2014 (7) TMI 547 - AT - Income Tax

Interest claimed on partners capital contribution made to chit funds and interest claimed on payment to retired partners outstanding balance - claim of deduction from income from other sources - nexus with lease rent received on lodge building Held that - Income of the assessee from lease rent of lodge is assessed as income from other sources - While computing the income from other sources any interest paid on money borrowed for the purpose of investment so as to earn income from such asset, then such interest on borrowal is to be considered wholly and exclusively for the purpose of earning income as per the provisions of s. 57(iii) of Income-tax Act, 1961 - The dominant purpose was to be for the purpose of acquisition of assets. If the funds are not borrowed to invest them for the purpose of earning income, the provisions of s. 57(iii) cannot be applied - although the borrowing may have a remote connection with the assessee s earning of income, the dominant purpose was not to earn lease rent - it cannot be said that money was borrowed wholly and exclusively for the purpose of earning lease rent from the lodge - the assessee failed to establish the link between the investments made in chit funds by the Managing Director and role of these investments in earning lease rent - the disallowances of interest on chit funds as well as interest to retired partners is confirmed Decided against assessee. Validity of proceedings u/s 147 r.w.s. 150(1) of the Act Held that - Re-assessment proceedings u/s. 147 of the Act were initiated after expiry of six years from the end of relevant assessment year and the same is time barred in terms of s. 149(1) of the Act, since the issue of notice u/s. 148 r.w.s. 149(1) can be said to have been barred by limitation and also provisions of s. 150(1) cannot be pressed into service thus, the order of the CIT(A) is upheld Decided against Revenue.

Summary

Issues involved:
1. Disallowance of interest claimed on partners' capital contribution to chit funds and payment to retired partners' outstanding balance.
2. Validity of re-assessment proceedings initiated under section 147 r.w.s. 150(1) of the IT Act for the assessment year 2001-02.
3. Whether the CIT(A) should have decided various other grounds raised by the appellant despite holding that there is no valid assessment order.

Issue 1: Disallowance of interest claimed on partners' capital contribution and payment to retired partners:
In ITA No. 1424/Hyd/2010 and 459/Hyd/2013, the Tribunal considered the disallowance of interest claimed on partners' capital contribution to chit funds and payment to retired partners' outstanding balance. The AO disallowed the interest payments, stating no nexus between the investments made and the income earned. The CIT(A) upheld the disallowances, emphasizing the lack of nexus between the investments and income earned. The Tribunal confirmed the disallowances, ruling that the dominant purpose of borrowing was not to earn income, thus failing to establish a link between investments and income earned. Consequently, the appeals were dismissed.

Issue 2: Validity of re-assessment proceedings under section 147 r.w.s. 150(1) for the assessment year 2001-02:
In ITA No. 698/Hyd/2013, the Revenue challenged the CIT(A)'s decision to invalidate re-assessment proceedings initiated under section 147 r.w.s. 150(1) for the assessment year 2001-02. The CIT(A) held that without specific direction or finding for that assessment year, invoking section 150(1) was improper. As the proceedings were initiated after the statutory time limit, the CIT(A) quashed the proceedings, which the Tribunal upheld. The Tribunal ruled the proceedings were time-barred and section 150(1) couldn't be applied, leading to the dismissal of the Revenue's appeal.

Issue 3: Decision on various other grounds despite the absence of a valid assessment order:
In ITA No. 458/Hyd/2013, the appellant argued that despite the absence of a valid assessment order, the CIT(A) should have decided other grounds raised in the appeal. The Tribunal dismissed this appeal, similar to ITA No. 457/Hyd/2013, stating that since the assessment order was non-est, the CIT(A) was justified in not adjudicating other additions on merit. Consequently, the appellant's appeal was dismissed.

In conclusion, all the appeals in ITA Nos. 1424/Hyd/2010, 457, 458, 459/Hyd/2013 (appellant's appeals) and 698/Hyd/2013 (Revenue's appeal) were dismissed by the Tribunal in its judgment dated May 22, 2014.