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Sushil Kumar Beniprasad Goenka Versus Income Tax Officer

2016 (11) TMI 963 - ITAT MUMBAI

Disallowance of interest expenses - whether interest expense was incurred to earn interest income on capital balance in the firm which is taxable as business income? - "Income from other sources" OR "Business Loss" - Held that:- No doubt, the interest due to or received by partner on capital contributed by partners in partnership firm is assessed to tax as business income u/s 28(v) of the Act in the hands of the partner but the assessee could not show that the partners have in-fact agreed to pay .....

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n from the actual conduct of Systematic Exports over the years to prove that the firm Systematic Exports in fact paid interest on capital contributed by the partners when there were profits in the said firm . The share of profits on the capital contributed by the assessee with the partnership firm M/s Systematic Exports , are exempt from tax u/s. 10(2A) of the Act. Thus, necessarily the expenses incurred in relation to earning of the income which does not form part of total income, has to be dis .....

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Ramit Kochar, Accountant Member Assessee by : Shri Rishabh Chaturvedi Revenue by : Ms. Pooja Swaroop ( D.R. ) ORDER Per Ramit Kochar, Accountant Member This appeal, filed by the assessee, being ITA No. 1430/Mum/2014, is directed against the appellate order dated 7th October, 2013 passed by learned Commissioner of Income Tax (Appeals)- 25, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2010-11, the appellate proceedings before the learned CIT(A) arising from the assessment orde .....

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f ₹ 10,27,507/-. The Appellant respectfully submits that CIT(A) ought to have considered that interest expense was incurred to earn interest income on capital balance in the firm which is taxable as business income and ought to have ignored Appellant's mistake of claiming interest expense as loss under the head "Income from other sources" instead of "Business Loss" as there is no estoppel against law, particularly when the total income, as returned, remains the same .....

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,27,507/- on account of interest payment against the salary income and interest income. It may be noted that the only allowable deduction out of salary income are professional tax and entertainment allowances. The deduction of interest payment claimed by the assessee out of the salary income is not allowable under the Income tax Act and interest payment claimed against the interest income are allowable only if the said expenses are incurred for the purpose of making or earning such income as per .....

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nd have paid interest of ₹ 10,27,507/- during the year ended 31.3.2010. 2. Above borrowed funds have been utilized by me in investing in Systematic Exports, a firm in which I am a partner. 3. The purpose of giving above loan was to earn interest. However, unfortunately, due to losses, Systematic Exports has been unable to pay any interest. 4. If Systematic Exports had earned profits and was in a position to pay interest to me, I would have shown the same as my Business Income as per 28(v) .....

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ave been liable to tax as business income (investment as capital in partnership firm to earn interest u/s 28(iv)), I have incurred the loss of ₹ 10,27,507/- under the head "profits and gains of business or profession. 7. My income from other sources stand corrected to ₹ 1,08,297/- instead of' loss of ₹ 9,19,210/-. 8. After setting off of business loss against income from other heads, viz; salary income, income from capital gain and income from other sources, my total i .....

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ence, the contention of the assessee that had there been profit in the partnership firm, the assessee would have received interest was not acceptable/teneble. The disallowance u/s 14A of the Act was not worked out by the assessee as observed by the AO. The assessee had made investment in the capital of partnership firm out of loan received from LIC and the assessee has not paid the interest on loan taken for the purposes of earning interest as no interest was received from partnership firm. The .....

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submitted that he had borrowed funds from LIC and paid interest of ₹ 10,27,507/- during the year and this money had been utilized for investing in the capital of Systematic Exports in which the assessee is a partner. The assessee credited this borrowed fund in his capital account in the books of the firm and interest is allowable to partners in terms of partnership deed of the firm. The assessee submitted copy of bank book, bank statements, capital account, partnership deed, balance sheet .....

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balance sheet of the firm M/s Systematic Exports that the assessee had opening outstanding capital at ₹ 4,82,079/-, additions made during the year at ₹ 67,786/-, withdrawals during the year at ₹ 5,33,834/-, share of loss at ₹ 5,29,619/-, and closing balance in negative at ₹ 5,13,588/-. The assessee was entitled to 15% share in the capital of firm and his capital at the end of year was negative, as against total capital of the firm at ₹ 346.05 lakhs. The ld. CI .....

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in capital of the firm with the sole intention of earning interest from the firm. The learned CIT(A) observed that the assessee failed to show any nexus with the loans taken and payments made to the firm except a stray incident instance which is not sufficient to justify the interest payment of an amount as high as ₹ 10,27,507/- on such loans taken. There is no evidence to prove that the assessee s sole intention was to earn interest on capital employed in the firm as against share in prof .....

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order dated 07-10-20113 passed by learned CIT(A). 6. Aggrieved by the appellate order dated 07-10-2013 passed by the ld. CIT(A), the assessee filed appeal before the Tribunal. 7. The ld. Counsel for the assessee submitted that the assessee has availed LIC loan and interest is paid on the said loan. The assessee has invested the said loan in partnership firm Systematic Exports in which the assessee is partner and the assessee would have earned interest had there been profits , by relying on clau .....

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s of the learned CIT(A). 9. In the rejoinder, the ld. Counsel submitted that interest income on capital of partnership firm is taxable u/s 28(v) of the Act and hence interest should be allowed as deduction / set off against income from other sources and salary. It was submitted that had there been profits, the partnership firm Systematic Exports in which the assessee was partner would have given interest on the investment in the capital by the assessee. 10. We have heard the rival contentions an .....

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me of ₹ 9,19,210/-. Before proceeding further, we would like to state that losses under the head Profit and gain from business or profession are not allowed to be set off against salary income in view of provisions of Section 71(2A) of the Act which was inserted by Finance Act, 2004, w.e.f. 01-04-2005. The assessee has stated to have invested LIC Loan in the capital of the partnership firm M/s Systematic Exports but on careful perusal of the ledger extracts submitted by the assessee in the .....

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de paper book/page 4 that the assessee has made payment of ₹ 25,00,000/- on 10-10-2008 to City Apparels vide cheque no. 153747 , ₹ 43,00,000/- to City Apparels vide cheque no. 153748 dated 14-10-2008, ₹ 15,00,000/- to Sushil Goenka HUF vide cheque 153751 on 15-10-2008, ₹ 20,00,000/- to City Apparels vide cheque no. 153752 on 17-10-2008 and also payment of ₹ 10,00,000/- to Systematic Exports vide cheque no. 153753 dated 17-10-2008. Thus, the assessee has invested onl .....

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ee in books of Systematic Exports also confirms the same. The balance outstanding in the capital account of the assessee with Systematic Exports is negative as brought out in the learned CIT(A) orders from the balance sheet of the firm M/s Systematic Exports that the assessee had opening outstanding capital at ₹ 4,82,079/-, additions made during the year at ₹ 67,786/-, withdrawals during the year at ₹ 5,33,834/-, share of loss at ₹ 5,29,619/-, and closing balance in negat .....

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l contributed by partners rather there is a general clause in partnership deed vide clause 8 which reads as under : "The capital of the partnership shall be brought in by the partners as and when required for the business in the manner as mutually agreed upon between the parties referred hereto, and the partners may be paid interest, at a rate, on their Capital as may be mutually agreed upon from time to time." There is a general clause in the partnership deed vide clause 8 of partners .....

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ematic Exports during the impugned assessment year and a valid and legal binding obligation is cast on the partnership firm M/s Systematic Exports to pay interest on capital specifically to the partners in presenti during the impugned assessment year . The assessee s had taken a contention that had there been any profits in Systematic Export, the assessee would have received interest from the partnership firm need verification from the actual conduct of Systematic Exports over the years to prove .....

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