M/s.Punnon Bankers, Chengannur V. The ITO, Thiruvalla

ITA 522/COCH/2019

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0621 (ITAT-COCHIN)
• Duration Of Justice: 3 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 16-12-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 16-09-2019
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Keywords: Proportionate interest; Notional interest
• Section: 40(b); 13; 12

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFOR E S/ SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., J M ITA NO S .5 2 1 & 522 /COC H/2019 ASSESSMENT YEAR S : 20 12 - 13 & 2013 - 14 M/S. PUNN O N BANKERS, PULLAMVILALIL BULDING, M.C. ROAD, CHENGANNUR, KOTTAYAM. [PAN:AAACU 5628B] VS. THE INCOME TAX OFFICER, WARD - 3, THIRUVALLA. (ASSESSEE - APPELLANT) (REVENUE - RESPONDE NT) ASSESSEE BY SHRI R. SREENIVASAN, FCA REVENUE BY SMT. A.S. BINDHU, SR. DR D ATE OF HEARING 16/12/2019 DATE OF PRONOUNCEMENT 16 /12/2019 O R D E R PER CHANDRA POOJARI, AM: TH ESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE DIFFERENT ORDERS OF THE CIT(A), KOTTAYAM DATED 02/07/2019 AND PERTAIN TO THE ASSESSMENT YEARS 2012 - 13 AND 2013 - 14. 2. SINCE THE ISSUES INVOLVED IN THESE TWO APPEALS ARE SIMILAR IN NATURE, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. I.T.A. NO S . 521&522/ COC H /2019 2 3. THE ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL EXCEPT FOR VARIANCE IN FIGURES : 1. THE CIT(A) IS NOT JUSTIFIED IN SUSTAINING THE ADDITION MADE IN RESPECT OF THE DISALLOWANCE PROPORTIONATE INTEREST PAID ON THE PARTNERS CURRENT ACCOUNT DEBIT BALANCE OF RS.90,36,108/ - . 2. THE AUTHORITIES BELOW ERRED IN DISALLOWING THE PROPORTIONATE INTEREST OF RS.10,33,714/ - ON THE PRE SUMPTION THAT INTEREST BEARING FUNDS ARE DRAWN BY PARTNERS FOR THEIR PERSONAL US. YOUR APPELLANT CONTENDED THAT THE DEBIT BALANCE WAS DUE TO THE TOTAL OF BROUGHT FORWARD LOSSES OF THE EARLIER YEARS OF THE FIRM. 3. THE AUTHORITIES BELOW FAILED TO NOTICE THAT THE BALANCE AMOUNT OF RS.12, 1 3 ,750/ - AFTER BROUGHT FORWARD LOSSES OF EARLIER YEARS WAS THE ONLY AMOUNT UTILIZED FOR NON BUSINESS PURPOSE EVEN AFTER PRODUCTION OF AUDITED FINAL ACCOUNTS FOR THOSE YEARS AND IT IS SUBMITTED THAT YOUR APPELLANT HAD GIVEN PROPER CONVINCING EXPLANATIONS AND STATEMENTS TO PROVE THE CLAIM THAT THE DISALLOWANCE IS NOT IN ORDER AND ALSO THE DEBIT BALANCE IN THE CURRENT ACCOUNT MOSTLY REPRESENTS THE CARRIED FORWARD OF LOSS FOR EARLIER YEARS WHICH THE AUTHORITIES BELOW DID NOT CON SIDERED JUDICIALLY IS NOT AT ALL JUSTIFIABLE. 4. IN VIEW OF THE ABOVE AND ANY OTHER GROUND URGED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ASSESSMENT MADE MAY PLEASE BE DELETED IN FULL. 4. AT THE TIME OF HEARING, THE LD. AR DID NOT PRESS GROUND NO. 2 AND HENCE, GROUND NO. 2 IS DISMISSED AS NOT PRESSED. 5. THE NEXT GROUND NO. 3 IS WITH REGARD TO DISALLOWANCE OF RS.10,33,714/ - BEING INTEREST TO THE PARTNERS. 6. THE FACTS OF THE ISSUE ARE THAT O N VERIFICATION OF THE BALANCE SHEET FILED BY T HE ASSESSEE TOR THE ASSESSMENT YEAR 2012 - 13 IT WAS SEEN THAT THE CAPITAL ACCOUNT OF THE PARTNERS SHOWED A CREDIT BALANCE OF RS . 3,61,35,429 WHEREAS THE CURRENT I.T.A. NO S . 521&522/ COC H /2019 3 ACCOUNT OF THE PARTNERS SHOWED DEBIT BALANCE OF RS . 90,36,108 / - BEFORE CREDITING THE CURRENT YEARS SHARE OF LOSS. WHILE COMPLETING THE ASSESSMENT AN AMOUNT OF RS . 39,15,808 / - BEING INTEREST ON CAPITAL COMPUTED @12% ON DAYS AS PER CLAUSE 5 OF PARTNERSHIP DEED WAS ALLOWED U/S 40(B). HOWEVER NO INTEREST WAS CHARGED ON DEBIT BALANCE IN THE PARTNER'S CURREN T ACCOUNT. SINCE THE AMOUNT SHOWN IN THE CURRENT ACCOUNT WAS NOT USED FOR BUSINESS PURPOSE DURING THE PREVIOUS YEAR, THE INTEREST IN PROPORTION TO THE INTEREST ALLOWED U/S SHOULD HAVE BEEN DISALLOWED IN VIEW OF THE SECTION 36( 1 ) ( II) OF THE I.T. ACT. 6.1 THE ASSESSEE WAS REQUESTED TO EXPLAIN AS TO WHY THERE CANNOT BE A PROPORTIONATE DISALLOWANCE OF INTEREST TO ACCOUNT FOR OVER - DRAWING BY PARTNERS VIDE LETTER DATED 25/04/2017. THE ASSESSEE EXPLAINED THAT THE AMOUNT OF RS. 90,36,108/ - REPRESENTED BROUGH T FORWARD LOSSES FOR THE YEARS FROM THE FINANCIAL YEAR S 2002 - 03 TO 2010 - 11 OF RS . 78,22 , 358/ - AND THE BALANCE OF RS.12,13,750/ - WAS THE ONLY AMOUNT DRAWN BY THE PARTNERS OTHER THAN FOR BUSINESS PURPOSE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 20 12 - 13. HOWEVER, WHILE RECORDING IN THE BOOKS OF ACCOUNT AND ALSO IN THE BALANCE SHEET AS ON 31 . 03.2012, THE SAID BROUGHT FORWARD LOSSES OF EARLIER YEARS WAS WRONGLY SHOWN AS DRAWINGS OF PARTNERS BY THE ACCOUNTANT. THUS , THE INTEREST TO BE DISALLOWED U/S 36 (1)(III) FOR UTILIZATION OF FUND, OTHER THAN BUSINESS PURPOSE, ON RS 12,13,750/ - @12%I WAS ONLY RS . 1,45,650/ - AND WHICH MAY BE SET OFF AGAINST THE LOSS OF RS 3,29,763/ - ALLOWED TO BE CARRY FORWARD VIDE ASSESSMENT ORDER DATED 26.02.2015 FOR THE ASSESSMENT Y EAR 2012 - 13. I.T.A. NO S . 521&522/ COC H /2019 4 6.2 THE EXPLANATION FILED BY THE ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER SI INCE AN AMOUNT OF RS . 39,15,808 / - BEING I NTEREST ON CAPITAL COMPUTED @12% ON DAYS AS PER CLAUSE 5 OF PARTNERSHIP DEED WAS ALLOWED U/S 40(B) AND NO INTEREST WAS CHARGED ON DEBIT BALANCE IN THE PARTNER'S ACCOUNT, A PROPORTIONAL DISALLOWANCE TO THE INTEREST ALLOWED U/S . 4 0 (B) SHOULD HAVE BEEN DISALLOW ED IN VIEW OF THE SECTION 36(1) ( III) OF THE INCOME - TAX ACT 1961. AMOUNT INVOLVED IS RS 1 0 ,33,714/ - WHICH IS WORKE D AS UNDER. 7. ON APPEAL, BEFORE THE CIT(A), THE LD. AR ARGUED THAT THE DEBIT BALANCE SHOWN IN THE CURRENT ACCOUNT REPRESENTS THE ACCUMULATED LOSSES A ND THEREFORE, CANNOT BE TREATED AS WITHDRAWAL BY THE PARTNERS. THE CIT(A) WAS OF THE VIEW THAT I NTERES T TO PARTNERS HAS TO BE ALLOWED AS PER THE CLAUSES IN THE PARTNERSHIP DEED SUBJECT TO THE PROVISIONS OF SECTION 4 0 (B) OF THE ACT. ON PERUSAL OF THE PARTNERSHIP DEED OF THE APPELLANT, THE CIT(A) FOUND THAT THE CLAUSE RELATING TO THE ALLOWANCE OF INTEREST R EADS AS UNDER: NOW THIS DEED WITNESSETH AS FOLLOWS: 1. THE NAME OF THE FIRM SHALL CONTINUE TO BE PUNNON BANKERS 2. THE HEAD OFFICE OF THE FIRM SHALL CONTINUE TO BE AT CHENGANNUR WITH THE RIGHT OF SHIFTING THE SAME TO ANY OTHER PLACE OR PLACES IN THE INDIAN UNION WITH THE UNANIMOUS CONSENT OF THE PARTNERS. 3. MR. JOHN DANIEL SHALL REGULATE AND CONTROL THE BUSINESS OF THE FIRM AND SHALL BE DESIGNATED AS THE MANAGING PARTNER OF THE FIRM. REGULAR ACCOUNTS RELATING TO THE TRANSACTION OF THE FIRM SHALL BE MAINTAINED/CAUSED TO BE MAINTAINED BY THE MANAGING PARTNER . THE ACCOUNTS OF THE FIRM SHALL BE CLOSED ON THE LAST OF MARCH EVERY YEAR. I.T.A. NO S . 521&522/ COC H /2019 5 4. MR. AJITH JOHN SHALL BE THE WORKING PARTNER OF THE FIRM. THE MANAGING PARTNER SHALL BE PAID REMUNERATION @RS.2,5400/ - (TWO THOUSAND FIVE HUNDRED) AND WORKING PARTNER SHALL BE PAID REMUNERATION @RS.5000/ - PER MONTH FOR MANAGING THE AFFAIRS OF THE FIRM, SUBJECT TO THE LIMIT PRESCRIBED BY THE INCOME TAX ACT, 1961 AND ANY AMENDMENTS MADE THERETO. 5. SIMPLE INTEREST @12% P. A. SUBJECT TO THE LIMIT PRESCRIBED BY THE INCOME TAX ACT, 1961 AND ANY AMENDMENTS MADE THERETO BE PAID ON THE DAYS PRODUCTS ON CAPITAL ACCOUNTS, LOAN AND CURRENT ACCOUNTS OF THE PARTNER. 6. THE ANNUAL NET PROFITS/LOSSES OF THE FIRM, AFTER MEETING ALL EXP ENSES, AND PARTNERS REMUNERATION AND INTEREST BE DIVIDED BETWEEN THE PARTNERS IN EQUAL PROPORTION. 7 .1 FROM THE PARTNERSHIP DEED, THE CIT(A) FOUND THAT THE PARTNERS ARE ELIGIBLE FOR INTEREST RECEIPT @ 12% ON THE BALANCE IN CAPITAL ACCOUNT AS WELL AS CURRENT ACCOUNT. THEREFORE, IT WAS APPARENT THAT TOTAL BALANCE WITH CAPITAL AND CURRENT ACCOUNT PUT TOGETHER HAS TO BE CONSIDERED FOR COMPUTATION OF INTEREST PAYMENT TO PARTNERS. ACCORDING TO THE CIT(A), THERE WAS NO CLAUSE FOR EXCLUSION OF CURRENT ACCOUN T FOR COMPUTATION OF INTEREST IN THE PARTNERSHIP DEED. HENCE, THE CIT(A) HELD THAT THE CO MPUTATION OF INTEREST PAYMENT MADE BY THE ASSESSING OFFICER WAS IN ACCORDANCE WITH THE PARTNERSS D EED. THE REFORE, THE DISALLOWANCE OF RS. 10,33,714 / - MADE BY THE ASSES SING OFFICER WAS UPHELD. 7. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. DR RELIED ON THE ORDER OF THE CIT(A) I.T.A. NO S . 521&522/ COC H /2019 6 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE LD. AR DREW OUR ATTENTION TO THE CUMU LATIVE LOSS DEBITED TO THE PARTNERS CAPITAL ACCOUNT WAS NOT CONSIDERED BY THE ASSESSING OFFICER TO COMPUTE THE NOTIONAL INTEREST ON DIVERSION OF INTEREST BEARING FUNDS. IN OUR OPINION, THE CUMULATIVE LOSS CHARGE D TO THE PARTNERS CAPITAL ACCOUNT CANNOT B E CONSIDERED AS WITHDRAWN BY THE RESPECTIVE PARTNERS FOR THEIR PERSONAL USE. HENCE, THAT AMOUNT OF CUMULATIVE LOSS DEBITED TO THE PARTNERS CAPITAL ACCOUNT CANNOT BE CONSIDERED FOR DISALLOWING THE NOTIONAL INTEREST ON DIVERSION OF INTEREST BEARING FUNDS FOR THE PARTNERS PERSONAL BENEFIT. ACCORDINGLY, THE ASSESSING OFFICER IS DIRECTED TO EXCLUDE THE SAME AND RE - COMPUTE THE NOTIONAL INTEREST DISALLOWANCE ON DIVERSION OF INTEREST BEARING FUNDS FOR THE PERSONAL BENEFIT OF THE PARTNER. WITH THIS OBSERVATIO N, WE REMIT THE ISSUE IN DISPUTE TO THE FILE OF THE ASSESSING OFFICER FOR RECOMPUTATION OF NOTIONAL INTERES T DISALLOWANCE ON DIVERSION OF INTEREST BEARING FUNDS FOR THE PERSONAL BENEFIT OF TH E PARTNERS. SIMILAR LY IS THE CASE FOR ASSESSMENT YEAR 2014 - 15. 10. IN THE RESULT, THE APPEAL S OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH DECEMBER , 2019. SD/ - SD/ - (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 16 TH DECEMBER , 2019 I.T.A. NO S . 521&522/ COC H /2019 7 GJ COPY TO: 1 . M/S. PUNN O N BANKERS, PULLAMVILALIL BUILDING, M.C. ROAD, CHENGANNUR, KOTTAYAM. 2. THE INCOME TAX OFFICER, WARD - 3, THIRUVALLA. 3 THE COMMISSIONER OF INCOME - TAX(APPEALS), KOTTAYAM. 3 . THE PR. COMMISS IONER OF INCOME - TAX, KO TTAYAM. 4 . D. R., I.T.A.T., COCHIN BENCH, COCHIN. 5 . GUARD FILE. BY ORDER (ASSISTANT REGISTRAR) I.T.A.T., COCHIN