Rashmin Ramniklal Vora, Ahmedabad V. ITO, Ward-5(2)(4), Ahmedabad

ITA 502/AHD/2019

AI Insights

The case involves Rashmin Ramniklal Vora, who appealed against the order of the CIT(A) confirming the disallowance of interest expenses claimed on borrowed funds used for investment in a partnership firm, M/s. Sweetoo Apparels. The Assessing Officer had disallowed the interest expenses, observing that the assessee had periodically withdrawn investments from the firm, and thus, the interest on such borrowed funds did not qualify for deduction under Section 57(iii) of the Income Tax Act. The Tribunal dismissed the appeal, referencing a similar case from A.Y. 2013-14 and emphasizing that the interest, salary, etc., earned by a partner from a partnership firm are taxable under the head 'profit and gains of business or profession' and not under 'income from other sources'.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 299979 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 12-02-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 25-03-2019
• Other Referred Cases: CIT v/s Rajendraprasad Moody, Calcutta 115 ITR 519(SC)
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Depreciation
• Section: 143(2); 20

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, AHMEDABAD BEFORE MS. SUCHITRA KAMBLE, JUDICIAL MEMBER I .T .A . No .5 02 /A h d / 20 19 ( A s se ss m e nt Y e a r : 20 15- 16 ) R a s h m i n R a m n ikl a l V o r a 3/4 , O m C o mp lex , C . G. R o ad , Ah me da bad - 3 80 00 9 V s . I T O War d - 5 ( 2) ( 4 ) , A h me da ba d [ P AN N o. A A LP V6 70 1 G ] (Appellant) .. (Respondent) Appellant by : Shri Shreekant S. Shah, A.R. Respondent by: Shri Y. R. Raval, Sr. D.R. D a t e of H ea r i ng 13.02.2023 D a t e of P r o no u n ce me nt 28.02.2023 O R D E R The appeal filed by the assessee is against the order passed by the Ld. CIT(Appeals)-5, Ahmedabad on 24.12.2018 for A.Y. 2015-16. 2. The grounds of appeal raised by the assessee are as under: “1. The order of Commissioner of Income-Tax Appeal-5 referred to as Commissioner Appeals is bad in law and erroneous as to facts inasmuch as though the judgment of the Hon’ble Supreme Court in the case of CIT. West v/s Rajendraprasad Moody, Calcutta 115 ITR 519(SC) is followed however erred in interpreting the same. 2. The Commissioner (Appeals) erred in confirming income of Rs.6,01,840/- in place of Rs. NIL income returned. 3. The Commissioner (Appeals) ought to have observed from the details on record that there is a huge potentiality of higher income. 4. The Commissioner (Appeals) ought to have followed ratio of Hon’ble Supreme Court in the case of CIT v/s Rajendraprasad Moody, Calcutta 115 ITR 519 (SC) Holding that “it is not necessary that any income should in fact have been earned as a result of the expenditure. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of section 57(iii) and that purpose must be making or earned of income. Section 57(iii) does not require that purpose must be fulfilled in order to qualify the expenditure for deduction.”” ITA No. 502/Ahd/2019 Rashmin Ramniklal Vora vs. ITO Asst.Year–2015-16 - 2 - 3. The assessee filed return of income for A.Y. 2015-16 on 30.09.2015 declaring total income at Rs. NIL. The case was selected for the limited scrutiny and notice under Section 143(2) alongwith questionnaire was issued to the assessee on 11.01.2017. The Assessing Officer observed that from the perusal of Profit and Loss account the assessee debited Rs. 17,65,962/- on account of interest. The assessee borrowed funds which have been invested in the firm M/s. Sweeto Apparels. However, on further scrutiny of the capital account of the assessee the Assessing Officer observed that the assessee is maintaining an opening debit balance of Rs. 1,48,88,743/- and closing debit balance of Rs. 37,45,645/- with the firm. Thus, the Assessing Officer observed that the assessee periodically withdrawn the investments made in the firm. A show-cause notice dated 20.11.2017 was issued thereby asking as to why the interest expenses of Rs. 17,65,962/- on the borrowed funds which was diverting the interest bearing funds should not be disallowed under Section 57(iii) of the Act. The assessee filed its reply as well as the details. The Assessing Officer made disallowance of Rs. 17,65,962/- which was claimed as interest expenses under Section 57(iii) of the Act. 4. Being aggrieved by the assessment order the assessee filed appeal before the CIT(A). The CIT(A) dismiss the appeal of the assessee. 5. The Ld. A.R. submitted that the assessee is partner in M/s. Sweetoo Apparels and for the year 2006-07 the sales of Sweetoo Apparels was Rs. 2,74,86,340/- and net profit was Rs. 8,45,848/-. The Ld. A.R. further submitted that there was a credit balance in assessee’s capital account i.e. Rs. 32,23,553/-. Then first expansion took in 2007-08 where the firm ITA No. 502/Ahd/2019 Rashmin Ramniklal Vora vs. ITO Asst.Year–2015-16 - 3 - purchase premises and in F.Y. 2007-08 sales rose to Rs. 6,41,61,350/- and net loss was Rs. 71,4,582.66/-. This was due to higher depreciation of Rs. 21,98,978/-, bank interest of Rs. 15,04,425/- and advertisement expense of Rs. 24,51,576/-, rent expense and higher salary expenses of the employees. Because of these aspects the assessee’s share of 40% loss was debited to the capital account. At that time rate of bank interest was 11% and in year 2011 the assessee firm purchased 8(eight) shops at Ahmedabad for Rs. 24 crores and additional capital expenditure for Air-Condition and Interior for about Rs. 4 crore which was acquired by taking loan of 90% from Cosmos Co. Op. Bank Ltd. @ 14%. Because of this expenditure of depreciation, interest and salary expenses of new staff increased substantially, which resulted in huge losses. Since the assessee was a partner of 40%, the loss of 40% was debited to assessee’s account since then. However, the growth of the said firm substantial increase in 2013-14, 2012-13, 2014-15 and 2015-16. The Ld. A.R. submitted that the Assessing Officer did not appreciate the fact that debit balance in assessee’s account is on account of assessee’s share of loss arisen due to expansion of partnership business and that there is a clear nexus between the expenditure incurred and the income sought to be earned. Despite loss the assessee had to pay interest on personal borrowings for investment as margin money on loan taken by the firm. This was the expenditure laid down or expended wholly and exclusively for the purpose of making or earning such income and same was claimed based on the decision of Hon’ble Apex Court in case of CIT vs. Rajendra Prasad Moody, 115 ITR 519(SC). The Ld. A.R. further submitted that nothing in the language of Section 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the ITA No. 502/Ahd/2019 Rashmin Ramniklal Vora vs. ITO Asst.Year–2015-16 - 4 - sake of income. The Ld. A.R. also relied upon the decision of Tribunal in assessee’s own case in ITA No. 1066/Ahd/2017 and distinguished the same that any interest salary etc. owned by the partner from partnership firm is taxable income under the head profit and gains of business and there is no question of categorizing it under the head income from other sources. Thus, the Ld. A.R. submitted that even in the past years assessee had earned income under the head income from other sources. 6. The Ld. D.R. submitted that the Tribunal in A.Y. 2013-14 has confirmed the disallowance on the similar circumstances, hence the present appeal may be dismissed. The Ld. D.R. relied upon the assessment order and the order of the CIT(A). 7. Heard both the parties and perused all the relevant material available on record. It is pertinent to note that the mention of the assessee that the loan was taken for expansion of business from A.Y. 2007-08 onwards the fact remains that the position in A.Y. 2013-14 has remained similar in present A.Y. 2015-16 as relates to capital investment in purchase of new shops. The Tribunal in ITA No. 1066/Ahd/2017 order dated 18.06.2019 categorically mentioned that there was debit balance of assessee’s capital account in the partnership firm as the opening debit balance and closing debit balance was having a major difference as closing debit balance was much more higher. Thus, the assessee has paid net interest to the partnership firm but at the same time assessee has withdrawn more money from the partnership firm that actually invested in the partnership firm. The Tribunal has also distinguished the factual aspect in assessee’s case and in case of Hon’ble Supreme Court’s decision in CIT v/s. Rajendra Prasad ITA No. 502/Ahd/2019 Rashmin Ramniklal Vora vs. ITO Asst.Year–2015-16 - 5 - Moody (supra). The facts are exactly identical to A.Y. 2013-14 and therefore, it is noticed that as per specific provision of Section 28(v) of the Income Tax any interest, salary etc. earned by a partner from a partnership firm is taxable under the head profit and gains of business or profession and there is no question of categorizing it under the head income from other sources. Thus, the claim of the assessee for deduction under Section 57(iii) is not justifiable and has rightly been disallowed by the Assessing Officer and the CIT(A). Thus, the appeal of the assessee is dismissed. 8. In result, the appeal of the assessee is dismissed. This Order pronounced in Open Court on 28/02/2023 Sd/- (SUCHITRA KAMBLE) JUDICIAL MEMBER Ahmedabad; Dated 28/02/2023 TANMAY, Sr. PS TRUE COPY आदेश क त ल प अ े षत/ Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. संबं धत आयकर आय ु त / Concerned CIT 4. आयकर आय ु त(अपील) / The CIT(A)- 5. वभागीय त न ध, आयकर अपील!य अ धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड' फाईल / Guard file. आदेशान ु सार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation 27.02.2023 2. Date on which the type draft is placed before the Dictating Member 27.02.2023 3. Other Member..................... 4. Date on which the approved draft comes to the Sr.P.S./P.S .02.2023 5. Date on which the fair order is placed before the Dictating Member for pronouncement .02.2023 6. Date on which the fair order comes back to the Sr.P.S./P.S 28.02.2023 7. Date on which the file goes to the Bench Clerk 28 .02.2023 8. Date on which the file goes to the Head Clerk.......................................... 9. The date on which the file goes to the Assistant Registrar for signature on the order.......................... 10. Date of Despatch of the Order..........................................