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TMI Blog2021 (12) TMI 1163X X X X Extracts X X X X X X X X Extracts X X X X ..... ell as law on the subject, the learned Pr. Commissioner of income-tax has erred in observing that order passed by assessing officer u/s 143(3) of the Act is erroneous on the ground that interest & remuneration to partners u/s 40(b) has been allowed without verifying that income disclosed in survey by assessee is business income. 3. It is therefore prayed that order passed by Pr. Commissioner of income-tax u/s 263 of the I.T.Act setting aside the order of Assessing Officer and directing Assessing Officer to make fresh investigations on issue of deduction of interest & remuneration u/s 40(b) of the I.T. Act may please be quashed." 2.The facts necessary for disposal of the appeals are stated in brief.The assessee before us is a firm. The assessee-firm is engaged in the business of real estate development and construction of properties and has filed its return of income on 22.09.2013, declaring total income of Rs. 8,26,38,930/-for AY 2013-14. The scrutiny assessment for the assessment year 2013-14 was framed by assessing officer on 29.02.2016, under section 143 (3) of the Act, by accepting the income returned by the assessee-firm. 3.Later, Learned Principal Commissioner of Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest payment of Rs. 23,30,367/- to partners was required to be disallowed. However, the same has not been disallowed by the Assessing Officer in the assessment order u/s 143(3) of the I.T.Act dated 29/12/2015 for the AY.2013-14 in the case of the assessee firm. The assessment order is therefore erroneous and prejudicial to the interest of Revenue. (ix). It is further observed that as per the provision of section 115BBE(2) of the I. T. Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Income Tax Act while computing the income referred to in sections 68, 69, 69A, 69B, 69C and 69D. In view of these provisions of law, the claim of payment of remuneration of Rs. 46,86,000/- to partners of the firm was required to be disallowed. However, the same has not been disallowed by the Assessing Officer in the assessment order u/s 143(3) of the I.T. Act, dated 29/12/2015, for the AY.2013-14 in the case of the assessee-firm. The assessment order is therefore erroneous and prejudicial to the interest of Revenue. Thus, after considering the return of income and other details and documents available on record, it is observ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no evasion of tax & there isno loss to revenue. Hence, the assessment order passed u/s 143(3) of the Act is not prejudicial to the interest of revenue. 3. As regards provision of section 115BBE(2) of the Act, it is pertinent to mention here at the outset that the income disclosed during the course of survey represents business income and against the same the expenditure relating to business of assessee are eligible for deduction. It is evident on perusal of statement dated 19.03.2013 recorded at the time of survey of Shri Sanjay N. Patel - partner of assessee firm that disclosure relates to cash received on sale of flats & entire disclosure pertains to the project of "Prestige Manor" developed by the firm & the same represents business income of the firm. Thus, this is not the case where addition is made on the basis of presumptive provisions of section 68 / 69 etc. & therefore, provisions of section 115BBE are not attracted. Consequently, partners salary and interest expenditure being directly related to earning of above income, the same is legitimately allowable as business expenditure. In support of above contention reliance can be placed on the following judicial pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not entitled for deduction of interest and remuneration against such income. 6. Therefore, Ld. PCIT held that in the case of assessee, it was obliged to disclose the receipts of Rs. 8,26,47,743/- in the Return of Income filed after the Survey after claiming deduction of interest and remuneration of Rs. 23,30,367/- and Rs. 46,86,000/- respectively. As per admission of the assessee, undisclosed receipts of Rs. 9,00,00,000/-were not recorded in the regular books of account with the intention of not disclosing it to the Department. Therefore, in absence of any evidentiary proof to correlate these receipts with the actual persons from whom the cash was accepted by the partner of the assessee firm during the course of Survey proceeding and not duly verified by the assessing officer during the course of assessment proceedings leads the assessment framed by the assessing Officer being erroneous and prejudicial to the Interest of Revenue. 7.Aggrieved by the order of Ld. PCIT, assessee is in appeal before us. 8.Shri Sapnesh R Sheth, Learned Counsel for the assessee submits before us that undisclosed receipts of Rs. 9,00,00,000/- which were not recorded in the regular books of account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crores, which were disclosed during the course of survey, has not been examined by the Assessing Officer i.e. its nature, whether it relates to 'business income' or it relates to 'income from other sources', has not been examined by the assessing officer, and (ii)The deduction of interest and remuneration of Rs. 23,30,367/- and Rs. 46,86,000/- respectively, have been allowed in violation of the provisions of the Income Tax Act. We note that said two issues raised by the ld PCIT in his order u/s 263 of the Act, have been examined by the assessing officer while framing assessment order under section 143(3) of the Act, dated 29.02.2016. The relevant part of the assessment order is reproduced below: "3. The assessee is engaged in real estate development and construction of properties. The firm has commenced its business during the current year. A survey u/s 133 A of the I T Act was conducted in the business premises of the assessee on 16.02.2013, whereby incriminating document marked as "B-1-1" was found and impounded. During the course of survey proceedings, statement on oath of Mr. Sanjaybhai Naranbhai Patel was recorded. Subsequently, notice u/s 131 of the Act was issued and his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eous nor prejudicial to the interest of Revenue. 12.During the assessment proceedings, assessee has submitted reply to the Assessing Officer in response to question raised by the Assessing Officer which is placed at paper book page no.5, and page no.11 of the paper book. Therefore, we note that Assessing Officer has raised the question during the assessment stage and assessee has replied to the assessing officer along with relevant documents. Thereafter, assessing officer has applied his mind and examined both the issues, viz: undisclosed income of Rs. 9 crores and interest and remuneration paid to the partners. Therefore, it cannot be said that the issue has not been examined by the Assessing Officer. Considering this factual position, we note that order passed by the Assessing Officer is neither erroneous nor prejudicial to the interest of Revenue and for that reliance can be placed on the judgment of Hon'ble jurisdictional High Court in the case of CIT vs. Suman Paper & Boards Ltd. 221 CTR 0781 (Guj), wherein it was held as follows:- "Respondent assessee is a partnership firm engaged in the business of running a hospital. For the assessment year -2004-05, the assessee fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,49,930/.The assessee has not constructed a new hospital and has only added extra facilities in the existing hospital. Therefore, the interest on borrowed funds utilized for expansion of running business deserves to be allowed. However, the A.O. may examine the utilization of borrowed funds for renovation of building for capitalization in the light of the decision of the Hon'ble Supreme Court in the case of Ballimal Naval Kishore 224 ITR 414. The income of Rs. 19,91,701/- was declared by the assessee during survey u/s.133A of I.T.Act as investment in assets not recorded in the books of A/c. Once the assessed has admitted the income to represent the investment in assets not recorded in the books of accounts, the income has to be assessed u/s.69 of the I.T.Act. The Department is not to seek or establish any other source of income which could have resulted in such investment." The assessee aggrieved by the said order of the Commissioner approached the Tribunal. The Tribunal by the impugned judgment dated 23.2.09 allowed the appeal and set aside the order by the said order of the Commissioner. With respect to question of interest bearing borrowed funds not being utilized for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f building. It nevertheless arose from the sole activity of the assessee, namely, that of business of running hospital. Remuneration to the partners within the limit prescribed under the law was therefore an allowable deduction. He submitted that in any case, even if it is held that two views are possible, powers under section 263 of the Act should not be exercised. Having thus,- heard the, learned counsel for the parties in so far as the first question on which the Commissioner sought to reopen the assessment by exercising powers under section 263 of the Act is concerned, same permits no debate. It is by now well settled that interest on borrowed funds would be allowable deduction irrespective of whether such funds are utilized for incurring revenue or capital expenditure. Reference in this regard can be made right from the decision of this Court in the case of CIT v. Khedut Sahakari Khand Udyog Mandli, 104 ITR 206.This view was reiterated by this Court in the case of Gujarat State Fertilizer &Chemicals Ltd. v. Asst. CIT, (2009) as also by the Apex Court in the case of Deputy CIT v. Core Health Care Ltd., (2008) 298 ITR 194 (SC). Therefore, the said ground does not hold valid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi v. Commissioner of Income-tax,(1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, West Bengal, 88 ITR 323." In the case of S.K.Srigiri and Bros. (supra), the Karnataka High Court held as under: "We have perused the orders of the Tribunal has carefully considered the questions put by the authority and the-, answer of the partners of the assessee's firm and based on the same, the Tribunal has come to the conclusion that the additional income received by the assessee in the instant case is from business and not from other sources. If the Tribunal has come to the conclusion that the additional income is from business, the remuneration paid to the partners has to be deducted while considering the profit and loss. In the circumstances, we are of the opinion that on facts the Revenue has no case on the merits. So far as the question of law is concerned, we have to answer the sam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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