Case Law Details
Ishwardas Satyanarayan Gupta Vs ITO (ITAT Mumbai)
ITAT Mumbai held that the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm. Thus, interest expenditure incurred by the assessee, as capital was introduced from borrowed funds, should be allowed as expenditure against remuneration income from the firm.
Facts- Assessee filed its return of income on 26.12.2014 declaring total income of ₹.Nil. The return was processed u/s.143(1) of Income-tax Act, 1961. Subsequently, the case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee.
Assessee has declared income under the head “Income from Business” “capital gains” and “other sources”. The assessee is a partner in M/s. Sri Jagannath Steel Co. and M/s. Gurunanak Metal Works. During the assessment proceedings, AO observed that assessee has claimed interest of ₹.31,55,304/- against the remuneration received of ₹.15,00,000/- from partnership firm under the head “income from business & profession”. The assessee was asked to substantiate the above said claim and why the interest should be allowed against the remuneration income and also prove the nexus for claiming interest against remuneration from the firm.
After considering the submissions of the assessee, AO rejected the same. CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Held that, salary or remuneration received from the firm is no doubt compensation for the services rendered but it is considered as income from business otherwise as a return of share of profits to the partners of the firm. Therefore, the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital u/s. 67(3) of the Act. Thus, in this case, assessee has introduced the capital in the firm by borrowing funds from various loan creditors, it has direct nexus with the remuneration and other profits earned by the partners. In this case, assessee has earned only remuneration income from the firm and incurred interest expenditure, therefore should be allowed to claim the interest expenditure.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal is filed by the assessee against order of Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi [hereinafter in short “Ld.CIT(A)”] dated 08.02.2023 for the A.Y.2014-15.
2. The present appeal is filed by the assessee with a delay of 53 days and assessee also filed an affidavit in this regard and prayed for condonation of delay. Assessee filed an affidavit dated 26.05.2023 and submitted as under: –
“Ishwardas S. Gupta, being an individual an appellant would like to state as under:
1. I had filed an appeal before Commissioner of Income Tax (Appeals) for A.Y.2014-15.
2. The learned Commissioner of Income Tax (Appeals) – NFAC has passed an appellate order on 08/02/2023 and the same must have been emailed to my registered email ID.
3. Since I was using email ID of another person, I was not having direct access to the mail received in respect of my Income Tax
4. It was only when my consultant visited the Portal to give reply to an outstanding demand, he came to know that the appellate order has been passed by the CIT(A). I immediately changed the email ID and has given my office email ID for the future correspondence.
5. Since I did not receive the order, I could not file an appeal in time.
6. My tax consultant had visited the site on 23rd May, 2023 and downloaded the order. As per his advised I immediately requested him to prepare the appeal to be filed before The Income Tax Appellate Tribunal.
7. There is a delay in filing of an appeal by 47 days. There was no malafide intention nor was a deliberate act to delay the matter. The delay was due to inadvertent mistake in not verifying day to day email
8. The appellant has not in any way benefited by delaying the appeal.
The appellant therefore request that the delay may be condoned and appeal may be admitted. Whatever stated above is true and correct to the best of my knowledge and belief.”
3. In view of the above submissions, Ld. AR of the assessee prayed for condonation of delay.
4. DR objected for the condonation of delay and however, he has not filed any submissions against the affidavit as well as the facts described in the above affidavit.
5. Considered the submissions of both parties, we found that the reasons brought on record by the assessee are reasonable, for the sake of overall justice, the Hon’ble Supreme Court in the case of Collector, Land Acquisition v. MST. Katiju and others, [1987]167 ITR 471, held as under:-
“3. The legislature has conferred the power to condone delay by enacting s. 5 of the Limitation Act of 1963 in order to enable the Courts to do substantial justice to parties by disposing of matters on “merits”. The expression “sufficient cause” employed by the legislature is adequately elastic to enable the Courts to apply the law in a meaningful manner which subserves the ends of justice—that being the life-purpose of the existence of the institution of Courts. It is common knowledge that this Court has been making a justifiably liberal approach in matters instituted in this Court. But the message does not appear to have percolated down to all the other Courts in the hierarchy.
4. And such a liberal approach is adopted on principle as it is realized that:
1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties.
3. “Every day’s delay must be explained” does not mean that a pedantic approach should be made. Why not every hour’s delay, every second’s delay? The doctrine must be applied in a rational common sense and pragmatic manner.
4. When substantial justice and technical considerations are pitted against each other, the cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.
5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.
6. It must be grasped that the judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.”
6. Respectfully following the ratio laid down in the above judgment, we condone the delay in filing the appeal and decide the appeal on merits.
7. Brief facts of the case are, assessee filed its return of income on 26.12.2014 declaring total income of ₹.Nil. The return was processed u/s.143(1) of Income-tax Act, 1961 (in short “Act”). Subsequently, the case was selected for scrutiny under CASS and notices u/s. 143(2) and 142(1) of the Act were issued and served on the assessee. In response Authorised Representative of the assessee attended and submitted the relevant information as called for.
8. Assessee has declared income under the head “Income from Business” “capital gains” and “other sources”. The assessee is a partner in M/s. Sri Jagannath Steel Co. and M/s. Gurunanak Metal Works. During the assessment proceedings, Assessing Officer observed that assessee has claimed interest of ₹.31,55,304/- against the remuneration received of ₹.15,00,000/- from partnership firm under the head “income from business & profession”. The assessee was asked to substantiate the above said claim and why the interest should be allowed against the remuneration income and also prove the nexus for claiming interest against remuneration from the firm.
9. In response, assessee vide letter dated 25.11.2016 submitted as under: –
“Assessee had shown loss under the head Income from business of Rs.21,960/- . The loss is the result of interest paid by the assessee on loans taken by him. The loans taken by the assessee had been introduced by him in the firm Sri Jagannath Steel Co. in which he is a partner. From the firm, assessee is receiving remuneration. The assessee has received remuneration of Rs. 15,00,000/- from Sri Jagannath Steel Co. and has paid interest of Rs.31,55,304/- resulting in a loss of Rs.16,35,844/-. As there is income of Rs.28,480/- only under the Income from other sources, loss is taken at Rs.21,960/-. It is pleaded by the assessee that as the loans taken by the assessee has been given to the firm, expenses of interest paid should be allowed as it is expenses for the purpose of business. It is seen from the Capital Account of Sri Jagannath Steel Co. that an amount of Rs.1,19,75,000/- has been introduced by the assessee in firm Sri Jagannath Steel Co.”
10. After considering the submissions of the assessee the Assessing Officer rejected the same by observing as under: –
“1. Assessee has not proved the nexus between the interest paid on unsecured loans taken by him.
2. There is no documentary evidence for introduction of loan amount by the assessee to the firm.
3. The list of unsecured loans taken by the assessee and by the firm are different.
4. There is no apportionment of the interest paid to each partner.
5. The net profit and remuneration paid to the partner are after considering the amount of interest paid which is already debited to P & L A/c, therefore the said interest expenses of 31,55,304/- can’t be allowed twice.
11. Aggrieved with the above order, assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions. After considering the detailed submissions of the assessee, Ld.CIT(A) dismissed the grounds raised by the assessee with the following observations: –
“5. After considering the facts and circumstances of the case, reply/submission of the appellant and the assessment order of the AO, the following major facts emerge from the order of the AO, which need careful consideration and analysis: –
i. The appellant has not produced any documentary evidence or proof, in support of raising of unsecured loans of 3.67 Crores, from third parties. Mere filing of a self-prepared balance sheet is not a credible and reliable evidence.
ii. No confirmations in this regard have been filed from the lenders/creditors.
iii. No lender/creditor has verified or confirmed any loan given to the appellant before the assessing authority or the appellate authority.
iv. There is no third-party verification/confirmation on record, except the mutual arrangement between appellant and the firm, namely M/s Sri Jagannath Steel.
v. No audited accounts or audit report of the appellant or the firm have been filed or produced before the assessing authority or the appellate authority, for examination or verification
vi. No bank accounts reflecting the transactions relating to loan taken, loan given and interest paid on such loan taken/given, of the appellant or the firm, have been produced before the assessing authority or the appellate authority, for examination and verification.
6. Considering the above discussed facts and circumstances in the case, the ground of appeal of the appellant are considered carefully but not found sustainable and are dismissed. Additional ground of appeal is also considered and not found sustainable in view of the facts as discussed above in para 5 of the order. In the conclusion, the appeal of the appellant is dismissed.
12. Aggrieved with the above order assessee is in appeal before us raising following grounds in its appeal: –
“1. The appellant request that delay in filing of an appeal is condoned. The appellant has a reasonable cause for not filing of an appeal in time.
2. On the facts and circumstances of the case, CIT(A) erred in confirming disallowance of interest of Rs.31,55,304 from out of business Income, though the interest was incurred for giving loan to the firm in which the appellant is a partner and appellant has received remuneration from the said firm.
3. On the facts and circumstances of the case, CIT(A) erred in confirming disallowance of interest of Rs.31,55,304, the appellant had sufficient interest free funds for personal use. The interest bearing funds were used for business purpose and hence the same are allowable.
4. On the facts and circumstances of the case and in law, the CIT(A) erred in not disposing the ground in respect of disallowance of Professional tax of Rs.2,500.”
13. At the time of hearing, Ld. AR of the assessee submitted that assessee has received remuneration of ₹.15,00,000/- from the firm and submitted that assessee has claimed interest expenditure against the above remuneration for the reason that assessee has borrowed funds and introduced the same in the partnership firm. Since the borrowing has a direct connection with the funds introduced in the partnership firm he submitted that it is a claimable expenditure against the income earned by the assessee from the firm.
14. He also submitted that assessee has transferred the funds received from loan creditors to the partnership firm in support of the same he brought to our notice bank statements of Kotak Mahindra Bank for the period wherein he highlighted the funds transferred to the partnership firm on various dates. He also brought to our notice Balance Sheet of the assessee at Page No. 4 of the Paper Book where the assessee has introduced capital in the partnership firms of ₹.2,49,23,869/- in M/s. Sri Jagannath Steel Co. and ₹.29,27,184/- in M/s. Gurunanak Metal Works and also he brought to our notice loan creditors outstanding of ₹.2.47 crores. He submits that in the immediately previous assessment year the assessee has shown the similar loan outstanding and submitted that A.Y.2013-14 is the first assessment year in which the present issue was raised. He submitted that only marginal increase of loan creditor during the current Assessment Year. In this regard he relied on the decision of the Coordinate Bench in the case of Santosh Kumar Agrawal v. ACIT in ITA.No. 2925 and 2926/Mum/1997 dated 13.07.2000 where the similar issue was decided in favour of assessee. Copy of the order is placed on record.
15. On the other hand, Ld. DR relied on the orders of the lower authorities, particularly Page No. 9 of the Appellate Order where the Ld.CIT(A) has questioned the genuineness of the loan taken by the assessee from the various creditors.
16. Considered the rival submissions and material placed on record, we observe that assessee has paid interest of ₹.31,55,304/- to the various loan creditors and only source of income was remuneration from the partnership firm and it is observed that assessee has introduced capital in the partnership firms by the name M/s. Sri Jagannath Steel Co. and M/s.Gurunanak Metal Works. The main source of income is only from these firms and income from other sources. The assessee has also brought to our notice the funds received from loan creditors and also transferring the same amount to the partnership firm. Since the main source of income to the assessee is only the remuneration and profit earned from the partnership firm and whatever the capital borrowed by the assessee was directly introduced in the partnership firm. By looking at the balance sheet, submitted before us, we observe that assessee has own capital and borrowings from family members which is equivalent to the property owned by the assessee. There is direct link with the loan creditors and the capital introduced in the partnership firm. Therefore, it establishes that the funds borrowed by the assessee is directly introduced in the partnership firm.
17. The next issue is whether the assessee can claim the interest expenditure against the remuneration received from the firm. In this regard, we observe that the Coordinate Bench in the case of Santosh Kumar Agrawal v. ACIT (supra) held as under: –
“2. From the asst. yr. 1993-94, a new scheme of taxation of the firm and partners was introduced and briefly stated according to the new scheme, the firm itself was taxed at the maximum marginal rate and the partners were taxed in respect of their share income. However, the interest and remuneration paid by the firm to its partners which were allowed as a deduction in computing the firm’s taxable income were assessed in the hands of the partners who were in receipt of the same. Sec. 28(v) which was also introduced w.e.f. the asst. yr. 1993-94 provided that any remuneration due or received by a partner of a firm from the firm shall be chargeable to income-tax under the head profits and gains of business or profession’. When the statute has, by fiction, provided that the remuneration received by the partner from the firm is to be assessed under the head ‘business’, any interest paid by the partner for the purpose of earning the remuneration must also be deducted. A fiction must be extended to its logical conclusion and one’s mind shall not boggle down when it comes to the extension of the fiction to all its logical consequences. The objection raised by the Revenue authorities is that the interest is not paid for the purpose of earning the remuneration. The answer to this objection is that strictly speaking, there cannot be a contract of service in law, between a firm and its partners. The firm is not a legal person even though it is recognised as a unit of assessment for the purpose of IT Act. Any payment of salary to a partner is only a mode of sharing the profits.
The salary paid to a partner retains the same character of the income of the firm. These principles have been laid down by the Supreme Court in the case of CIT vs. R.M. Chidambaram Pillal Etc. 1977 CTR (SC) 71: (1977) 106 ITR 292 (SC). It has been held in this decision, that the salary of a partner is only an alias for the return by way of profits for the human capital-sweat, skill and toil–which the partner has brought in for the common benefit. The immediate reason for payment of salary may be the service contract, but the causa causans is the partnership. The Supreme Court held that when an arrangement is made by which a partner works and receives amounts as wages for services rendered, the agreement should in truth be recorded as a mode of adjusting the amount, that must be taken to have been contributed to the partnership’s assets by a partner, who has made what is really a contribution in kind, instead of contribution in money. On this reasoning, the Supreme Court held that what has been paid as salary by the firm to a partner is really the share of profits paid to him. It would appear that the legislature has recognised this principle by enacting a fiction in s. 28(v). If really the remuneration has to be treated as a return of the share of profits by the firm to the partner. It follows that the partner should be entitled to all the deductions which he was hitherto entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital under s. 67(3). Sec. 36(1)(iii) of the Act enacts the same principle. The assessee in the present case is, therefore, entitled to the deduction of the interest paid on monies borrowed for investment in the firm in which he is a partner, against the amount received by him from the firm as remuneration and assessed under the head ‘business’. I direct accordingly and allow the appeals.”
18. From the above, it was held that, salary or remuneration received from the firm is no doubt compensation for the services rendered but it is considered as income from business otherwise as a return of share of profits to the partners of the firm. Therefore, the partner should be entitled to all the deductions which he was entitled while computing his share of profits in the firm including the deduction in respect of interest paid on monies borrowed for investment in the firm as capital u/s. 67(3) of the Act. Respectfully following the above said decision, even in this case, assessee has introduced the capital in the firm by borrowing funds from various loan creditors, it has direct nexus with the remuneration and other profits earned by the partners. In this case, assessee has earned only remuneration income from the firm and incurred interest expenditure, therefore should be allowed to claim the interest expenditure. Further, we observe that Ld.CIT(A) has not addressed the issue under consideration and took it to a different dimension questioning the genuineness of the loan borrowed by the assessee. However, no concrete findings were given by the Ld.CIT(A) on the borrowings and also did not proceeded to make proper investigation to reach a logical conclusion, rather he proceeded to confirm the additions made by the Assessing Officer. Whereas, the issue raised by the Assessing Officer is only whether the assessee is allowed to claim the interest expenditure against the remuneration received from the firm. In view of our above findings on the issue, we are inclined to allow the appeal filed by the assessee.
19. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 15th September, 2023
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