR 0237 (GUJ). IN THIS DECISION THE COURT HAD HELD AS FOLLOWS:- : '4. IN THE INSTANT CASE, THE FINDING OF THE TRIBUNA L IS THAT THE ASSESSEE PROPOSED TO ESTABLISH A NEW UNIT FOR THE M ANUFACTURE OR PRODUCTION OF SODA ASH AND IT WAS FOR THE PURPOSE O F ESTABLISHMENT OF THIS NEW UNIT THAT IT HAD INCURRED EXPENDITURE FOR OBTAINING TECH NO-ECONOMIC FEASIBILITY REPORT AND C ONSULTED DR. PANDYA. THE TRIBUNAL HAS FOUND THAT THE EXPENDITURE WAS INCURRED FOR ACQUIRING A NEW ASSET AND, CONSEQUENTLY, IT WAS AN EXPENDITURE OF CAPITAL IN NATURE. WE DO NOT SEE ANY REASON TO DISTURB THIS FINDING. ONCE IT IS FOUND THAT THE EXP ENDITURE IN QUESTION WAS INCURRED FOR ACQUIRING CAPITAL ASSET, THE EXPENDITURE WOULD BE CAPITAL IN NATURE. DEDUCTION OF EXPENDITURE, WHICH IS CAPITAL IN NATUR E, CANNOT BE ALLOWED UNDER SECTION 37. IN THE VIEW WHICH WE ARE TAKING, THE DECISION OF THE SUPREME COURT IN INDIA CEMENTS LTD. V. CIT [1966] 60ITR 52 AND ALEMBIC CHEMICAL WORKS CO. LTD. V. CIT FL 989J 177 ITR 377 AND THE DECISIONS OF THE GUJARAT H IGH COURT IN SAYQJI IRON & ENGG. WORKS (P.) LTD. V. CIT [1974] 9 6 ITR 240 AND CIT V. ALEMBIC GLASS INDUSTRIES LTD. [1976] 103 ITR 715 (GUJ.) CANNOT BE OF ANY ASSISTANCE TO THE ASSESSEE. IN OUR OPINION, THE EXPENDITURE IN QUESTION, BEING CAPITAL EXPENDITURE, ITS DEDUCTION WAS RIGHTLY DISALLOWED BY THE TRIBUNAL. WE, THEREFO RE, ANSWER THE QUESTION WHICH IS REFERRED TO US IN THE AFFIRMATIVE AND AGAINST THE ASSESSEE' THE JURISDICTIONAL HIGH COURT HAS DECIDED ON SIMILA R LINES IN ITS DECISIONS IN THE CASE OF SHRI. DIGVIJAY LTD 159 ITR 0253 AND AMBIKA MILLS LTD 2136 ITR 91 (GUJ). HENCE, THIS EXP ENDITURE IS HELD NOT TO BE ALLOWABLE IN COMPUTING THE INCOME OF THE APPELLANT. 4.3.4 THE OTHER CONTENTION OF THE APPELLANT IS THAT IT HAD INCURRED EXPENDITURE OF RS.14,72,347/- FOR AHMEDABAD TOWNSHI P PROJECT OFFICE. THE APPELLANT HAS SUBMITTED THAT IT HAD SET UP THE AHMEDABAD OFFICE IN ORDER TO CATER TO THE NEEDS OF THE AHMEDABAD TOWNSHIP PROJECT WHICH WAS IN NO WAY RELA TED TO . THE INVESTMENT ACTIVITY CARRIED OUT IT. BUT AGAIN AS CA N BE SEEN FROM THE SUBMISSIONS, THIS WAS A PROJECT UNDERTAKEN BY T HE APPELLANT WHICH DID NOT MATERIALIZE AND NO INCOME WAS EARNED BY THE APPELLANT FROM IT. ANY EXPENDITURE TOWARDS THIS NEW PROJECT WAS NEEDED TO BE CAPITALIZED TO BE ULTIMATELY ALLOWED A GAINST THE INCOME EARNED FROM THE PROJECT. THUS, SUCH EXPENDIT URES ARE ALSO ITA NO.1449/AHD/2015 4 CAPITAL EXPENDITURE IN NATURE AND HENCE CANNOT BE A LLOWED AS DEDUCTION IN THE COMPUTATION OF INCOME OF THE CURRE NT YEAR. FOR THIS PURPOSE, RELIANCE IS PLACED UPON THE JUDICIAL PRONOUNCEMENTS ALREADY MENTIONED ABOVE IN RELATION TO SOLAR PROJEC T EXPENSES. 4.3.5 THE OTHER EXPENDITURES INCURRED BY THE APPELL ANT ARE IN THE NATURE OF GENERAL ADMINISTRATIVE EXPENSES WHI CH ARE DIRECTLY RELATED TO THE INVESTMENT ACTIVITY OF THE APPELLANT IN THE PARTNERSHIP FIRMS AND HENCE THESE ARE CLEARLY C OVERED BY THE PROVISIONS OF THE SECTION 14A OF THE ACT. BESIDES, IF RULE 8D IS INVOKED, THE EXPENDITURE DETERMINED IT HAS TO BE DI SALLOWED SUBJECT TO THE LIMIT OF TOTAL EXPENDITURE INCURRED BY THE APPELLANT. HENCE, THE DISALLOWANCE : MADE BY THE AO OUT OF THE ADMINISTRATIVE EXPENSES IS UPHELD EXCEPT THE DEPREC IATION EXPENSES WHICH ARE DIRECTED TO BE ALLOWED AS DISCUS SED ABOVE. 6. WHILE IMPUGNING THE ORDER OF THE LD.CIT(A), THE LD.COUNSEL FOR THE ASSESSEE TOOK US THROUGH PAGE NO.121 OF THE PAPER B OOK, WHERE THE MEMORANDUM OF ASSOCIATION (MOA FOR SHORT) IS BEIN G PLACED ON RECORD. HE POINTED OUT THAT UNDER CLAUSE-1 OF THE MOA, THE ASSESSEE HAS PROVIDED ITS MAIN OBJECTS. UNDER THIS MAIN OBJ ECT CLAUSE, THE ASSESSEE COULD ALSO CONSTRUCT OR MAINTAIN A POWER P LANT. THEREFORE, EXPLORING THE POSSIBILITY OF ESTABLISHING A SOLAR P OWER PLANT IS NOT A NEW LINE OF BUSINESS. HE SUBMITTED THAT THE EXPENDITUR E INCURRED IS IN THE LINE OF BUSINESS OF THE ASSESSEE AND DESERVES TO BE ALLOWED AS REVENUE EXPENDITURE. 7. ON THE OTHER HAND, THE LD.DR RELIED UPON THE ORD ER OF THE LD.CIT(A) AND SUBMITTED THAT THE LD.CIT(A) HAS EXAM INED THIS ASPECT WITH ALL POSSIBLE ANGLE, AND THEREAFTER ARRIVED AT A CONCLUSION THAT IT WAS FOR A NEW PROJECT, WHICH COULD NOT MATERIALIZE. 8. WE HAVE CONSIDERED RIVAL CONTENTIONS AND GONE TH ROUGH THE RECORD CAREFULLY. WE HAVE PERUSED THE MEMORANDUM O F ASSOCIATION AVAILABLE AT PAGE NO.121 ONWARDS OF THE PAPER BOOKS . AS FAR AS THE CONTENTION OF THE LD.COUNSEL FOR THE ASSESSEE THAT CONSTRUCTION OF POWER PLANT OR ITS MAINTENANCE IS BEING PROVIDED IN THE M AIN OBJECT IS CONCERNED, ACCORDING TO OUR MIND, IT IS NOT RELATED TO POWER PLANT AND ITA NO.1449/AHD/2015 5 RELATED TO CIVIL CONSTRUCTION WORK. THIS ASPECT WA S ALSO OTHERWISE NOT CONSIDERED BY THE AO IN THE ASSESSMENT ORDER NOR IT IS DISCERNIBLE. CONSIDERING THE SMALLNESS OF THE ISSUE, WE DEEM IT NOT NECESSARY TO SET ASIDE THE ISSUE, AND WE CONCUR WITH THE FINDING OF THIS LD.CIT(A). THIS GROUND OF APPEAL IS REJECTED. 9. IN THE NEXT FOLD OF GRIEVANCE, THE ASSESSEE HAS PLEADED THAT THE LD.CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.14,72,347/- BY TREATING IT AS INCURRED FOR A NEW PROJECT NAMELY, A HMEDABAD TOWNSHIP OFFICE PROJECT. BRIEF FACTS OF THE CASE ARE THAT T HE ASSESSEE HAS INCURRED EXPENDITURE OF RS.14,72,347/-. ACCORDING TO THE AS SESSEE, IT HAS SET UP AHMEDABAD OFFICE IN ORDER TO CATER THE NEEDS OF THE AHMEDABAD TOWNSHIP PROJECT. THE LD.CIT(A) HAS CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THIS EXPENDITURE WAS INCURRED FOR A NEW PROJECT, WHICH NEEDED TO BE CAPITALIZED. 10. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD. A PERUSAL OF THE MOA AND OTHER ACTIVITIES OF THE ASSESSEE WILL DISCERN THAT THE ASSESSEE IS IN A BUS INESS OF DEVELOPMENT AND CONSTRUCTION. IT HAS MADE INVESTMENT IN FOUR F IRMS, WHICH ARE REALTY FIRMS. IT HAS EXPLORED A BUSINESS VENTURE U NDER THE AHMEDABAD TOWNSHIP PROJECT. TO OUR MIND, IT IS IN THE LINE O F THE ASSESSEES EXISTING BUSINESS, WHICH CANNOT BE TREATED AS A SEP ARATE INDIVIDUAL AND NEW BUSINESS FOR WHICH EXPENDITURE HAS BEEN INCURRE D, WHICH DESERVES TO BE CAPITALIZED. THE LD.CIT(A) HAS NOT APPRECIAT ED THE FACTS IN RIGHT PERSPECTIVE. SECTION 37 OF THE INCOME TAX ACT CONT EMPLATES THAT IF AN ASSESSEE INCURS ANY EXPENDITURE, WHICH IS NOT OF TH E NATURE DESCRIBED IN SECTION 30 TO 36, NOT BEING IN THE NATURE OF CAPITA L EXPENDITURE OR PERSONAL EXPENDITURE, AND IT WAS LAID OUT WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS THEN, IT IS TO BE ALLOWED. THE EXPRESSION WHOLLY REFERS TO THE QUANTUM AND EXCLUSIVELY REFERS TO O BJECT/MOTIVE. NOW IN THE PRESENT CASE, ASSESSEE IS IN THE REAL ESTATE DE VELOPMENT BUSINESS. ITA NO.1449/AHD/2015 6 IT HAS INCURRED THIS EXPENDITURE TO FULFILL ITS REQ UIREMENT IN THIS LINE. THEREFORE, THE EXPENSES COULD NOT BE DISALLOWED. WE ALLOW THIS GROUND AND DELETE THE DISALLOWANCE. 11. IN THE NEXT GROUND OF APPEAL, THE ASSESSEE HAS RAISED TWO FOLD SUBMISSIONS. IT HAS CHALLENGED DISALLOWANCE OF RS. 82,426/- AND RS.1,99,111/-. THESE EXPENDITURES HAVE BEEN DISALL OWED TO THE ASSESSEE ON THE GROUND THAT ONE IS AN ADMINISTRATIV E EXPENSES, WHICH DESERVES TO BE DISALLOWED UNDER SECTION 14A AND OTH ER IS STATUTORY EXPENDITURE. THE LD.COUNSEL FOR THE ASSESSEE DID N OT PRESS THIS GROUND OF APPEAL, THEREFORE, THESE ADDITIONS ARE CONFIRMED . 12. IN THE NEXT GROUND OF APPEAL, THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD.CIT(A) HAS MADE AN ADDITION OF RS.1,30, 36,783/- BY MAKING AN ENHANCEMENT TO THE INCOME OF THE ASSESSEE. 13. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE A T THE RELEVANT TIME WAS A PARTNER IN FOUR FIRMS, VIZ. M/S.AGRIM REALTY PVT. LTD., M/S.PRATHAM DOSTI REALTY, M/S.PRATHAM DEVELOPERS AN D M/S.PRATHAM PROPERTIES. AS ON 31.3.201, IT HAD SHOWN TOTAL INV ESTMENT IN THESE FIRMS OF RS.38,44,41,774/-. THE LD.CIT(A) HAS OBSE RVED THAT A PERUSAL OF NOTES AND SUBMISSIONS MADE BY THE ASSESSEE BEFOR E THE AO, IT REVEALED THAT THE ASSESSEE HAD AVAILED LOAN FROM IN FINA FINANCE P. LTD., AND M/S.J.M. FINANCIAL PRODUCTS. AGREEMENT FOR AV AILING THE LOANS WERE EXECUTED ON 12.5.2010 AND 26.6.2010 RESPECTIVELY. THE LOANS WERE SANCTIONED ON PLEDGE OF SHARES BY MR.JAYANT S. SANG HVI AND MS. VISHAKA J. SANGHVI. ACCORDING TO THE ASSESSEE IT H AS ADVANCED THESE LOANS TO M/S.PRATHAM DOSTI REALTY. IT WAS AGREED U PON BY THE PARTNERS THAT ON THE LOANS CONTRIBUTED BY ANY PARTNER WOULD FETCH INTEREST. ACCORDINGLY, THE ASSESSEE EARNED INTEREST OF RS.1,3 0,55,413/- FROM M/S.PRATHAM DOSTI REALTY. THE ASSESSEE HAD INCURRE D INTEREST EXPENDITURE OF RS.1,30,55,413/- ON THE LOANS OBTAIN ED FROM INFINA FINANCE P. LTD. AND M/S.J.M. FINANCIAL PRODUCTS. A CCORDING TO THE ITA NO.1449/AHD/2015 7 ASSESSEE, THESE FUNDS WERE FURTHER ADVANCED TO M/S. PRATHAM DOSTI REALTY AND INTEREST EXPENDITURE INCURRED BY IT HAS BEEN TAKEN CARE OF BY THE INTEREST INCOME EARNED BY THE ASSESSEE FROM M/S .PRATHAM DOSTI REALITY. THE LD.CIT(A) ON APPRECIATION OF THE FACT S AND CIRCUMSTANCES, HOWEVER, DID NOT CONCUR WITH THE ASSESSEE. ACCORDI NG TO THE LD.CIT(A), THE LOANS TAKEN BY THE ASSESSEE WERE NOT EXCLUSIVEL Y GIVEN TO M/S.PRATHAM DOSTI REALTY, RATHER A CAPITAL CONTRIBU TION WAS MADE BY THE ASSESSEE IN ALL THE FIRMS, WHERE IT IS A PARTNER. THUS, ACCORDING TO THE LD.CIT(A) SHARE OF PROFIT OUGHT TO BE RECEIVED BY T HE ASSESSEE FROM THE REST OF THREE FIRMS WILL BE EXEMPT FROM TAX, AND DI SALLOWANCE OF INTEREST EXPENDITURE ATTRIBUTABLE TO EARNING OF TAX FREE INC OME WAS REQUIRED TO BE MADE. THE LD.CIT(A) IN THIS WAY DISALLOWED INTE REST EXPENDITURE CLAIMED BY THE ASSESSEE, AND SIMULTANEOUSLY TAXED T HE ALLEGED INTEREST INCOME ON THE GROUND THAT THIS INTEREST INCOME WAS FOR MAKING AN INVESTMENT IN THE PARTNERSHIP FIRM, WHICH DESERVES TO BE ASSESSED AS BUSINESS INCOME. A SMALL AMOUNT OF INTEREST INCOME , ACCORDING TO THE ASSESSEE, AMOUNTING TO RS.18,630/- FOR MAKING AN IN VESTMENT OF RS.2 CRORES IN M/S.PRATHAM DOSTI REALTY HAS BEEN ALLOWED TO THE ASSESSEE BY THE LD.CIT(A). THE LD.CIT(A) HAS ASSESSED INTEREST INCOME OF RS.1,30,36,783/- UNDER SECTION 28(V) AS BUSINESS IN COME. 14. THE LD.COUNSEL FOR THE ASSESSEE WHILE IMPUGNING THE ORDER OF THE LD.CIT(A) TOOK US THROUGH THE PAGE NO.94 OF THE PAP ER BOOK, WHERE COPY OF AMENDMENT MADE TO PARTNERSHIP DEED OF M/S.P RATHAM DOSTI REALTY IS AVAILABLE. HE POINTED OUT THAT IN THE OR IGINAL DEED, THERE WAS CLAUSE, BEING CLAUSE NO.16 WHICH AUTHORIZES THE PAR TNERS TO EFFECT, MODIFY THE TERMS RELATING TO THE REMUNERATION, INTE REST, ETC. PAYABLE TO THE PARTNERS BY EXECUTING SUPPLEMENTARY DEED. IT F URTHER PROVIDES THAT AS AND WHEN SUCH SUPPLEMENTARY DEED IS EXECUTED, TH EN, IT WILL BE APPLICABLE FROM THE FIRST DAY OF THE ACCOUNTING YEA R OF THAT YEAR IN WHICH SAID DEED IS BEING EXECUTED. ON THE STRENGTH OF TH IS DOCUMENT, HE CONTENDED THAT THIS DEED WAS EXECUTED ON 5.1.2011. AS PER THE ORIGINAL ITA NO.1449/AHD/2015 8 PARTNERSHIP DEED, IT IS TO BE GIVEN EFFECT ON 1.4.2 010, MEANING THEREBY, AS PER THE AMENDED PARTNERSHIP DEED, M/S.PRATHAM DO STI REALTY WOULD PROVIDE INTEREST TO THE PARTNER I.E. (ASSESSEE IN T HE PRESENT CASE) ON THE LOANS PROCURED BY THE PARTNERS AND PROVIDED TO THE FIRM. IN ORDER TO BUTTRESS HIS CONTENTION, HE FURTHER TOOK US THROUGH THE RESOLUTION OF M/S.PRATHAM DOSTI REALTY AVAILABLE AT PAGE NO.98 OF THE PAPER BOOK. ON THE STRENGTH OF THIS DOCUMENT, HE RAISED TWO FOL D SUBMISSIONS. IN THE FIRST FOLD OF SUBMISSIONS, HE CONTENDED THAT TH E RIGHT OF INTEREST INCOME IS BEING GENERATED BY VIRTUE OF THIS DOCUMEN T, BUT FOR THE PURPOSE OF GRANTING BENEFIT OF INTEREST EXPENDITURE AS A SET OFF, THE LD.CIT(A) HAS NOT CONSIDERED THESE DOCUMENTS. 15. IN THE NEXT FOLD OF SUBMISSION, HE CONTENDED TH AT EVEN FOR THE SAKE OF ARGUMENT, IT IS PRESUMED THAT THE ASSESSEE HAD MADE CAPITAL CONTRIBUTION OUT OF THE LOANS TAKEN BY IT FROM TWO FIRMS VIZ. M/S.J.M. FINANCIAL PRODUCTS AND INFINA FINANCE P. LTD., THEN ALSO THE INTEREST INCOME ON SUCH CAPITAL GIVEN TO OTHER FIRMS IS TAXA BLE INCOME. IT IS A DIFFERENT MATTER THAT IN THESE YEARS NO INTEREST HA S BEEN PROVIDED IN THOSE FIRMS. BUT SUCH CONDUCT OF THE FIRMS WOULD N OT ELIMINATE THE TAXABILITY OF PARTICULAR INCOME IN THE HANDS OF PAR TNERS. ACCORDING TO THE LD.COUNSEL, IF THAT BE SO, THEN HOW THE SECTION 14A COULD BE APPLIED TO THE ASSESSEE FOR MAKING THE DISALLOWANCE. IT IS ALSO POINTED OUT BY THE LD.COUNSEL FOR THE ASSESSEE THAT INTEREST HAS N OT BEEN ACCOUNTED FOR BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS, RATHER, I T IS BOOKED IN THE BOOKS OF M/S.PRATHAM DOSTI REALTY. 16. ON THE OTHER HAND, THE LD.DR RELIED UPON THE OR DER OF THE LD.CIT(A). HE SPECIALLY TOOK US THROUGH PARA-5.5 W HEREIN THE LD.CIT(A) HAS DISCUSSED THE ISSUE UNDER 9 HEADS. ACCORDING T O HIM, THE LD.CIT(A) HIGHLIGHTED THE FACTS THAT THE ASSESSEE FAILED TO D EMONSTRATE EXCLUSIVE USER OF THIS AMOUNT FOR THE PURPOSE OF FINANCING TH E AFFAIRS OF M/S.PRATHAM DOSTI REALTY. ITA NO.1449/AHD/2015 9 17. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. IN ORDER TO APPRECIATE THE CONTE NTION OF THE ASSESSEE, WE DEEM IT PERTINENT TO TAKE NOTE OF THE RELEVANT A MENDMENT MADE TO THE PARTNERSHIP DEED OF M/S.PRATHAM DOSTI REALTY, W HICH AUTHORIZED THE PARTNERS TO RECEIVE INTEREST ON LOANS PROVIDED TO T HE FIRM. THE RELEVANT PART OF THIS AMENDMENT READS AS UNDER: WHEREAS THE PARTIES OF THE FIRST PART TO FIFTH PAR T HAVE BEEN CARRYING ON THE BUSINESS IN PARTNERSHIP UNDER THE N AME AND STYLE OF M/S. PRATHAM DOSTI REALTY VIDE DEED OF PARTNERSH IP ENTERED INTO W.E.F. 1S' APRIL, 2010 DULY AMENDED BY DEED OF ADMISSION OF A PARTNER VIDE PARTNERSHIP DEED DATED 2.3RD DECEMBER 2010. AS PER CLAUSE NO.16 OF THE ORIGINAL PARTNERSHIP DEE D DATED 1S1 APRIL, 2010 AND AS PER CLAUSE NO.16 OF ADMISSION TO PARTNERSHIP DEED DATED 23RD DECEMBER 2010, THE PARTNERS SHALL B E ENTITLED TO MODIFY THE TERMS RELATING TO REMUNERATION, INTEREST ETC. PAYABLE TO THE PARTNERS BY EXECUTING A SUPPLEMENTARY DEED A ND ANY SUCH DEED WHEN EXECUTED SHALL HAVE EFFECT, UNLESS OTHERW ISE PROVIDED, FROM THE FIRST DAY OF THE ACCOUNTING PERIOD IN WHIC H SUCH SUPPLEMENTARY DEED IS EXECUTED AND THE SAME SHALL F ORM PART OF THIS DEED OF PARTNERSHIP. WHEREAS THE PARTIES OF THE FIRST TO FIFTH PARTS NOW DECIDED TO PROVIDE FOR INTEREST ON CAPITAL OF PARTNERS SUBJECT TO CERTAIN CONDITION. NOW THIS INDENTURE WITNESSETH AND IT IS HEREBY AGRE ED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS: IT HAS BEEN MUTUALLY AGREED UPON BY THE PARTIES HER ETO THAT FOLLOWING CLAUSE IS INSERTED IN PLACE OF CLAUSE NO. 6 OF THE ORIGINAL PARTNERSHIP DEED DATED 1ST APRIL, 2010 AND DEED OF ADMISSION OF PARTNER DATED 23'RT DECEMBER, 2010. '6. THE CAPITAL OF THE PARTNERSHIP SHALL CONSIST OF SUCH AMOUNT AS MAY BE MUTUALLY AGREED UPON FROM TIME TO TIME AND SUCH/CAPITAL SHALL BE PROVIDED BY THE PARTNERS AS MAY BE MUTUALLY AGREED. NO INTEREST SHALL BE PAID ON CA PITAL ACCOUNT OF THE PARTNERS. HOWEVER, IN CASE IF ANY OF THE PARTNERS, AFTER HAVING BEEN AUTHORISED BY ALL OTHER PARTNERS, HAVE BORROWED MONEY FOR MAKING INVESTMENT IN*THE FI RM AS CAPITAL, THEN TO THE EXTENT INTEREST PAID (NOT EXCE EDING ITA NO.1449/AHD/2015 10 @12% SIMPLE INTEREST PER ANNUM) BY SUCH PARTNER, IN TEREST WOULD BE PAID BY THE FIRM ON THE CAPITAL ACCOUNT, A S IF THE AMOUNT BORROWED BY SUCH PARTNER WERE TO BE THE AMOU NT BORROWED BY THE FIRM IT IS FURTHER AGREED BY THE PA RTNERS THAT BALANCE IN CAPITAL ACCOUNT OF THE FIRST AND SE COND PARTNER SHALL BE MAINTAINED IN THE PROPORTION OF TH EIR PROFIT SHARING RATIO' THAT ALL THE OTHER CLAUSES OF THE DEED OF PARTNERSH IP DATED 1 ST APRIL, 2010 AS AMENDED BY THE DEED OF ADMISSION OF PARTNER DATED 23RD DECEMBER, 2010 SHALL REMAIN UNCHANGED. THAT THIS DEED OF AMENDMENT OF PARTNERSHIP SHALL BE COME A PART AND PARCEL OF THE DEED OF PARTNERSHIP DATED 1ST APRIL, 2010 AS AMENDED BY THE DEED OF ADMISSION OF PARTNER 23RD DECEMBER, 2010 AND SHALL REMAIN IN CUSTODY OF THE P ARTY OF THE FIRST PART AS PROVIDED IN THE DEED OF PARTNERSH IP DATED 1 ST APRIL, 2010. 18. THE AMENDMENT TO THE PARTNERSHIP DEED HAS BEEN GIVEN EFFECT FROM 1.4.2010. WHILE CONSIDERING THIS ASPECT, THE LD.CIT(A) IN SUB- PARA II AND III OF PARA-5.5 HAS OBSERVED THAT WHILE AVAILING THE LOAN FROM M/S.J.M. FINANCIAL PRODUCTS AND INFINA FINANCE P. LTD., THE ASSESSEE NOWHERE PROVIDED IN THE AGREEMENT THAT THE SE LOANS WILL BE USED BY M/S.PRATHAM DOSTI REALTY. TO OUR MIND THAT CANNOT BE RELEVANT FACTORS TO DECIDE THE ISSUE WHETHER THE INTEREST EX PENDITURE ALLOWABLE IN THE HANDS OF THE ASSESSEE OR NOT. THE LOANERS, M/S .J.M. FINANCIAL PRODUCTS AND INFINA FINANCE P. LTD. ARE NOT CONCERN ED WHETHER THE FUNDS ARE BEING USED BY THE ASSESSEE OR THEY ARE BEING FU RTHER FORWARDED TO SOMEONE ELSE FOR USER. IT HAS NOT BEEN BROUGHT TO OUR NOTICE THAT THEY HAVE PUT ANY CONDITION ABOUT PARTICULAR USER OF THE LOAN GIVEN TO THE ASSESSEE. THE LD.CIT(A) FAILED TO TAKE COGNIZANCE OF THE AMENDMENT MADE TO THE PARTNERSHIP DEED. NON-CONSIDERATION OF THIS AMENDMENT HAD LED THE LD.CIT(A) TO OBSERVE THAT THE ASSESSEE HAD MADE CAPITAL CONTRIBUTION TO OTHER FIRM ALSO, WHERE THE ASSESSEE IS A PARTNER. IT IS PERTINENT TO MENTION HERE THAT THE CASE OF THE ASSE SSEE IS THAT IT HAS TAKEN FROM LOAN FROM TWO CONCERNS, WHENEVER IT HAS AN IDLE FUND, THESE ITA NO.1449/AHD/2015 11 WERE BEING USED BY OTHER CONCERNS ALSO. BUT SPECIF ICALLY, ULTIMATELY THE LOANS TRAVELLED TO M/S.PRATHAM DOSTI REALTY AND THA T FIRM HAS RECOGNIZED ITS OBLIGATION TO PAY INTEREST AS PER TH E AMENDMENT MADE TO THE PARTNERSHIP DEED. THE ASSESSEE HAS DEMONSTRATED AS TO HOW INTEREST BEARING FUNDS WERE PROVIDED TO A FIRM WHER E IT IS A PARTNER. IT HAS ALSO DEMONSTRATED THAT INTEREST WAS GIVEN TO TH E ASSESSEE BY THE FIRM AS PROVIDED IN THE PARTNERSHIP DEED. THE LD. FIRST APPELLATE AUTHORITY HAS CREATED AN ARTIFICIAL DISTINCTION ABO UT THE USER OF INTEREST BEARING FUNDS. IT WAS CONSTRUED BY THE LD.CIT(A) T HAT THE INTEREST BEARING FUNDS WERE USED BY THE ASSESSEE AS A CAPITA L CONTRIBUTION IN OTHER THREE FIRMS FROM WHERE SHARE OF PROFIT WOULD BE TAX FREE. THE LD.CIT(A) FAILED TO CONSIDER THAT IF PAYMENT OF IN TEREST ON CAPITAL OF PARTNERS IS BEING PROVIDED IN THE PARTNERSHIP DEED THAT INTEREST INCOME WOULD NOT BE EXEMPT FROM TAX, AND SECTION 14 WILL N OT BE APPLICABLE. IN THE PRESENT CASE, ASSESSEE HAS DEMONSTRATED THAT IN TEREST EXPENDITURE WAS INCURRED ON EARNING INTEREST INCOME FROM THE PA RTNERSHIP FIRM. 19. ON CONSIDERATION OF ALL THESE FACTS AND CIRCUMS TANCES, WE ARE OF THE VIEW THAT THE LD.CIT(A) FAILED TO APPRECIATE TH E FACTS IN RIGHT PERSPECTIVE. WE ALLOW THIS GROUND AND DELETE ADDIT ION OF RS.1,30,36,783/-. THIS GROUND IS ALLOWED. 20. IN RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 12 TH JULY, 2016 AT AHMEDABAD. SD/- SD/- (ANIL CHATURVEDI) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 12/07/2016