TMI Blog2009 (4) TMI 544X X X X Extracts X X X X X X X X Extracts X X X X ..... f business or profession . By allowing this deduction it would mean that the loss under the head Business income would swell by the amount of interest to the partners. A bare perusal of Section 71(1) divulges that the loss incurred by an assessee under the head Profits and gains of business or profession shall be set off against the income under any other head, which also includes Income from other sources . We, therefore, uphold the impugned order on this score. In the result, the revenue s appeal is dismissed. Deduction being the interest paid to the partners on the capital contributed by them - interest paid to the partners on capital - utilized for the purpose of advancing loan to the parties from whom no interest was charged - Whether AO was justified in invoking the provisions of section 40A(2) - HELD THAT:- In our considered opinion there is a basic fallacy in the opinion of CIT(A) for the reason that after the Finance Act, 1992 interest paid to the partners has been made as deductible subject to the limitations contained under section 40(b)(iv). With the insertion of non-obstante clause at the beginning of section 40, it has become clear that even if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n raised by the assessee, grant of relief to him on another ground was justified, it would be open to the departmental authority and the Tribunal would be under a duty to grant that relief. Similarly if the disallowance of certain expenditure to an assessee was warranted by certain provisions of law where the allowance and disallowance were the subject-matter of the appeal, the Tribunal is competent u/s 254 to deal with that question and decide the same in accordance with law. Therefore, it was open to the Tribunal yet to sustain the disallowance partially u/s 37 . Thus it is clear that the Tribunal is empowered to consider the same disallowance made by AO under one section, if it is not sustainable under the section made by AO. Therefore, it is noted that though AO discussed the issue of availability of capital and other interest free funds vis-a-vis the amount given by loan without interest, yet he chose to make addition u/s 40A(2). CIT(A) erroneously took a view which is no more a valid law in the light of the judgment of the Hon ble Supreme Court in Munjal Sales Corpn. (supra) in which it has been held that the deductibility of interest to partners has to be proved u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal, which emanates from the impugned order dated 19-1-2007, runs as under : On the facts and in the circumstances of the case and in law, the CIT(A) has erred in allowing the deduction on account of interest to partners to the tune of Rs. 6,50,236 ignoring the fact that the capital of Rs. 44,44,186 contributed by the partners did not remain in the business but had been diverted by way of loan of the order of Rs. 73,63,058 to parties not related to its business on which no interest was charged/received. 3. Briefly stated the facts of the case are that the assessment was completed in this case under section 143(3) on 28-2-2003 accepting the returned income at Rs. 6,52,023. Thereafter, the learned CIT passed revisionary order under section 263 on 20-3-2005. Pursuant to that the present assessment order has been framed. Needless to mention the assessee filed appeal against the order passed by the learned CIT under section 263 but without any success. The copy of the order passed by the Tribunal upholding the action under section 263 in ITA No. 2667/Mum./2005 dated 17-4-2006, is available on record. 4. The assessee had shown income by way of leave and licence rent of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debited by the assessee as business expenses should be commensurate with the business activity conducted. In the instant case, as aforesaid the assessee is only keeping the business alive to pay off the creditors and realize the recoverables. As such, the expenses to be claimed by the assessee as business loss and to be set off against income from other sources shall be minimal and inclusive of office rent, telephone, taxes and the like. 5. After perusing the remand report the learned CIT(A) observed that it was clear from the order passed by the learned CIT under section 263 and the Tribunal upholding this order, that the assessee was simply giving the premises on rent which did not involve any organized activity and hence, the rental income could not be treated as Business income. Resultantly, it was held that the rental income was not taxable under the head Profits and gains of business or profession . As regards the deduction on account of brokerage and commission expenses debited by the assessee in its Profit and Loss Account at Rs. 1,50,000, he allowed it as deductible expenditure from the rental income as directly relatable to earning such income. About the deductibi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l submissions and perused the relevant material on record. It is obvious that the revenue had not taken any ground in the Memo of appeal against the finding returned by the learned CIT(A) that the assessee was continuing its business. The ld. D.R. has relied on Rule 11 of Income-tax (Appellate Tribunal) Rules, 1963 in support of raising the oral ground on this issue, for the first time before us. Let us see the mandate of this Rule 11, which reads as under : 11. The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule: Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground. 8. A bare perusal of Rule 11 divulges that there is no blanket bar on the appellant raising additional ground not set forth in the memorandum of appeal. The only rider is that the leave of the Tribunal is required to be obtaine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrary to the finding given by the Assessing Officer. If such a course is allowed, then it will amount to the ld. D.R. revising the assessment order in the garb of his arguments, by usurping the power under section 263, which incidentally lies only in the domain of the ld. CIT. We further find that the learned CIT(A) has also granted deduction in respect of the administrative expenses against the business income, which has not been assailed by the department. Thus, it impliedly suggests that the continuation of business has not been disputed by the Assessing Officer and that he has no objection to the allowability of these expenses. Under these circumstances we are unable to accept the contention of the learned D.R. that it be allowed a fresh opportunity to argue that the assessee had closed its business. We, therefore, refuse to admit this oral additional ground. 9. Coming to the merits of the case, it is found as an undisputed fact that the assessee was tenant of premises which was given on lease rent from which the instant income of Rs. 16,70,000 was earned. When the order of the ld. CIT has been upheld by the Tribunal, and it has not been brought to our notice that the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the availability of the book profits, the interest to partners, which is otherwise authorized by and in accordance with the terms of the partnership deed and relates to any period falling after the date of such partnership deed, is not deductible if it is in excess of the amount calculated at the rate of 12 per cent simple interest with effect from 1-6-2002. In other words if the rate of interest payable to partners to their capital balances is within the prescribed percentage, then such amount of interest is allowable as deduction from the computation of business income. Thus there is no requirement of having any book profit as a pre-condition for granting deduction in respect of interest paid to the partners, which is required for allowing remuneration to partners beyond the specified sum. Therefore, the interest to partners is allowable deduction under the head Profits and gains of business or profession even if there is loss under this head. Adverting to the facts of the instant case we find that the learned CIT(A) has recorded a categorical finding that the business was continuing though temporarily suspended which implies that the business was carried on by the assessee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om other sources computed by the Assessing Officer at Rs. 15.58 lakhs. We, therefore, uphold the impugned order on this score. 12. In the result, the revenue s appeal is dismissed. Assessment year 2005-06 13. The Department is aggrieved against the allowing of deduction of Rs. 2,76,392 being the interest paid to the partners on the capital contributed by them. As per ground number 3, the ld. CIT(A) ought to have noted that the interest was paid to the partners on capital of Rs. 1.12 crores which was utilized for the purpose of advancing loan to the extent of Rs. 2.07 crores to parties from whom no interest was charged. 14. The assessee had claimed deduction of Rs. 2.76 lakhs and odd on account of interest to partners which was not allowed by the Assessing Officer on the ground that the interest income earned by the assessee was by way of leave and licence rent which was treated by him as Income from other sources . In para 7.1, it has been discussed that though originally the assessee was dealing in textiles but during the year it had not earned any business income. In para 7.2, the Assessing Officer noted that the total business income of the assessee would be l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest paid to partners, the ld. CIT(A) in para 3.3 came to hold that section 40( b ) was having overriding effect over the provisions from sections 30 to 38 and as such it was not possible to disallow any interest charged on the capital of the partners on the ground that it was not for the purpose of business, as in his opinion section 36(1)( iii ) and section 37 will not be applicable. On the question of applicability of section 40A(2), the learned CIT(A) held that the Assessing Officer had failed to determine the market rate of interest chargeable and as such he deleted the addition made by the Assessing Officer. 16. We have heard the rival submissions and perused the relevant material on record. The learned CIT(A) has deleted the addition by giving a finding that the deduction under sections 30 to 38 are not subject to the limitation under section 40( b )( iv ). In other words his opinion is that where the partnership deed authorizes the payment of interest to partners and such interest relates to any period falling after the date of such partnership deed, the amount of interest, if it is within the prescribed limit, is allowable deduction notwithstanding the fact that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... more way of answering the above contention. Section 36(1)( iii ) and section 40( b )( iv ) both deal with payment of interest by the firm for which deduction could be claimed, therefore, keeping in mind the scheme of Chapter IV-D every assessee who claims deduction under sections 30 to 38 is also required to establish that it is not disentitled under section 40. It is in this respect that it is stated that the object of section 40 is to put limitation on the amount of deduction which the assessee is entitled to under sections 30 to 38. Section 40 is a corollary to sections 30 to 38 and, therefore, section 40 is not a stand-alone section. 17. From the above enunciation of law by the highest Court of the land there remains no doubt whatsoever that the deductibility of interest to partners is primarily to be considered under section 36(1)( iii ) and if such interest is allowable then it has to be seen whether there is any disentitlement under section 40( b ) of the Act. The learned CIT(A) has misdirected himself in holding that section 40( b ) was a stand-alone provision and if the interest to partners is deductible as per the parameters laid down in clause ( iv ) of section 40 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lar circumstances at 8 per cent, then the differential rate of 4 per cent can be held as excessive under section 40A(2). The co-relation of the funds contributed by the partners with the rate of interest on which the money is actually lent by the assessee, for making disallowance under section 40A(2), is misconceived. We, therefore, hold that the Assessing Officer was not justified in invoking the provisions of section 40A(2). 19. The next question which falls for our consideration is to decide that if a particular disallowance made by the Assessing Officer under one section is not sustainable then is it permissible to sustain such disallowance under any other section. The ld. DR has relied on the judgment by Hon ble Kerala High Court in the case of P. Ibrahim Haji v. CWT [1998] 232 ITR 253 , and in our opinion rightly so, in which it has been held that : Tribunal did not go to decide the subject-matter of appeal when it sustains the addition of net wealth treating it as cost of building under construction instead of the value of goodwill as originally treated by WTO . In our considered view there should not be any difficulty in answering this question as the power of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 crores as loans and advances without interest. He has tried to build a case that the entire share capital of the partners have been diverted in the form of loans on which no interest is charged. The learned D.R. has relied on several judgments including that of the Hon ble Supreme Court in the case of Madhav Prasad Jethia v. CIT [1979] 118 ITR 200 and that of the Madras High Court in the case of K. Somasundaram Bros. v. CIT [1999] 238 ITR 939 in support of his proposition that the deduction on account of interest under section 36(1)( iii ) cannot be allowed since the interest free loans were advanced without any business purpose. On a pointed query, the learned A.R. could not furnish the detail and purpose of advances for ascertaining the link of such loans and advances with the business. In the absence of this vital information, we are constrained to give any positive finding on this aspect. Under these circumstances we are of the considered opinion that it will be just and fair if the impugned order on this issue is set aside and the matter is restored to the file of Assessing Officer. We order, accordingly, and direct him to verify the nature and purpose of loan give ..... X X X X Extracts X X X X X X X X Extracts X X X X
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