2019 (11) TMI 984 - AT - Income Tax

Disallowance of various expenses debited to the Profit and Loss account - assessee has not carried out any business activity during the year - HELD THAT - The copy of the Partnership Deed which is placed by the assessee in the Paper Book reveals that one of the activity of the firm is financing as spelt out in the Partnership Deed. We further find that the conclusion of the AO of assessee not having carried out any business activity is also contrary to the facts in view of the fact that in computation of income in the assessment order. AO himself has computed the income of ₹ 19,09,431/- as business income . The aggregate capital balance of the partners also reveals that the partners capital account in aggregate is in credit and only the capital of one of the partners is in debit. We are of the view that AO was not justified in disallowing the expenses by noting that no business activity has been carried out by the assessee. We therefore the AO direct to delete the addition made by him. Thus, the grounds of the assessee are allowed.

Summary

Issues:
1. Opportunity of being heard not granted violating principles of natural justice.
2. Addition of ?70,13,404 on account of disallowance of various expenses debited to Profit and Loss account.

Analysis:
1. The appeal raised concerns over the violation of natural justice principles due to the lack of proper opportunity to be heard. The Assessee did not press the issue further during the proceedings.
2. The main issue revolved around the addition of ?70,13,404 on the disallowance of expenses by the Assessing Officer (AO). The AO contended that the Assessee, a partnership firm, was not authorized to engage in money lending activities without a license, thus categorizing the interest earned as 'income from other sources' instead of business income. The AO re-casted the Profit and Loss account, disallowing certain expenses and making the addition based on his calculations.

3. The Commissioner of Income Tax (Appeals) upheld the AO's decision, emphasizing that the expenses claimed were not related to income generation as the Assessee was not actively conducting business activities. The CIT(A) highlighted the Assessee's failure to justify the expenses as business-related, citing legal precedents regarding the onus of proof on the Assessee for claiming deductions under the Income Tax Act.

4. The Assessee challenged the decision, presenting the Partnership Deed indicating financing as a permissible activity and disputing the AO's assertion of no business activity based on the computation of income in the assessment order. The Assessee argued that the addition should be deleted as the AO's assumptions were incorrect.

5. The ITAT Pune, after reviewing the submissions and evidence, found that the Assessee's Partnership Deed allowed for financing activities, contradicting the AO's claim of no business activity. Considering the income computation in the assessment order and the overall capital balance of the partners, the ITAT concluded that the AO's disallowance of expenses was unjustified. The ITAT directed the AO to delete the addition, partially allowing the Assessee's appeal.

6. The judgment highlighted the incorrect assumptions made by the AO regarding the Assessee's business activities and concluded that the disallowance of expenses was unwarranted. The ITAT's decision to delete the addition of ?70,13,404 was based on a comprehensive analysis of the facts and legal principles, providing relief to the Assessee in this matter.