IN THE INCOME TAX APPELLATE TRIBUNAL "H", BENCH MUMBAI
BEFORE : SHRI R.C.SHARMA, AM
SHRI SANJAY GARG, JM
( Assessment Year :2009-10)
Shree Harshadbhai S. Patel, Vs. DCIT-14(2), Mumbai-21
301/303, Kalbadevi Road,
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
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
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
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
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
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
such interest income and also credited the same in his profit and loss
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.
( ) ( )
(SANJAY GARG) (R.C.SHARMA)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai; Dated 31/10/2014
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.
/ BY ORDER,
/ ITAT, Mumbai