ACIT, New Delhi V. M/s Kamla Kant & Co., Kanpur

ITA 5974/DEL/2016

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 3759 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Appeal Filed On: 23-11-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure
• Section: 40(b); 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH D, NEW DELHI BEFORE SH. AMIT SHUKLA, JUDICIAL MEMBER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER ITA NO. 5974/DEL/2016 : ASSTT. YEAR : 2013-14 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-50(1), NEW DELHI VS M/S KAMLA KANT & COMPANY, 28/114, PHEEL KHANA, KANPUR, U.P.-208011 (APPELLANT) (RESPONDENT) PAN NO. AAFFK2884D ASSESSEE BY : SH. SATYAJEET GOYAL, CA REVENUE BY : SH. ARUN KUMAR YADAV, SR. DR DATE OF HEARING: 16.01.2020 DATE OF PRONOUNCEMENT: 28.02.2020 ORDER PER DR. B. R. R. KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER OF THE LD. CIT(A)-27, NEW DELHI DATED 08. 08.2016. 2. FOLLOWING GROUNDS HAVE BEEN RAISED BY THE REVENU E: 1. THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS I N DELETING THE ADDITION OF RS.2,10,35,583/-. 2. THE LD. CIT (A) HAS ERRED IN LAW AND ON FACTS IN NOT CONSIDERING THAT THE INTEREST PAID TO OTHERS AND IT S PARTNERS ARE NOT ALLOWABLE AS BUSINESS EXPENDITURE U/S 37(1) OF THE ACT AS THE ASSESSEE HAS USED THIS COLORABLE DEVICE TO EVADE THE TAXES. 3. THE LD. CIT (A) HAS ERRED IN LAW AND FACTS IN NO T CONSIDERING THAT THE CAPITAL INTRODUCED BY THE PARTNERS HAS IN FACT NO RELATION TO INCOME EARNED B Y THE ASSESSEE AS THE ASSESSEE HAS BEEN EARNING MAINL Y ROYALTY INCOME FROM ITS FRANCHISES WHICH ARE THEIR ASSOCIATED CONCERNS. ITA NO. 5974/DEL/2016 KAMLA KANT & COMPANY 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FILED THE RETURN OF INCOME ON 29.09.2011 DECLARING AN INCOME OF RS.22,62,64,270/- WHICH HAS BEEN ASSESSED U/S 143(3 ) OF THE INCOME TAX ACT, 1961 ON INCOME OF RS.24,79,85,714/- BY MAKING DISALLOWANCE OF INTEREST PAID TO PARTNERS & OTHERS OF RS.2,10,35,583/- AND DISALLOWANCE ON ACCOUNT OF ADV ERTISEMENT EXPENSES. THE LD. CIT (A) DELETED BOTH THE ADDITION S. THE REVENUE IS BEFORE US REGARDING THE DISALLOWANCE OF INTEREST PAID TO PARTNERS. 4. HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERU SED THE MATERIAL AVAILABLE ON RECORD. 5. THE RELEVANT FACTS REQUIRED FOR THE ADJUDICATION ARE AS UNDER: A) THE PARTNER CAPITAL ACCOUNT AS ON 31.03.2013 NAME OPENING INTEREST REMUNERATION PROFIT TOTAL BALANCE AS ADJUSTED BY DECEASED PARTNER AND KAMLA KANT CHAURASIA 65092156 7751724 187500 71519681 144551062 143970490 KAMAL KISHOR CHAURASIA 93191527 9953202 187500 71519681 17451911 154271439 SMT. SUDAMA DEVI CHAURASIA 64329701 3235872 0 13276108 80841681 0 TOTAL 222613385 20940798 375000 156315472 400244655 298241929 B. THE DEBTORS OF THE FIRM FROM WHICH THE FIRM EARN ED ROYALTY INCOME ARE AS UNDER: I) KP PAN FLAVOURS PVT. LTD. RS. 82,47,967 II) KP POUCHES PVT. LTD. RS. 18,07,879 III) KAIPAN PAN MASALA PVT. LTD. RS.3,58,54,392 ITA NO. 5974/DEL/2016 KAMLA KANT & COMPANY 3 IV) KAY PAN MASALA PVT. LTD. RS. 4,91,21,325 V) KAY PAN SUGANDH PVT. LTD. RS. 32,43,457 VI) RAJSHREE FLAVOURS PVT. LTD. RS. 12,500 VII) KP FRAGRANCES PVT. LTD. RS. 74,80,718 VIII) KAY PAN SUGANDH PVT. LTD. RS.5,50,97,585 IX) KAY FLAVOURS PVT. LTD. RS. 5,81,73,895 TOTAL: RS.21,90,39,718 6. THE ASSESSING OFFICER HELD THAT THE FIRM IS ADJU STING THEIR FUNDS FOR THE DEBTORS AND WITHDRAWING THE CAPITAL A ND HENCE THE INTEREST PAID TO THE PARTNERS CAPITAL NEEDS TO BE D ISALLOWED. 7. WE HAVE GONE THROUGH THE PROVISIONS OF SECTION 3 6(1)(III) OF THE INCOME TAX ACT, 1961. 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWI NG CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL26 BORROWED26 FOR THE PURPOSES OF THE BUSINESS OR PROF ESSION : [PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET [***] (WHETHER CAPITALIZED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINN ING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION O F THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHAL L NOT BE ALLOWED AS DEDUCTION.] EXPLANATION.RECURRING SUBSCRIPTIONS PAID PERIODICA LLY BY SHAREHOLDERS, OR SUBSCRIBERS IN MUTUAL BENEFIT SOCI ETIES WHICH FULFILL SUCH CONDITIONS AS MAY BE PRESCRIBED, SHALL BE DEEM ED TO BE CAPITAL BORROWED WITHIN THE MEANING OF THIS CLAUSE. 8. THUS, A PLAIN READING OF THE ACT, ENTITLES THE A SSESSEE TO CLAIM DEDUCTION OF INTEREST ON THE PARTNERS CAPITAL , IF THE INTEREST IS PAYABLE, IF THERE IS A BORROWING AND TH AT BORROWING IS FOR THE PURPOSE OF THE BUSINESS. THE ONLY EXCEPTION TO DEBITING ITA NO. 5974/DEL/2016 KAMLA KANT & COMPANY 4 OF INTEREST IN P&L ACCOUNT IS, IF SUCH CAPITAL IS B ORROWED FOR ACQUISITION OF AN ASSET OR FOR EXTENSION OF EXISTIN G BUSINESS AND THAT TOO TILL SUCH ASSET WAS FIRST PUT TO USE. IN T HE INSTANT CASE, THERE IS NOTHING ON RECORD TO PROVE THAT THE ASSESS EES CASE COME UNDER THE PURVIEW OF THE PROVISION OF THE ACT. THE BALANCE SHEET READS AS UNDER: LIABILITY ASSET PARTNERS CAPITAL RS.29,82,41,000/- SUNDRY DEBTORS RS.21,90,39,700/- 9. THE SUNDRY DEBTORS ARISE IN THE NORMAL COURSE OF BUSINESS, HENCE IT CANNOT BE SAID THAT THE PARTNERS CAPITAL I S NOT UTILIZED FOR THE PURPOSE OF BUSINESS. THE INTEREST ON THE CA PITAL BORROWED FROM THE PARTNERS BY THE FIRM IS AN ALLOWA BLE EXPENSE. 10. FURTHER, THE PROVISIONS OF SECTION 28 ARE AS UN DER: 28. THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INC OME-TAX UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSI ON', (I) THE PROFITS AND GAINS81 OF ANY BUSINESS OR PROF ESSION81 WHICH WAS CARRIED ON BY THE ASSESSEE AT ANY TIME DURING THE P REVIOUS YEAR ; (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, CO MMISSION OR REMUNERATION, BY WHATEVER NAME CALLED, OR ANY PART THEREOF HAS NOT BEEN ALLOWED TO BE DEDUCTED UNDER CLAUSE (B) OF SEC TION 40, THE INCOME UNDER THIS CLAUSE SHALL BE ADJUSTED TO THE E XTENT OF THE AMOUNT NOT SO ALLOWED TO BE DEDUCTED ;] 11. THUS, INTEREST RECEIVED ON CAPITAL IS TAXABLE I N THE HANDS OF THE PARTNER UNDER SECTION 28. THAT MEANS THAT IN TEREST IS TAXABLE UNDER THE HEAD PROFITS OR GAINS OF BUSINESS OR ITA NO. 5974/DEL/2016 KAMLA KANT & COMPANY 5 PROFESSION. SUCH INTEREST SHALL FORM PART OF THE TO TAL INCOME OF THE PARTNER AND TAXABLE AT NORMAL SLAB RATES. 12. A CONCURRENT READING OF SECTION 28(V), SECTION 40(B) AND SECTION 36(1)(III) AND THE FACTS OF THE CASE, THE A SSESSEE IN THE INSTANT CASE IS ENTITLED TO CLAIM THE INTEREST PAID TO THE PARTNERS ON THE BORROWED CAPITAL. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 28/02/2020. SD/- SD/- (AMIT SHUKLA) (DR. B. R. R. KUMAR) JUDICIAL MEMBER ACCOUNT ANT MEMBER DATED: 28/02/2020 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR