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2015 (11) TMI 534 - ITAT VISAKHAPATNAM

2015 (11) TMI 534 - ITAT VISAKHAPATNAM - TMI - Addition on interest paid to HDFC Bank - CIT(A) deleted the addition - Held that:- It is undisputed fact that the assessee has invested ₹ 50 lakhs in the partnership firm and as a result of this investment, it has earned remuneration of ₹ 6 lakhs and share of income of ₹ 32,48,000/- from the firm. Unless this investment is being made, the assessee would not have earned these two incomes. The A.O. disallowed the interest paid on loa .....

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00,000/- remuneration, which is taxable in the hands of the assesse and also share of profit of ₹ 32.48 lacs, which is exempt, as it has already suffered tax in the hands of the firm. Therefore, expenditure incurred on the borrowed funds for investments in share capital of firm should be allowed as business expenditure. - Decided in favour of assessee.

Disallowance of standard deduction and interest paid on housing loan - Held that:- The property so let out is consisting of land .....

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said property under income from house property. We do not agree with the contention of the Assessing Officer, for the reason that the annual vale of any buildings or land appurtenant thereto of which the assessee is a owner, income from such property is chargeable under the head income from house property. Further, Once the income is assessable under the head house property, consequent deductions being standard deduction u/s 24(a) and interest paid on borrowed capital u/s 24(b) should be allowed .....

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l locality. To arrive at an annual value one has to refer to section 22 of the Act. The said section prescribes the mode of computation of annual value which is the higher of the gross annual value received by the assessee, municipal valuation and fair market value of the property. In the present case, the municipal valuation of the said property as per the assessee’s claim is ₹ 10,544/- and the assessee has received annual rent of ₹ 96,000/-. Further, the fair market value of the pr .....

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details of the property deleted the additions made by the A.O. Therefore, for the reasons stated above, we do not find any infirmity in the order of the CIT(A) and accordingly delete the additions made by the A.O. and dismiss the ground raised by the revenue. - Decided in favour of assessee.

Disallowance of Advertisement charges u/s 40a(ia) - Held that:- The issue is squarely covered in favour of the assessee by the decision of this coordinate bench in the case of Merilyn Shipping & .....

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s Joint Commissioner of Income-tax, Rajamundry Range [2014 (9) TMI 311 - ITAT VISAKHAPATNAM ] - Decided in favour of assessee.

Notional Interest of Investments in Company - Held that:- A.O. cannot estimate notional interest without establishing that either interest is received or accrued to the assessee. Unless, there is contractual obligation to charge interest, the question of income accrue or arise does not arise. The A.O., cannot sit in the place of a businessman and decide how to .....

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the facts.- Decided in favour of assessee. - I.T.A.No. 117/Vizag/2013 - Dated:- 30-9-2015 - SHRI V. DURGA RAO, JUDICIAL MEMBER AND SHRI G. MANJUNATHA, ACCOUNTANT MEMBER For The Appellant : Shri C. Subrahmanyam, AR For The Respondent : Shri B. Babu Rao, DR ORDER PER G. MANJUNATHA, Accountant Member: This appeal filed by the revenue is directed against the order of Ld. CIT(A), Vijayawada, dated 11.12.2012 and it pertains to the assessment year 2008-09. 2. The brief facts of the case are that the a .....

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r scrutiny through CASS (Computer Assisted Selection System) and notice u/s 143(2) of the Act dated 18.8.2009 was issued and duly served on 27.8.2009. In response to the notice issued u/s 143(2) & 142(1) of the Act, the assessee s authorised representative Shri Prabhakar Rao and assessee Shri Bhaskar Murthy appeared from time to time and produced the books of accounts, bills & vouchers and other relevant material before the assessing officer. The A.O., after considering the details submi .....

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- vii. Notional interest on investments Rs.26,02,952/- viii. Notional interest on investments Rs.41,25,000/- 3. The assessee challenged the assessing officer s order before the CIT(A). The Ld. CIT(A), after considering the explanations offered by the assessee, deleted the following additions and confirmed the rest of the additions: i. Interest paid to HDFC Bank Rs.7,10,543/- ii. Interest paid on housing loan and disallowance of Statutory deduction u/s 24 Rs.2,81,179/- iii. Estimated income on Ho .....

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nd the share income from the firm is exempt u/s. 10(2A) and expenditure incurred on exempt income is not allowable as per the provisions of section 14A of the I.T Act. c. The Id. CIT(A) failed to note that the assessee was not in receipt of interest on the capital balance of ₹ 1,96,02,444/- from the firm M/s.The Mitra Agencies in which the assessee has invested the borrowed funds. Hence, the CIT(A) ought to have confirmed the disallowance of interest of ₹ 7,10,543/-. d. Reliance is p .....

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income under the head 'income from other sources' considering the plinth area of the building in the site and as the rent is being paid for using the vacant site. The statutory deduction claimed u/s.24(a) is not allowable under the head other sources. f. The Id. CIT(A) erred in agreeing with the contentions of the assessee that the property is 40 years old and does not fetch much rent since the assessee has not put forth these facts before the AO. The CJT(A) ought to have given an oppor .....

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t incurring huge expenditure towards interest. i. Any other ground that may be urged at the time of hearing. 5. From the above grounds of appeal, the revenue has agitated the following issues for our consideration. a) Whether on facts and circumstances of the case, the CIT(A) is right in deleting the following additions made by the Assessing Officer? i. Interest paid to HDFC Bank of ₹ 7,10,543/- ii. Standard deduction and interest paid on borrowed capital of ₹ 2,81,979/- claimed u/s .....

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p firm M/s. Mithra Agencies, wherein he has a partner having 60% share of profits. The assessee has claimed interest paid on loan amount of ₹ 7,10,543/- as business expenditure. The assessing officer disallowed the interest paid to HDFC bank by stating that the appellant has claimed the deduction without deriving any taxable income. The CIT(A) deleted addition made by the assessing officer, by holding that the assessee has received remuneration of ₹ 6 lakhs from the partnership firm .....

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Therefore, the CIT(A), deleted the addition made by the Assessing Officer. 7. The Ld. D.R. submitted that the assessee has claimed the interest against exempt income, therefore, it cannot be allowed as a deduction as a business expenditure. The Ld. D.R. further submitted that though assessee earns remuneration of ₹ 6 lakhs and share of income of ₹ 32,48,000/- from the firm, the remuneration is paid to the partner for services rendered by him in the capacity of an individual and the .....

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re capital of firm, as a result of which he has earned ₹ 6 lakhs remuneration which is taxable u/s 28(v) of the Act and also share of income of ₹ 32,48,000/- which is exempt u/s 10(2A) of the Act. Unless, the funds are invested in the partnership firm, assessee would not have earned this income. Though, the share of profit is exempt in the hands of the assessee, it has already suffered tax in the hands of the firm. Therefore, even assuming that the interest is paid on partner s capit .....

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e have heard both the parties and perused the materials available on record and also considered the case laws cited by the revenue. It is undisputed fact that the assessee has invested ₹ 50 lakhs in the partnership firm and as a result of this investment, it has earned remuneration of ₹ 6 lakhs and share of income of ₹ 32,48,000/- from the firm. Unless this investment is being made, the assessee would not have earned these two incomes. The A.O. disallowed the interest paid on l .....

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6,00,000/- remuneration, which is taxable in the hands of the assesse and also share of profit of ₹ 32.48 lacs, which is exempt, as it has already suffered tax in the hands of the firm. Therefore, expenditure incurred on the borrowed funds for investments in share capital of firm should be allowed as business expenditure. 10. The Revenue has relied on Hon ble Kerala High Court judgment in the case of CIT vs. Popular Vehicles and Services Ltd. (2010) 325 ITR 523. We have examined the Hon bl .....

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-ordinate Bench decision in the case of D.J. Mehta vs. Income Tax Officer, (2007) 104 ITD 527, wherein, the Bench held that there is no provision in the partnership deed for payment of interest to the partners on the funds advanced by partners. Therefore, the findings of the bench is that when interest paid on borrowed funds with no possibility of generating interest when the said fund is advanced as loan to firm, interest paid is disallowable. Therefore, the two judgments relied on by the reven .....

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. The property was let out to partnership firm M/s. The Mithra Agencies for parking and making ready for PDI of Maruti Vehicles and the income from the said property was offered under the head income from house property. During the course of assessment, the assessing officer assessed the income from said property under the head income from other sources and disallowed the standard deduction and interest paid on borrowed capital u/s 24 of the Act of ₹ 34,200/- and ₹ 2,46,949/- respect .....

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and deductions claimed u/s 24 of the Act being standard deduction and interest paid on borrowed capital cannot be allowed as a deduction. 13. The authorised representative of the assessee on the other hand, submitted that the property let out was consisting of land and building which was let out to a partnership firm for an annual rent of ₹ 1,14,000/-. The A.R. further submitted that the said property was acquired by the assessee in the year 2004 from the borrowed funds of Oriental Bank o .....

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income under the head income from house property right from the beginning. The department accepts the stand of the assessee in the earlier years, cannot dispute now under the same set of facts. The AO was of the view that the property was predominantly was a vacant site and having a small building cannot be considered as a house property to assess the income from said property under income from house property. We do not agree with the contention of the Assessing Officer, for the reason that the .....

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e, for the reasons stated above, we do not find any infirmity in the order passed by the CIT(A) and accordingly the revenue s ground is dismissed. Estimated income from the house property 15. The assessee owned a house property situated at New Nallakunta, Hyderabad. The house was let out for an annual rent of ₹ 96,000/- and offered the income under the head income from house property. During the course of assessment, the A.O. noticed that the assessee paying rent of ₹ 1,08,000/- to h .....

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the A.O., by holding that the said building is 40 years old situated in a residential locality and cannot be compared to the another building belonging to assessee s wife which is situated in a commercial locality. 16. The Ld. D.R. submitted that the plinth area of the property let out was 2880 sq.ft. and the rent offered to such building seems to be very low. The D.R, further, submitted that the assessee is paying a rent of ₹ 1,08,000/- on leased premises to his wife which is consisting o .....

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es paid for the subject property is of ₹ 2636/-, which gives a municipal valuation of ₹ 10,544/-, as against which the assessee offered a annual value of ₹ 96,000/-. The A.R. further, submitted that the municipal valuation is a strong piece of evidence for determining the annual value of the property. Since, the annual value declared by the assessee is more than the municipal value, the A.O. ought to have accepted the income declared by the assessee. The A.R., further, submitte .....

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of another property owned by the assessee s wife which is situated at Himayatnagar. The assessee s contention is that the property let out was a residential property which was situated at Nallakunta is 40 years old, whereas the assessee s wife property situated at Himayatnagar is a posh commercial property cannot be compared. The assessee, further claimed that the property was assessed in the municipal records as a residential property and he has paid a municipal tax of ₹ 2,636/- which gi .....

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sessee s property is a residential property situated in a residential locality of Nallakunta area, Hyderabad, whereas assessee wife property which is situated at Himayatnagar, a posh commercial locality. To arrive at an annual value one has to refer to section 22 of the Act. The said section prescribes the mode of computation of annual value which is the higher of the gross annual value received by the assessee, municipal valuation and fair market value of the property. In the present case, the .....

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ssing officer without bringing on record any comparable cases, simply compared the property, which is situated in a different locality and estimated the income. The CIT(A), after examining the details of the property deleted the additions made by the A.O. Therefore, for the reasons stated above, we do not find any infirmity in the order of the CIT(A) and accordingly delete the additions made by the A.O. and dismiss the ground raised by the revenue. Disallowance of Advertisement charges u/s 40a(i .....

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ACIT in ITA No.477/Vizag/2008 deleted the additions made by the A.O. 20. We have heard both the parties and perused the materials and also the co-ordinate bench order available on record. The issue is squarely covered in favour of the assessee by the decision of this coordinate bench in the case of Merilyn Shipping & Transport Vs. ACIT (supra). By respectfully following the decision cited supra, we delete the additions made by the assessing officer and accordingly ground raised by the revenu .....

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,000/- and also ₹ 4,20,480/- on capital balance of ₹ 35,04,000/- by holding that since, the assessee offered interest for the advance amount given to M/s. Achyuta Automobiles, he should have done so even for the above two cases. Therefore, A.O. adopted the same policy in respect of the above funds and estimated notional interest. On appeal before the CIT(A), the Ld. CIT(A), deleted the additions made by the assessing officer by holding that there is no provision in the Act to assess .....

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7; 34,24,682/- from the firm M/s. Achyuta Automobiles. By applying the same principles, he should have received the interest from these two investments. The Ld. D.R. further submitted that the assessee is paying interest on borrowed funds for investing in these firms. Therefore, he should have estimated the interest income@ 12% on investment in firm. 23. On the other hand, the authorised representative of the assessee, submitted that the assessee is a partner in M/s. The Mithra Agencies and the .....

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her, submitted that the assessee has invested funds in M/s. Dasarath Motors with an intention to join the partnership firm, however, this was not happened due to various reasons. Though, assessee borrowed funds from M/s. Reliance Capital Limited to make investment in this firm, the interest of ₹ 3,52,853/- paid to M/s. Reliance Capital Limited was not claimed by it as its business expenditure. The A.R. relied on the following judgments in support of his case. 1. Highways Construction Co. P .....

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Vs. JCIT in ITA No.6/Vizag/2012 24. We have heard both the parties and perused the materials available on record. We also considered the case laws cited by the parties. Admittedly, the assessee is a partner in M/s. The Mithra Agencies and invested an amount of ₹ 1,96,00,000/- which consist of his basic investment plus income earned from the partnership firm over a period of time which is evident from the capital account copy available on records. The assessee argues that the partnership de .....

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from said capital account. The logic that seems to have been applied by the assessing officer is that no prudent businessman would lend money without any interest. We do not agree with the assessing officer s stand for the reason that there is no provision in the Income-tax Act to estimate income on partner s capital account in the firm, unless the partnership deed provides for interest on partner s capital account. Admittedly, in the present case, the partnership deed does not provide for inter .....

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icer to include the income which is not due or not collected. The A.O. has not given any cogent reason to establish that such legal right to receive the income has arisen to the assessee. There is no evidence with the A.O., to show that the assesse has received any interest income. 25. It is pertinent to mention here that the Hon ble Delhi High Court s decision in the case of Shivnandan Buildcon Pvt. Ltd. Vs. CIT & Anr. (2015) 93 CCH 46, wherein Hon ble High Court held as follows: On going t .....

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for a businessman to advance a sum of ₹ 1.6 crores as in the case of W.P.(C) 6265/2013 to Smart Tourist Private Limited and to not charge anything in return. The explanation sought to be given by the petitioner in both these cases was that the advances were made in the course of their business and it is not at all necessary that an advance given by a businessman at all times must have an element of interest also. There are various other considerations which come into the calculations when .....

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f accounts of the petitioner. It was, therefore, submitted that unless and until there was a concrete finding that something was received by the petitioner from the said Smart Tourist Private Limited and other persons similarly situated, nothing can be added by way of notional income. A reference was made to the decision of the Guwahati High Court in B and A Plantations and Industries Ltd. v Commissioner of Income - Tax: 242 hR 22. The relevant portion of that decision reads as under:- "4. .....

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e amount of interest. The said addition was approved by the Commissioner of Income Tax (Appeals) and the Tribunal. 16. In this case there is no finding when the assessee had in fact received the interest or that the Jorhat Investments Ltd., had in fact paid the interest to the assessee and the interest was not reflected in the accounts. The finding is that the assessee ought to have charged interest. 17. The facts in the instant case are more or less identical with the case of Highways Construct .....

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n accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to see how the Income Tax authorities can fix a notional interest as due, or collected by the assessee. Our attention has not been invited to any provision of the Income Tax Act empowering the Income Tax authorities to include in the Income, .....

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st was not reflected in the accounts. The only finding recorded was that the assessee "ought to" have charged interest. Referring to an earlier decision of the Guwahati High Court, in Highways Construction Co. Private Limited v. CIT [1993] 199 ITR 702, the Court observed that their attention had not been invited to any provision of the Income-Tax Act empowering the income-tax authorities to include in the income, interest which was not due or not collected. 26. A similar issue, came be .....

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but to delete the additions made on account of notional interest estimated by the assessing officer. Therefore, we uphold the CIT(A) s order and dismiss the revenue s grounds. Notional Interest of Investments in Company: 28. The assessee has invested an amount of ₹ 3,43,75,000/- in M/s. Bhanu Auto Agencies (I) Pvt. Ltd., in which he is a shareholder and director. The assessee has made this investment out of the amount borrowed from M/s Achyutha Automobiles. The assessee is one of the promo .....

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leted the additions made by the A.O. by holding that without establishing that either interest was accrued or received as required under the provisions of the section 5 of the Act, the A.O. cannot make any additions. Aggrieved by the CIT(A) order, the Revenue is in appeal. 29. The Ld. D.R., submitted that the assessee has borrowed ₹ 3 crores from M/s. Achyuta Automobiles and the lender has charged interest on the money borrowed by the assessee. Therefore, whether the assessee claims it as .....

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ent is not correct. The A.R. further, submitted that the assessee is one of the promoter of the Company and the Company did not commenced its commercial operations during the period under consideration, hence it was decided not to charge interest. The A.R, further submitted that, there is no condition as to charge interest on funds. Unless, there is contractual obligation to charge interest, the question of income accrue or arise does not arise. The A.R., further argued that, the A.O., cannot si .....

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n advance amount of ₹ 3,43,75,000/-. The A.O., was of the view that the assessee ought to have estimated the income. The assessee, contention is that neither interest is received nor accrued to him for the period under consideration. We do not agree with the A.O., contention for the reason that the assessee has not received any interest on investment. The assessee contended that he has not charged any interest on the investments for the reason that the company did not commenced its commerc .....

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