IN THE ITAT MUMBAI
Assistant Commissioner of Income-tax 12(3)
V/s.
Novel Enterprises
IT APPEAL NO. 1328 (MUM.) OF 2009
[ASSESSMENT YEAR 2005-06]
JUNE 13, 2012
ORDER
Vivek Varma, Judicial Member
The appeal filed by the department emanates from the order of the CIT(A)-XII, Mumbai, dated 16.12.2008.
2. The grounds raised by the department are as under :-
1. “On the facts and circumstances of the case and in law, the ld. CIT(A) erred in directing the A.O. to delete the addition of Rs. 33,08,179/- u/s 14A made on account of notional interest of paid to Reliance Capital Ltd. ignoring the facts that:
a. There was a nexus between the capital contribution and the share of profits of partners.
b. The assessee has earned both taxable as well as exempt income in the form of interest & share of profit from M/s Shreenath Enterprises.
c. The assessee has earned exempt income also on account of the capital introduced in the firm and this capital has come from the loan taken from Reliance Capital Ltd. on which it is paying interest, the addition made by the AO by invoking the provisions of section 14A is correct.”
3. The basic facts of the case are :
The appellant is a trust engaged in the business of shares and securities and a partner of a partnership firm M/s Shreenath Enterprises. During the year under reference, the Appellant had obtained loan from Reliance Capital Ltd (RCL) and was utilized for the purpose of business of trading in shares securities and also its loan/contribution to capital to Shreenath Enterprises. The appellant has paid interest to RCL and also received interest from Shreenath Enterprises. M/s. Shreenath Enterprises was formed as a partnership firm vide partnership deed dated 24th July, 2000. The assessee was admitted as a partner in the said Shreenath Enterprises vide agreement dated 1.1.2004. Clause (5) of the admission agreement sets out the profit sharing ratio amongst the partners including the assessee. On perusal of the said clause, it is seen that the contribution of capital or profit by way of loan were not the conditions while admitting the assessee in the partnership firm. The partners are entitled to their share of profits as per the partnership deed and such, share of profit is not dependent on contribution of funds made by the partners. The AO has estimated and apportioned interest expenses of Rs. 33,08,179 towards earning of exempt income and accordingly computed income after disallowing u/s 14A.
4. The A.O. took up the assessment proceeding and sought an explanation from the assessee that when interest payment is more than interest received and moreover interest free income in the form of share of profits from partnership firm is received then why suitable disallowance u/s.14A of the I.T. Act, 1961 be not made. The assessee made detailed submissions vide submission dated 26.11.2007. After considering the submissions of the assessee, the A.O. makes the following observations :
As per agreement dt. 1-1-2004 between the three partners of M/s Shreenath Enterprises i.e. M/s Deite Enterprises Pvt Ltd, M/s Radian Texfab Pvt. Ltd and the assessee point no.5 states that the net profit / loss of the partnership will be shared between the partners in the ratio of 1:1:98. On going through the capital account of all the three partners in M/s Shreenath Enterprises, it is seen that the assessee has an opening balance of Rs. 332,13,49,642 and has made an addition of Rs. 322,79,00,000 during the year. Whereas Delite Enterprises has an opening balance of Rs. 31,90,09,749 and Radian Texfab Pvt. Ltd. has an opening balance of Rs. 31,90,34,792 and no capital has been introduced by these partners during the financial year 2004-05. Thus, if total capital contribution is to be measured in percentage terms, the following facts will be observed:
