Income Tax Appellate Tribunal - Jaipur
Ram Gopal Sarraf, Jaipur vs Dcit, Jaipur on 9 November, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL,
JAIPUR BENCHES (SMC), JAIPUR
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BEFORE: SHRI BHAGCHAND, ACCOUNTANT MEMBER
vk;dj vihy la-@ITA No. 549/JP/2015
fu/kZkj.k o"kZ@Assessment Year : 2009-10
Shri Ram Gopal Sarraf cuke The DCIT
Khanda Bai Ji, Manak Chowk Vs. Central Circle- 2
Jaipur Jaipur
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AHNPS 6705 Q
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@Assessee by: Shri P.C. Parwal, CA
jktLo dh vksj ls@ Revenue by :Smt. Poonam Rai, DCIT-. DR
lquokbZ dh rkjh[k@ Date of Hearing : 8/11/2016
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 9 /11/2016
vkns'k@ ORDER
PER BHAGCHAND, AM
The assessee has filed an appeal against the order of the ld. CIT(A), Alwar dated 25-03-2015 for the assessment year 2009-10 raising therein following ground:-
(1) That on the facts and in the circumstances of the case, the ld. CIT(A) is wrong, unjust, and has erred in law in confirming action of the Assessing Officer in disallowing deduction of interest paid to the extent of Rs. 12,50,213/-
from interest received on capital account in partnership firm allegedly on the ground that interest paid on loan cannot be adjusted from this income.
2 ITA No. 549/JP/2015
Shri Ram Gopal Saraf vs. DCIT, Central Circle- -2, Jaipur . 2.1 The issue in question as emerges from the ld. CIT(A)'s order is as under:-
''4.3 I have gone through the assessment order as well as submissions made by the appellant and find that an amount of Rs. 12,50,213/- has been added by the AO to the income of the appellant on account of interest received from partnership firm on capital account balance. AO has stated that no income was found to have been declared in the computation of income under the head income from business on account of interest received on capital account balance from the firm. It is further stated that as per the provisions of Section 40(b)(iv) of the I.T. Act the interest received by a partner from the firm on capital account balance is an income from business.
4.4 The appellant has justified the non-disclosure of receipt of income on the ground that he has received interest on advances given to other persons and from firms as interest on capital amounting to Rs. 1,41,58,454/- and has paid interest of Rs. 1,42,99,180/- during the period under consideration. These interest receipts and payments have been declared under the head income from other sources.
The net interest paid was not claimed in the computation of income. The total interest received by the appellant firm is of Rs. 12,50,213/-. The capital investment in the firms has been made out of funds borrowed on interest and therefore, there is no net income left.
4.5 Having considered the material placed on record including the copy of ledger account filed by the appellant, I find that appellant has failed to make disclosure of interest earned on capital account balances in the firms under the head income from business. Under the provisions of Income Tax Act, any remuneration earned by the partner including interest on capital account balance from the firm has to be treated as income from business. The interest on money borrowed for the same can be considered for 3 ITA No. 549/JP/2015 Shri Ram Gopal Saraf vs. DCIT, Central Circle- -2, Jaipur . deduction, only if the nexus of funds borrowed and funds invested in the firm can be proved. However, in this case, the appellant has tried to camouflage this income from firms with the interest received on loans and advances and interest paid under the head income from other sources. Therefore, I do not find any force in the contentions of the appellant and accordingly hold that an income of Rs. 12,50,213/- received on account of interest from firms has not been declared by the appellant.
4.6 In view of the above facts, I confirm an addition of Rs. 12,50,213/- made by the AO under this head.'' 2.2 During the course of hearing, the ld. AR of the assessee prayed that the ld. CIT(A) has erred in confirming the addition of Rs. 12,50,213/- made by the AO for which the ld. AR of the assessee filed the written submission and the relevant para of his submission is as under:-
''It is submitted that there is no dispute that interest from partnership firm is to be assessed as income from business. However, interest paid on any borrowing obtained for making investment in the capital with the firm is allowable as deduction against the interest received from the firm. This has been accepted by CIT(A). Assessee has established the nexus of borrowed funds with the investment in the capital of the firm. CIT(A) has not found any discrepancy in the contention of the assessee nor has given any finding against the explanation of the assessee. He without any basis has held that assessee has tried to camaflouge his income by way of interest from the firm. Hence, the CIT(A) has erred in confirming the addition made by the AO by not directing him to allow the deduction on account of interest paid for earning interest income on the capital invested with the firm. Thus the addition confirmed by the CIT(A) be directed to be deleted.
2.3 The ld. DR relied on the orders of the lower authorities.
2.4 I have heard the rival contentions and perused the materials available on record. In this case the AO observed that scrutiny details of 4 ITA No. 549/JP/2015 Shri Ram Gopal Saraf vs. DCIT, Central Circle- -2, Jaipur .
interest received revealed that the assessee had received Rs. 12,50,213/- from following two firms as interest on capital of the assessee.
(a) M/s. Shree Ganpati Construction Rs. 75,000/-
(b) M/s. Manglam Land Bank Co. Rs. 11,75,213/
Rs. 12,50,213/-
As per provision of Section 40(b)(iv) of the Act, the interest received from partnership firm on capital is a business income. The AO further observed in the instant case that the assessee had received interest from partnership firm on capital invested in them but it has not been shown in computation statement under the head ''Income from business or profession''. The interest paid on loans cannot be adjusted from business income and interest received on loans and investments can be set off against the interest paid on loans. . The AO finally added the sum of Rs.
12,50,213/- to the income of the assessee. The ld. CIT(A) confirmed the action of the AO with the above observations in his order. It is noted that the assessee had received Rs. 12,50,213/- as interest from two firms namely M/s. Shree Ganpati Construction i.e. Rs. 75,000/- and M/s. Manglam Land Bank Co. i.e. Rs. 11,75,213/- on capital balances. As per provisions of Section 40(b)(iv) of the Act, the interest received from partnership firm is to be taxed as business income. However, the assessee has shown the same as income from other sources. In my considered 5 ITA No. 549/JP/2015 Shri Ram Gopal Saraf vs. DCIT, Central Circle- -2, Jaipur . view, the interest income received from partnership firm on capital balances is to be taxed under the Profit and Gains of Business or profession and for claiming the deduction of interest paid by the assessee, it has to establish the nexus of borrowed funds and the funds invested as capital in the firms. The ld. CIT(A)'s observation in this regard is to be upheld that there must be nexus in borrowed fund on which interest paid and interest earned in capital with firms. The assessee has submitted in his written reply before the ld. CIT(A) that there is a direct nexus of borrowed funds and interest earned on capital balances with the firm. The assessee has submitted that in the partnership firm M/s. Mandlam Land Bank Company, borrowed funds from Shri Ram Babu Agarwal of Rs. 50.00 lacs on 9-06-2007 and Rs. 40 lacs on 9-08-2007 were directly invested. Further, borrowed funds of Rs. 30 lacs from Shri Om Prakash Miyan Bajaj was directly invested in the firm M/s. Ganpati Construction on which interest was earned. The ld. CIT(A) has not considered this aspect of submissions. Therefore, in the interest of justice and equity, I found it appropriate to restore the issue to the file of the AO to verify whether the loan received from Shri Ram Babu Agarwal of Rs. 50 lacs on 9-6-2007 and Rs. 40 lacs on 9-08-2007 were invested in the partnership firm M/s. Manglam Land Bank Co. as capital and loan amount of 6 ITA No. 549/JP/2015 Shri Ram Gopal Saraf vs. DCIT, Central Circle- -2, Jaipur . Rs. 30 lacs received from Shri Om Prakash Miyan Bajaj was invested in M/s. Ganpati Construction as capital. If the direct nexus is established then assessee's claim for payment of interest on the borrowed funds invested in the capital account shall be allowed otherwise not. For this purpose, the matter is restored to the file of the AO to decide it accordingly as indicated above. Thus the appeal of the assessee is allowed for statistical purposes.
3.0 In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 9/11/2016 Sd/-
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(Bhagchand)
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fnukad@Dated:- 9 /11/ 2016
*Mishra
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- Shri Ram Gopal Saraf, Jaipur
2. izR;FkhZ@ The Respondent- The DCIT, Central Circle- 2, Jaipur
3. vk;dj vk;qDr¼vihy½@ CIT(A).
4. vk;dj vk;qDr@ CIT,
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 549/JP/2015) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar