DCIT, CC-2, MADURAI V. SHRI V. MANOHARAN, RAMNAD

ITA 3246/CHNY/2019

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 7827 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2016-2017
• Appeal Filed On: 25-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained investment; Business income; Document seized; Earning of tax free income; Source of fund; TDS; Set aside
• Section: 69; 132; 28; 10; 40A(3); 143(3); 142(1); 40(a)(ia); 43D; 44AB; 194A

Judgement Text

आयकर अपीलीय अिधकरण, ‘ए’ Ɋायपीठ, चेɄई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘A’ BENCH, CHENNAI ŵी वी. दुगाŊ राव, Ɋाियक सद˟ एवं ŵी मनोज कु मार अŤवाल, लेखा सद˟ के समƗ । Before Shri V. Durga Rao, Judicial Member & Shri Manoj Kumar Aggarwal, Accountant Member आयकर अपील सं./I.T.A. No.3246/Chny/2019 िनधाŊरण वषŊ/Assessment Year: 2016-17 & C.O. No. 2/Chny/2021 [in I.T.A. No.3246/Chny/2019] The Deputy Commissioner of Income Tax, Central Circle 2, Madurai. Vs. Shri V. Manoharan, D. No. 99/2, Maharnonbu Ground Road, Near Velumanickam Theatre, Ramnad 632 501. [PAN: ACSPM0189J] (अपीलाथŎ /Appellant) (ŮȑथŎ/Respondent/Cross Objector) Department by : Shri AR.V. Sreenivasan, Addl. CIT Assessee by : None सुनवाई की तारीख/ Date of hearing : 27.06.2022 घोषणा की तारीख /Date of Pronouncement : 13.07.2022 आदेश /O R D E R PER V. DURGA RAO, JUDICIAL MEMBER: The appeal filed by the Revenue and the Cross Objection filed by the assessee are directed against the order of the ld. Commissioner of Income Tax (Appeals) 19, Chennai, dated 14.08.2019 relevant to the assessment year 2016-17. The Revenue has raised the following grounds: “1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law. I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 2 2. The ld. CIT(A) erred on facts, as the turnover of the assessee during the relevant year was to the tune of Rs.2,43,88,213/-. The turnover limit for compulsory audit u/s. 44AB for AY 2016-17 was Rs.1 crore. Thus, there is a clear violation of TDS provisions and the disallowance ought to have been upheld. 3. The ld. CIT(A) failed to consider that the land (property in survey no. 441/6) regarding which the assessee claimed that the said investment was included in his return for AY 2016-17 was different from the land (property in survey No. 441/4) for which the Assessing Officer had made the addition. 4. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT (Appeals) may be set aside and that of the Assessing Officer be restored.” 2. The assessee is a partner in the firms M/s. Velumanickam Lodge, M/s. Velusamy & Co. and M/s. VM & Co., which are located in Ramanathapuram. The assessee has filed his original return of income belatedly on 31.03.2018, for the assessment year 2016-17, admitting total income of ₹.49,37,430/-. A search and seizure action under section 132 of the Income Tax Act, 1961 [“Act” in short] was conducted on 26.04.2016 in the group cases of Shri S.M. Noor Mohamed & others in Ramanathapuram. During the course of search, certain documents were seized, among others, a sale agreement between Shri V. Manoharan and Shri S.M. Noor Mohamed. On the basis of the above finding, Shri V. Manoharan was summoned on 13.10.2016 and a statement was recorded. Notice under section 142(1) of the Act dated 06.12.2018, along with questionnaire, calling for various details like I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 3 sources of income derived, details of exempt income claimed under section 10 of the Act, copies of bank accounts, purchase/sale of movable and immovable properties, etc., along with balance sheet and profit and loss account for the impugned assessment year 2016-17. 2.1 As per the profit and loss account statement furnished, the Assessing Officer has noticed that the net profit admitted was at ₹.2,40,48,963/- and the net business income was claimed at ₹.44,82,323/-. On a perusal of the P&L Account, the Assessing Officer has also found that the assessee was in receipt of salary and interest to the tune of ₹.1,63,85,672/- from M/s VM & Co., Ramnad. When this was pointed out to the assessee during the assessment proceedings, the authorized representative furnished another statement of total income wherein he had claimed an amount of ₹.1,63,85,672/- as interest paid on borrowed loans. But, however, the AR could not substantiate his claims of eroding the net profit and as such, the Assessing Officer had treated the sum of ₹.1,63,85,672/- as having been derived from business under section 28 of the Act, as they are in violation of provisions of sections 40A(3) and 40(a)(ia) of the Act and brought to tax. On appeal, after considering the submissions of the I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 4 assessee and by following the assessment order for earlier assessment years, the ld. CIT(A) deleted the addition. 3. Aggrieved, the Revenue is in appeal before the Tribunal. By referring to the grounds of appeal, the ld. DR has submitted that the turnover of the assessee during the relevant year was to the tune of ₹.2,43,88,213/-. It was further submission that as the turnover limit for compulsory audit under section 44AB of the Act was ₹.1 crore, there is a clear violation of TDS provisions and pleaded for confirmation of the disallowance made by the Assessing Officer. 4. On the other hand, by filing detailed written submissions of the assessee, the ld. Counsel for the assessee has submitted that the assessee was not liable to compulsory audit under section 44AB of the Act. It was further submission that the receipts by way of interest and salary received from partnership firms in his capacity as partner was only technically assessable under the head business or profession and same did constitute turnover for the purposes of section 44AB of the Act and prayed for confirming the order passed by the ld. CIT(A). 5. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In the I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 5 assessment order, the receipt of salary and interest to the tune of ₹.1,63,85,672/- earned by the assessee has been treated as income from business in terms of section 28 of the Act. On appeal, after considering the submissions of the assessee, the ld. CIT(A) has observed as under: “4. I have gone through the assessment order, grounds of appeal and the written submissions made in this regard. The fact in this case show that the Appellant was indeed earlier a Proprietorship concern and subsequently it got merged with the Partnership concern in the name of M/s. V.M. & Co, As a Proprietorship concern, the Appellant had been engaged in the business of Contractorship etc. For this business undertaken by him, he had arranged certain loans and was entitled for deduction of interest payments made for availing these loans. The Appellant thereafter on account of merging his business with the Partnership concern carried all his erstwhile business and funds with their respective liabilities to the Partnership Firm. From this Partnership Firm, the Appellant derives salary and interest income. This income is categorized as Business Income as per the provisions of Section-28 (v) of the Act. Thus, once receipts on account of salary and interest from Partnership are to be treated as business profits, then the computation of income from the same has also to be computed as per the provisions of the Act contained in Section-30 to 43D as stipulated by Section 29 of the Act. The deduction on account of payment of interest in respect of capital borrowed is provided in Section-36(1). If a provision for deduction is allowable for the computation of income in the Act, then the same has to be allowed and there cannot be any alternate view on that account. Therefore, the Appellant is entitled to deduction on account of payment of interest on loans taken that has been used for business purposes in the Partnership Firm. 4.1 The deductions, however, claimed from Business Income are subject to certain restrictions and prohibitions as contained in Sections-40 & 40A. Section-40 mentions about the amounts not deductible. In the present context the sub-section-40(i)(a) is relevant which states that where the assessee does not deduct tax as required by the provisions contained in Chapter-XVII-B (TDS provisions) then the same expenditure is not to be allowed as deduction. The Assessing Officer in the present case has mentioned that the Appellant has not deducted any tax on the interest paid. Therefore, he is not entitled to claim the deduction. It is relevant to note here the provisions of Section- 40(i)(a) are not absolute as it states that only those amounts will not be allowed as deduction on which tax is deductible at source but has not been deducted. Here, the first thing that is to be noted is whether in the present I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 6 case the interest paid was deductible at source or not. Here, we have to see the provisions of Section-194A that mentions about payments on account of interest other than "interest on securities". This particular section stipulates that when any person not being an individual or HUF, who is responsible for paying to a resident any income by way of interest shall at the time of credit of such income to the account of payee will deduct income tax thereon. Here, it may be seen that this section exempts an individual from deducting tax on interest payment. Since, the Appellant in this case is an individual, he is exempt from deducting any tax. However, there is a proviso to section- 194A(i) that states that "provided that an individual or HUF whose total sales, gross receipts or turnover from Business or Profession carried out by him exceeds the monetary limit specified under section 44AB during previous year, relevant to the Financial Year, he should be liable to deduct income tax". In the present case, the Appellant is not having any turnover or sales of business or profession and therefore, here also he is outside the ambit of the requirement of deducting tax at source under the provisions of Section-194A. Once, he is not required to deduct tax then automatically the Appellant is immune from the mischief of Section-40(i)(a). Therefore, the deduction on account of payment of interest in the present case cannot be disallowed u/s 40(i)(a). 4.2 The Assessing Officer has also mentioned that the amounts are not deductible as the same is hit by the provisions of Section-40A(3). Section- 40A(3) deals with expenses of payments which are not deductible in certain circumstances. The circumstance which attract Section-40A(3) is when an assessee incurs any expenditure and in respect of which payment is made otherwise than by an account payee cheque drawn on a Bank no deduction is to be allowed in respect of such expenditure. The Section-40A(3) was brought on statute with the purpose designed to counter evasion of tax through claims for expenditure shown to have been incurred in cash with a view to frustrate proper investigation by the Department as to be identity of the payee and the reasonableness of the payment. The emphasis in this section is on the term payment made. In the present case, the assessee has not made any payment in cash, in fact, the payment has not been made at all. The amount has been shown to have accrued and only journal entry has been passed. However, the identity of the payee is very much there and the respective recipients of interests are income tax assessees and paying their taxes on the interest received from the Appellant. The Appellant in fact has not made any payment and it is only a journal entry and therefore is not hit by the provisions of section-40A(3). It is only when the Appellant makes a payment of this interest to the payee otherwise than cheque or electronic means that the provisions of Section-40A(3) will get attracted as of now payments have not been made. The expenditure on account of interest has been claimed on the basis of accrual and the same is admissible under the provisions of Section-36(1). The sec.43B states that certain expenses can be claimed on actual payment only. This section does not mention about the payments under sec.36(1)(iii) I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 7 meaning thereby the deduction can be claimed on accrual basis and there need not be actual payment. In any case, the payee is identifiable and acknowledging the income of interest on accrual basis and taxes are paid on the same. 4.3 The nexus between borrowal and investment has been accepted by the Department in the asst. year 2013-14, u/s 143(3) assessment and also in the asst. year 2015-16, as per assessment order dated 31.12.2016. In both the years, the payment of interest is allowed. In this year also, there apparently is no reason to disallow the deduction on account of interest and hence, the addition made is deleted.” 6. In this case, the Assessing Officer has noticed that as per profit and loss account statement, the assessee was in receipt of salary and interest to the tune of ₹.1,63,85,672/- from M/s VM & Co., Ramnad. Thus, it is clear from the assessment order that the assessee was not carrying on any business or profession and his main income during the period was from salary and interest received as a partner in partnership firms. The details of his income as admitted in the return of income and furnished before the Tribunal are as follows: Sl.No. Head of Income Description Details Amount 1. Income from House property Rent from properties let out ₹.10,68,766 (loss after claiming interest paid) 2. Income from business or profession Partners salary and interest received from partnership firm partners 1. Partners salary from M/s. Velumanickam Lodge, Ramnad -₹.60000 2. Salary from M/s. V.M. & Co., Ramnad – ₹.1680000: Total salary = ₹.17,40,000 3. Partners Interest from M/s. V.M. & Co., I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 8 Ramnad –₹.1,46,45,672 – Total receipts=₹.1,63,85,672 Less: Interest paid on borrowed loans ₹.1,19,03,349 ₹.44,82,323 3. Other sources ₹.15,26,354 Gross total income ₹.4939,911 Less: Deductions ₹.2,481 Total income ₹.49,37,430 6.1 Since the assessee was not carrying on any business or profession, he was not liable to compulsory audit under section 44AB of the Act. The receipts by way of interest and salary received from partnership firms in his capacity as partner is only technically assessable under the head business or profession, which could not constitute turnover for the purposes of section 44AB of the Act. Thus, we are of the considered opinion that the assessee was not liable to get his accounts audited. 6.2 Moreover, after passing elaborate order from para 4 to 4.2, the ld. CIT(A) has observed that the nexus between borrowal and investment has been accepted by the Department in the assessment year 2013-14 as per assessment order under section 143(3) of the Act and also for the assessment year 2015-16 as per the assessment order dated 31.12.2016, wherein, in both the assessment years, the I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 9 payment of interest was allowed. Since there was no reason apparently to disallow the deduction on account of interest in the year under consideration, the ld. CIT(A) has rightly deleted the addition made by the Assessing Officer. Otherwise also, since, the assessee is not having any turnover or sales of business or profession and he was outside the ambit of the requirement of deducting tax at source under the provisions of section 194A of the Act. Once, he is not required to deduct tax then automatically the assessee is immune from application of section 40(i)(a) of the Act. Therefore, the deduction on account of payment of interest in the present case cannot be disallowed under section 40(i)(a) of the Act. Moreover, the provision of section 40A(3) of the Act has no application on the ground that the assessee has not made any payment and it was only a journal entry and therefore, it is not hit by the provisions of section 40A(3) of the Act. Thus, we find no reason to interfere with the order passed by the ld. CIT(A) on this issue and accordingly, the ground raised by the Revenue is dismissed. 7. The next ground raised in the appeal of the Revenue relates to deletion of undisclosed investment under section 69 of the Act. During the course of search action under section 132 of the Act in the group cases of Shri S.M. Noor Mohamed & others in Ramanathapuram. I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 10 certain documents were seized including a sale agreement between Shri V. Manoharan and Shri S.M. Noor Mohamed. Since the unregistered sale agreement has culminated into sale on 16.12.2015, the agreement value of sale of plots in survey No. 441/4 to the extent of 70 cents at ₹.49,00,000/- [₹.70,000/- per cent as per agreement dated 16.06.2015] was assessed in the hands of the assessee as undisclosed investment for the assessment year 2016-17 and brought to tax. On appeal, the ld. CIT(A) deleted the addition made under section 69 of the Act. 7.1 Aggrieved, the Revenue is in appeal before the Tribunal. 7.2 We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The Assessing Officer added ₹.49 Lakhs as undisclosed or unexplained investment in property in Survey No.414/4 to the extent of 70 cents. The value of ₹.49 lakhs was arrived at by the Assessing Officer on the basis of rate of ₹.70,000/- per cent indicated in the document seized from Shri Noor Mohammed dated 16-06-2015. Before the ld. CIT(A), the assessee has not denied the sale agreement and has admitted that the purchase was made at the rate of ₹.70,000/- per cent. It was also I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 11 accepted that actually he has purchased 74 cents of land and the same was purchased along with others viz. Sri.V. Jegannathan and Sri.V. Kathiresan (brothers of the assessee). It was further submitted by the assessee before the ld. CIT(A) that the total cost of the property including the registration charges comes to a total investment of ₹.61,53,000 and this amount is inclusive of ₹.49 lakhs that the Assessing Officer has alleged to be the unexplained investment of the assessee. After verification of the return filed by the assessee for the assessment year 2016-17 and the share of investment by the other two persons are accounted by them separately, the ld. CIT(A) has observed that, no further addition can be made on this account. Accordingly, the ld. CIT(A) deleted the addition of ₹.49 lakhs made by the Assessing Officer. The ld. DR could not controvert the above facts. In view of the above, we find no infirmity in the order passed by the ld. CIT(A) on this issue. Thus, the ground raised by the Revenue is dismissed. 8. So far as Cross Objection filed by the assessee is concerned, since we have dismissed the grounds raised by the Revenue, the CO filed by the assessee become anfractuous and liable to be dismissed. Accordingly, the CO filed by the assessee is dismissed. I.T.A. No.3246/Chny/19 & C.O. No.2/Chny/21 12 9. In the result, the appeal filed by the Revenue and the CO filed by the assessee are dismissed. Order pronounced on the 13 th July, 2022 at Chennai. Sd/- Sd/- (MANOJ KUMAR AGGARWAL) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER Chennai, Dated, the 13.07.2022 Vm/- आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy to: 1. अपीलाथᱮ/Appellant, 2.ᮧ᭜यथᱮ/ Respondent, 3. आयकर आयुᲦ (अपील)/CIT(A), 4. आयकर आयुᲦ/CIT, 5. िवभागीय ᮧितिनिध/DR & 6. गाडᭅ फाईल/GF.