TMI Blog2010 (10) TMI 407X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner of Income-tax (Appeals) on 13.07.2006 in relation to the assessment year 2003-04. 2. Following three effective grounds have been raised in this appeal:- 1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing the A.O. to allow the deduction in respect of entire interest of Rs. 1,82,20,173 u/s.36(1)(iii) of the I.T.Act on the amount borrowed from Reliance Capital Ltd. and invested in partnership firm by name M/s.Sreenath Enterprises from which the interest income has been earned by the assessee company without appreciating the fact that the assessee company has not only earned the interest income but also the share of profit from the said firm which is exempt u/s.10(2A) and hence the proportionate interest on the amount borrowed and invested in the firm should have been disallowed u/s.14A and thus the entire income cannot be allowed as deduction 2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in coming to the conclusion that the entire interest paid on the money borrowed from Reliance Capital Ltd. has been paid on the funds which are utilized only for earning interest from partnership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs.2.34 crores received from partnership firm was assessed by the A.O. under the head `Income from other sources as against `Business income shown by the assessee. He also did not allow any deduction towards interest paid amounting to Rs.1.82 crores. In the first appeal, the learned CIT(A) overturned the assessment order on this issue and ordered for the deletion of disallowance of interest and further held that the interest income shall be categorized under the head `Profits and gains of business or profession . The Revenue is aggrieved as projected in the grounds set out above. 4. We have heard both the sides and perused the relevant material on record. The principal grievance in this appeal is against the deletion of addition of Rs.1.82 crores. The Revenue has also invoked the provisions of section 14A in its grounds of appeal for making out a case that proportionate amount of interest on borrowed and invested in the firm should have been disallowed u/s.14A. In order to answer the chief question, it is imperative to decide the following inter-related issues:- A. Interest earned from firm is taxable under which head of income. B. Whether the interest expenditure is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finally jettisoning this contention, their Lordships of the Hon ble Supreme Court held that before dividend on shares could be assessed under the head `Business income , the assessee must carry on the business in respect of shares. The argument raised by that assessee that it was incorporated to carry on investment proved that the company was carrying on the business, was repelled. Almost similar view has been recently reiterated in South India Corporation Ltd Vs. Addl.CIT Ors. [(2009) 312 ITR 31 (Ker.)]. In view of the above discussion it is clear that the actual carrying on of any business is determinative of the transaction to be characterized as business or otherwise and not how the position has been described in the object clause of the MoA. Adverting to the facts of the instant case we find that, apart from relying on certain object clause in the MoA, the assessee has not furnished any details to indicate that it was actually engaged in the business activity of entering into partnership firms. As such, we refuse to accept this contention put forth on behalf of the assessee. 6. Section 28(i) provides that the profits and gains of any business or profession which was carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Business income. Clause (v) of section 28 is relevant for our purpose, which provides that any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm shall be chargeable to income-tax under the head `Profits and gains of business or profession . On going through the prescription of section 28(v) it is palpable that any interest, salary or bonus etc. [other than share of profit from partnership firm which is exempt u/s.10(2A)] is chargeable to tax under the head `Profits and gains of business or profession . There is no further embargo, unlike clause (i), that the income must result from the activity of carrying on the business of entering into partnership firms. It shows that when interest and/or salary etc., called by whatever name, are received by a person as partner from a partnership firm, these will partake of the character of `Business income , notwithstanding the fact that the entering into partnership was or was not the business of the assessee. 8. When a specific provision has been enshrined in the Act, through clause (v) of section 28, for treating interest and salary etc. earned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ises is taxable under the head `Profits and gains of business or profession . Section 36(1)(iii) provides that the amount of interest paid in respect of capital borrowed for the purpose of the business or profession shall be allowed as deduction in computing the income referred to in section 28. There are three essential requisite conditions of sec. 36(1)(iii). Firstly there should be payment of interest; secondly such interest should have been paid on capital borrowed; and thirdly such borrowed funds should have been utilized for the purposes of business or profession. The assessee made out a categorical claim before the Assessing Officer that the funds which were borrowed from M/s Reliance Capital Limited, in respect of which interest of Rs.1.82 crores was paid, were advanced to the firm M/s Sreenath Enterprises, the partnership firm from where interest income of Rs.2.34 crores was earned. The same contention was reiterated before the learned first appellate authority. The ld. CIT(A), on perusal of the copy of account of M/s Reliance Capital Limited and M/s Sreenath Enterprises in the books of account of the assessee, found that the amounts borrowed by the assessee from M/s Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the amount borrowed and invested in the firm should have been disallowed u/s.14A of the Act. In such a scenario the question is - whether the Department is entitled to take shelter of section 14A for the first time before the Tribunal ? The learned A.R. has placed on record a copy of the judgement of the Hon ble jurisdictional High Court in Topstar Mercantile Pvt. Ltd. Vs. ACIT dated 26.08.2009 in ITA No.1460 of 2009. In this case the Assessing Officer made a query in respect of disallowance of expenditure attributable to the exempt dividend income u/s.14A. The said query was answered. The A.O. did not pursue the matter further. No finding was recorded by the A.O. with respect of the disallowance of part of expenditure on the touchstone of section 14A. However interest expenditure, to the extent of Rs.1.50 crores, was disallowed by holding it to be not incurred wholly and exclusively for earning any business income. The Tribunal restored the matter to the file of A.O. with a direction to compute the disallowance u/s.14A by applying the Special Bench order in Daga Capital Management Pvt. Ltd. in 199 TTJ 289 (SB) (Mum.). The assessee contended before the Hon ble High Court that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rs2.34 crores from the partnership firm in the shape of interest but also received the share in the profits of the firm to the tune of Rs8.54 crores, which is exempt u/s.10(2A) and therefore the proportionate interest on the amount borrowed and invested in the firm as relatable to the share in the profits of the firm was concerned, ought to have been disallowed u/s.14A. In other words the contention is that the interest paid amounting to Rs.1.82 crores should be bifurcated into two parts, that is, as relatable to the earning of the share in the profits of the firm and earning of interest income in the capacity of partner in the partnership firm and thereafter the part as is relatable to share in the profits of the firm should be disallowed by invoking the provisions of section 14A. 13. From the facts mentioned above it has been clearly noticed that the assessee borrowed funds from M/s Reliance Capital Limited and the same funds were invested in M/s Sreenath Enterprises. One to one nexus between the borrowed funds as invested in partnership firm was proved by the assessee. The extent of contribution of capital by partners or the proportion is not determinative of the profit s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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