ADDL CIT RG 19(2), MUMBAI V. HARISH P. SHAH, MUMBAI

ITA 5610/MUM/2009

• Counselvise Citation: 561019914 RSA 2009
• Duration Of Justice: 1 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 31-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 15-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: RAJEGH KOTHARI
• Keywords: Capital asset; Business income; Earning of tax free income
• Section: 14A

Judgement Text

1 . ITA NO. 5610/MUM/2009 (ASST YEAR 2006-07 ) IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI L LL L BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, AM & AM & AM & AM & SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. 5610/MUM/2009 ITA NO. 5610/MUM/2009 ITA NO. 5610/MUM/2009 ITA NO. 5610/MUM/2009 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006 (ASST YEAR 2006- -- -07 ) 07 ) 07 ) 07 ) THE ASST COMMR OF INCOME TAX 19(2), MUMBAI VS SHRI HARISH P SHAH 9 RETREAT SARAWAT COLONY SANTACRUZ (W) MUMBAI 54 ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AAIPS 6495H AAIPS 6495H AAIPS 6495H AAIPS 6495H A SSESSEE BY SHRI RAJEGH KOTHARI REVENUE BY SHRI M R KUBAL PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, , , , JM JMJM JM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 21.8.2009 OF THE CIT(A) FOR THE ASSESSMENT YEAR 20 06-07. 2 THE ONLY ISSUE ARISES IN THIS APPEAL FOR OUR CONS IDERATION AND ADJUDICATION IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE CIT(A) IS JUSTIFIED IN ALLOWING THE INTEREST EXPENDITURE OF RS. 16,22,628/ - AGAINST INTEREST EARNED ON CAPITAL INVESTMENT IN THE FIRM, WHICH WAS DISALLOWE D U/S 14A R.W.R 8D OF I T RULE BY THE ASSESSING OFFICER . 3 THE ASSESSEE IS A PARTNER IN THE FIRM/S SIGNET CH EMICAL CORPORATION. HE HAS EARNED INTEREST @ 12% ON THE CAPITAL CONTRIBUTE D IN THE PARTNERSHIP FIRM AS PER THE PARTNERSHIP DEED. PART OF THE CAPITAL IN TH E FIRM CONTRIBUTED OUT OF THE MONEY BORROWED FROM THE BANK. THE ASSESSEE HAD CLAI MED INTEREST EXPENDITURE OF RS. 24,40,917/- PAID ON THE BANK OVERDRAFT FACIL ITY IN THE CAPITAL ASSETS AGAINST THE INTEREST INCOME OF RS. 1,46,13,460/- EARNED ON THE CAPITAL INVESTED IN THE FIRM. THE TOTAL INTEREST RECEIVED BY THE ASSESSEE I NCLUDES THE INTEREST OF 2 . ITA NO. 5610/MUM/2009 (ASST YEAR 2006-07 ) RS. 40,66,150/- EARNED FROM THE FIRM ONLY IN THE CA PITAL CONTRIBUTED BY IT OUT OF BANK OVERDRAFT. THE ASSESSING OFFICER MADE THE DIS ALLOWANCE OF RS. 16,22,628/- OUT OF THE INTEREST OF RS. 24,40,917/- PAID TO THE BANK BY INVOKING PROVISIONS OF SEC. 14A R.W R. 8D OF THE I T RULES. 3.1 ON APPEAL, THE CIT(A) HELD THAT THE ASSESSEE IS ENTITLED FOR THE DEDUCTION OF INTEREST EXPENDITURE FROM TAXABLE INTEREST EARN ED ON THE CAPITAL BY UTILISING THE BANK OVERDRAFT SINCE THERE IS A DIRECT NEXUS B ETWEEN CLAIM OF INTEREST EXPENDITURE AND TAXABLE INTEREST EARNED FROM THE FI RM. 4 BEFORE US, THE LD DR SUBMITTED THAT THE CAPITAL I NTRODUCED BY THE ASSESSEE IN THE PARTNERSHIP FIRM, AS PER PARTNERSHIP DEED AN D BY VIRTUE OF BEING PARTNER, THE ASSESSEE IS GETTING HIS SHARE OF PROFIT, WHICH IS EXEMPTED FROM TAX. HE HAS FURTHER CONTENDED THAT THE CAPITAL OF THE ASSESSEE IN THE FIRM HAS DIRECT NEXUS WITH THE SHARES OF THE PROFIT. THEREFORE, FROM THE COMBINED READING OF SEC. 14A WITH SEC. 10(2A), IT IS CLEAR THAT THE SHARE OF PRO FIT FROM THE PARTNERSHIP FIRM BEING EXEMPTED U/S 10(2A) AND EXPENDITURE INCURRED IN RELATION TO THIS INCOME IS NOT ALLOWABLE AS DEDUCTION. THUS, THE LD DR SUBM ITTED THAT THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING THE PROPORTIONA TE INTEREST EXPENDITURE AS ATTRIBUTABLE TO THE INCOME EARNED BEING THE SHARE O F PROFIT OF THE PARTNERSHIP FIRM, WHICH IS EXEMPT. 4.1 ON THE OTHER HAND, THE LD AR OF THE ASSESSEE HA S SUBMITTED THAT THERE IS DIRECT RELATION BETWEEN THE CAPITAL INTRODUCED BY T HE ASSESSEE IN THE PARTNERSHIP FIRM AND THE PROFIT SHARING RATIO. HE HAS REFERRED THE DETAILS OF THE CAPITAL BALANCES OF VARIOUS PARTNERS IN THE FIRM AND PROFIT SHARING RATIO AMONGST THE PARTNERS AND SUBMITTED THAT THERE IS NO DIRECT RELA TION BETWEEN THE PROFIT SHARING RATIO OF THE PARTNERS AND THEIR CAPITAL INVESTED IN THE PARTNERSHIP FIRM. HE HAS 3 . ITA NO. 5610/MUM/2009 (ASST YEAR 2006-07 ) SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED THA T IT IS SETTLED PROPOSITION OF LAW THAT THE INTEREST PAID ON FUNDS FOR THE PURPOSE OF CONTRIBUTION IN THE PARTNERSHIP FIRM CANNOT BE TREATED AS EXPENDITURE I NCURRED FOR EARNING PROFIT IN THE PARTNERSHIP FIRM. MOREOVER, IN THE PARTNERSHIP DEED, INTEREST PAYMENT IS PROVIDED ON THE CAPITAL INVESTED BY THE PARTNER; TH EREFORE, THERE IS NO DIRECT NEXUS BETWEEN THE CAPITAL INVESTED BY THE PARTNER A ND THE PROFIT-SHARING RATIO. THE LD AR OF THE ASSESSEE HAS RELIED UPON THE ORDER OF THE TRIBUNAL IN THE CASE OF ACIT VS DELITE ENTERPRISE (P) LTD REPORTED IN 136 T TJ 663, COPY OF WHICH IS PLACED ON RECORD. 5 WE HAVE CONSIDERED THE RIVAL CONTENTION AND PERUS ED THE RELEVANT MATERIAL ON RECORD. AS PER THE DETAILS OF THE CAPIT AL CONTRIBUTION BY THE PARTNERS AND THE PROFIT SHARING RATIO AT PAGE 15 OF THE PAPE R BOOK, IT IS CLEAR THAT THERE IS NO DIRECT RELATION BETWEEN THE BALANCE OF CAPITAL C ONTRIBUTED BY THE PARTNERS AND THE PROFIT SHARING RATIO. THE ANALYSIS, WHICH IS P LACED AT PAGE 15 OF THE PAPER BOOK ARE AS UNDER: NAME OF NAME OF NAME OF NAME OF THE THE THE THE PARTNER PARTNER PARTNER PARTNER OPENING CAPITAL OPENING CAPITAL OPENING CAPITAL OPENING CAPITAL BALANCE BALANCE BALANCE BALANCE CLOSING CAPITAL CLOSING CAPITAL CLOSING CAPITAL CLOSING CAPITAL BALANCE BALANCE BALANCE BALANCE AVERAGE CAPITAL AVERAGE CAPITAL AVERAGE CAPITAL AVERAGE CAPITAL SHARE OF PROFIT SHARE OF PROFIT SHARE OF PROFIT SHARE OF PROFIT EARNED EARNED EARNED EARNED % % % % SHARE SHARE SHARE SHARE OF OF OF OF PROF PROF PROF PROFIT IT IT IT AS PER AS PER AS PER AS PER DEED DEED DEED DEED % OF % OF % OF % OF PROFIT TO PROFIT TO PROFIT TO PROFIT TO CAPITAL CAPITAL CAPITAL CAPITAL INVESTED INVESTED INVESTED INVESTED HPS 129,758,837.80 173,294,865.97 151,526,851.89 18,455,638.70 25% 12.18 BHS 64,936,063.16 103,144,263.10 84,040,163.13 18,455,638.70 25% 21.96 PDS 31,334,927.05 40,885,899.53 36,110,413.29 7,382,255.48 10% 20.44 NPS 24,808,316.93 33,631,006.41 29,219,661.67 7,382,255.48 10% 25.26 PDS HUF 17,876,309.36 22,905,127.69 20,390,718.53 3,691,127.73 5% 18.10 HPS HUF 41,329,555.26 62,683.287.96 52,006,421.61 18,455,638.70 25% 35.49 5.1 IT IS EVIDENT FROM THE ABOVE CHART THAT THE PRO FIT SHARING RATIO OF THE VARIOUS PARTNERS IS DIFFERENT FROM THE PERCENTAGE O F THE PROFIT TO CAPITAL INVESTED. MOREOVER, WHEN THE INTEREST RECEIVED FROM THE PARTN ERSHIP FIRM IS TREATED AS BUSINESS INCOME IN THE HANDS OF THE PARTNERS AS PER SEC. 28(V) THEN ANY EXPENDITURE INCURRED IN RELATION TO THE EARNING OF THE SAID INCOME, WHICH IS 4 . ITA NO. 5610/MUM/2009 (ASST YEAR 2006-07 ) TREATED AS INCOME FROM BUSINESS OR PROFESSION IS AL LOWABLE CLAIM AGAINST THE SAID INCOME. AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND DECIDED BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF DELITE ENTERPR ISE (P) LTD (SUPRA), IN WHICH ONE OF US JUDICIAL MEMBER - IS THE PARTY, WHEREIN THE TRIBUNAL HAS DECIDED THE ISSUE IN PARA 13 AS UNDER: 13. FROM THE FACTS MENTIONED ABOVE IT HAS BEEN CLEARLY NOTICED THAT THE ASSESSEE BORROWED FUNDS FROM M/S RELIANCE CAPIT AL LIMITED AND THE SAME FUNDS WERE INVESTED IN M/S SREENATH ENTERPRISE S. ONE TO ONE NEXUS BETWEEN THE BORROWED FUNDS AS INVESTED IN PARTNERSH IP FIRM WAS PROVED BY THE ASSESSEE. THE EXTENT OF CONTRIBUTION OF CAPI TAL BY PARTNERS OR THE PROPORTION IS NOT DETERMINATIVE OF THE PROFIT SHARI NG RATIO. A PARTNER MAY HAVE 90% SHARE IN THE PROFITS OF THE FIRM WITH CAP ITAL CONTRIBUTION OF 10%. SO THERE IS NO CORRELATION BETWEEN THE EXTENT OF CA PITAL CONTRIBUTION AND SHARE IN THE PROFITS OF THE FIRM. ON THE OTHER HAN D, INTEREST INCOME FROM THE FIRM HAS ALWAYS A DIRECT AND IMMEDIATE RELATION WITH THE CAPITAL CONTRIBUTION. INTEREST IS ALLOWED ON THE CAPITAL CO NTRIBUTED BY A PARTNER IN FIRM IRRESPECTIVE OF THE PROFIT SHARING RATIO. IF SOME FUNDS ARE BORROWED AND INVESTED IN THE FIRM AS CAPITAL, IT IS ONLY THE RELATION BETWEEN THE INTEREST PAID ON SUCH BORROWED FUNDS AND INTEREST E ARNED FROM THE FIRM THAT EXISTS DE HORS THE SHARE IN THE PROFITS OF THE FIRM. COMING BACK TO THE FACTS OF THE PRESENT CASE, WE FIND THAT THE INTERES T PAID BY THE ASSESSEE AT RS.1.82 CRORES HAS DIRECT AND SOLE RELATION WITH TH E INTEREST INCOME OF RS.2.34 CRORES. WHEN THE INTEREST INCOME OF RS.2.34 CRORES IS TAXABLE U/S.28(V) AS BUSINESS INCOME, HOW AND UNDER WHICH C IRCUMSTANCES IT CAN BE BIFURCATED INTO TWO PARTS VIZ., TOWARDS INTEREST RECEIVED AND SHARE FROM FIRM, IS BEYOND OUR COMPREHENSION. NO PART OF INTER EST EXPENDITURE, WHICH IS SOUGHT TO BE DISALLOWED U/S.14A, RELATES TO SHAR E IN PROFITS OF PARTNERSHIP FIRM WHICH IS OTHERWISE EXEMPT U/S.10(2 A). AS THERE IS DIRECT NEXUS BETWEEN THE FUNDS BORROWED ON WHICH INTEREST IS PAID AND THE FUNDS INVESTED IN THE FIRM ON WHICH INTEREST IS RECEIVED, IN OUR CONSIDERED OPINION, SUCH INTEREST HAS TO BE DEDUCTED U/S.36(1) (III) AGAINST THE INTEREST INCOME IN ENTIRETY. WE, THEREFORE, HOLD THAT NO DIS ALLOWANCE OF INTEREST EXPENDITURE IS CALLED FOR U/S.14A AS IT DOES NOT RE LATE TO ANY EXEMPT INCOME. 6 IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF T HE CASE AS WELL AS THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNAL, WE D O NOT FIND ANY ERROR OR ILLEGALITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE ; ACCORDINGLY, THE SAME IS CONFIRMED. 5 . ITA NO. 5610/MUM/2009 (ASST YEAR 2006-07 ) 7 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THE 29 TH , DAY OF JUNE 2011. SD/ SD/- ( (( ( J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED:29 TH , JUNE 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI