M/s. FCML Projects, New Delhi V. ACIT, New Delhi

ITA 2959/DEL/2012

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 6511 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 6 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2016
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 17-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 13-06-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R K KAPOOR
• Keywords: Business income
• Section: 43B; 143(3); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B, NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ITA NO.2959/DEL/2012 ASSESSMENT YEAR : 2009-10 FCML PROJECTS, A-217, OKHLA INDL. AREA, PHASE-1, NEW DELHI. VS. ACIT, CIRCLE- 28(1), NEW DELHI. PAN : AAAFF 1343 H (APPELLANT) (RESPONDENT) ITA NO.2522/DEL/2013 ASSESSMENT YEAR : 2010-11 FCML PROJECTS, A-217, OKHLA INDL. AREA, PHASE-1, NEW DELHI. VS. ACIT, CIRCLE- 28(1), NEW DELHI. PAN : AAAFF 1343 H (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI PRADEEP DINODIA, CA & SHRI R. K. KAPOOR, CA RESPONDENT BY : SHRI ANIL KUMAR SHARMA, SR.DR DATE OF HEARING : 20-12-2016 DATE OF PRONOUNCEMENT : 23-12-2016 O R D E R PER S.V. MEHROTRA, A.M : BOTH THE CAPTIONED APPEALS, PREFERRED BY THE SAME A SSESSEE, WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CO NSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 ITA NO.2959/DEL/2012 (A.Y. 2009-10) : 2. THIS APPEAL, FILED BY THE ASSESSEE, AGAINST THE ORDER DATED 23.04.2012 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- XXV, NEW DELHI, U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT T HE ACT) RELATES TO ASSESSMENT YEAR 2009-10. 3. BRIEF FACTS OF THE CASE ARE THAT ASSESSEE, IN TH E RELEVANT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF DEALER/RETAILE R IN HOME/HOSPITALITY ACCESSORIES SUCH AS SANITARY GOODS, BATHROOM HARDWA RE, TISSUES PAPER, SOAP, DETERGENTS, GLASSWARES, CUTLERY, CROCKERY, DE CORATION ITEMS SUCH AS PHOTO FRAMES AND ALSO IN MATTRESSES, CARPETS AND EL ECTRONICS ITEMS SUCH AS LCT TVS, HAIR DRYER ETC.. THE ASSESSEE FILED ITS R ETURN OF INCOME DECLARING TOTAL INCOME AT RS.5,60,35,817/-. THE ASSESSING OF FICER NOTICED THAT THE ASSESSEE HAD PAID INTEREST ON PARTNERS CAPITAL @ 12 % ON THE BALANCE OUTSTANDING IN THEIR CAPITAL ACCOUNT. HE NOTED THA T THE PARTNERS CAPITAL INCLUDED AMOUNT OF RS.5 CRORES, WHICH WAS CREDITED IN EQUAL PROPORTION TO ALL THE THREE PARTNERS OF THE FIRM ON ACCOUNT OF GO ODWILL BY WAY OF A BOOK ENTRY. HE OBSERVED THAT THE ACTUAL MONEY WAS NEVER INTRODUCED IN THE BOOKS OF ACCOUNT AND BY PASSING A BOOK ENTRY THE ASSESSEE HAD CLAIMED THAT CAPITAL HAD INCREASED BY RS.5 CRORES AND PAID INTEREST OF R S.60 LAKHS ON THE ENHANCED PARTNERS CAPITAL. HE REQUIRED THE ASSESSE E TO EXPLAIN AS TO HOW THE 3 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 INTEREST OF RS.60 LAKHS WAS ALLOWABLE AS PER THE PR OVISIONS OF SECTION 36(1)(III) R.W.S. 40(B)(IV) OF THE ACT. THE ASSESS ING OFFICER, RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MUNJAL SALES CORPORATION VS. CIT, (2008) 298 ITR 298 (SC), OBSER VED THAT SECTION 40 WAS A COROLLARY TO SECTION 30 TO 38 AND, THEREFORE, SECTION 40 WAS NOT A STANDALONE SECTION, THEREFORE, THE LIMITATION OF DE DUCTION OF INTEREST OF SECTION 40(B)(IV) WILL COME INTO PLAY ONLY IF THE E XPENDITURE OF INTEREST WAS ALLOWABLE U/S 36(1)(III) OF THE ACT. LD. CIT(A) CO NFIRMED THE ASSESSING OFFICERS ACTION. 4. LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBM ISSIONS MADE BEFORE LD. CIT(A) AND POINTED OUT THAT THE ASSESSEE FIRM I S IN THE BUSINESS FOR LAST 100 YEARS AND, AS SUCH, THE ASSESSEE FIRM HAD GENER ATED/CREDITED A GOODWILL, WHICH HAD BEEN CREDITED IN THE CAPITAL ACCOUNTS OF THE PARTNERS OF THE FIRM AS THE CAPITAL OF THE PARTNERS. HE, FURTHER, SUBMITTE D THAT THE INTEREST ON GOODWILL ALLOWED BY THE FIRM HAS BEEN TREATED AS BU SINESS INCOME IN THE HANDS OF THE PARTNERS AS PER SECTION 28(V) OF THE A CT AND THE SAME HAD BEEN OFFERED AS INCOME IN THE INDIVIDUAL INCOME-TAX RETU RNS OF THE PARTNERS. LD. COUNSEL SUBMITTED THAT THE WHOLE EXERCISE IS TAX NE UTRAL BECAUSE THE RATE OF TAXATION IS SAME, BOTH IN THE HANDS OF THE ASSESSEE FIRM AS WELL AS PARTNERS. 4 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 LD. CIT(A) CONFIRMED THE ASSESSING OFFICERS ACTION OBSERVING IN PARA 4.6 AS UNDER :- 4.6 I HAVE CONSIDERED THE ORDER OF THE AO AND THE SUBMISSIONS OF THE ASSESSEE AND I DO NOT FIND ANY MERIT IN THE SUBMISSION OF TH E ASSESSEE THAT THE INTEREST PAYMENT IS ALLOWABLE U/S 40(B) ON THE GOODWILL AS T HE INTEREST PAYMENT IS ALLOWABLE ONLY WHEN THE SAME IS PAYABLE FOR THE BOR ROWED CAPITAL AND THE CAPITAL IS BORROWED FOR THE PURPOSE OF BUSINESS AS PROVIDED U/S 36(1)(III). IN THE PRESENT CASE, ASSESSEE HAS CLAIMED TO HAVE CREATED A GOODWI LL WHICH HAS BEEN CREDITED IN THE CAPITAL ACCOUNTS OF THE PARTNERS AND THE ASSESS EE FIRM IS CLAIMING THE PAYMENT OF INTEREST AS AN EXPENDITURE OR DEDUCTION U/S 40(B ) BUT THE SAME IS NOT ALLOWABLE AS NO MONEY OR CAPITAL HAS BEEN BORROWED FOR THE PU RPOSE OF BUSINESS. THE PAYMENT OF INTEREST AS A DEDUCTION MAY BE ALLOWED O NLY WHEN THE CAPITAL IS BORROWED FOR THE PURPOSE OF BUSINESS AS PROVIDED U/ S 36(1)(III). IT IS ALSO SEEN THAT THE CREATION OF GOODWILL CLAIMED BY THE ASSESS EE IS ONLY A NOTIONAL ASSET AND THE SAME CANNOT BE TREATED AT PAR WITH THE BORROWED CAPITAL AND AS SUCH THE AO IS JUSTIFIED TO DISALLOW THE PAYMENT OF INTEREST AS NO MONEY OR CAPITAL HAS BEEN BORROWED FOR THE PURPOSE OF BUSINESS. AFTER CONSID ERING ALL THE FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE VIEW THAT TH ERE IS NO MERIT IN THE SUBMISSION OF THE ASSESSEE AND THE AO HAS RIGHTLY M ADE THE DISALLOWANCE/ADDITION OF THE INTEREST PAYMENT AND A CCORDINGLY, THE ADDITION MADE BY THE AO IS CONFIRMED. 5. LD. DR RELIED ON THE ORDER OF THE CIT(A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF BOTH THE PARTIES AND PERUSED THE RECORD OF THE CASE. THE FACTS ARE NOT DISPUTED. THE ONLY POINT FOR CONSIDERATION IS WHETHER ASSESSEE IS ENTITLED T O INTEREST PAID TO THE PARTNERS ON THE AMOUNT CREDITED ON CAPITALIZATION O F GOODWILL. THE SUBMISSION OF LD. COUNSEL IS THAT THE INTEREST PAID IS WITHIN THE LIMIT AS PRESCRIBED U/S 40(B)(IV) AND IS IN TERMS OF THE PAR TNERSHIP DEED, THEREFORE, NO DISALLOWANCE COULD BE MADE. LD. COUNSEL ALSO SUBMI TTED THAT THE ASSESSEES CLAIM IS ALLOWABLE U/S 37 AND NOT U/S 36(1)(III). SECTION 40 DEALS WITH 5 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 CERTAIN EXPENSES ENUMERATED THEREIN, WHICH ARE NOT DEDUCTIBLE. THE SCHEME OF THE ACT IN REGARD TO COMPUTATION OF BUSINESS INC OME IS LIKE THIS. SECTION 28 DEALS WITH VARIOUS KINDS OF INCOME WHICH ARE CHA RGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PR OFESSION. SECTION 28(V) READS AS UNDER :- S.28 THE FOLLOWING INCOME SHALL BE CHARGEABLE TO I NCOME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION, (I) . . (V) ANY INTEREST, SALARY, BONUS, COMMISSION OR REMU NERATION, BY WHATEVER NAME CALLED, DUE TO, OR RECEIVED BY, A PAR TNER 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 NOT 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 ;] 7. SECTION 29 LAYS DOWN THE MODE OF COMPUTATION OF BUSINESS INCOME AND AS PER THIS THE INCOME REFERRED TO IN SECTION 2 8 IS TO BE COMPUTED HAVING REGARD TO THE PROVISIONS CONTAINED IN SECTIONS 30 T O 43D. SECTION 30 ONWARDS DEALS WITH VARIOUS DEDUCTIONS ALLOWABLE TO ASSESSEE FROM THE BUSINESS INCOME. 8. NOW, COMING TO SECTION 40, WE FIND THAT THIS SEC TION STARTS WITH NON- OBSTANTE CLAUSE AND MANDATES THAT EVEN IF ANYTHING CONTRARY IS CONTAINED IN SECTION 30 TO 38 STILL THE ITEMS ENUMERATED U/S 40 WOULD NOT BE ALLOWABLE AS 6 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 DEDUCTION. IT IMPLIES THAT EVEN IF DEDUCTION IS AL LOWABLE UNDER THE PROVISIONS OF SECTIONS 30 TO 38 ON ACCOUNT OF CERTA IN EXCEPTIONS STILL FOR ALLOWANCE OF VARIOUS ITEMS ENUMERATED U/S 40 CONDIT IONS LAID DOWN THEREIN HAVE TO BE FULFILLED. SECTION 40 IS PRIMARILY AN E XTENSION OF SECTIONS 30 TO 38 AND CANNOT BE INVOKED DE-HORS THE CONSIDERATION OF PROVISIONS OF SECTIONS 30 TO 38. AS A MATTER OF FACT, IT IS COMP LETE SCHEME OF THE COMPUTATION OF BUSINESS INCOME WHICH IS TO BE TAKEN INTO CONSIDERATION WHILE COMPUTING THE TOTAL INCOME UNDER THE HEAD BU SINESS. WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF MUNJAL SAL ES CORPORATION (SUPRA) HAS OBSERVED AS UNDER :- BEFORE THE ENACTMENT OF THE FINANCE ACT, 1992, BRO ADLY SPEAKING, PAYMENT OF INTEREST BY THE FIRM TO ANY PARTNER OF THE FIRM CON STITUTED BUSINESS DISALLOWANCE PER SE. AFTER THE FINANCE ACT, 1992, SECTION 40(B)( IV) OF THE 1961 ACT PLACES LIMITATIONS ON THE DEDUCTIONS UNDER SECTIONS 30 TO 38. PRIOR TO THE FINANCE ACT, 1992, PAYMENT OF INTEREST TO THE PARTNER WAS AN ITE M OF BUSINESS DISALLOWANCE. HOWEVER, AFTER THE FINANCE ACT, 1992, THE SAID SECT ION 40(B) PUTS LIMITATIONS ON THE DEDUCTIONS UNDER SECTIONS 30 TO 38 FROM WHICH I T FOLLOWS THAT SECTION 40 IS NOT A STANDALONE SECTION. SECTION 40, BEFORE AND AFTER THE FINANCE ACT, 1992, HAS REMAINED THE SAME IN THE SENSE THAT IT BEGINS WITH A NON OBSTANTE CLAUSE. IT STARTS WITH THE WORDS 'NOT-WITHSTANDING ANYTHING TO THE CO NTRARY IN SECTIONS 30 TO 38' WHICH SHOWS THAT EVEN IF AN EXPENDITURE OR ALLOWANC E COMES WITHIN THE PURVIEW OF SECTIONS 30 TO 38 OF THE 1961 ACT, THE ASSESSEE COULD LOSE THE BENEFIT OF DEDUCTION IF THE CASE FALLS UNDER SECTION 40. IN OT HER WORDS, EVERY ASSESSEE INCLUDING A FIRM HAS TO ESTABLISH, IN THE FIRST INS TANCE, ITS RIGHT TO CLAIM DEDUCTION UNDER ONE OF THE SECTIONS BETWEEN SECTIONS 30 TO 38 AND IN THE CASE OF THE FIRM IF IT CLAIMS SPECIAL DEDUCTION IT HAS ALSO TO PROVE TH AT IT IS NOT DISENTITLED TO CLAIM DEDUCTION BY REASON OF APPLICABILITY OF SECTION 40( B)(IV). THEREFORE, IN THE PRESENT CASE, THE ASSESSEE WAS REQUIRED TO ESTABLISH IN THE FIRST INSTANCE THAT IT WAS ENTITLED TO CLAIM DEDUCTION UNDER SECTION 36(1)(III ) AND THAT IT WAS NOT DISENTITLED TO CLAIM SUCH DEDUCTION ON ACCOUNT OF APPLICABILITY OF SECTION 40(B)(IV). IT IS IMPORTANT TO NOTE THAT SECTIONS 36(1) REFERS TO OTH ER DEDUCTIONS WHEREAS SECTION 40 COMES UNDER THE HEADING 'AMOUNTS NOT DEDUCTIBLE' . THEREFORE, SECTIONS 30 TO 38 ARE OTHER DEDUCTIONS WHEREAS SECTION 40 IS A LIM ITATION ON THAT DEDUCTION. IT IS 7 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 IMPORTANT TO NOTE THAT SECTIONS 28 TO 43C ESSENTIAL LY DEAL WITH BUSINESS INCOME. SECTIONS 30 TO 38 DEAL WITH DEDUCTIONS. SECTIONS 40 A AND 43B DEAL WITH BUSINESS DISALLOWANCES. KEEPING IN MIND THE SAID SCHEME THE POSITION IS THAT SECTIONS 30 TO 38 ARE DEDUCTIONS WHICH ARE LIMITED BY SECTION 40. THEREFORE, EVEN IF AN ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 36(1)(III), THE ASSESSEE (FIRM) WILL NOT BE ENTITLED TO CLAIM DEDUCTION FOR INTEREST PAYMENT EX CEEDING 18/12 PER CENT. PER SE. THIS IS BECAUSE SECTION 40(B)(IV) PUTS A LIMITATION ON THE AMOUNT OF DEDUCTION UNDER SECTION 36(1)(III). IT IS VEHEMENTLY URGED ON BEHALF OF THE ASSESSEE TH AT THE PARTNER'S CAPITAL IS NOT A LOAN OR BORROWING IN THE HANDS OF A FIRM. ACCORDING TO THE ASSESSEE, SECTION 40(B)(IV) APPLIES TO PARTNER'S CAPITAL WHER EAS SECTION 36(1)(III) APPLIES TO LOAN/BORROWING. CONCEPTUALLY, THE POSITION MAY BE C ORRECT BUT WE ARE CONCERNED WITH THE SCHEME OF CHAPTER IV-D. AFTER THE ENACTMEN T OF THE FINANCE ACT, 1992, SECTION 40(B)(IV) WAS BROUGHT TO THE STATUTE BOOK N OT ONLY TO AVOID DOUBLE TAXATION BUT ALSO TO BRING ON PAR DIFFERENT ASSESSE ES IN THE MATTER OF ASSESSMENT. THEREFORE, THE ASSESSEE-FIRM, IN THE PRESENT CASE, WAS REQUIRED TO PROVE THAT IT WAS ENTITLED TO CLAIM DEDUCTION FOR PAYMENT OF INTE REST ON CAPITAL BORROWED UNDER SECTION 36(1)(III) AND THAT IT WAS NOT DISENT ITLED UNDER SECTION 40(B)(IV). THERE IS ONE MORE WAY OF ANSWERING THE ABOVE CONTEN TION. SECTION 36(1)(III) AND SECTION 40(B)(IV) BOTH DEAL WITH PAYMENT OF INTERES T BY THE FIRM FOR WHICH DEDUCTION COULD BE CLAIMED, THEREFORE, KEEPING IN M IND THE SCHEME OF CHAPTER IV-D EVERY ASSESSEE WHO CLAIMS DEDUCTION UNDER SECT IONS 30 TO 38 IS ALSO REQUIRED TO ESTABLISH THAT IT IS NOT DISENTITLED UN DER SECTION 40. IT IS IN THIS RESPECT THAT WE HAVE STATED THAT THE OBJECT OF SECTION 40 I S TO PUT A LIMITATION ON THE AMOUNT OF DEDUCTION WHICH THE ASSESSEE IS ENTITLED TO UNDER SECTIONS 30 TO 38. IN OUR VIEW, SECTION 40 IS A COROLLARY TO SECTIONS 30 TO 38 AND, THEREFORE, SECTION 40 IS NOT A STANDALONE SECTION. 9. THEREFORE, THE ASSESSING OFFICER HAS RIGHTLY POI NTED OUT THAT SECTION 40 IS COROLLARY TO SECTIONS 30 TO 38 AND, THEREFORE , SECTION 40 IS NOT A STANDALONE SECTION. THEREFORE, THE LIMITATION OF D EDUCTION OF INTEREST U/S 40(B)(IV) WILL COME INTO PLAY ONLY AFTER EXPENDITUR E OF INTEREST IS ALLOWABLE U/S 36(1)(III) OF THE ACT. THE CONTENTION OF LD. C OUNSEL IS THAT THE EXPENDITURE CLAIMED BY ASSESSEE IS ALLOWABLE U/S 37 . LET US EXAMINE THIS PLEA OF THE ASSESSEE. ADMITTEDLY, THERE WAS NO INF USION OF FUNDS IN THE 8 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 CAPITAL ACCOUNT AND ONLY ON THE BASIS OF BOOK ENTRY THE GOODWILL WAS CREDITED IN THE CAPITAL ACCOUNTS OF PARTNERS. THER EFORE, PAYMENT OF INTEREST TO PARTNERS COULD NOT BE HELD TO BE WHOLLY AND EXCL USIVELY FOR BUSINESS PURPOSES BECAUSE IT WAS PRIMARILY FURTHER ADDITION TO GOODWILL ACCOUNT. WE, THEREFORE, DO NOT FIND ANY MERIT IN THE SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE. THE NEXT PLEA ADVANCED BY THE LD. COUNSE L IS THAT THE WHOLE EXERCISE IS TAX NEUTRAL AND, THEREFORE, THE ASSESSE ES CLAIM SHOULD HAVE BEEN ALLOWED. WE ARE NOT INCLINED TO ACCEPT THIS PLEA O F THE LD. COUNSEL OF THE ASSESSEE BECAUSE MERELY THAT AN EXERCISE IS TAX NEU TRAL DOES NOT JUSTIFY AN INADMISSIBLE CLAIM OF AN ASSESSEE. IN THE LIGHT OF AFORESAID DISCUSSION, THE ASSESSEES APPEAL IS DISMISSED. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO.2959/DEL/2012 FOR ASSESSMENT YEAR 2009-10 IS DISMISSED. ITA NO.2522/DEL/2013 (A.Y. 2010-11) : 11. THIS APPEAL, FILED BY THE ASSESSEE, AGAINST THE ORDER DATED 09.04.2013 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- XXV, NEW DELHI, U/S 143(3) OF THE ACT RELATES TO ASSESSMENT YEAR 20 10-11. 12. SINCE THE FACTS ARE IDENTICAL TO ASSESSMENT YEA R 2009-10 AND, THEREFORE, FOLLOWING THE SAME PARITY OF REASONING G IVEN THEREIN, WE DISMISS 9 ITA NO.2959/DEL/2012 ITA NO.2522/DEL/2013 THE ASSESSEES APPEAL IN ITA NO.2522/DEL/2013 FOR A SSESSMENT YEAR 2010-11. 13. RESULTANTLY, BOTH THE CAPTIONED APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF DECEMBER, 2016. SD/- SD/- (RAJPAL YADAV) (S.V. MEHROTRA) JUDICIAL MEMBER ACCOUN TANT MEMBER DATED : 23-12-2016. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT; 2) THE RESPONDENT; 3) THE CIT; 4) THE CIT(A)-, NEW DELHI; 5) THE DR, I.T.A.T., NEW DELHI; BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI