J.Madhan Mohan, Trichy V. ITO, Trichy

ITA 1470/CHNY/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64156 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-08-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 09-08-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 18-09-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: V D GOPAL
• Keywords: Business income; Salary income; Source of fund
• Section: 143(3); 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER I.T.A. NO. 1470/MDS/2009 ASSESSMENT YEAR: 2005-06 SHRI J. MADAN MOHAN, NO.2/4, LAWSONS ROAD, CANTONMENT, TRICHY. PAN : AAEPM8368B (APPELLANT) V. THE INCOME TAX OFFICER, WARD I(2), TRICHY. (RESPONDENT) APPELLANT BY : SHRI V.D. GOPAL, ADVOCATE RESPONDENT BY : SHRI K.E.B. RENGARAJAN, JUNIOR STANDING COUNSEL DATE OF HEARING : 09.08.2012 DATE OF PRONOUNCEMENT : 09.08.2012 O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL, GRIEVANCE OF THE ASSESSEE IS THAT CIT(APPEALS) SUSTAINED DISALLOWANCE OF CLAIM OF INTEREST PAYMENT OF ` 7,32,000/- AGAINST SALARY RECEIVED BY THE ASSESSEE FROM FIRMS. 2. FACTS APROPOS ARE THAT ASSESSEE, AN INDIVIDUAL, HAD FILED HIS RETURN FOR THE IMPUGNED ASSESSMENT YEAR DECLARING A LOSS O F ` 3,48,977/-. ASSESSEE WAS IN RECEIPT OF SALARY FROM ONE M/S VIJA Y DAIRY AND FARM 2 I.T.A. NO. 1470/MDS/09 PRODUCTS (P) LTD. AND ALSO FROM A FIRM NAMED M/S VI JAY CEMENTS, IN WHICH HE WAS A PARTNER. SALARY RECEIVED FROM THE F IRMS WAS SHOWN AS BUSINESS INCOME. ASSESSEE HAD MADE INTEREST PAYMEN TS OF ` 7,32,000/- DURING THE RELEVANT PREVIOUS YEAR, WHICH WERE SET O FF AGAINST SALARY RECEIPTS FROM THE FIRMS. EXPLANATIONS WERE SOUGHT. SUBMISSION OF THE ASSESSEE WAS THAT THE MONEYS WERE LOANED FOR INVEST ING IN THE FIRMS AND THEREFORE, INTEREST PAYMENT MADE ON SUCH BORROWINGS WERE CONNECTED TO THE BUSINESS. SALARY WAS ALSO RECEIVED FROM THE SA ME FIRMS AND THEREFORE, ACCORDING TO ASSESSEE, THE INTEREST PAYM ENT HAD TO BE SET OFF AGAINST SUCH SALARY INCOME. HOWEVER, THE ASSESSING OFFICER WAS NOT IMPRESSED. ACCORDING TO HIM, SALARY WAS PAID TO TH E ASSESSEE FOR THE SERVICES RENDERED, AS PER THE PARTNERSHIP DEED. IN TEREST PAYMENTS MADE BY THE ASSESSEE TO THE CONCERNS FROM WHICH HE HAD BORROWED MONEY, HAD NO NEXUS WITH SALARY EARNINGS. NO BUSIN ESS EXPEDIENCY WAS ESTABLISHED. AS PER THE ASSESSING OFFICER, IF THE FIRMS REQUIRED MONEY, IT COULD HAVE BORROWED DIRECTLY FROM CONCERN ED CREDITORS AND CLAIMED INTEREST EXPENDITURE DIRECTLY. IT WAS ONLY FOR THE PURPOSE OF SUPPRESSING THE INCOME THAT ASSESSEE HAD CLAIMED IN TEREST PAYMENT AGAINST THE SALARY RECEIPTS FROM THE FIRMS. ACCORD INGLY, THE CLAIM OF INTEREST PAYMENT WAS DISALLOWED. 3 I.T.A. NO. 1470/MDS/09 3. IN ITS APPEAL BEFORE CIT(APPEALS), ARGUMENT OF T HE ASSESSEE WAS THAT INTEREST DUE TO PARTIES FROM WHOM MONEY WAS BO RROWED, WAS ALLOWABLE UNDER THE HEAD INCOME FROM BUSINESS. B OTH SALARY RECEIPTS AS WELL AS INTEREST PAYMENTS WERE PART OF BUSINESS INCOME. MONEYS BORROWED FOR THE PURPOSE OF INVESTING IN THE FIRM F OR WHICH ASSESSEE HAD PAID INTEREST, HAD A NEXUS WITH SALARY EARNED BY TH E ASSESSEE FROM THE SAME FIRM. AS PER THE ASSESSEE, THE CLAIM OF SET O FF WAS RIGHTLY MADE. HOWEVER, THE CIT(APPEALS) WAS NOT IMPRESSED. ACCOR DING TO HIM, CONCLUSION DRAWN BY THE ASSESSING OFFICER WAS CLEAR THAT THERE WAS NO NEXUS BETWEEN SALARY RECEIVED BY THE ASSESSEE FROM THE FIRM AND THE INTEREST PAID ON THE LOANS RAISED BY THE ASSESSEE F ROM DIFFERENT CONCERNS. CIT(APPEALS) ALSO NOTED THAT INTEREST PA YMENT WAS JUST TO REDUCE ITS TAX LIABILITY. IN THIS VIEW OF THE MATT ER, HE DISMISSED ASSESSEES APPEAL. 4. NOW BEFORE US, LEARNED A.R. SUBMITTED THAT ADMIT TEDLY THE ASSESSEE WAS IN RECEIPT OF SALARY FROM THE FIRM IN WHICH HE WAS A PARTNER. ACCORDING TO HIM, SUCH SALARY, BY VIRTUE OF SECTION 28(V) OF THE ACT WAS CHARGEABLE TO TAX UNDER THE HEAD PROFITS A ND GAINS FROM BUSINESS OR PROFESSION. ASSESSEE HAD LOANED MONEY FROM DIFFERENT PERSONS FOR INVESTING IN THE FIRM AND THEREFORE, TH E INTEREST PAID ON SUCH LOANS WAS AN ALLOWABLE EXPENSES UNDER THE HEAD PRO FITS AND GAINS FROM 4 I.T.A. NO. 1470/MDS/09 BUSINESS OR PROFESSION. SUCH MONEYS, WHICH WERE L OANED, WERE ADVANCED TO THE FIRM ON GROUNDS OF COMMERCIAL EXPED IENCY FOR SUSTAINING THEIR REQUIREMENTS OF MEETING OPERATIONA L EXPENSES. THERE WAS NO COLOURABLE DEVICE IN THE CLAIM, SINCE IT WAS A LEGITIMATE BUSINESS EXPENSE. SALARY BEING CLASSIFIED UNDER THE HEAD I NCOME FROM BUSINESS OR PROFESSION, CLAIM OF INTEREST WHICH FELL UNDER THE SAME HEAD OUGHT HAVE BEEN ALLOWED. LEARNED A.R. RELIED ON THE DECI SION OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SHRI S. CHAND RASEKARAN V. ACIT IN I.T.A. NO. 1924/MDS/06 DATED 11 TH APRIL, 2008. LEARNED A.R. FURTHER POINTED OUT THAT SUCH CLAIM WAS ALLOWED BY THE ASSE SSING OFFICER IN AN ASSESSMENT FOR ASSESSMENT YEAR 2002-03, WHICH WAS C OMPLETED UNDER SECTION 143(3) OF THE ACT. A COPY OF THE ASSESSMEN T ORDER WAS ALSO PLACED ON RECORD. 5. PER CONTRA, LEARNED D.R. SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL SUBMISSIONS. THERE IS NO DISPUTE THAT ASSESSEE WAS RECEIVING SAL ARY FROM THE FIRM AND IT WAS AGAINST SUCH SALARY, SET OFF OF INTEREST WAS CLAIMED. SALARY RECEIVED FROM THE FIRM WAS SHOWN UNDER THE HEAD IN COME FROM BUSINESS. AS POINTED OUT BY THE LEARNED A.R., SUC H SALARY WAS RIGHTLY CLASSIFIED UNDER THE HEAD INCOME FROM BUSINESS IN VIEW OF SECTION 28(V) OF THE ACT. HOWEVER, THE QUESTION IS WHETHER THE PAYMENT OF 5 I.T.A. NO. 1470/MDS/09 INTEREST MADE BY THE ASSESSEE FOR AMOUNTS BORROWED CAN BE SET OFF AGAINST SUCH SALARY INCOME? MAY BE IT IS TRUE THAT SUCH AMOUNTS, WHICH WERE BORROWED BY THE ASSESSEE, WERE DEPLOYED BY HIM IN THE BUSINESS OF THE FIRM IN WHICH HE WAS A PARTNER. NEVERTHELES S, IN OUR OPINION, JUST BECAUSE A PAYMENT CAN BE CLASSIFIED AS AN EXPENDITU RE THAT MIGHT BE FALLING UNDER THE HEAD INCOME FROM BUSINESS OR PRO FESSION, WOULD NOT BE A REASON ADEQUATE FOR ALLOWING SET OFF OF SUCH E XPENDITURE AGAINST ANY INCOME WHICH ALSO FALLS UNDER THE SAME HEAD. A DMITTEDLY, ASSESSEE WAS RECEIVING ONLY SALARY INCOME FROM THE FIRM. TH OUGH CLASSIFIED UNDER THE HEAD INCOME FROM BUSINESS OR PROFESSION, SALA RY LEGITIMATELY IS CONSIDERATION RECEIVED FOR SERVICES RENDERED. INTE REST PAID BY THE ASSESSEE FOR LOANS RAISED BY IT STANDS ON A DIFFERE NT FOOTING. IT IS NOT AN EXPENDITURE WHICH IS HAVING ANY NEXUS WITH THE SALA RY EARNED BY THE ASSESSEE FROM THE FIRM. FOR THE PURPOSE OF TAXATIO N, THE QUESTION IS OF A PROXIMATE NEXUS AND NOT A DISTANT NEXUS. MAY BE IT CAN BE ARGUED THAT IF THE ASSESSEE HAD NOT DEPLOYED THE BORROWED FUNDS IN THE FIRM, THE FIRM WOULD NOT HAVE BEEN ABLE TO SUSTAIN ITS BUSINESS OP ERATIONS AND CONSEQUENTLY NOT ABLE TO PAY SALARY TO THE ASSESSEE . IN OUR OPINION, SUCH A LONG DRAWN OUT PROCESS OF REASONING CAN AT T HE BEST PROVE AN INDIRECT AND DISTANT NEXUS AND NOT A PROXIMATE NEXU S. 6 I.T.A. NO. 1470/MDS/09 7. AS FOR THE RELIANCE PLACED ON THE DECISION OF CO -ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF SHRI S. CHANDRASEKARAN (SUPRA), THERE, AGAINST SALARY RECEIVED BY THE ASSESSEE FROM THE FI RM, EXPENDITURE CLAIMED WAS ALLOWED FOLLOWING THE DECISION OF HONB LE JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT V. N. VAIDYANATHAN (180 I TR 198). THE QUESTION BEFORE HONBLE JURISDICTIONAL HIGH COURT W AS WHETHER CAR EXPENSES INCURRED CAN BE ATTRIBUTED TO THE EARNING OF SALARY FROM FIRM. IT WAS HELD BY HONBLE JURISDICTIONAL HIGH COURT THAT UTILIZATION OF CAR FOR EARNING OTHER SOURCES OF INCOME AND PURSUIT OF PROF ITS FROM FIRM COULD NOT BE DENIED AND THEREFORE, ALLOWANCE OF A PART OF THE CLAIM OF CAR EXPENSES AGAINST EARNING OF SALARY INCOME WAS JUSTI FIED. HERE, ON THE OTHER HAND, IT IS NOT A CLAIM OF CAR EXPENSES. IN THE CASE OF CAR EXPENSES, IT COULD BE CONSIDERED THAT ASSESSEE FOR THE PURPOSE OF HIS EMPLOYMENT WITH THE FIRM HAD TRAVELLED IN THE CAR F OR GOING TO THE BUSINESS PREMISES AND RETURNING THEREFROM. AS AGAI NST THIS, AS ALREADY MENTIONED BY US, THERE IS NO SUCH PROXIMATE RELATIO N BETWEEN INTEREST PAYMENT EFFECTED BY THE ASSESSEE AND SALARY RECEIVE D FROM THE FIRM. 8. COMING TO THE SCRUTINY ASSESSMENT DONE ON THE AS SESSEE FOR ASSESSMENT YEAR 2002-03, ON WHICH SUBSTANTIAL RELIA NCE WAS PLACED BY LEARNED A.R., NO DOUBT THERE ALSO ASSESSEE HAD CLAI MED SET OFF OF INTERESTS PAID BY IT. A CAREFUL LOOK INTO THE SAID ASSESSMENT ORDER SHOWS 7 I.T.A. NO. 1470/MDS/09 THAT SUCH SET OFF WAS ALLOWED AGAINST INTEREST INCO ME OF THE ASSESSEE FROM THE FIRM AND NOT FROM SALARY INCOME. THERE CA N BE NO QUARREL ON THIS QUESTION WHERE CLAIM OF INTEREST EXPENSES IS A GAINST INTEREST INCOME. IN OUR OPINION, THEREFORE, THE ASSESSMENT DONE ON THE ASSESSEE FOR 2002-03 WILL NOT HELP THE CASE OF THE ASSESSEE AT ALL. 9. WE THUS FIND NO REASON TO INTERFERE WITH THE ORD ERS OF AUTHORITIES BELOW. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED. THE ORDER WAS PRONOUNCED IN THE COURT ON THURSDAY, THE 9 TH OF AUGUST, 2012, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 9 TH AUGUST, 2012. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A), TIRUCHIRAPALLI (4) CIT-I, TRICHY (5) D.R. (6) GUARD FILE