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TMI Blog2015 (11) TMI 534X X X X Extracts X X X X X X X X Extracts X X X X ..... , as it has already suffered tax in the hands of the firm. Therefore, expenditure incurred on the borrowed funds for investments in share capital of firm should be allowed as business expenditure. - Decided in favour of assessee. Disallowance of standard deduction and interest paid on housing loan - Held that:- The property so let out is consisting of land and building. The assessee has acquired the said property in the year 2004 by borrowing a loan from commercial bank and assessed the income under the head income from house property right from the beginning. The department accepts the stand of the assessee in the earlier years, cannot dispute now under the same set of facts. The AO was of the view that the property was predominantly was a vacant site and having a small building cannot be considered as a house property to assess the income from said property under income from house property. We do not agree with the contention of the Assessing Officer, for the reason that the annual vale of any buildings or land appurtenant thereto of which the assessee is a owner, income from such property is chargeable under the head income from house property. Further, Once the income is ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Notional interest on investment in firms - Held that:- There was no provision in the Income-Tax Act empowering the Income-Tax authorities to include the interest income which was not due or not collected, See3F Industries Ltd. Versus Joint Commissioner of Income-tax, Rajamundry Range [2014 (9) TMI 311 - ITAT VISAKHAPATNAM ] - Decided in favour of assessee. Notional Interest of Investments in Company - Held that:- A.O. cannot estimate notional interest without establishing that either interest is received or accrued to the assessee. Unless, there is contractual obligation to charge interest, the question of income accrue or arise does not arise. The A.O., cannot sit in the place of a businessman and decide how to conduct business. Every prudent businessman makes investment with the intention to earn income. But, the fact is that all investments may not yield income. The A.O. has not given any cogent reason to establish that such legal right to receive the income has arisen to the assessee. There is no evidence with the A.O., to show that the assessee has received any interest income. Therefore, the A.O., is not correct in estimating the income. The CIT(A), rightly deleted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vii. Notional interest on investments Rs.26,02,952/- viii. Notional interest on investments Rs.41,25,000/- 3. The assessee challenged the assessing officer s order before the CIT(A). The Ld. CIT(A), after considering the explanations offered by the assessee, deleted the following additions and confirmed the rest of the additions: i. Interest paid to HDFC Bank Rs.7,10,543/- ii. Interest paid on housing loan and disallowance of Statutory deduction u/s 24 Rs.2,81,179/- iii. Estimated income on House Property Rs.2,38,816/- iv. Advertisement charges paid Rs.23,974/- v. Notional interest on investments Rs.26,02,952/- vi. Notional interest on investments Rs.41,25,000/- 4. Aggrieved by the CIT(A) s order, the revenue is in appeal before us and raised th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure towards interest. i. Any other ground that may be urged at the time of hearing. 5. From the above grounds of appeal, the revenue has agitated the following issues for our consideration. a) Whether on facts and circumstances of the case, the CIT(A) is right in deleting the following additions made by the Assessing Officer? i. Interest paid to HDFC Bank of ₹ 7,10,543/- ii. Standard deduction and interest paid on borrowed capital of ₹ 2,81,979/- claimed u/s 24 of the Act. iii. Estimation of gross annual value from let out property of ₹ 2,38,816/- iv. Disallowance of advertisement expenditure u/s 40a(ia) of the Act of ₹ 23,974/-. v. Notional interest on investments in firms and companies of ₹ 26,02,952/- vi. Notional interest on investments and in firms and companies of ₹ 41,25,000/-. Interest paid to HDFC Bank: 6. The assessee has borrowed ₹ 50 lakhs from HDFC Bank and in turn invested the same amount in the partnership firm M/s. Mithra Agencies, wherein he has a partner having 60% share of profits. The assessee has claimed interest paid on loan amount of ₹ 7,10,543/- as business expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt is deductible as business expenditure in the hands of the firm. Therefore, the legitimate taxes payable to the exchequer of the Government is already paid by the firm and balance amount is distributed among the partners which is being exempt u/s 10(2A) of the Act. The assessee has rightly claimed the interest paid on borrowed funds against the business income. Therefore, the A.R., urged to confirm the order of the CIT(A). 9. We have heard both the parties and perused the materials available on record and also considered the case laws cited by the revenue. It is undisputed fact that the assessee has invested ₹ 50 lakhs in the partnership firm and as a result of this investment, it has earned remuneration of ₹ 6 lakhs and share of income of ₹ 32,48,000/- from the firm. Unless this investment is being made, the assessee would not have earned these two incomes. The A.O. disallowed the interest paid on loan on the sole ground that the income from the partnership firm is exempt in the hands of the assessee and the remuneration received from the firm is for the services rendered by him to the firm. Therefore, there is no nexus between investments and income earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said property was offered under the head income from house property. During the course of assessment, the assessing officer assessed the income from said property under the head income from other sources and disallowed the standard deduction and interest paid on borrowed capital u/s 24 of the Act of ₹ 34,200/- and ₹ 2,46,949/- respectively. During the appellate proceedings, the CIT(A) allowed the claim of the assessee and held that income from the said property is assessable under the head income from house property. 12. The Ld. D.R. submitted that the assessee owns a property ad measuring 380 Sq.yds. of land and built a small portion of building of 307 sq.ft. The property let out to firm was a vacant land therefore, the annual rental income from the said property should be assessable under the head income from other sources and deductions claimed u/s 24 of the Act being standard deduction and interest paid on borrowed capital cannot be allowed as a deduction. 13. The authorised representative of the assessee on the other hand, submitted that the property let out was consisting of land and building which was let out to a partnership firm for an annual rent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- and after allowing 30% rebate u/s 24 of the Act computed the income from house property at ₹ 2,38,816/- as against the assessee s declaration of ₹ 96,000/-. The CIT(A), after considering the submissions made by the assessee, deleted the additions made by the A.O., by holding that the said building is 40 years old situated in a residential locality and cannot be compared to the another building belonging to assessee s wife which is situated in a commercial locality. 16. The Ld. D.R. submitted that the plinth area of the property let out was 2880 sq.ft. and the rent offered to such building seems to be very low. The D.R, further, submitted that the assessee is paying a rent of ₹ 1,08,000/- on leased premises to his wife which is consisting of 650 sq.ft. which works out to ₹ 13.84ps. per sq.ft. Therefore, keeping in view of the locality, fair market value and the average rent paid on leased premises to his wife, the average rent paid to wife property, shall be adopted to the let out property in the hands of the assessee. 17. On the other hand, the authorised representative of the assessee, strongly supported the orders of the CIT(A) and requested to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of annual value which is the higher of the gross annual value received by the assessee, municipal valuation and fair market value of the property. In the present case, the municipal valuation of the said property as per the assessee s claim is ₹ 10,544/- and the assessee has received annual rent of ₹ 96,000/-. Further, the fair market value of the property cannot be ascertained from the same locality as the relevant materials are not available on record. So, from the above, it is very clear that the gross rent received by the assessee is higher of these three. The assessee has rightly adopted the gross annual value of ₹ 96,000/-, whereas the assessing officer without bringing on record any comparable cases, simply compared the property, which is situated in a different locality and estimated the income. The CIT(A), after examining the details of the property deleted the additions made by the A.O. Therefore, for the reasons stated above, we do not find any infirmity in the order of the CIT(A) and accordingly delete the additions made by the A.O. and dismiss the ground raised by the revenue. Disallowance of Advertisement charges u/s 40a(ia): 19. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agencies and also he had offered ₹ 3,76,216/- as interest income from investment of ₹ 34,24,682/- from the firm M/s. Achyuta Automobiles. By applying the same principles, he should have received the interest from these two investments. The Ld. D.R. further submitted that the assessee is paying interest on borrowed funds for investing in these firms. Therefore, he should have estimated the interest income@ 12% on investment in firm. 23. On the other hand, the authorised representative of the assessee, submitted that the assessee is a partner in M/s. The Mithra Agencies and the investment in the firm represent his share capital as a partner. No interest was admitted because the partnership deed does not provide for interest in the firm. He further, submitted that when the firm has not paid interest nor provided in its books of accounts, the assessing officer cannot estimate the income from these two investments. He further, argued that there is no provision under the Income Tax Act to estimate notional interest on capital account of the partnership firms. The A.R. further, submitted that the assessee has invested funds in M/s. Dasarath Motors with an intention to join ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide for interest on capital. The assesse has earned share of income and remuneration from the partnership firm, as a result of these investments in the firm. The finding of the assessing officer is that the assessee ought to have collected the interest. If the assessee had not bargained for interest or had not collected any interest, the Income-Tax authorities could not fix a notional interest as due or as collected by the assessee. There was no provision in the Income-Tax Act, to authorise the assessing officer to include the income which is not due or not collected. The A.O. has not given any cogent reason to establish that such legal right to receive the income has arisen to the assessee. There is no evidence with the A.O., to show that the assesse has received any interest income. 25. It is pertinent to mention here that the Hon ble Delhi High Court s decision in the case of Shivnandan Buildcon Pvt. Ltd. Vs. CIT Anr. (2015) 93 CCH 46, wherein Hon ble High Court held as follows: On going through the reasoning adopted by the Commissioner of Income Tax, it appears that the only reason why the addition was made was on account of the fact that no explanation has allegedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax (Appeals) and the Tribunal. 16. In this case there is no finding when the assessee had in fact received the interest or that the Jorhat Investments Ltd., had in fact paid the interest to the assessee and the interest was not reflected in the accounts. The finding is that the assessee ought to have charged interest. 17. The facts in the instant case are more or less identical with the case of Highways Construction Co... Pvt. Ltd. v CIT [1993] 199 ITR 702, wherein this court held (page 708) There is no finding of fact to the effect that actually the loan had been granted to the managing director or any other person on interest, or that interest had actually been collected and the collection of the interest was not reflected in the accounts. The finding of the Income Tax Officer is that the assessee ought to have collected interest. In other words, the view of the Income Tax Officer, which has been accepted by the Tribunal, was that the assessee, as a good business concern, should not have granted interest-free loan, or should have insisted on payment of interest. If the assessee had not bargained for interest, or had not collected interest, we fail to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on the investment, hence no income was admitted on this investment. During the course of assessment, the assessing officer has estimated notional interest of ₹ 41,25,000/- @12% on the advance of ₹ 3,43,75,000/- and brought to tax. The assessee carried the matter to the CIT(A). During the course of appellate proceedings, the CIT(A) deleted the additions made by the A.O. by holding that without establishing that either interest was accrued or received as required under the provisions of the section 5 of the Act, the A.O. cannot make any additions. Aggrieved by the CIT(A) order, the Revenue is in appeal. 29. The Ld. D.R., submitted that the assessee has borrowed ₹ 3 crores from M/s. Achyuta Automobiles and the lender has charged interest on the money borrowed by the assessee. Therefore, whether the assessee claims it as a deduction or not, once the interest bearing funds utilized for making investment in another firm, the interest should be brought to tax. 30. On the other hand, the A.R. submitted that the assessee has advanced funds to M/s Bhanu Auto Agencies Pvt Ltd., out of the funds borrowed from its sister concern M/s Achyuth Automobiles. Though, the le ..... X X X X Extracts X X X X X X X X Extracts X X X X
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