Case Law Details
Enco Shoes Vs DCIT (ITAT Delhi)
ITAT Delhi held that notional interest on debit balance of partner’s account not sustainable in absence of information of diversion of interest bearing borrowed funds for non-business purpose. Further, notional interest cannot be charged for taxing in the partner’s debt balance specifically when there is no discussion in the partnership deed
Facts-
The facts noted by AO are that there is debt balance in the partners account of Rs.1,16,50,965/- i.e., in the account of Shri Najmul Hasan and Smt. K. Faiza Simin and further, there is an investment in the name of Shri Najmul Hasan under the Najmul Investment Account of Rs.40 lakhs. The net debt balance in partner’s account adds up to Rs.1,41,78,774/-. According to AO, since there is net debt balance of Rs.1,41,78,774/-, the assessee has diverted interest bearing borrowed funds for the purpose of non-business purposes. Therefore, the AO charged notional interest @ 12% on the net debt balance which worked out to Rs.17,01,453/-. CIT(A) confirmed the action of AO. Being aggrieved, the present appeal is filed.
Conclusion-
In our view, the interest can be disallowed if the assessee has diverted interest bearing borrowed funds for the purpose of non-business. But here there is no information that how much is borrowed funds and moreover only packing credit is meant for exports against orders. Therefore, there is no reason that any diversion of these funds for debt balance of the partners. Accordingly, we are of the view that there cannot be any notional interest charged for taxing in the partner’s debt balance specifically when there is no discussion in the partnership deed, if any, has provided any charging of interest on debt balance and rates specified therein. Since these evidences are not brought on record by the AO or there is no discussion, simpliciter the notional interest cannot be charged and cannot be disallowed u/s.37 of the Act. Hence, we delete the addition and allow this issue of assessee’s appeal.
FULL TEXT OF THE ORDER OF ITAT DELHI
This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-12, Chennai in ITA No.69/CIT(A)-12/2015-16 dated 14.12.2017. The assessment was framed by the DCIT, Non Corporate Circle 10(1), Chennai for the assessment year 2012-13 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’), vide order dated 28.03.2015.
2. At the outset, it is noticed that this appeal is barred by limitation by 28 days as noted by the Registry. The facts are that the order appealed against i.e., the appellate order of CIT(A) dated 14.12.2017 was received by assessee only on 14.12.2017 as noted in Form No.36. The appeal was to be filed on or before 12.02.2018 whereas the appeal was filed before Tribunal only on 12.03.2018. The ase has filed condonation petition dated 07.07.2018, wherein it has clarified that the date of receipt of order of CIT(A) is dated 22.12.2017 whereas they have wrongly mentioned the date of receipt of order of CIT(A) in Form No.36 as 14.12.2017. It was also explained that the date on which appeal ought to have been filed is 20.02.2018 but appeal was actually filed on 12.03.2018 thereby there is a delay of 20 days instead of 28 days as noted by the Tribunal. The assessee filed condonation petition stating that there is delay of 20 days and could not state any reason in its petition which we have gone through. But, seeing the nature of delay and the smallness of delay, we condone the delay and admit the appeal.
3. The first issue in this appeal of ase is as regards to the order of CIT(A) confirming the action of AO in restricting the addition of introduction of capital by one partner Shri Najmul Hasan added u/s.68 of the Act by the AO to the extent of Rs.11 lakhs.
4. We have heard ld. Senior DR and gone through facts and circumstances of the case. Since, none is present from assessee’s side despite notices and this is 33rd occasion when the case is fixed for hearing. Hence, we decided to hear the matter ex-parte qua the assessee.
5. Brief facts are that the AO noted that one of the partner Shri Najmul Hasan introduced capital amounting to Rs.21 lakhs by way of cash as under:-
01/04/2011 – Rs.3,00,000/-
05/04/2011 – Rs.18,00,000/-
The AO asked the assessee to explain. The assessee explained vide letter dated 09.03.2015 that they have heaving drawing of Shri Najmul Hasan and the income returned during the year is Rs.28 lakhs, which explains the source of cash introduced. The assessee explained that the firm has given cash amounting to Rs.10 lakhs to Shri Najmul Hasan on 05.03.2011 and his wife having sundry debtors and other investments amounting to Rs.28,51,676/- from which, this amount of Rs.21 lakhs was invested as capital in the firm. The AO noted that the partner Shri K. Najmul Hasan has returned the income for assessment year 2012-13 at Rs.20,19,656/- and not Rs.28 lakhs as claimed. It was also noted by AO that there is drawing of Rs.6,77,130/- and cash belongs in the partners statement of affairs is not actually cash as entries relates to share of profit and remuneration are not paid by the firm by way of cash. Therefore, he added the assessee’s introduction of capital in the firm amounting to Rs.21 laks as unexplained. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) deleted the addition of Rs.10 lakhs accepting the explanation that the cash drawing of Rs.10 lakhs on 05.03.2011 was available with him but restricted the addition at Rs.11 lakhs being unexplained by observing in para 5.2.3 & 5.2.4 as under:-
“5.2.3 I have gone through the submissions filed and the evidences submitted in support of the above. It is seen that Rs.10,00,000/- was given by Enco Shoes to Najmul Hasan on 5/3/2011. There is no dispute regarding the appellant’s explanation of returned income of Rs.28,00,000/-. However, the cash flow for the balance of Rs.11,00,000/- is not clear from the accounts.
5.2.4 The AR of the appellant has not furnished the cash flow to explain the source of balance of Rs.11,00,000 introduced as capital. It is not enough to explain the identity of the creditor. That is not doubted at all. However, onus is on the appellant to prove with evidence the immediate source of funds by way of cash flow from the accounts to explain the introduction of capital. The cash of Rs.10,00,000/- received on 5/3/2011 can be considered for the source to that extent for the capital introduced on 1/4/2011 and partly for 5/4/2011 being proximate dates to the date of cash receipt. But there is no clear fund flow available to explain the deposit of rest of the amount. Therefore, I confirm the addition to the extent of Rs.11,00,000/-.
6. After hearing ld. senior DR and going through the case records, we notice that there is no dispute that there is returned income for assessment year 2012-13 of Rs.20,19,656/- and admittedly, there is a withdrawal of Rs.6,77,130/- during the year as cash as admitted by AO in assessment order while rejecting the assessee’s explanation. We noted that there is no dispute that out of Rs.21 lakhs, the CIT(A) accepted the explanation of Rs.10 lakhs availability with the assessee which is out of withdrawal from the firm on 05.03.2011 just one month before. For balance Rs.11 lakhs, we are of the view that the assessee is able to explain the same out of the returned income of Rs.20,19,656/- and withdrawals admitted by AO at Rs.6,77,130/-. Hence, we delete the addition on merits and allow the appeal of assessee on this ground. This issue of assessee’s appeal is allowed.
7. The second issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in disallowing interest on debt balance of partners at Rs.17,01,453/-.
8. We have heard ld. Senior DR and gone though the facts and circumstances of the case. The facts noted by AO are that there is debt balance in the partners account of Rs.1,16,50,965/- i.e., in the account of Shri Najmul Hasan and Smt. K. Faiza Simin and further, there is an investment in the name of Shri Najmul Hasan under the Najmul Investment Account of Rs.40 lakhs. The net debt balance in partner’s account adds up to Rs.1,41,78,774/-. According to AO, since there is net debt balance of Rs.1,41,78,774/-, the assessee has diverted interest bearing borrowed funds for the purpose of non-business purposes. Therefore, the AO charged notional interest @ 12% on the net debt balance which worked out to Rs.17,01,453/-and disallowed by observing in para 8.4 as under:-
“8.4 Hence, the net debit balance of Rs.1,41,78,774/- is taken for the purpose of interest calculation. The assessee has diverted interest-bearing borrowed funds for the purpose of non-business purpose. The interest disallowance is computed at 12% of the net debit balance which works out to Rs.17,01,453/-. This interest is considered as being incurred for non-business purpose and disallowed under section 37.”
The CIT(A) also confirmed the action of AO by observing in para 5.3.4 as under:-
“5.4.4 The AR of the appellant was asked to substantiate his reasoning by way of credible evidence. It is clear that there is a huge debit balance of Rs.1,41,78,744/- in the accounts of the partners. The argument that partners belong to a community where interest was not charged cannot be a valid explanation. It is immaterial whether interest was charged or chargeable. What is important to examine is the funds of the firm have been used for the purposes other than business when there is huge borrowings. IT is also not proved by way of fund flow statement that credit availed were used only for business purposes and not diverted for any other purpose. Neither during the assessment proceedings nor during the appellate proceedings has the appellant given satisfactory explanation on the balance in the accounts of partners. In the absence of the above, I confirm the interest disallowance computed at 12% of the net debit balance which worked out to Rs.17,01,453/-.”
Aggrieved assessee is in appeal before Tribunal.
9. After hearing ld.Senior DR and going through the case records, we noted that first of all there is no evidence that the assessee has diverted interest bearing funds for this debt balance of partners account of Rs.1,41,78,774/-. The AO is unable to bring nexus that the interest bearing funds were diverted towards partner’s debt balance. Secondly, can the notional interest be charged for making disallowance u/s.37 of the Act or not. In our view, the interest can be disallowed if the assessee has diverted interest bearing borrowed funds for the purpose of non-business. But here there is no information that how much is borrowed funds and moreover only packing credit is meant for exports against orders. Therefore, there is no reason that any diversion of these funds for debt balance of the partners. Accordingly, we are of the view that there cannot be any notional interest charged for taxing in the partner’s debt balance specifically when there is no discussion in the partnership deed, if any, has provided any charging of interest on debt balance and rates specified therein. Since these evidences are not brought on record by the AO or there is no discussion, simpliciter the notional interest cannot be charged and cannot be disallowed u/s.37 of the Act. Hence, we delete the addition and allow this issue of assessee’s appeal.
10. The next issue in this appeal of assessee is as regards to addition by disallowance of interest on TDS of Rs.69,058/-.
11. We have heard ld. Senior DR and gone through the case records. There is no disallowance by the AO. However, the CIT(A) has disallowed this interest paid on TDS of Rs.69,058/- and debited to the profit & loss account as interest paid. WE noted that this issue is covered in favour of Revenue and against assessee by the decision of ITAT, Ahmedabad in the case of ITO vs. Royal Packaging in ITA No.1363/Ahd/2010, wherein it is held that interest on late payment of direct taxes is not deductible. Hence, we confirm the addition and dismiss this ground of assessee’s appeal.
12. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 6th January, 2023 at Chennai.
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