WESTERN CHEMICAL INDUSTRIES, MUMBAI V. DCIT 24(3), MUMBAI

ITA 1854/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1372 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 05-04-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 23-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K M KESHKAMAT
• Keywords: Business income; Proportionate interest
• Section: 37(1)

Judgement Text

ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 1 IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. BEFORE S/SHRI S.V.MEHROTRA, AM & V.DURGA RAO,JM I.T.A. NO.1854/MUM/2009 ASSESSMENT YEAR: 2005-06 WESTERN CHEMICAL INDUSTRIES, V. THE DCIT 24(3), WESTERN HOUSE, SONAWALA CROSS ROAD NO.2, MUMBAI. GOREGAON (E), MUMBAI-63. PA NO.AAAFW 0105 C (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI SATISH MODY RESPONDENT BY : SHRI K.M.KESHKAMAT O R D E R PER S.V.MEHROTRA, AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGA INST THE ORDER DATED 14.1.2009 OF LD CIT (A)-XXIV, MUMBAI CONFIRMING THE DISALLOWA NCE OF INTEREST OF RS.8,70,468/- BEING THE INTEREST PAID TO PARTNERS AND ALSO ERRED IN CONFIRMING THE INTEREST INCOME AS INCOME FROM OTHER SOURCES FOR THE ASSESSMENT YEAR 2005-06. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE FIRM, IN TH E RELEVANT ASSESSMENT YEAR, DERIVED BUSINESS INCOME FROM WEIGH BRIDGE, RENTAL INCOME AN D INTEREST INCOME. IT HAD FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT RS.23,33 ,285/-. THE AO NOTICED FROM THE PROFIT AND LOSS ACCOUNT THAT THE ASSESSEE HAD EARNE D PALTRY BUSINESS INCOME OF RS.44,680/- ONLY BUT IT HAD DEBITED HUGE EXPENSES. HE FURTHER NOTICED THAT THE ASSESSEE HAD SHOWN RENTAL INCOME OF RS.50,02,521/- AND HAD CLAIMED DEDUCTION U/S.24. FURTHER, HE NOTICED THAT AN INCOME OF RS.5,27,422/- WAS SHOWN FROM BANK FIXED DEPOSIT AND CLAIMED AS BUSINESS INCOME BEING CREDITED TO PR OFIT AND LOSS ACCOUNT. HE OBSERVED THAT AS FAR AS ACCRUED INTEREST ON FIXED DEPOSIT WA S CONCERNED, THE SAME DID NOT ENTAIL ANY EXPENSES. AS REGARDS RENTAL INCOME, HE OBSERVE D THAT THE ASSESSEE HAD CLAIMED ALL THE EXPENSES AVAILABLE UNDER THE PROVISIONS OF INCO ME TAX ACT. THEREFORE, THE ONLY ITEM ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 2 WHICH REMAINED WAS WEIGH BRIDGE INCOME AMOUNTING TO RS.44,680/-. HE RECORDED THE STATEMENT OF PARTNER SHRI SATYENDRA PATEL U/S.131 I N ORDER TO VERIFY THESE EXPENSES. THE AO NOTICED THAT IN THE PROFIT AND LOSS ACCOUNT, THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.8,89,230/- UNDER THE HEAD INTEREST TO PARTNE RS ON CAPITAL. HE FURTHER NOTICED THAT THE PARTNERS CAPITAL WAS INVESTED IN LAND AND BUILDING, MOTOR CAR AND OFFICE FURNITURE, FURNITURE AND FIXTURES AND FDS WITH THE BANK. THE MAJOR PORTION INVESTED IN LAND, BUILDING, FURNITURE AND FIXTURES PROVIDED WI TH TWO STREAMS OF INCOME I.E. BUSINESS INCOME FROM WEIGH BRIDGE AND RENTAL INCOME FROM BUI LDING. AFTER CONSIDERING THE AREA OCCUPIED BY WEIGH BRIDGE BEING 2.11% OF THE ENTIRE LAND, HE ALLOWED PROPORTIONATE INTEREST OUT OF PARTNERS CAPITAL AMOUNTING TO RS. 18,763/- AND THE BALANCE AMOUNT OF RS.8,70,468/- WAS DISALLOWED. FURTHER, THE AO HELD THAT INTEREST ON FIXED DEPOSIT IS TO BE TREATED AS INCOME FROM OTHER SOURCES. HE OBSERV ED THAT SINCE THE EARNING OF INTEREST INCOME ON FD DID NOT ENTAIL ANY EXPENSES, THEREFORE , NO EXPENSE WAS TO BE ALLOWED AGAINST THE SAID INCOME. 3. THE LD CIT (A) AFTER CONSIDERING THE FACTS OF TH E CASE ISSUED ENHANCEMENT NOTICE AND DISALLOWED RS.17,20,757/- AS AGAINST THE DISALL OWANCE OF RS.8,70,468/- MADE BY THE ASSESSING OFFICER. HE CONFIRMED THE FINDINGS OF TH E AO AS REGARDS THE DETERMINATION OF INCOME FROM HOUSE PROPERTY AND INTEREST ON FDS. AS REGARDS INTEREST PAID TO PARTNER, HE OBSERVED THAT IN A.Y. 2004-05, THE LD CIT (A) HA D CONFIRMED THE DISALLOWANCE OF EXPENSES OTHER THAN REMUNERATION AND INTEREST PAID TO PARTNERS. HE FURTHER OBSERVED THAT AS REGARDS REMUNERATION AND INTEREST PAID TO PARTNERS, THE AO WAS REQUIRED TO EXAMINE THE FULFILLMENT OF CONDITIONS GIVEN IN SECT ION 40(B)(IV) AND (V). HE OBSERVED THAT THE ASSESSEE FAILED TO PROVE THE FULFILLMENT O F THESE CONDITIONS AND, THEREFORE, THE SAME WAS NOT ALLOWABLE. FURTHER, THESE EXPENSES WE RE NOT INCURRED EXCLUSIVELY FOR EARNING THE LITTLE WEIGH BRIDGE INCOME OF RS.44,680 /-. HE, THEREFORE, CONFIRMED THE FINDINGS OF THE AO IN REGARD TO DISALLOWANCE OUT O F INTEREST PAID TO PARTNERS. APART FROM THIS, HE MADE FURTHER DISALLOWANCE OUT OF OTHER EXP ENSES CLAIMED BY THE ASSESSEE. KEEPING IN VIEW THE FACT THAT THE INCOME EARNED FRO M WEIGH BRIDGE WAS VERY NOMINAL, HE, INTER ALIA, OBSERVED THAT EVEN IF THESE EXPENSE S WERE ASSUMED TO BE GENUINELY INCURRED, THEY WERE MAINLY IN CONNECTION WITH THE M AINTENANCE AND UP KEEPING OF THE SEVERAL RENTAL BUILDINGS FROM WHICH THE ASSESSEE HA D RECEIVED THE RENT OF MORE THAN RS.50,00,000/-. ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 3 4. LD COUNSEL FOR THE ASSESSEE REFERRED TO PAGE 7 O F PAPER BOOK, WHEREIN, BALANCE SHEET OF THE ASSESSEE FIRM IS CONTAINED AND POINTED OUT THAT TOTAL PARTNERS CAPITAL INVESTED IN THE BUSINESS WAS TO THE TUNE OF RS.98,7 5,457.17, ON WHICH THE ASSESSEE FIRM HAD PAID INTEREST. HE REFERRED TO PAGES 39 TO 51 O F PAPER BOOK, WHEREIN, PARTNERSHIP DEED IS CONTAINED AND POINTED OUT THAT THE THIRD C OVENANT REFERS TO THE BUSINESS OF PARTNERSHIP WHICH WAS AS UNDER:- 3. THE PARTNERSHIP BUSINESS SHALL CONTINUE TO BE TH AT OF MANUFACTURERS OF LAND DEALERS IN ACIDS, CHEMICALS AND FERTILIZERS AN D/OR ANY SUCH OTHER BUSINESS OR BUSINESSES AS MAY BE MUTUALLY AGREED UP ON AMONG THE PARTNERS AND SHALL CONTINUE TO BE CARRIED ON AT GOR EGAON (EAST), BOMBAY AND/OR AT SUCH OTHER PLACE OR PLACES OF THE PARTNER S MAY FROM TIME TO TIME MUTUALLY AGREED UPON. LD COUNSEL FOR THE ASSESSEE FURTHER REFERRED TO PAG E 28 OF PAPER BOOK, WHEREIN, THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1993-94 IS CONTAINED, TO DEMONSTRATE THAT THE ASSESSEE HAD DECLARED INCOME FROM WEIGH BRIDGE IN EARLIER YEARS ALSO. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CAPITAL BORROWE D FROM PARTNERS HAD BEEN INVESTED IN FIXED DEPOSIT, HOUSE PROPERTY AND BUSINESS AND, THE REFORE, PROPORTIONATE INTEREST SHOULD HAVE BEEN ALLOWED OUT OF THE INTEREST EXPENSES UNDE R THREE HEADS OF INCOME. HE RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF SASSOON J DAVID AND CO. P.LTD V. CIT, 118 ITR 261 (SC) TO SUBMIT THAT THE E XPRESSION WHOLLY AND EXCLUSIVELY USED IN SECTION 37(1) DOES NOT MEAN NECESSARILY A ND, THEREFORE, PROPORTIONATE EXPENSES OUT OF INTEREST PAID TO PARTNERS SHOULD BE ALLOWED AGAINST THE INCOME FROM HOUSE PROPERTY AND INCOME FROM FD U/S.24 AND 57(II I), RESPECTIVELY. 5. LD D.R. SUBMITTED THAT THE ASSESSEE HAS NOT TAKE N ANY ALTERNATIVE GROUND IN THIS REGARD. UNDER SECTION 24, THE ASSESSEE HAS NOT CLAI MED ANY INTEREST EXPENSES AND CLAIMED ONLY 30% FOR REPAIRS. NO ATTRIBUTION HAS B EEN MADE BY THE ASSESSEE IN THIS REGARD. FURTHER, AS REGARDS ASSESSEES CLAIM U/S.5 7(III), HE SUBMITTED THAT THE ASSESSEE HAS NOT TAKEN ANY GROUND BEFORE THE LOWER AUTHORITI ES. THE NEXUS HAS NOT BEEN ESTABLISHED IN REGARD TO INVESTMENT OF PARTNERS CA PITAL IN FDS, PARTICULARLY BECAUSE ORIGINALLY, THE PARTNERS CAPITAL WAS VERY SMALL. ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 4 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE RECORD OF THE CASE. AS FAR AS LD COUNSELS SUBMISSION THAT THE PROPORTI ONATE INTEREST BE CONSIDERED UNDER DIFFERENT HEADS IS CONCERNED, WE DO NOT FIND MUCH M ERIT IN THE SAME BECAUSE INTEREST PAID TO PARTNERS IS DEDUCTIBLE ONLY IF THE SAME HAS BEEN PAID FOR THE PURPOSE OF EARNING OF BUSINESS INCOME. THE SCHEME OF THE ACT IS THAT U NDER DIFFERENT HEADS OF INCOME, SPECIFIC EXPENSES ARE TO BE ALLOWED. INTEREST PAID ON PARTNERS CAPITAL IS ALLOWABLE U/S.40 UNDER THE HEAD BUSINESS INCOME. THE LOGIC OF THE SAME CANNOT BE IMPORTED TO INCOME FROM HOUSE PROPERTY OR INCOME FROM OTHER SOURCES. THE INCOME UNDER EACH HEAD IS TO BE DETERMINED SEPARATELY AND THEN GROSSED UP TO GET THE GROSS TOTAL INCOME. FURTHER, WE FIND THAT IT IS NOT DISPUTED THAT THE ASSESSEE H AD BUSINESS INCOME THOUGH ONLY RS.44,680/-. AGAINST THIS INCOME, INTEREST PAID TO PARTNERS AS PER THE PARTNERSHIP DEED WAS ALLOWABLE AS PER THE PROVISIONS OF SECTION 40(B )(IV). THE LD CIT(A) HAS OBSERVED THAT THE ASSESSEE DID NOT FULFILL THE CONDITIONS LA ID DOWN UNDER SECTION 40(B)(IV). FURTHER, HE HAS NOT MENTIONED AS TO WHICH CONDITION HAS NOT BEEN FULFILLED. WE FIND FROM THE PARTNERSHIP DEED CONTAINED AT PAGE 39 OF THE PA PER BOOK THAT PARTNERS WERE ENTITLED TO SIMPLE INTEREST @ 18% P.A. CALCULATED ON THE BAS IS OF MONTHLY CLOSING BALANCE. AS PER SECTION 4O(B)(IV) ONLY 12% SIMPLE INTEREST IS A LLOWABLE AND THIS INTEREST COULD NOT BE DISALLOWED ON THE GROUND THAT THE ASSESSEE HAD EARN ED PALTRY BUSINESS INCOME ONLY. THE INTEREST SO PAID TO PARTNERS IS TAXABLE IN THEI R HANDS AS BUSINESS INCOME. WE, ACCORDINGLY, DIRECT THE AO TO RE-COMPUTE THE ALLOWA BLE INTEREST AS PER THE PROVISIONS OF SECTION 40(B)(IV) AND THEN DETERMINE THE TOTAL INCO ME ACCORDINGLY. 7. FOR THE BALANCE OF EXPENSES, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDINGS OF LD CIT (A) AS IT IS EVIDENT FROM THE QU ANTUM OF BUSINESS INCOME THAT BUSINESS WAS OF VERY MEAGER MAGNITUDE AND COULD NOT ENTAIL S UCH HUGE EXPENSES. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 30 TH JUNE, 2010 SD/- (V. DURGA RAO) (JUDICIAL MEMBER) SD/- (S.V. MEHROTRA) (ACCOUNTANTMEMBER) ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 5 MUMBAI, DATED 30 TH JUNE, 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-XXIV, MUMB AI 4. COMMISSIONER OF INCOME TAX-24, MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH G, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 6 DATE INITIALS 1. DRAFT DICTATED ON 5.4.2010 PS 2. DRAFT PLACED BEFORE AUTHOR 25.6.2010 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/J M 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER ITA NO.1854/M/2009 M/S. WESTERN CHEMICALS IND 7