Shri Prafulla Dayaram Pipada, Ahmednagar V. Income-tax Officer, Ward - 2, Ahmednagar

ITA 26/PUN/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 2317 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2015-2016
• Appeal Filed On: 08-01-2019
• Result in Favour of: Matter Remanded
• Court: TRIBUNAL
• Keywords: Business income; CHAPTER IV

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “SMC”, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT आयकर अपील सं. / ITA No.26/PUN/2019 नधा रण वष / Assessment Year : 2015-16 Prafulla Dayaram Pipada, Dayaram Nagar, Manmad Road, Sakuri Rahata, Ahmednagar – 423 107 PAN : ACHPP8007F Vs. ITO, Ward-2, Ahmednagar Appellant Respondent आदेश / ORDER PER R.S. SYAL, VP : This appeal by the assessee is directed against the order passed by the CIT(A)-2, Pune on 21-11-2018 in relation to the assessment year 2015-16. 2. The only issue raised in this appeal is against the confirmation of disallowance of interest paid on debit balance of the assessee-partner’s capital account in the partnership firm. 3. Succinctly, the facts of the case are that the assessee is an individual who derived income from house property and interest. During the course of assessment proceedings, the Assessing Assessee by Shri Pramod Shingte Revenue by Shri Piyush Kumar Singh Yadav Date of hearing 28-06-2022 Date of pronouncement 28-06-2022 ITA No.26/PUN/2019 Prafulla Dayaram Pipada 2 Officer (AO) observed that the assessee was a partner in M/s. Pipada Motors, a partnership firm, from which remuneration of Rs.9,98,358/- was received and to which interest of Rs.20,94,755/- was paid on debit balance of the capital account with the resultant net minus income from the firm at Rs.10,96,397/-. Such negative income was adjusted against income from house property etc. The assessee could not place necessary documents before the AO, which led to the passing of the assessment order u/s.144 of the Income-tax Act, 1961 (hereinafter also called `the Act’), in which deduction of interest of Rs.20,94,755/- was denied. The matter was taken up before the ld. CIT(A), but without success. Aggrieved thereby, the assessee has come up in appeal before the Tribunal. 4. I have heard the rival submissions and gone through the relevant material on record. The assessee has been a partner in M/s. Pipada Motors, from which he received remuneration of Rs.9,98,358/-. Because of excess withdrawals, the firm charged interest of Rs.20,94,755/- from the assessee. The case of the assessee is that interest paid to the firm should be allowed as deduction in the same manner as the interest received from the ITA No.26/PUN/2019 Prafulla Dayaram Pipada 3 firm is charged to tax u/s.28(v) of the Act. To put it differently, once the receipt of interest from the firm is treated as `business income’ chargeable u/s 28(v) of the Act without any other consideration, the payment of interest to the firm should also be treated as `business expenditure’ without any further consideration because interest payment to firm is negative interest income from the firm and both should be treated alike. 5. I am unable to accord my imprimatur to the proposition advanced on behalf of the assessee. Section 28(v) provides that : “Any interest, salary, bonus, commission, remuneration by whatever name called due to or received by a partner of a firm from such firm” is treated as income falling under the head `Profits and gains of business or profession’. The fact that interest from a firm in which the assessee is a partner is charged to tax as ‘business income’, does not ipso facto leads to the conclusion that interest paid to the firm on excess withdrawals should also be automatically allowed as deduction under the same section by treating it as the negative interest income. One needs to look at the relevant provision for taxing an income or allowing a deduction. Section 28(v) of the Act governs only the taxability of ITA No.26/PUN/2019 Prafulla Dayaram Pipada 4 salary and interest income from firm. Au contraire, the deductibility of interest is managed by section 36(1)(iii) of the Act, which is a special provision. I am reminded of the legal maxim generalia specialibus non derogant, which means that special provision overrides general provisions. Once there is a special provision dealing with the deductibility of interest expenditure in terms of section 36(1)(iii), it is impermissible to contend that section 28(v), covering interest income from firm, should also be read to deal with interest expenditure paid to firm. It is, ergo, held that the deductibility of interest under Chapter IV- D is covered only under the express provision of section 36(1)(iii) and has to pass through the mandate of this provision irrespective of the fact that such interest is paid to the partnership firm in which the assessee is partner or otherwise. 6. Now, I turn to the mandate of section 36(1)(iii) which provides that the deduction shall be allowed for “the amount of interest paid in respect of capital borrowed for the purposes of business or profession”. This transpires that deduction of interest under this head is permissible only if the capital is borrowed and such borrowing is for the purpose of business. If the purpose of ITA No.26/PUN/2019 Prafulla Dayaram Pipada 5 borrowing is non-business, the payment of interest on such borrowing will go outside the ambit of section 36(1)(iii). A hypothetical situation in the setting under which the case is proceeding can be when an amount is withdrawn by a partner from a partnership firm and such amount is utilized for personal purpose, say, marriage etc. Interest paid to partnership firm on such withdrawal will not qualify as business expenditure. The test of user of funds for business purpose, enshrined under section 36(1)(iii), must be satisfied before becoming eligible for deduction of interest paid to a partnership firm in which the assessee is a partner, which is failing in this theoretical case. 7. The assessee made out a case of the deduction before the ld. CIT(A) on the raison d’etre that the amount withdrawn from the firm was utilized for purchasing share in some running Hotel as per the Purchase Agreement dated 28-06-2013, which was a business purpose. The ld. CIT(A) relied on the proviso to section 36(1)(iii) of the Act and denied the deduction by observing that no income from the hotel was shown by the assessee for the year. 8. Proviso to section 36(1)(iii) stipulates that the amount of interest paid in respect of capital borrowed for acquisition of an ITA No.26/PUN/2019 Prafulla Dayaram Pipada 6 asset “for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which the asset was first put to use, shall not be allowed as deduction”. This proviso makes a pitch for disallowance of interest only when the asset acquired with the borrowed funds is not put to use. In other words, no disallowance can be made if the borrowed funds are utilized for acquiring an asset which does not produce any income albeit it has been put to use. The relevant criterion for disallowing interest is to examine the date up to which the asset acquired with the borrowed funds was first put to use. If the asset has been actually put to use, deduction of interest cannot be denied even if no income resulted from such an asset. The ld. CIT(A) has gone with the `income criterion’ and not the `user criterion’ for disallowing the interest, which is not justified. 9. The ld. AR submitted that the assessee acquired his share in the running hotel in the year 2013. He, however, failed to place any concrete evidence either before the AO or the ld. CIT(A) to demonstrate the activities of the hotel as to whether it was really in operation during the year. Similar position obtains before the Tribunal as well. Since the assessment order was passed u/s.144 ITA No.26/PUN/2019 Prafulla Dayaram Pipada 7 and the assessee could not lead evidence before the authorities below in this regard, I consider it expedient to remit the matter to the file of the AO for examining the question of deductibility of interest on the touchstone of the discussion made herein above. Needless to say, the assessee will be allowed a reasonable opportunity of hearing to put forth the relevant evidence in support of his case. 10. In the result, the appeal is allowed for statistical purposes. Order pronounced in the Open Court on 28 th June, 2022. Sd/- (R.S.SYAL) उपा य / VICE PRESIDENT प ु णे Pune; दनांक Dated : 28 th June, 2022 Satish आदेश की ितिलिप अ ेिषत/Copy of the Order is forwarded to: 1. अपीलाथ / The Appellant; 2. 3. थ / The Respondent The CIT(A)-2, Pune 4. 5. The Pr.CIT-1, Pune DR, ITAT, ‘SMC’ Bench, Pune 6. गाड फाईल / Guard file. आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune ITA No.26/PUN/2019 Prafulla Dayaram Pipada 8 Date 1. Draft dictated on 28-06-2022 Sr.PS 2. Draft placed before author 28-06-2022 Sr.PS 3. Draft proposed & placed before the second member JM 4. Draft discussed/approved by Second Member. JM 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *