DCIT, Jaipur V. MAN MADE, Jaipur

ITA 87/JPR/2013

• Counselvise Citation: 8723114 RSA 2013
• Duration Of Justice: 2 year(s) 6 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2008-2009
• Appeal Filed On: 28-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D C SHARMA
• Keywords: Opportunity of being heard; Deemed dividend
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VKJ-IH-RKSYKUH] U;KF;D LNL; ,OA JH VH-VKJ-EHUK] YS[KK LNL; DS LE{K BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM VK;DJ VIHY LA- @ ITA NO. 87/JP/2013 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2008-09 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2, JAIPUR. CUKE VS. M/S MAN MADE K-28-29, DHANSHRI, SHYAM NAGAR, JANPATH, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ L A-@ PAN/GIR NO.: AAIFM 5853 B VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI D.C. SHARMA (ADDL.CIT) FU/KZKFJRH DH VKSJ LS @ ASSESSEE BY : SHRI P.C. PARWAL (C.A.) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 03/06/2015 MN?KKS'K .KK DH RKJH[ K @ DATE OF PRONOUNCEMENT : 11/08/2015 VKNS'K @ ORDER PER: BENCH THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 19/11/2012 PASSED BY THE LEARNED CIT (A)-I, JAIPUR FOR A.Y. 2008-09. THE SOLE GROUND OF APPEAL IS AGAINST DELETING THE AD DITION OF RS. 11,43,263/- MADE BY THE ASSESSING OFFICER AS THE AS SESSEE FIRM HAS ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 2 DIVERTED THE INTEREST BEARING FUNDS TO ONE OF ITS P ARTNER SHRI DEEPAK KHANNA FOR NON BUSINESS PURPOSES. 2. THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF M ANUFACTURING AND EXPORT OF HANDMADE WOOLEN CARPETS, DURRIES AND F ABRICS. IT FILED RETURN ON 17/11/2008 AT RS. 40,29,390/-. THE CASE WAS SCRUTINIZED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFE RRED AS THE ACT). THE LD ASSESSING OFFICER OBSERVED THAT DURING THE YE AR UNDER CONSIDERATION, THE ASSESSEE HAD DEBITED RS. 45,74,6 63/- UNDER THE HEAD OF INTEREST PAID. THERE WAS A DEBIT BALANCE OF RS. 95 ,27,195/- IN THE CAPITAL ACCOUNT OF SHRI DEEPAK KHANNA, WHO IS A PAR TNER OF THE FIRM. NO INTEREST HAD BEEN CHARGED ON THE DEBIT BALANCE SHEE T. THE ASSESSING OFFICER GAVE REASONABLE OPPORTUNITY OF BEING HEARD ON THIS ISSUE, WHICH WAS AVAILED BY THE ASSESSEE VIDE LETTER DATED 10/11/ 2010. THE ASSESSEES REPLY WAS REPRODUCED BY THE ASSESSING OFF ICER ON PAGE 2 OF THE ASSESSMENT ORDER. AFTER CONSIDERING THE ASSESSE ES REPLY, THE LD ASSESSING OFFICER HELD THAT INTEREST PAYABLE ON CA PITAL IS GOVERNED BY THE TERMS AND CONDITIONS LAID DOWN IN THE PARTNERSHI P DEED TO THIS EFFECT. IF PARTNERSHIP DEED DOES NOT ALLOW INTEREST TO PARTNERS THEN IT IS NOT OPEN FOR THE PARTNERS TO CLAIM INTEREST ON THEI R CAPITAL. THE ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 3 PARTNERSHIP DEED DOES NOT AND CANNOT DEPICT A TERM WHICH ALLOWED PARTNERS TO DETAIN FIRMS FUND FOR THEIR PERSONAL B ENEFITS. EVEN, IF SUCH SITUATION ARISES, FOR SOME REASONS, INTEREST OUGHT TO BE CHARGED AT PREVAILING MARKET RATES. HE FURTHER REFERRED SECTIO N 2(22)(E) OF THE ACT IN CASE OF COMPANYS FUNDS TO DIRECTORS, WHICH CRED ITS CHARGES ON THE DIRECTORS AS DEEMED DIVIDEND SO AS TO CURB ANY ATTE MPT OF APPROPRIATION OF COMPANYS FUNDS. TO CONTENTION THAT IN TOTALITY I N A CREDIT BALANCE IN PARTNERS CAPITAL ACCOUNT WAS NOT CONVINCED AS EACH PARTNER IS A SEPARATE LEGAL ENTITY. CUMULATIVE BALANCE HAS NOT E VIDENCE IN THE EYES OF LAW. IF THIS FUND WAS MIGHT HAVE AVAILABLE WITH THE FIRM, THE FIRM MIGHT HAVE PAID LESS INTEREST AND DEBITED LESS EXPE NSES. HE FURTHER RELIED ON THE FOLLOWING CASE LAWS:- (I) CIT VS. H.R. SUGAR FACTORY (P) LTD. 187 ITR 363 (ALLD). (II) CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (20 06) P&H. (III) INDIAN METALS & FERRO ALLOYS LTD. VS. CIT 193 ITR 344. BY FOLLOWING THE ABOVE DECISIONS, THE LD ASSESSING O FFICER WORKED OUT THE DISALLOWANCE AT RS. 11,43,263/-. ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 4 3. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING OF FICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT( A), WHO HAD ALLOWED THE APPEAL BY OBSERVING AS UNDER:- 4.3 I HAVE CAREFULLY PERUSED THE ORDER OF THE A.O. AND THE SUBMISSIONS OF THE AR AND CONCUR WITH THE SUBMISSION S OF THE AR ON THE FOLLOWING GROUNDS: 1) THE PARTNERSHIP DEED IN THE CASE OF APPELLANT ALL OWS FOR SUCH INTEREST FREE WITHDRAWALS BY THE PARTNERS. THE FIRM HAS NOT CHARGED ANY INTEREST ON THE CAPITAL ACCOUNT OF THE PARTNERS NOR ANY INTEREST HAS BEEN PAID. 2) MOREOVER, WHILE THE DEBIT BALANCE IN THE ACCOUNT OF SHRI DEEPAK KHANNA, ONE OF THE PARTNERS WAS RS. 95,27,195/-, THE CREDIT BALANCE IN THE CAPITAL ACCO UNT OF SMT. ARTI KHANNA, THE OTHER PARTNER WAS RS. 95,49,041/-. THEREFORE, IF THE INTEREST PAID WAS TO BE CALCULATED THEN IT WOULD NULLIFY THE INTEREST TO BE RECEIVED FROM THE OTHER PARTNERS OF THE FIRM. 3) THE CASE LAWS RELIED ON BY THE A.O. PERTAIN TO COMPANIES RATHER THAN THE PARTNERSHIP FIRM AND SO THE FACTS OF THE CASES RELIED ON BY HIM ARE DISTINC T FROM THE FACTS OF THE CASE OF THE APPELLANT. IN THE CASE OF THE PARTNERSHIP FIRM, THE IDENTITY OF THE PARTNERS IS NOT SEPARATE FROM THE FIRM UNLIKE THAT IN COMPANY. ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 5 4) FINALLY, THE MATTER IS COVERED IN FAVOUR OF THE APPELLANT IN ASSESSMENT YEAR 2005-06 ON THE SAME FACTS BY THE ORDER OF THE LD. CIT(A), ITA NO. 554/2007-08 DATED 16/6/2008. THE A.O. HAS NOT BROUGHT ANY ARGUMENT OR EVIDENCE TO REBUT OR CONTROVERT THIS FINDING OF THE LD. CIT(A) SO THE MAT TER IS COVERED BY HIS JUDICIAL PRONOUNCEMENT. IN VIEW OF THE ABOVE DISCUSSIONS AND THE FACTS OF THE CASE, THE DISALLOWANCE OF INTEREST OF RS. 11,43,263/- IS DELET ED. 4. NOW THE REVENUE IS IN APPEAL BEFORE US. THE LEARNE D D.R. HAS SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 5. AT THE OUTSET, THE LEARNED AR FOR THE ASSESSEE H AS SUBMITTED THAT THE INTEREST ON CAPITAL TO THE PARTNERS IS GOVERNED BY THE PROVISIONS IN THE PARTNERSHIP DEED. AS PER PARTNERSHIP DEED, THE FIRM HAS TO ALLOW INTEREST @ 12% ON CREDIT BALANCE OF THE PARTNERS SUB JECT TO CHANGE IN THE RATE OF INTEREST FROM TIME TO TIME BUT THE FIRM NEITHER PAYING INTEREST ON CREDIT OF THE CAPITAL ACCOUNT AND CHARG ING INTEREST ON DEBIT OF THE PARTNERS ACCOUNT SINCE INCEPTION. DURING TH E YEAR UNDER CONSIDERATION, THERE WAS A DEBIT BALANCE OF RS. 95,2 7,195/- IN THE ACCOUNT OF SHRI DEEPAK KHANNA WHEREAS THE CREDIT BAL ANCE OF RS. 95,49,041/- IN THE ACCOUNT OF SMT. ARTI KHANNA. IN TOTALITY THERE WAS ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 6 CREDIT BALANCE IN PARTNERS CAPITAL ACCOUNT. IF THE FIRM PAYS INTEREST ON CREDIT BALANCE OF ONE PARTNER, IT SHOULD ALSO CHARG E THE INTEREST ON DEBIT BALANCE. FINALLY, THE FIRM HAS TO PAY INTEREST TO T HE PARTNER ON CUMULATIVE CAPITAL ACCOUNT OF BOTH THE PARTNERS. HE FURTHER RELIED ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F MUNJAL SALES CORPORATION VS. CIT & ORS. 298 ITR 298 WHEREIN IT HA S BEEN HELD THAT INTEREST FREE ADVANCE IS GIVEN TO ITS SISTER CONCER N IN EARLIER YEARS WHERE NO DISALLOWANCE IS MADE, THE SAME CANNOT BE DISALLOWE D IN SUBSEQUENT YEAR. IN THE PRESENT CASE ALSO, ADVANCE WAS GIVEN TO PARTNERS IN THE EARLIER YEARS OUT OF THE INTEREST FREE FUND WHERE NO DISALLOWANCE WAS MADE. HENCE THE INTEREST CANNOT BE DISALLOWED IN THE YEAR UNDER CONSIDERATION. THE CASE LAW REFERRED BY THE ASSESSING OFFICER ARE NOT SQUARELY APPLICABLE, THEREFORE, ORDER OF THE LD CIT (A) MAY PLEASE BE CONFIRMED. 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE INTEREST IN THE CASE OF FIRM HAS TO BE CALCULATED ON BOTH THE ACCOUNTS OF THE PARTNER I N DEBIT AND CREDIT BY THE ASSESSING OFFICER NOT ONLY DEBIT BALANCE OF THE PARTNER. THE FIRM HAD NOT CHARGED OR PAID ANY INTEREST TO THE PARTNER EITHER ON DEBIT OR ITA 87/JP/2013_ DCIT VS. M/S MAN MADE 7 CREDIT SINCE INCEPTION. THEREFORE, THERE IS NO JUSTI FICATION IN CALCULATING THE DISALLOWANCE ON DEBIT BALANCE OF ONE OF THE PART NER NAMELY SHRI DEEPAK KHANNA. THE LD DR HAS ALSO NOT CONTROVERTED T HE FINDING GIVEN BY THE LD CIT(A). THEREFORE, WE UPHOLD THE ORDER OF T HE LD CIT(A). 7. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 11/08/2015. SD/- SD/- VKJ-IH-RKSYKUH VH-VKJ-EHUK (R.P.TOLANI) (T.R. MEENA) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ @ JAIPUR FNUKAD @ DATED:- 11 TH AUGUST, 2015 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- THE D.C.I.T., CIRCLE-2, JAIPUR. 2. IZR;FKHZ @ THE RESPONDENT- M/S MAN MADE, JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA NO. 87/JP/2013) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR