MUNIR MAHENDRAKUMAR SHAH,ELLISBRIDGE , AHMEDABAD V. PCIT , AHMEDABAD - 1, AHMEDABAD

ITA 646/AHD/2024

AI Insights

The case involves Munir Mahendrakumar Shah, who filed an appeal against the order of the PCIT, Ahmedabad-1, concerning the assessment year 2018-19. The PCIT had invoked revisional jurisdiction under Section 263 of the Income Tax Act, 1961, after finding that the AO had made an error in allowing deductions for interest expenses claimed against income from partnership firms. The Tribunal's decision focused on whether the AO had conducted a sufficient inquiry into these deductions and whether the deductions claimed were legally permissible. The Tribunal concluded that the AO's failure to properly examine the deductions made the original assessment order erroneous and prejudicial to the interest of the revenue.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 25550 (ITAT-AHMEDABAD)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2018-2019
• Other Referred Cases: CIT v. Kamal Galani (2018) 95 taxmnn.com 261 (Guj.) (HC), Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PRATHVI RAJ MEENA
• Assessee Lawyers: SULABH PADSHAH
• Keywords: Set aside; Business income; Salary income; Revision of order
• Section: 143(3); 263

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, AHMEDABAD BEFORE SHRI SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER & SHRI NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER आयकर अपील सं./ITA No. 646/Ahd/2024 (Ǔनधा[रण वष[ / Assessment Year: 2018-19) Munir Mahendrakumar Shah 27D, Maharashtra Society, Anmol Mithakali Owners Association, Ellisbridge, Ahmedabad 380006, Gujarat बनाम/ Vs. PCIT, Ahmedabad-1, Ahmedabad èथायी लेखा सं./जीआइआर सं./PAN/GIR No. : ALXPS5757N (Appellant) .. (Respondent) अपीलाथȸ ओर से /Appellant by : Shri Sulabh Padshah, AR Ĥ×यथȸ कȧ ओर से/Respondent by : Shri Prathvi Raj Meena, CIT.DR Date of Hearing 24/12/2024 Date of Pronouncement 10/01/2025 O R D E R PER SHRI NARENDRA PRASAD SINHA, AM: This appeal is filed by the assessee against the order of Principal Commissioner of Income Tax, Ahmedabad-1, (in short ‘the PCIT’) dated 16.03.2024 passed in his revisional jurisdiction under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for the Assessment Year 2018-19. 2. The brief facts of the case are that the return of income for A.Y. 2018- 19 was filed by the assessee on 30.10.2018 declaring total income of Rs.67,67,450/-. The case was selected for complete scrutiny under CASS. ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 2 – The assessment was completed under Section 143(3) r.w.s. 144B of the Act on 27.04.2021 at total income of Rs.1,07,43,621/-. In the course of assessment, the AO had made addition of Rs.39,76,171/- in respect of wrong deduction of interest claimed by the assessee u/s.57 of the Act. Subsequently, the case record was called for and examined by the Ld. PCIT who found that the assessee had claimed deduction of interest expenses of Rs.68,95,778/- against the income/receipts of the assessee in the capacity of partner of the firm. According to the Ld. PCIT, the interest expenditure was not an allowable deduction against remuneration and interest on capital received in the capacity of partner of the firm. Therefore, he initiated proceeding u/s.263 of the Act and passed the impugned order directing the AO to verify the set off of interest expense against the income of the assessee in the form of remuneration and interest from partnership firm. 3. Aggrieved with the order of the Ld. PCIT, the assessee has filed the present appeal. The following grounds have been taken in this appeal: “1. The learned Pr. CIT. has erred in passing Order u/s 263 without jurisdiction and appropriate powers available under the Act. It is submitted that the order passed us. 263 is bad in law and void ab initio. 2. The learned Pr. CIT. has erred in invoking the provisions of Section 263 of the Income Tax Act on the ground that order passed by the A.O. u/s 143(3) of the Act for A.Y: 2018. 19 is erroneous and prejudicial to the interest of revenue. It is submitted that the order passed by the learned A.O. is neither erroneous nor prejudicial to the interest of revenue. On facts and circumstances of the case, the order passed by Pr. CIT. u/s 263 of the Act is completely incorrect on facts and on law and the same be quashed and set aside accordingly. 3. The learned Pr. C.IT. has erred in holding that the Assessing Officer has not verified the issue of set off of interest expense of Rs 68,95,778/- against taxable income received from partnership firm. It is submitted that the complete justification along with documentary evidences were duly filled for total interest expense claimed Rs. 1,58,76,232/- and only after careful ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 3 – examination and application of mind, the Ld. AO has disallowed interest expenditures of Rs 39,76,171/- and allowed remaining expenditures including Rs 68,95,778/-, It is therefore submitted that is no question of any lack of inquiry or verification on the part of assessing officer and further under assessment of income. In view of this, order passed u/s 263 being totally illegal and unjustifiable be set aside and Original Assessment Order passed u/s 143(3) r.w.s 144B of the Act be restored. The same please be held accordingly. 4. The order passed by the learned Pr. C.I.T.is bad in law and contrary to the provisions of law and facts. It is submitted that the same be held so now.” 4. Shri Sulabh Padshah, the ld. Counsel of the assessee submitted that the order of the AO was neither erroneous and prejudicial to the interest of the Revenue, as the AO had conducted proper enquiries in respect of deduction of interest claimed from the remuneration and interest received from partnership firm. According to the Ld. AR, the AO after carrying out the enquiry was satisfied that no disallowance was called for in this respect. Further that when the AO had taken a particular view, it was not open for the Ld. PCIT to superimpose his own views and to held that the order of the AO was erroneous and prejudicial to the interest of the Revenue. The Ld. AR explained that the assesse had also claimed deduction of interest expense against the interest income disclosed under the head ‘income from other source’ and after examining the matter on its entirety, the AO had made an disallowance of Rs.39,76,171/-. Under the circumstances, it was not the case that the AO had not carried out proper enquiry in the matter. According to the Ld. AR, the facts of the assessee’s case do not fit into any of the conditions as specified in Explanation-2 to Section 263 of the Act. Therefore, the proceeding initiated by the PCIT u/s.263 of the Act was bad ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 4 – in law and void ab initio. In this regard, the Ld. AR also placed reliance on the decision of Jurisdictional High Court in the case of CIT v. Kamal Galani (2018) 95 taxmnn.com 261 (Guj.) (HC) and on the decision of Co-ordinate Bench of this Tribunal in ITA No.328/Ahd/2023 dated 05.07.2024. 5. Per contra the, Shri Prathvi Raj Meena, ld. CIT-DR submitted that assessee was not carrying on any independent business. The income from business and profit as disclosed by the assessee in the Income-tax return was in the form of profit from partnership firm, which was claimed exempt u/s.10(2A) of the Act. Further, the assessee had also claimed the deduction for interest against the remuneration received from partnership firm Ratna Developers, which was patently not allowable under the provisions of law. According to the Ld. CIT.DR, the AO did not examine the claim for deduction of interest against the profit and remuneration from partnership firm. Therefore, the order of the AO was certainly erroneous and prejudicial to the interest of the revenue and the Ld. PCIT had rightly initiated the proceeding u/s.263 of the Act and passed the order accordingly. He further submitted that Ld. PCIT had only directed the AO to verify the set off of interest expense against the remuneration and interest of the partnership firm and no prejudice was caused to the assessee as it was open for the assessee to establish the nexus between the borrowing of the loan on which interest was paid with the advancement of the funds to the partnership firm. 6. We have carefully considered the rival submissions. It is found that the assessee had shown following interest and ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 5 – remuneration received from partnership firms against which deduction for interest expense was claimed by the assessee: Sr. No. Name of the Firm Salary Interest earned Interest expenses claimed against the interest income and salary 1 Samvatt Developers 0 0 2 Aadi Infra Developers 0 4136968 4136968 3 Samvatt Construction 0 1288616 1288616 4 Samvatt Residency 0 280194 280194 5 Ratna Developers 1190000 1190000 6895778 It is, thus, found that the interest received from three partnership firms to the extent of Rs.57,05,778/- was adjusted with the interest expense. In order to claim this deduction, the assessee was required to substantiate that the loans on which the interest of Rs.57,05,778/- was paid were laid out wholly and exclusively for earning of interest income from three partnership firms. The assessee had also shown remuneration of Rs.11,90,000/- received from Ratna Developers, which was adjusted with interest expense of equivalent amount. The adjustment of interest expense with the remuneration was apparently not allowable as deduction, as the interest expense was not laid out for earning of remuneration of the assessee as working partner of Ratna Developers. It is found that this aspect was not examined by the AO while completing the assessment, which made the order of the AO erroneous and prejudicial to the interest of revenue. 7. Apart from the deduction of interest expense of Rs.68,95,778/- from the remuneration and interest from the partnership firm, the assessee had also claimed deduction of interest expense of Rs.89,80,454/- under the head ‘income from other source’. The deduction claimed under the ‘income from other source’ was examined by the AO in detail and disallowance of ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 6 – Rs.39,76,171/- was made in the assessment order. However, the deduction of interest claimed by the assessee under the head ‘business income’ was not properly examined by the AO. From the copy of the notice and the reply of the assessee as brought on record in the paper book, it is found that the AO did raise a query about the deduction of interest claimed by the assessee under the head ‘business income’. The AO vide notice dated 10.03.2021 had made following query in respect of deduction of Rs.68,95,778/-: “3. Amount of Rs. 6895778/- has been claimed as deduction from business income. Perusal of schedule BP of ITR shows that you have claimed in column No. 24 (Any other income not included in Profit) Salary of Rs 1190000/- (Remuneration from Ratna Developers) and interest of Rs 5705778/- earned from following firms: Sr. No. Name of the Firm Interest earned 1 Samvatt Developers 0 2 Aadi Infra Developers 4136968 3 Samvatt Construction 1288616 4 Samvatt Residency 280194 Total 5705778 You are requested to justify your claim of deduction of Rs.6895778/-. Please file the copy of your capital account in the books of above tabulated firms.” 8. In reply, the assessee had made the following submission: “3. Capital account of partnership firms: We have already attached working for deductions claimed of Rs. 6895778/- in the above point no. 1 vide working \"Interest expense claimed\" We are attaching herewith copy of \"Capital account of partnership firms\" for interest income and salary income earned for below mentioned firms- (i) Samvatt Developers (ii) Aadi Infra Developers (iii) Samvatt Construction (iv) Samvatt Residency (v) Ratna Developers” 9. It is, thus, evident from the above communication that the assessee did not give any proper explanation in respect of deduction of interest of ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 7 – Rs.68,95,778/- from the interest and remuneration received from the partnership firms. The copy of capital account of partnership firm and the working of the deduction as submitted by the assessee did not explain as to why the claim of the assessee was allowable. It is not the case that the assessee had explained the reason for deduction of interest claimed against interest and remuneration received from partnership firms and thereafter, the AO had taken a reasoned decision to allow the claim. The AO had failed to make further enquiries and verifications which should have been made in this case. There was no material to support the claim of the assessee that the deduction of interest against remuneration from partnership firm was an admissible deduction. The AO had accepted the claim of the assessee without making proper inquiry. On these facts the conclusion that the order of the ITO was erroneous was irresistible. As held by the Hon’ble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT, 243 ITR 83 (SC) an incorrect assumption of facts or incorrect application of law will satisfy the requirement of the order being erroneous. In the present case, the claim for deduction of interest against the remuneration received from partnership firm was patently not allowable as deduction. The AO had allowed the same on incorrect assumption of facts and incorrect application of law. Therefore, the order of the AO was certainly erroneous and prejudicial to the interest of the revenue to that extent. 10. The reliance placed by the assessee on the decision of Jurisdictional High Court in the case of CIT vs. Kamal Galani (supra) is not found applicable to the facts to the present case. Even if it is admitted that the AO had carried out the enquiry in the present case, the fact remains that the deduction of interest claimed by the assessee with the remuneration received from partnership firm, was not admissible as per the provisions of law and the order was passed without properly enquiring into the claim. Similarly, ITA No. 646/Ahd/2024 [Munir Mahendrakumar Shah vs. PCIT] A.Y. 2018-19 - 8 – the facts of the other decisions relied upon by the assessee are found to be different and not applicable to the facts of the present case. 11. In view of the above facts and discussions, we are of the considered opinion that the Ld. PCIT had rightly invoked the jurisdiction u/s.263 of the Act as the order of the AO was erroneous and prejudicial to the interest of the revenue. Accordingly, the order passed by the Ld. PCIT u/s.263 of the Act is sustained. 12. In the result, the appeal filed by the assessee is dismissed. This Order pronounced on 10/01/2025 Sd/- Sd/- (SIDDHARTHA NAUTIYAL) (NARENDRA PRASAD SINHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated 10/01/2025 S. K. SINHA True Copy आदेश कȧ ĤǓतͧलͪप अĒेͪषत/Copy of the Order forwarded to : 1. अपीलाथȸ / The Appellant 2. Ĥ×यथȸ / The Respondent. 3. संबंͬधत आयकर आयुÈत / Concerned CIT 4. आयकर आयुÈत(अपील) / The CIT(A)- 5. ͪवभागीय ĤǓतǓनͬध, आयकर अपीलȣय अͬधकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड[ फाईल / Guard file. आदेशानुसार/ BY ORDER, उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलȣय अͬधकरण, अहमदाबाद / ITAT, Ahmedabad "