BORKAR & MUZUMDAR, MUMBAI V. ACIT RG 11(2), MUMBAI

ITA 8956/MUM/2010

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79577 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 16-07-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 22-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: RA JEEV WAGLAY
• Keywords: Depreciation; Source of fund; Proportionate interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI , ! BEFORE SHRI SANJAY ARORA, AM AND DR. S. T. M. PAVA LAN, JM ' # I.T.A. NO. 8956/MUM/2010 ( / ASSESSMENT YEAR: 2005-06) BORKAR & MUZUMDAR 235-37, PENINSULA HOUSE, DR. D. N. ROAD, FORT, MUMBA-400 001 # VS. ASST. CIT, RANGE 11(2), ROOM NO. 479, 4 TH FLOOR, AAYAKAR BHAVAN, M. K. MARG, MUMBAI-400 020 $ #'%' ./PAN/GIR NO. AAAFB 3194 J ( $& /APPELLANT ) : ( '($& / RESPONDENT ) $&)* / APPELLANT BY : SHRI RAJEEV WAGLAY '($&)* / RESPONDENT BY : MS. AMRITA SINGH + ,)- / DATE OF HEARING : 17.07.2014 ./0 )- / DATE OF PRONOUNCEMENT : 31.07.2014 '1# O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-3, MUMBAI (CIT(A) FOR SHO RT) DATED 28.09.2010, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2005-06 VIDE ORDER DATED 25.10.2007. 2. THE PRINCIPAL ISSUE ARISING IN THIS APPEAL, PRES SED PER GROUND NO. 1, IS WITH REGARD TO THE DISALLOWANCE OF INTEREST U/S.36(1)(III) QUA THE DEBIT BALANCE OF THREE PARTNERS, I.E., AS 2 ITA NO. 8956/MUM/2010 (A.Y. 2005-06) BORKAR & MUZUMDAR VS. ASST. CIT TO ITS MAINTAINABILITY IN LAW, IN THE FACTS AND CIR CUMSTANCES OF THE CASE. THE ASSESSEE IS A FIRM OF CHARTERED ACCOUNTANTS WITH 11 PARTNERS. OBS ERVING A DEBIT BALANCE IN THE CAPITAL ACCOUNT OF THREE PARTNERS, BOTH AS AT THE BEGINNING AND THE END OF THE RELEVANT YEAR; THE ASSESSEE HAVING BORROWED CAPITAL, INCURRING INTERES T AT RS.5,25,621/-, PROPORTIONATE INTEREST, WORKED AT 15% P.A. ON THE CLOSING BALANCE IN THE ACCOUNT OF THE SAID PARTNERS, I.E., RS.1,38,030/-, WAS DISALLOWED U/S.36(1)(III), RELYING ON THE DECISIONS IN THE CASE OF CIT VS. H.R. SUGAR FACTORY (P.) LTD. [1991] 187 ITR 363 (ALL.) AND CIT VS. V.I. BABY & CO. 254 ITR 248 (KER). IN APPEAL, THE LD. CIT(A) OBSERVED THAT THE TOTAL W ITHDRAWAL OF ALL THE PARTNERS DURING THE YEAR EXCEEDED THEIR REMUNERATION AND SHA RE OF PROFIT FOR THE YEAR BY ABOUT RS. 9 LACS, SO THAT THE AGGREGATE CAPITAL OF THE PARTNE RSHIP DECLINED FROM RS.61.24 LACS AS AT THE BEGINNING OF THE YEAR TO RS.52.65 LACS AT ITS E ND. BESIDES, THE PARTNERS OBTAINED PERSONAL LOANS, WHICH WERE UTILIZED BY THE ASSESSEE -FIRM FOR ITS WORKING CAPITAL PURPOSES, PAYING INTEREST AT RS.86,281/-. HE, ACCORDINGLY, CO NFIRMED THE DISALLOWANCE AT RS.86,281/- . RELIANCE WAS PLACED BY HIM ON THE DECISION IN THE CASE OF CIT VS. V.M. SALGAOCAR & BROTHERS (P.) LTD. [1992] 198 ITR 738 (KAR) AND JT. CIT VS. BEEKAY ENGINEERING CORPORATION [2010] 325 ITR 384 (CHHATISGARH). 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. AS APPARENT, THE DISALLOWANCE, AS CONFIRMED, IS NOT FOR THE REASON THAT THE ASSESSEES CLAIM OF GROSS CREDIT BALANCE IN THE ACC OUNT OF THE PARTNERS, I.E., WHEN RECKONED FOR ALL THE PARTNERS TOGETHER, SO THAT THE DEBIT BA LANCE IN THE ACCOUNT OF ANY INDIVIDUAL PARTNER OUGHT NOT TO BE RELEVANT OR MATERIAL, IS OF NO CONSEQUENCE, I.E., AS PROJECTED BEFORE US BY THE LD. AR DURING HEARING. THE ASSESSEES CAS E BEFORE US WAS THAT NO INTEREST HAVING BEEN PAID BY THE PARTNERSHIP ON THE PARTNERS CAPIT AL, NO DISALLOWANCE IN ITS RESPECT OUGHT TO BE MADE WITH REFERENCE TO THE BALANCE IN THE IND IVIDUAL ACCOUNT OF A PARTICULAR PARTNER IN-AS-MUCH AS NO INTEREST ON THE PARTNERS CAPITAL STOOD SUFFERED OR INCURRED BY THE FIRM. THAT IS, THE PARTNERS CAPITAL IN THE FIRM IS TO BE RECKONED AS A SEPARATE CATEGORY OR SOURCE OF FUNDS, WITH WHICH WE AGREE. FURTHER, THE DISALLO WANCE IS SUSTAINED ON ACCOUNT OF 3 ITA NO. 8956/MUM/2010 (A.Y. 2005-06) BORKAR & MUZUMDAR VS. ASST. CIT PERSONAL LOANS OBTAINED BY THE PARTNERS AND TRANSFE RRED TO THE FIRM, ON WHICH INTEREST STANDS PAID BY THE FIRM. THE SAME IS ONLY AN INDIRE CT MANNER OF INTEREST BEING PAID BY THE FIRM ON THE FUNDS SOURCED THROUGH THE PARTNER. AS S UCH, THE CAPITAL HAVING BEEN UTILIZED FOR THE PURPOSES OF THE FIRM, INTEREST WOULD STAND TO BE ALLOWED. THIS WOULD STATE THE ASSESSEES CASE, I.E., ON THE BASIS OF THE OBTAININ G FACTS. THE FUNDS HAVING BEEN UTILIZED FOR THE WORKING CAPI TAL PURPOSES OF THE FIRM, INTEREST THEREON IS DECIDEDLY ADMISSIBLE U/S.36(1)( III). IT IS NOT CLEAR AS TO WHETHER THE SAID LOANS HAVE BEEN INTRODUCED IN THE PARTNERSHIP BY WA Y OF CAPITAL OF THE RESPECTIVE PARTNERS OR DIRECTLY AS LOANS. IN OUR VIEW, IN-AS-MUCH AS TH E PERSONAL LOANS DO NOT REPRESENT THE FIRMS LIABILITY, WHICH EXTENDS ONLY TO THE RELEVAN T PARTNERS, IRRESPECTIVE OF THE MANNER OF BOOKING OF THE SAID AMOUNT/S IN ITS ACCOUNTS, THEY ARE LOANS OF THE PARTNERS, AND REPRESENT THE CAPITAL OF THE RESPECTIVE PARTNERS IN THE FIRM, I.E., IS THE CAPITAL OF THE FIRM. INTEREST THEREON IS THEREFORE DEDUCTIBLE ONLY WHERE AND TO T HE EXTENT ALLOWABLE UNDER THE TERMS OF THE PARTNERSHIP, SUBJECT TO A STATUTORY CAP U/S.40B (IV). IN THE PRESENT CASE, IT IS NOBODYS CASE THAT INTEREST IS PAID OR PAYABLE TO PARTNERS; THAT, IN FACT, BEING THE PREMISE ON WHICH THE ASSESSEE SEEKS THE CATEGORIZATION OF THE PARTNE RS CAPITAL AS A SEPARATE AND DISTINCT CLASS OF CAPITAL, AND FOR BEING ACCORDED A UNIFORM TREATMENT ON THAT BASIS. ACCORDINGLY, INTEREST ON THESE PERSONAL LOANS OF THE PARTNERS, I NCURRED AND CLAIMED BY THE ASSESSEE, STANDS RIGHTLY DISALLOWED. WE DECIDE ACCORDINGLY. 4. GROUNDS 2 TO 5 CONCERN THE PARTIAL DISALLOWANCE OF THE EXPENDITURE ON VARIOUS HEADS ON ACCOUNT OF BEING NOT PROPERLY VOUCHED, SO THAT THEY ARE NOT VERIFIABLE, I.E., GIVEN THE STATE OF MAINTENANCE OF THE VOUCHERS, AS WELL A S THE PERSONAL ELEMENT ATTENDING THE SAID EXPENDITURE. THE SAME AND THE CORRESPONDING DI SALLOWANCES ARE AS UNDER: PARTICULARS AMOUNT CLAIMED AMOUNT DISALLOWED REMARKS STAFF WELFARE EXPENSES RS.5,08,675/- RS.25,000/- GENERAL EXPENSES RS.7,00,519/- RS.50,000/- OFFICE EXPENSES RS.5,40,657/- RS.25,000/- DEPRECIATION ON MOTOR CARS RS.2,53,394/- RS.50,678/- @ 1/5 TH 4 ITA NO. 8956/MUM/2010 (A.Y. 2005-06) BORKAR & MUZUMDAR VS. ASST. CIT THE MATTER IS PURELY FACTUAL. WE FIND NO INFIRMITY IN THE DISALLOWANCE QUA THE FIRST THREE DISALLOWANCES, NONE HAVING BEEN POINTED OUT TO US B Y THE ASSESSEE. HOWEVER, FOR THE DISALLOWANCE IN RESPECT OF MAINTENANCE OF, AND DEPR ECIATION ON, MOTOR CARS, WE ARE OF THE VIEW THAT THE DISALLOWANCE AT 1/5 TH OF THE TOTAL EXPENDITURE IS EXCESSIVE AND, ACCORDI NGLY, RESTRICT IT TO 10% THEREOF. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. 20 -34 52-) '61 7 -) -89! ORDER PRONOUNCED IN THE OPEN COURT ON JULY 31, 2014 SD/- SD/- (DR. S. T. M. PAVALAN) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER + :, MUMBAI; ; DATED : 31.07.2014 # ROSHANI , SR. PS ! ' #$%& ' &$ # COPY OF THE ORDER FORWARDED TO : 1. $& / THE APPELLANT 2. '($& / THE RESPONDENT 3. '' + <- = > / THE CIT(A) 4. '' + <- / CIT - CONCERNED 5. ?@ A'-B4 ' B40 + :, / DR, ITAT, MUMBAI 6. A 5C , # GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , + :, / ITAT, MUMBAI