TMI Blog1996 (12) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... as a partner at the relevant time and the year ended 31-3-1979 for taxing income from house property and the income from undisclosed sources. The relevant facts briefly are that the assessee is a partner in the firm of M/s. A.M. Deokar, Pune. The original assessment for the assessment year 1979-80 was completed under section 143(1) on 18-8-1979 on a total income of Rs. 21,960. The ITO noticed that during the year accounting year relevant to the assessment year 1979-80 the assessee had earned a monthly rent of Rs. 1,900 for a period of six months from November 1978 to March 1979, which he had not disclosed while returning income from house property which he continued to declare as before at Rs. 882. Since the assessee had not disclosed material facts relating to a vital source of income which had resulted in an under-assessment, proceedings under section 143 of the Act were started. 3. In the course of these proceedings the ITO noticed that the assessee and his son Shri M.A. Deokar are the joint owners of a house known as 'Laxmi Niwas'. During the period January 1978 to September 1978 both these assessees (father and son) had constructed the first floor of the house, the cost of w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the firm as on 31-3-1979)." The ITO thus worked out the deficit of resources available as compared to total investments and expenditure estimated by him for the period 1-4-1978 to 31-3-1979 at an amount of Rs. 43,160. Since the investment in the aforementioned Laxmi Niwas during the relevant period was jointly made, he treated half of the deficit as income from undisclosed sources representing unexplained investment and Rs. 21,580 in the assessment of Shri Anna M. Deokar. He made similar addition for the assessment year 1979-80 for the same reasons in the assessment of his son Shri M.A. Deokar. This addition was challenged in appeal, before the Appellate Asstt. Commissioner, Pune Range, Pune. In a very detailed and well reasoned order dated 28-2-1985, the AAC dealt with this issue at great length. He dealt with every item of investment and expenses and resources available which were discussed by the ITO in the body of his order and which are reproduced hereinabove. After setting out the rationale of the allocation of investment between the two periods adopted by the ITO, the AAC recorded the arguments of the appellant in para 5 of his order. It was argued before him that since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into account even on ITO's own reckoning a sum of Rs. 14,000 would be available as on 1-4-1978 because, according to the ITO, only Rs. 20,000 is to be attributed to the period January 1978 to March 1978. The AAC found that the appellants had withdrawn Rs. 64,000 during the entire period January 1978 to August 1978, whereas the entire cost of construction was Rs. 60,000. He took note of the fact that the firm was not dependent on the overdraft facilities as could be seen from the figures of borrowings from the bank as well as of the turnover of the firm recorded by the AAC in para 9 of his order. He also took note of the fact that the ITO had accepted the submission of the appellant that only the deficit of Rs. 41,620 was not properly explained and did not make any addition on this account for the assessment year 1980-81 and in so doing had partially accepted the argument of the assessee that the amounts withdrawn by the assessee from the bank account belonging to the firm were available for investment. 4. Before us the case was very vehemently argued by the learned Departmental Representative, Shri S.P. Joshi. He argued that the assessee could not give actuals of the expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al at Rs. 20,000 for the period 1-1-1978 to 31-3-1978, and Rs. 40,000 from 1-4-1978 to end of September 1978. 5. Shri S.N. Inamdar, the learned Counsel for the assessee, relied wholly on the order of the AAC for the assessment year 1979-80 in the case of Shri A.M. Deokar. He accepted that the assessee or the firm of which he was a partner did not maintain accounts. But he emphasised that the loan from the bank was taken only during the construction period and it was taken with the ostensible purpose of facilitating the construction of the house. The transactions concerning the payment of construction were throughout made through the bank that all trading receipts were credited in the bank account. All this was done because it was much easier to take the loan in the name of the firm. The assessee had not concealed this fact and his conduct all along was consistent with the stand that the bank account of the firm was during the relevant period to be utilised for the purpose of financing the construction of the house. In support of this contention Shri Inamdar pointed out that no interest was claimed on the overdraft account in the assessment of the firm because the overdraft accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 983 and this was quite consistent with the firm's earlier letter dated 29-6-1982 to which reference has been made. 6. Viewed in the light of these facts, we are convinced that the finding given by the AAC after the elaborate reasoning of all the relevant facts in para 9 of his order to the effect that there is no deficit regarding investment in house so far as the assessment year 1979-80 is concerned and that the ITO erred in adding Rs. 43,160 as unexplained investment is confirmed. We are satisfied that the AAC has given cogent reasons for arriving at this conclusion. The first ground of appeal raised by the Revenue is, therefore, dismissed. 7. As regards the second ground, however, we cannot pursuade ourselves to agree with the AAC's finding which concerns the admissibility of interest on overdraft payable on the firm's bank account and in fact paid by the partners. From the facts mentioned in the foregoing paragraphs it would be clear that the facility of the bank account as well as the overdraft which could be operated from the bank account of the firm was utilised by the partners for the construction of the house. It would also be clear that the partners had not taken any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by one partner, the assessee-company who was a partner and the brother of another partner, who was included in the firm in place of the first partner. The payment made by the assessee-company and the claim made for deduction of such payment in partial discharge of its liability was disallowed by the ITO and the disallowance was confirmed by the AAC. The Tribunal reversed the order of the AAC and allowed the assessee's claim that though there was a change in the constitution of the firm, the assessee's liability had not ceased, since the assessee was a company there was no question of any personal consideration and that the assessee had made the payment purely out of business considerations with the sole object of maintaining its business connection which was yielding profit. This was confirmed by the Supreme Court, which held that the two tests of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. 9. We are afraid that it is precisely these tests laid down by the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst share income from the firm being interest on bank loan taken by the firm. I respectfully differ from for the reasons given below. 3. The question to consider is that whether the deduction of payment of interest is to be allowed against the share of profit received from the firm. It is seen from the facts and there is no dispute that the loan of Rs. 50,000 was obtained by the firm known as M/s A.M. Deokar in July, 1978 as the loan was borrowed by the firm, the firm had to pay interest to the bank. These facts are admitted by the ITO. The firm of M/s A.M. Deokar is constituted of two partners and the two partners are Shri Anna M. Deokar and Shri Manohar A. Deokar. These two partners have the relation of father and son. They have mutually decided and agreed that the partners right from the beginning, i.e., from the period of borrowing the amount of Rs. 50,000 the firm is not to suffer from its business on account of payment of interest to the bank for the loans taken. It would be better to mention here that the firm had also borrowed a sum of Rs. 10,000 and Rs. 20,000 over and above the sum of Rs. 50,000. This policy decision of the partners was intimated to the ITO on 31-10-19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the bank account and debited the interest account in the books of the firm. This debit balance of interest would have appeared on the debit side of the profit and loss account of the firm. But since this interest is paid by the firm on behalf of the partners and since the partners have used over-draft or the construction of the property, the firm would have been entitled to credit interest account and debit partners' account in the books of the firm thereby squaring the interest account appearing in the books of the firm. Thus the resultant in the interest account of the firm would appear to be nil. There will also be no effect on the profit and loss account of the firm on account of interest. 7. Shri S.N. Inamdar, the learned advocate for the assessees has contended that the assessees are strong cutters, they belong to Wadari community and they are not educated. If they failed to claim the payment of interest to the bank against their income from the firm, the ITO would have given a good guidance to them regarding the proper claim as they have explained in their letter. 8. The AAC says in his order that he does not agree with the ITO that the interest payment should have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en to consider as to who is finally entitled to claim deduction of interest paid to the bank or to the firm, as it is explained that the assessees have been charged interest by the firm and the firm has paid interest to the bank, so far as the question of accounting interest in the books of the firm is concerned, it is already stated that the resultant is nil because receipt of interest from the partners is on one hand and payment of interest to the bank by the firm is on the other hand thereby leaving nothing in the hands of the firm and as such the firm has not claimed either receipt of interest or payment of interest in the profit and loss account of the firm. Ultimately who is to claim deduction of interest is a question to be considered. It is the assessee who is entitled to claim deduction of interest. The assessee has paid interest to the firm and he is the real person to claim deduction of interest either as against property income or against share income. The assessees have reserved their such right to claim interest against the share income in their letter explaining that if the interest is not allowable against property income, then such allowance may be considered again ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mounts paid). In my view the ratio of this decision is fully applicable to the facts of the present case. Hence, I am of the opinion that the interest so paid by the partners should be allowed as a deduction against the share of profit from the firm and not against income from house property. 14. 1 further make it clear from the judgment of the Supreme Court cited above that the right of the assessee is in no way barred if the firm fails to claim interest in its return. I agree with the view taken by the AAC who has considered the decision of the Supreme Court as the most important guideline while deciding the present case and applying principles laid down by the Supreme Court. 15. It appears that the issue involved is arising out of facts, but at the same time the assessee's legal right to claim interest payment against share income has arisen out of the legal position and therefore it cannot be said that there is no necessity to consider the facts in a different way. 16. After the above discussion and narration of the facts, the legal position which has arisen for consideration is whether the assessees are legally entitled to claim payment of interest to the bank against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of interest made to the bank against their share income of the partner-ship firm of M/s A.M. Deoka ?" 2. The appeals were fixed for hearing after due notice to the parties. I find that the acknowledgment due is available in the file. One of the reasons for non-appearance might be that the assessees are not interested in prosecuting the matter or to assist the Tribunal in a befitting manner. It transpires from record that earlier also opportunities were given to the assessees, but they did not appear. They did not make even a prayer for adjournment. I, therefore, proceed to decide the matter, ex parte, qua, the assessees. 3. I have heard the learned departmental representative. I have perused the relevant records. The assessees are partners in the firm M/s A.M. Deokar, Pune. The original assessment for the assessment year 1979-80 was completed under section 143(1). The Assessing Officer noticed that in this year the assessees had earned rent for a period of 6 months which was not disclosed in the return. For this purpose, proceedings under section 147(a) of the Income-tax Act, were initiated. The outcome of the proceedings revealed that Sri A.M. Deokar and his son Shri M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by the partners to the firm. Under these circumstances the firm did not claim the interest paid to the bank in its own assessment. The partners had claimed deduction of the interest payable to the bank under section 24 of the Act thinking it to be the interest on borrowed capital used for construction of house property. The ITO did not agree with the contention of the appellant. According to him, the loan was taken from the bank by the firm for business purposes. 8. In my opinion, the CIT(A) committed a mistake over here. There is no categorical finding in the order of assessment that the loan was taken from the bank by the firm for business purposes. I have gone through the assessment order. Vide para 5 of the assessment order, the Assessing Officer observed as under : "The Income-tax Act provides that interest on borrowed capital used for construction of house property can be allowed under section 24, if it is established that the loan was taken for the purposes of construction of the house property and if interest is either paid or payable on such a loan. In the instant case, it was the firm which took loan from the bank. The assessee is not able to show that the wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulting in total loss to the managed company. The three partners agreed to recoup the loss of the managed company. The assessee's claim for deduction in respect of his share was upheld because the payment was for preservation of the profit earning asset. On this factual backdrop, the Hon'ble Supreme Court held that the fact that the firm had not claimed the expenditure in its return is not fatal to partners' claim for deduction. The, sine qua non, for the allowability of the expenditure is its nexus with the business. In Delhi Sate Deposit Co. Ltd.'s case , that nexus was clearly established. But in the instant case, it is not clear that how the borrowed funds were utilised. Whether these funds were used for the purposes of business or for construction of property is a dark cat. 11. Admittedly, the assessee made claim under section 24 in the return of income. This indicates that money was utilised for the purpose of construction. Before the Assessing Officer also the assessee stated in very clear and unequivocal terms that the borrowed money was utilised for the purpose of construction. The Assessing Officer simply raised a doubt as to this fact. He adumbrated on certain possibi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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