TMI Blog2012 (7) TMI 103X X X X Extracts X X X X X X X X Extracts X X X X ..... essee was that the building used for the purposes of the business as well as for the purpose of providing stay for partners. But simultaneously, this fact has also been brought on record that the said building was not treated as a business asset because the assessee has not claimed depreciation on the same. Thus a nexus has been established the non-business assets have factually been funded from the current accounts of the partners. Further, assessee has not discharged its primary onus to prove that entire interest-bearing funds including partners’ capital account were entirely used for the purposes of the business. Dis-allowance made upheld - Decided against assessee. - I.T.A.No.267/Ahd/2009, I.T.A.No.398/Ahd/2010 - - - Dated:- 31-5-2012 - SHRI MUKUL Kr.SHRAWAT, SHRI A. MOHAN ALANKAMONY, JJ. Appellant by : Shri S.N.Soparkar, Sr.Adv. Respondent by : Shri D.P.Gupta Shri B.L.Yadav, D.Rs. O R D E R PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER : These two appeals are hereby consolidated and thus decided by this common order. One of the appeals is against the order of CITValsad passed u/s.263 dated 9/4/2007 and the other appeal is arising from an order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 263 has observed that the assessee had claimed a deduction of interest paid to the partners of Rs.72,65,894/-. As per the partners capital account only an amount of Rs.10,000/- was reflected in the balance-sheet. Partners current account had shown Rs.7,82,36,658/-. The assessee has also shown investment of Rs.5,84,60,738/- in various instruments, i.e. mutual funds. The assessee has also made an investment in the residential house of Rs.31,08,158/-. The ld.Commissioner has therefore alleged that the interest was paid to the partners on the funds utilised for non-business purposes and therefore should be disallowed. A notice was issued pointing out the said discrepancy. The assessee s plea was that the investment was with HDFC Bank and interest on such deposit amounting to Rs.45.94 lacs was offered for taxation, hence not an exempted income. Likewise it has also been pleaded that the investment in residential building had no live-link with the borrowed funds. It has also been pleaded that interest on capital and remuneration to partner was nothing but distribution of profits and taxed in the hands of the partner as business income as per section 28(v of IT Act. However, ld.CIT was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssioner has examined the records of the case and prima-facie he has arrived at the conclusion that the assessee had claimed a deduction of interest of Rs.72,65,894/- paid to the partners. An another fact which was noticed; on prima-facie perusal of balance-sheet; that on one side the partners current account had shown an amount of Rs.7,82,36,658/-, as against that on the other side the investment shown was at Rs.5,84,60,738/-. On examination of the investment, it was noted that the investment was made in residential building and also investment made in mutual funds. On that basis, we have to examine that whether in such circumstances the ld.Commissioner has rightly invoked the revisional powers or not. As far as the necessity of introduction of section 263 is concerned, a well-known reason is that the Department had no right to appeal before the first appellate authority against any order passed by the A.O. Therefore, the provisions of section 263 were enacted to arm the Commissioner with the powers of revision whenever he is of the opinion that an erroneous judgement was taken by the AO and, therefore, that order is prejudicial to the interest of the Revenue. The essential featur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of Rs.21,89,507/- out of interest paid to partners, lenders and distributors on the ground of interest bearing funds have been utilized for non-business purpose. 7.1. While passing the order u/s.143(3) r.w.s.263 of the IT Act dated 19/12/2008, the AO has noticed that the ld.Commisisoner has given directions vide an order passed u/s.263 dated 09/04/2007 to re-compute the assessment considering the interest paid on borrowed funds alleged to be utilized for the acquisition of residential property. The AO observed that the partners capital account shows a credit balance of Rs.10,000/- only and paid interest of Rs.72,65,894/- on the current accounts of the partners. Since the interest paid on current account is nothing but the distribution of profit of the business and realization of interest on investment is less than 10%, whereas, the interest paid to the partners at the rate of 12% is suggestive of diversion of profit to the partners through colourful device. The Assessing Officer has further observed that the use of borrowed funds for non-business purpose was as under:- (i) Residential Building : Rs. 3,13,531/- (ii) Residential Building No.134: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation. The arguments advanced by the AR of the appellant are highly illogical because without objecting the order of the C.I.T. u/s.263 of the Act and without establishing nexus of investment and borrowed funds, he wanted to shift his onus to the AO asking him to make a spot inquiry and the specific finding since the appellant failed to discharge his onus, the AO is justified in making the said addition. Thus, this ground of appeal is Dismissed. 9. From the side of the appellant-assessee Mr.S.N.Soparkar Sr.Adv. appeared and placed reliance on Cornerstone Exports Pvt.Ltd. vs. DCIT (ITAT A Bench Ahmedabad in ITA No.859/Ahd/1999 A.Y. 1995- 96, order dated 31/07/2006), Dy.CIT vs. Aditya Medisales Limited (ITAT D Bench Ahmedabad in ITA No.3272/Ahd/2002 others A.Y. 199-2000 others, order dated 30/09/2010). Ld.AR also placed reliance on Glaxo Smithkline Asia (P) Ltd. 236 CTR 113 (SC) and Indo Saudi Services (Travel) (P) Ltd. 310 ITR 306(Bom.). From the side of the Revenue, Ld.DRs Mr.D.P.Gupta Mr.B.L.Yadav have appeared and supported the orders of the Revenue Authorities. 10. Having heard the submissions of both the sides and after considering the compilation file ..... X X X X Extracts X X X X X X X X Extracts X X X X
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