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 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Shree Harshadbhai S. Patel, 301/303, Kalbadevi Road, Mumbai-400 002 Vs. DCIT-14(2), Mumbai-21
November, 06th 2014
                                                             ,,     ,
     IN THE INCOME TAX APPELLATE TRIBUNAL "H", BENCH MUMBAI
                                                            ,

                    BEFORE : SHRI R.C.SHARMA, AM
                                      &
                             SHRI SANJAY GARG, JM
                                     ITA No.7446/Mum/2012
                (               Assessment Year :2009-10)
     Shree Harshadbhai S. Patel, Vs. DCIT-14(2), Mumbai-21
     301/303,  Kalbadevi   Road,
     Mumbai-400 002
                             PAN/GIR No. : AADPP 1213 H
          (       Appellant)      ..      (       Respondent)

                     /Assessee by         :      Shri Mayur R. Makadia
                    /Revenue by           :      Shri Viek A. Perampurna

                     Date of Hearing :             22nd Sept, 2014
                    Date of Pronouncement :        31st Oct, 2014

                                       ORDER

PER R.C.SHARMA (A.M.) :

        This is an appeal filed by the assessee against the order of CIT(A),

dated 25-9-2012 for the assessment year 2009-10, in the matter of order

passed u/s.143 (3) of the I.T. Act., wherein the assessee has taken

following grounds :-

        "1.   On the fact and circumstances of the case and in law the Ld.
              CIT(Appeals) erred in upholding the addition of Rs.19,25,300/-
              on account of disallowance suffered by the firm u/s.14A in
              respect of interest paid.
        2.    On the fact and circumstances of the case and in law the Ld.
              CIT(Appeals) erred in upholding the addition of Rs.57,500
              u/s.68 which was received from the estate of his late father
              Shri S.V.Patel as undisclosed income."

2.      We have considered rival contentions and perused the record. The

assessee declared the interest on M/s Venus Steel Products at

Rs.10,36,700/- whereas in the income and expenditure account it has
                                      2
                                                              ITA No.7446/12

been shown at Rs.29,62,001/-. The assessee, vide office letter dated

3/10/2011, was intimated the above facts and was asked to explain as to

why the excess interest of Rs.19,25,361/- (29,62,001 - 10,36-700) should

not be treated as suppressed income and why the same should not be

added to his total income. In reply to it, the authorized representative of

the assessee vide its letter dated 21/11/2011, stated that the firm in which

the assessee is partner, has disallowed the interest of Rs. 37,83,738/- u/s

14A and as the firm has paid the tax on the disallowed interest, the

interest of income of Rs. 19,25,361/- should not be added to the

assessee's total income. The AO did not convince with the explanation

offered by the assessee. According to the AO, the firm is different entity.

The interest is paid to the partners and their credit balance as per the

provision made in the partnership deed The interest and remuneration

paid to the partners. The firm does not pay tax on the interest and

remuneration paid to the partners. The partners pay the tax on the interest

and remuneration received from firm. The interest paid to the partners is

not taken into account at the time of disallowance u/s 14A in the case of

the firm. The disallowance made u/s 14A in the hands of the firm has no

relevance with the interest paid to the partner. Therefore the explanation

offered by the assessee's A.R is rejected and the excess interest of Rs.

1925,361/- received from the firm is treated as suppressed income and is

added to the total income of the assessee.




3.    By the impugned order, the CIT(A) upheld the action of the AO after

recording the following findings :-

      " On careful consideration of arguments of Id.AR as well as
      facts and reasoning discussed by the AO, it immensely
                                    3
                                                           ITA No.7446/12

      transpires that the contention of the assessee is devoid of
      merit. The disallowance u/s 14A is based on different facts
      and different reasons. In other words disallowance u/s 14A
      relates to expenditure incurred for earning exempt income.
      In contrast thereof interest paid to partner is allowable u/s
      40(b)(iv) of the Act. As an abundant precautionary
      measure I had perused the computation of income of the
      firm from which assessee had received interest income. In
      the computation, the firm had disallowed Suemoto "interest
      paid     u/s    14A"       amounting     to    Rs.37,87,738/-.
      Simultaneously, the firm had claimed interest allowed to
      partners at Rs.58,85,042/-. The said interest includes
      interest paid to the assessee amounting to Rs.29,62,000/-
      Thus, there is different treatment of both types of interest
      payments. The assessee had received interest of Rs.
      29,62,000/- from the firm and credited in this income
      expenditure account. However, in return of income he had
      disclosed and offered for taxation interest of Rs.
      10,36,700/- only. Thus the assessee had concealed
      balance amount of interest received for taxation under the
      guise of u/s 14A disallowance in the case of firm, which is
      in fact separate item. It is worth to note that disallowance
      u/s 14A was made by the firm Suemoto. In the
      computation of income in the case of firm, it is specifically
      mentioned as       interest paid u/s 14A". The impugned
      interest not disclosed by the assessee and not offered for
      taxation is also paid by the firm to the assessee. Thus
      contention of the assessee is not tenable in the eyes of
      law on face of it. It is an endeavor to conceal income to the
      extent of difference between amount received from the firm
      and amount disclosed and         offered for taxation in the
      return of income. Accordingly, addition of Rs. 19,25,300/- is
      upheld and relevant ground of appeal is rejected."

4.    The AO also made addition of Rs.57,500/- u/s.68 of the Act which

was received from the estate of assessee's late father Shri S.V. Patel as

undisclosed income. The CIT(A) also upheld the addition made by the

AO.

5.    In regard to addition of interest income of Rs.19,25,300/- received

by the assessee as interest on capital from Venus Steel Products, a

partnership firm where he is a partner, we found that the Venus Steel

Products has paid a sum of Rs.58,85,042/- by way of interest on capital

to its partners. Out of the same, a sum of Rs.29,62,000/- is paid to the
                                     4
                                                               ITA No.7446/12

assessee. The said interest on capital of Rs.58,85,042/- along with certain

other interest of Rs.2,63,689/- paid by VSP was subject to a suo motu

disallowance u/s.14A r.w.r.8D in the hands of the firm. Accordingly, a sum

of Rs.37,83,738/- was disallowed in the hands of the firm. Out of the total

interest of Rs. 29,62,000 received by the assessee from VSP, a sum of

Rs.10,36,700/- was offered to tax by him in his ITR. The balance amount

of Rs. 19,25,300/- was not offered to tax on the grounds that the same

has already suffered disallowance in the hands of the firm and the same

cannot be once again taxed in the hands of the assessee. The AO

observed that interest paid by the firm to its partners has not been taken

into account for computing disallowance u/s 14A, therefore, made an

addition of Rs.19,25,300/- to the income of the assessee. The

disallowance of the interest u/s.14A was made on the plea that interest

expenditure was incurred for earning exempt income. It is not in dispute

that assessee firm has claimed total interest of Rs.58,85,042/- in its profit

and loss account. It is also not in dispute that assessee has been paid

total interest of Rs.29,62,000/- from the firm. Merely because assessee's

claim of interest of firm was declined u/s.14A, does not mean that

assessee has not been paid any interest. The disallowance of interest on

the plea of same being incurred for earning exempt income is a separate

issue which has to be considered while framing assessment in the hand

of the firm. Such interest income even if disallowed in the hands of the

firm u/s.14A cannot be made the reason for not taxing such interest

income in the hands of the assessee partner       who      has      received
                                             5
                                                                              ITA No.7446/12

such interest income and also credited the same in his profit and loss

account.




6.     In view of the above, we do not find any infirmity in the order of the

lower authorities for taxing the interest income of Rs.19,25,300/- not

offered for tax by the assessee partner.

7.    So far as addition of Rs.57,500/-, is concerned, We found that the

amount in question was received by the assessee from the bank account

of assessee's late father Shri S.V. Patel. Thus, the source of fund is

clearly established. We, therefore, delete the addition made by the AO

and confirmed by the CIT(A).

8.    In the result, appeal of the assessee is allowed in part, in
terms indicated hereinabove.
      Order pronounced in the open court on this 31/10/2014.
                                                               31/10/2014
                    Sd/-                                               Sd/-
          (      )                                                  (       )
       (SANJAY GARG)                                              (R.C.SHARMA)
                / JUDICIAL MEMBER                                / ACCOUNTANT MEMBER
     Mumbai;                 Dated      31/10/2014
      /pkm,        PS
                         Copy of the Order forwarded to :
1.          / The Appellant
2.         / The Respondent.
3.                       / The CIT(A), Mumbai.
4.               / CIT
5.                                        / DR, ITAT, Mumbai

6.             Guard file.

                                    //True Copy//
                                                                                      / BY ORDER,



                                                                            (Asstt.   Registrar)
                                                                                  / ITAT, Mumbai

 
 
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