Beharilal Agarwal, Kolkata V. ACIT, Central Circle - XIX, Kolkata

ITA 1816/KOL/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 9419 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 2 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2011
• Appeal Filed By: Assessee
• Bench Allotted: SMC
• Assessment Year: 2005-2006
• Appeal Filed On: 03-11-2009
• Court: TRIBUNAL
• Department Lawyers: R K PAUL
• Keywords: Business income; Salary income; Earning of tax free income; Set aside
• Section: 14A

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : KOLKATA () BEFORE . . . . . . . . , , , , !'# !'# !'# !'# /AND . .. . . .. .' '' ' , $ [BEFORE HONBLE SRI D. K. TYAGI, JM & HONBLE SRI C. D. RAO, AM] #% #% #% #% / I.T.A NO. 1816/KOL/2009 &'( ')* &'( ')* &'( ')* &'( ')*/ // / ASSESSMENT YEAR : 2005-06 BEHARILAL AGARWAL, -VS- ASSISTANT COMMISSIONER O F INCOME-TAX, (PA NO.ADEPA 0041 J) C.C. XIX, KOLKATA. (,- / APPELLANT ) (.,-/ RESPONDENT ) FOR THE APPELLANT: SRI SUBASH AGARWAL FOR THE RESPONDENT : SRI R. K. PAUL / / ORDER PER D. K. TYAGI, JM ( . . . . . . . . , , , , ) THE APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AG AINST THE ORDER OF THE LD. CIT(A) KOLKATA DATED 20.08.2009 FOR THE ASSESSMENT YEAR 2 005-06 ON THE SOLE GROUND OF DISALLOWING RS.1,66,658 OUT OF INTEREST PAID APPLYING SEC. 14A OF THE I. T. ACT, 1961. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE AS SESSING OFFICER IN THE ASSESSMENT ORDER STATED THAT ASSESSEE HAS CLAIMED DEDUCTION O F INTEREST OF RS.4,93,509/- AGAINST HIS INCOME FROM SALARY OF RS.47,107/- AND INTEREST OF R S.5,39,153/- EARNED ON THE CAPITAL EMPLOYED WITH TWO FIRMS NAMELY M/S. HANUMAN UDYOG A ND M/S. YOGENDRA INTERNATIONAL. THERE IS EXEMPT INCOME OF RS.2,98,9 26/- ALSO AS SHARE OF PROFIT FROM THESE FIRMS WHICH IS ABOUT 37.77% OF THE TOTAL TAXA BLE AND NON TAXABLE INCOME. ASSESSING OFFICER STATED THAT THE COST OF CAPITAL E MPLOYED AS INTEREST PAID IS REQUIRED TO BE DISTRIBUTED BETWEEN THE TAXABLE AS WELL AS NON T AXABLE INCOME AND, THEREFORE, ALLOCATED 37.7% OF THE INTEREST PAID, I.E. RS.4,93, 509/-, WHICH AMOUNTED TO RS.1,66,658/- FOR EARNING THE EXEMPT INCOME OF SHARE OF PROFIT FR OM THE FIRM U/S. 14A OF THE I. T. ACT AND DISALLOWED THE SAME AS DEDUCTION AGAINST THE TA XABLE INCOME. IN APPEAL, THE LD. CIT(A) UPHELD THIS ACTION OF THE ASSESSING OFFICER. BEING FURTHER AGGRIEVED, THE ASSESSEE IS NOW IN APPEAL BEFORE US. 2 3. AT THE TIME OF HEARING BEFORE US, THE LD. COUNSE L FOR THE ASSESSEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFOR E THE LD. CIT(A) FURTHER SUBMITTED THAT THE ASSESSEE CLAIMED INTEREST EXPENDITURE OF R S.4,93,509/- FOR DEDUCTION IN THE RETURN OF INCOME. THIS INTEREST WAS PAID ON LOANS AND FUNDS INCLUDING SUCH LOANS WERE EMPLOYED AS INVESTMENT IN THE CAPITAL OF TWO FIRMS IN WHICH THE ASSESSEE IS A PARTNER FOR EARNING TAXABLE INTEREST INCOME AS WELL AS NON TAXA BLE SHARE OF PROFIT. HE ALSO SUBMITTED THAT THE ASSESSEE IS ENTITLED TO THE DEDUCTION OF T HE INTEREST PAID ON MONEYS BORROWED FOR INVESTMENT IN THE FIRM IN WHICH HE HAS BECOME A PAR TNER AGAINST THE AMOUNT RECEIVED BY HIM FROM THE FIRM AS REMUNERATION/SALARY AND ASSESS ED UNDER THE HEAD BUSINESS. HE FURTHER SUBMITTED THAT SHARE INCOME OF THE FIRM IS EXEMPT FROM THE TAX U/S. 10(2A) OF THE ACT NOT IN THE ABSOLUTE SENSE. IT IS ONLY TO AVOID DOUBLE TAXATION ONCE IN THE HANDS OF THE FIRM AND AGAIN IN THE HANDS OF THE PARTNER. TH EREFORE, THE PROVISION OF SECTION 14A WOULD NOT APPLY TO THE ASSESSEE/PARTNER AND THE ASS ESSING OFFICER SHOULD NOT HAVE DISALLOWED THE PROPORTIONATE EXPENDITURE FROM THE C LAIM OF THE ASSESSEE. FOR MAKING THIS SUBMISSION, HE PLACED RELIANCE ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF HITESH D GAJARIA VS. ACIT IN ITA NO.993/MUM/2007 FO R ASSESSMENT YEAR 2003-04 DATED 14.11.2008. 4. ON THE OTHER HAND, THE LD. DR RELIED ON THE ORDE RS OF THE LOWER AUTHORITIES AND PRAYED BEFORE THE BENCH TO CONFIRM THE ORDER OF THE LD. CIT(A). 5. HEARD BOTH THE PARTIES, PERUSED THE MATERIAL AVA ILABLE ON RECORD AND WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF THE TRIBUNA L MUMBAI BENCH IN THE CASE OF HITESH D GAJARIA VS. ACIT, CITED SUPRA, WHEREIN THE HONBL E TRIBUNAL HAS HELD AS UNDER : 4. WE HAVE CONSIDERED THE ARGUMENTS OF THE PARTIE S AND PERUSED THE MATERIAL PLACED BEFORE US. WE FIND THAT SIMILAR ISSUE WAS CONSIDERE D BY CBENCH OF THE MUMBAI TRIBUNAL VIDE ORDER DATED 26TH FEBRUARY. 2007 IN TH E CASE OF SHRI SUDHIR KPADI VS ITO IN ITANO.7888/M/03 AND THE TRIBUNAL DEALT WITH THE ISSUE IN THE FOLLOWING MANNER: 4.ITAT, MUMBAI BENCH J IN THE CASE OF SUDHIR DETT ARAM PATH VS DCIT 2 SOT 678 (MUM) HAS CONSIDERED THE QUESTION OF TAXING THE EXPENDITURE WHILE COMPUTING INCOME OF A PARTNER AGAINST SALARY RECEIV ED BY THE PARTNER FROM THE FIRM. THE TRIBUNAL HELD THAT THE SALARY FROM THE FI RM IN WHICH THE ASSESSEE IS A PARTNER IS IN THE NATURE OF BUSINESS INCOME U/S 28( V) AND THEREFORE, INTEREST PAID BY THE PARTNER ON MONEY BORROWED FOR CONTRIBUTING C APITAL HAS TO BE ALLOWED AS DEDUCTION IN THE HANDS OF THE ASSESSEE. IN RESPECT OF THE NATURE OF THE SHARE IN THE PROFITS OF A FIRM, IN THE HANDS OF THE PARTNER, THE SUPREME COURT HAS 3 CONSIDERED THE ISSUE IN THE CASE OF CIT. MADRAS VS. RM. CHIDAMBARAM PILLAI 106 ITR 292. THE COURT WAS EXAMINING THE NATURE OF SHARE OF PROFITS RECEIVED BY A PARTNER. THE COURT HELD THAT A FIRM IS NOT A LEGA L PERSON EVEN THOUGH IT HAS SOME ATTRIBUTES OF PERSONALITY. IN INCOME TAX LAW A FIRM IS A UNIT OF ASSESSMENT, BY SPECIAL PROVISIONS, BUT IS NOT A FULL PERSON. SI NCE A CONTRACT OF EMPLOYMENT REQUIRES TWO DISTINCT PERSONS, THE EMPLOYER AND THE EMPLOYEE, THERE CANNOT BE A CONTRACT OF SERVICE, IN STRICT LAW, BETWEEN A FIRM AND ONE OF ITS PARTNERS. PAYMENT OF SALARY TO A PARTNER REPRESENTS A SPECIAL SHARE OF THE PROFITS. SALARY PAID TO A PARTNER RETAINS THE SAME CHARACTER OF THE INCOME OF THE FIRM. ITAT. MUMBAI BENCH H IN THE CASE OF ACIT VI, RUSTOM J, GAGRAT, HAS CONSIDERED THE VERY SAME ISSUE FOR THE ASSESSMENT YEAR 97-98 IN IT S ORDER DATED 31/12/O4 IN ITA NO.3860/M/00. THERE ALSO THE TRIBUNAL HAS HELD IN FAVOUR OF ASSESSEE THAT DEDUCTION IS PERMISSIBLE UNDER LAW. 5. WHEN WE EXAMINE THE ISSUE IN THE LIGHT OF THE AB OVE JUDGMENT AND DECISIONS, WE FIND THAT THE CLAIM MADE BY THE ASSESSE IS ACCEP TABLE IN LAW. THE SUPREME COURT IN THE CASE OF CIT. MADRAS VS. R.M. CHIDAMBAR AM PILLAI HAS HELD THAT SALARY PAID TO A PARTNER RETAINS THE SAME CHARACTER AS INCOME OF THE FIRM THIS LEADS US TO THE NEXT STEP; I.E. THE ABASE OF PROFIT S RECEIVED BY THE PARTNER FROM THE FIRM RETAINS THE SAME CHARACTER OF THE INCOME O F THE FIRM : I.E. THE SHARE INCOME RETAINS THE CHARACTER OF BUSINESS INCOME. TH E SAID BUSINESS INCOME IS EXEMPT FROM THE LEVY OF TAX ONLY IN THE HANDS OF TH E ASSESSES; BUT IT IS TAXABLE IN THE HANDS OF THE FIRM, THE ASSESSEE PARTNER GETS IT S SHARE OF PROFIT FROM THE FIRM AFTER FIRM HAS BEEN SUBJECTED TO TAX IN ITS HANDS. THEREFORE, IT IS NOT POSSIBLE TO HOLD THE VIEW THAT THE SHARE INCOME IN THE HANDS OF A PARTNER IS ALL TOGETHER TAX FREE; ON THE OTHER HAND THE SHARE IS TAX SUFFERED I NCOME IN THE HANDS OF THE FIRM. THEREFORE. SEC 14A IS NOT APPLICABLE IN THAT CASE. THE SHARE INCOME OF THE FIRM IS EXEMPT FROM THE TAX U/S 10(2A), NOT IN THE ABSOL UTE-SENSE. IT IS ONLY TO AVOID DOUBLE TAXATION; ONCE IN THE HANDS OF THE FIRM AND SECONDLY IN THE HANDS OF THE PARTNER. THEREFORE WE FIND THAT THE PROVISIONS OF S ECTION 14A WOULD NOT APPLY TO THE ASSESSEE/PARTNER AND IT IS NOT NECESSARY FOR TH E ASSESSING AUTHORITY TO DISALLOW THE PROPORTIONATE EXPENDITURE FROM THE CLA IM OF THE ASSESSEE. THEREFORE, THE DISALLOWANCE OF RS.3,09,792 IS DELET ED AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW RS3,95,500/- CLAIMED BY THE AS SESSEE. THIS FINDING IS FORTIFIED BY THE FACT THAT THE ASSESSEE/PARTNER IS NOT ALLOWED TO CLAIM ANY CONVEYANCE EXPENDITURE FROM THE FIRM AS PROVIDED IN THE PARTNERSHIP DEED (PLEASE REFER TO STATEMENT OF FACTS FILED BEFORE T HE CIT(A). WE FIND THAT THE ISSUE IS ALSO COVERED IN FAVOUR OF THE AESESSEE BY THE DECISION OF E BENCH OF THE TRIBUNAL IN THE CASE OF SHRI BHARAT S RAUT IN ITA NO.9212/MUM/2004 AND CO NO. 212/MUM/2005 VIDE ORDER DATED 25TH JUNE, 2008. THUS, RESPECTFULLY FOLLOWING THE PRECEDENT, WE DELETE THE DISALLOWANCE . RESPECTFULLY FOLLOWING THE AFORESAID ORDER AND IN T HE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT ON RECORD BY THE REVENUE AT THE TIME OF HEA RING BEFORE US, WE SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND DELETE THE DISA LLOWANCE OF RS.1,66,658/- AS MADE BY 4 THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT( A). THE APPEAL OF THE ASSESSEE IS, THEREFORE, ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. 7. THE ORDER IS ANNOUNCED IN THE OPEN COURT ON 7.1. 2011 SD/- SD/- . .. . . .. .' '' ' , $ . . , (C. D. RAO) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER ( $ $ $ $) )) ) DATED : 7 TH JANUARY, 2011 '01 &'23 &4' JD.(SR.P.S.) / 5 .&&6 76)8- COPY OF THE ORDER FORWARDED TO: 1 . ,- / APPELLANT SRI BEHARILAL AGARWAL, 54/5A, STRAND RO AD, KOLKATA-6. 2 .,- / RESPONDENT : ACIT, CENTRAL CIRCLE-XIX, KOLKATA. 3 . &/' / THE CIT, , KOLKATA 4 . &/' ( )/ THE CIT(A), KOLKATA 5 . '?& .&' / DR, KOLKATA BENCHES, KOLKATA 6 .&/ TRUE COPY, /'@/ BY ORDER, A #3 /DEPUTY REGISTRAR .