Commercial Auto Sales Pvt. Ltd., Allahabad V. Asst. Director of Income Tax (CPC), Bengaluru, Bengalugu

ITA 24/ALLD/2022

• Counselvise Citation: [2022] 104 COUNSELVISE.COM (IT) 1268 (ITAT-ALLAHABAD)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 03-10-2022
• Assessment Year: 2017-2018
• Appeal Filed On: 06-07-2022
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Principle of natural justice; Corroborative evidences; Notional interest; Set aside
• Section: 154; 143(3); 40(b); 234B; 43

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH, ALLAHABAD BEFORE SHRI.VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI. RAMIT KOCHAR, ACCOUNTANT MEMBER ITA No.24/ALLD/2022 Assessment Year: 2017-18 Commercial Auto Sales Private Limited, 4-C, Maharishi Dayanand Marg, Allahabad, U.P. PAN-AABCC3962F vs . Assistant Director of Income Tax Centralized Processing Centre, Bengaluru (Appellant) (Respondent) Appellant by: Sh. S.K. Jaiswal, CA Respondent by: Sh. A.K. Singh, Sr. DR Date of hearing: 04.10.2022 Date of pronouncement: 11.10.2022 O R D E R VIJAY PAL RAO, JUDICIAL MEMBER This appeal by the assessee is directed against the order dated 24.06.2022 of CIT(A) (National Faceless Appeal Centre, Delhi) for the assessment year 2017-18. The assessee has raised the following grounds:- “1. BECAUSE the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in holding that no response or submission received in compliance to notice dated 02.06.2022 fixed for compliance on 09.06.2022 and dismissing the appeal ex parte. 2. BECAUSE the appellant has sought a short adjournment on the ground of illness of his counsel C.A. S. K. Jaiswal and filed the copy of medical prescription of the hospital, therefore the finding that appellant has neither filed any response nor sought any adjournment is altogether wrong and misleading. 3. BECAUSE the learned Commissioner of Income Tax (Appeals) has erred in law and on facts in sustaining addition of Rs. 74,31,417/- made on account of notional interest calculated at the rate of 12% on the credit balance of Rs. 6,19,28,475/- in capital account with M/s Shree Infratech, a partnership firm in which the appellant company is a partner. 4. BECAUSE the learned Commissioner of Income Tax (Appeals) has failed to appreciate the facts that partnership firm, M/s Shree Infratech has ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 2 neither paid nor credited any interest on capital account as agreed upon by partners, in terms of partnership deed. 5. BECAUSE the partnership firm, M/s Shree Infratech has neither claimed nor allowed any interest on partners capital account as per the provision of under section 40(b) of the Income Tax Act, 1961, therefore not liable to be taxed under section 28(v) in the hands of the partner. 6. BECAUSE the learned Commissioner of Income Tax (Appeals) has failed to appreciate the facts that as per the provision of section 28(v) interest due or received on capital account by partner is chargeable under the head income from business only to the extent the amount so allowed to be deducted in the hand of partnership firm. 7. BECAUSE the appellant denies for levy of interest under section 234B and 234C of the Income Tax Act, 1961. 8. BECAUSE the order appealed against is contrary to the facts, law and principle of natural justice.” 2. The solitary issue arises in this appeal of the assessee is regarding an addition of Rs. 74,31,417/- made by the A.O. on account of notional interest on the credit balance in the capital account of the assessee with M/s Shree Infratech a Partnership Firm. 3. The learned AR of the assessee has submitted that the assessee company is a partner in M/s Shree Infratech Partnership Firm and has not received any interest on the credit balance in the capital account with the partnership firm. He has further submitted that neither any interest was payable nor it was paid by the partnership firm to the assessee therefore, the addition made by the A.O. on account of notional interest is highly unjustified and liable to be deleted. He has referred to the partnership deed at page no. 17 to 30 of the paper book and submitted that as per Clause 7 of the partnership deed, it was left to the partners as per their mutual understanding for payment of interest @ 12% or such rate as may be permitted by the Income Tax Act under section 40(b) of the Act be credited in their capital account. The learned AR has submitted that in pursuant to the Clause 7 of the partnership deed, there was no further mutual understanding or supplementary deed executed by the partners for providing the ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 3 interest on the capital account of the partners. The learned AR has further submitted that even as per the provisions of section 28(v), there is no question of notional interest to be calculated and liable to be taxed in the hand of the partners. Thus, the learned AR has submitted that when the partnership firm has neither made any provision for interest on partners’ capital nor paid any interest to the partners, the addition made by the AO and confirmed by the CIT(A) is liable to be deleted. He has referred to the order of the CIT(A) and submitted that the CIT(A) has passed the ex parte order without considering the application of the assessee seeking adjournment on the ground of sickness of the Authorized Representative. He has referred the online application submitted by the assessee alongwith the medical certificate of the Authorized Representative to seek the adjournment of hearing fixed on 9.6.2022 placed at page no. 5 and 6 of the paper book. Thus, the learned AR has submitted that when the assessee filed an application alongwith medical certificate for seeking adjournment of hearing then the impugned order passed by the CIT(A) ex parte without considering the said request of adjournment is in violation of principles of natural justice and liable to be set aside. He has then referred to the petition filed by the assessee under section 154 of the Income Tax Act on 5.7.2022 placed at page no. 1 to 4 of the paper book and submitted that the assessee has prayed for restoration of the appeal of the assessee to be decided on merits after considering the facts already narrated in the statement of facts as part of Form No. 35. The learned AR has pointed out that the CIT(A) has passed the impugned order even without considering the fact as explained by the assessee in the statement of facts which were available with the CIT(A). He has further submitted that the assessee also explained all these facts before the AO in the reply dated 15.12.2019 and as per para 6 of the said reply, the assessee has pointed out that the Clause 7 of the partnership deed provides that the firm may pay the interest not exceeding 12% on capital account if mutually agreed by the partners meaning thereby the ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 4 interest on capital is payable by the firm only if partners mutually agree and make the provisions of interest on capital by executing a supplementary deed. As per the provisions of section 40(b)(ii), no interest to any partners shall be allowed as deduction in the hand of the partnership firm which is not authorized or in is not in accordance with the terms of the partnership deed. Thus, the partnership deeds executed on 5.6.2015 provides that the firm may pay the interest on capital if mutually agreed by the partners through a supplementary deed. The learned AR has referred to the assessment order passed under section 143(3) dated 18.11.2019 in the case of partnership firm M/s Shree Infratech placed at page no. 41 to 43 of the paper book and submitted that the firm has not claimed any deduction on account of any interest to the partners on capital balance. Therefore, even as per section 28(v) until and unless any interest has been allowed to be deducted under section 40(b), the same cannot be assessed as income in the hand of the partners. The learned AR has thus contended that when the partnership firm has neither paid any interest nor claimed any deduction on account of interest to partners and the said fact has not been disputed by the A.O. while passing the scrutiny assessment then the addition made by the A.O. on account of notional interest is unsustainable and liable to be deleted. 4. On the other hand, the learned DR has submitted that the documents at Serial No. 3 to 5 were not produced before the authorities below and the assessee has filed these documents first time in the proceedings before the Tribunal. He has referred to the assessment order and submitted that the assessee itself, vide its reply dated 15.12.2019 submitted that as per partnership deed dated 05.06.2015 firm may pay interest @ not exceeding 12% on capital if mutually agreed by the partners. The learned DR has submitted that the assessee has not produced any mutual agreement by the partners to show that the interest was not payable by the firm to the partners. Thus, the learned DR has submitted that the assessee has failed to produce the supporting evidence to show that the ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 5 partnership firm has not claimed the interest as deduction. He has also referred to the order of the CIT(A) and submitted that despite various opportunities given by the CIT(A) the assessee failed to appear or make any submissions therefore, the CIT(A) is justified in deciding the appeal ex parte. The learned DR has thus submitted that the matter may be remanded to the record of the CIT(A) for fresh adjudication after considering the record which has been filed by the assessee first time before the Tribunal. 5. In a rejoinder, the learned AR has submitted that all the notices issued by the CIT(A) were during the COVID-19 Pandemic period and the assessee has duly filed an application online alongwith the medical certificate for seeking adjournment of the hearing of the appeal on 9.6.2022 which is the last date of hearing fixed by the CIT(A) before passing the order on 24.6.2022. Thus, the learned AR has submitted that without considering the request for adjournment, the CIT(A) is not justified in dismissing the appeal by ex parte order. He has contended that even in the ex parte order, the CIT(A) ought to have decided the appeal on merits after considering the facts explained by the CIT(A) as stated in the statement of facts. 6. We have considered the rival submissions as well as relevant material on record. The A.O. has made the addition on account of interest on the capital account balance of the assessee with M/s Shree Infratech as under:- “The assessee company vide its reply dated 15.12.2019 submitted that as per partnership deed of the firm executed on 05.06.2015, the firm may pay interest @not exceeding 12% on capital account, if mutually agreed by the partners. The reply of the assessee company cannot be accepted as it has not submitted any mutual agreement which may authorize M/s Shree Infratech that interest is not payable on capital introduced by the partners during the year under consideration. The undersigned is unable to understand that how two different companies and one LLP can decide without their shareholders consent and partners consent not to take interest on capital from M/s Shree Infratech. Hence, in view of the above ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 6 the interest @12% on the capital introduced by the assessee company of Rs.6,19,28,475/- in M/s Shree Infratech which amounts to Rs.74,31,417/- is being added in the business income of the assessee company. (Addition: Rs.74,31,417/-).” 7. The A.O. has referred to the reply filed by the assessee dated 15.12.2019 but only a limited extract was reproduced in the assessment order whereas the reply dated 15.12.2019 is running in 7 pages and placed at page no. 9 to 16 of the paper book. The relevant part of the reply on this issue is in para 6 of letter dated 15.12.2019 as under:- “As regards interest on capital invested in M/s Shree Infratech it is respectfully submitted that M/s Shree Infratech has not paid any interest to its partners on their capital contribution. As per Clause 7 of the partnership deed executed on 05.06.2015, it is provided that the firm may pay interest @ not exceeding 12% on capital account, if mutually agreed by partners. Meaning thereby interest on the capital is payable by the firm, only if the partners agree and make the provision my executing the supplementary deed. As per the provision of section 40(b) sub clause (ii) no interest to any partners shall be allowed as deduction which is not authorized by, or is not in accordance with, terms of the partnership deed. Thus partnership deed executed on 05.06.2015 only authorizes the firm to pay interest on capital account, if mutually agreed by executing the supplementary deed. Moreover, as per the provision of section 28(v) interest on capital received from partnership firm is chargeable to income tax under the head "Profit and gains of business or profession" provided that interest or part thereof has been allowed to be deducted under clause (b) of section 40. For the sake of ready reference the provision of section 28(v) is reproduced here as under: "28. The following income tax be chargeable to income-tax under the head "Profit and gains of business or profession" X X X X X X X X (v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to or received by, a partner of a firm from such firm: Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted. In view of the above categorical provision of the act no income on account of interest on capital is chargeable under this section until and ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 7 unless the firm has claimed the said interest as deduction from their income under section 40(b). It may be seen that M/s Shree Infratech has neither claimed nor allowed as deduction on account of Interest on capital, therefore no interest is chargeable as income under the head "Income from business profession". 8. Thus, the assessee has clearly explained the facts that there is a provision in the partnership deed to enable the firm to pay the interest on capital, subject to the mutual agreement between the partners for such payment. The assessee has submitted that unless the firm has claimed the said interest as deduction from its income under section 40(b), the same cannot be treated as income chargeable to tax in the hand of the partners as income from business or profession. The assessee has specifically stated that the partnership firm has neither claimed nor allowed as deduction on account of interest on capital therefore, no interest is chargeable as income. The A.O. has also not disputed the fact that there was no payment of interest or credit of interest by the partnership firm in the account of the assessee partner. The A.O. has added the said income as notional interest on the capital balance of the assessee with the partnership firm. The assessee has now produced the audited financial statements of partnership firm as well as the assessment order passed under section 143(3), dated 18.11.2019 to show that the partnership firm has neither made any provision of the interest to the partners nor claimed any deduction on this account. We further note that the CIT(A) has passed the ex parte order after granting six opportunities to the assessee however, on the last date of hearing, the assessee sought adjournment vide application filed online alongwith the medical certificate of the A.R. of the assessee. Therefore, once the assessee has requested for adjournment of hearing on the ground of illness of the A.R. and proof of illness was also filed then the CIT(A) ought to have granted one more opportunity of hearing to the assessee. Though, the assessee has not responded to the earlier notices issued by the CIT(A) however, once on the last date of hearing, the assessee has requested for ITA No. 24/ALLD/2022 Commercial Auto Sales Pvt. Ltd. 8 adjournment on the ground of the illness of the A.R the CIT(A) instead of passing an ex parte order ought to have granted one more opportunity and then pass the order on merits after considering the relevant facts and record. As it is evident that the relevant record comprising of the financial statements of the partnership firm, computation of income and assessment order passed under section 143(3) were not available before the authorities below therefore, in the facts and circumstances of the case and in the interest of justice, the impugned order of the CIT(A) is set aside and the matter is remanded to the record of the CIT(A) for deciding the same afresh on merits after giving one more opportunity of hearing to the assessee as well as after considering the relevant evidence and record filed by the assessee. 9. In the result, the appeal of the assessee is allowed for statistical purpose. Order pronounced in the open court on 11.10.2022. Sd/- Sd/- [RAMIT KOCHAR] [VIJAY PAL RAO] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 11/10/2022 Allahabad Sh Copy forwarded to: 1. Appellant-Commercial Auto Sales Pvt. Ltd. 2. Respondent-Assistant Director of Income Tax Centralized Processing Centre, Bengaluru 3. CIT(A) 4. CIT 5. DR By order Sr. P.S.