2014 (4) TMI 1235 - AT - Income Tax

Tribunal reclassifies income as 'Business income' and allows interest deduction

Mr. Nayant Maneklal Savani Versus ITO, Ward 7 (2) (2), Mumbai

The Tribunal allowed the appeal of the assessee, directing the treatment of the income declared during survey proceedings as 'Business income' and ... Treatment of income declared by the assessee during the survey proceedings u/s 133A - income from other sources OR business income claimed by the assessee - HELD THAT:- In the absence of any evidence brought by the authorities below to disprove/disbelieve the claim of the assessee treating the impugned receipt under the head 'business income', the authorities below are not justified in treating the same under the head 'income from other sources'. D.R. could not bring before us any contrary fact or case law which may justify departure from the above finding of the Tribunal given in the case of other partner of the firm namely Mr. Hansat Maneklal Savani [2013 (12) TMI 1364 - ITAT MUMBAI]. So respectfully following the same, for the sake of consistency, this issue is allowed in favour of the assessee and the income declared by the assessee during the course of survey is directed to be treated under the head ‘Business income’ as has been claimed by the assessee. Disallowance of interest paid by the assessee to the firm in which he has been a partner - HELD THAT:- The partners are entitled to interest on the credit balance in the capital account, as prescribed u/s 40(b)(iv) of the I.T. Act 1961 @ 12%. The partners are also liable to pay interest on the debit balance in capital account on similar basis. It is further submitted that the liability to pay interest arises out of contractual obligation. The perusal of the copy of the Firm's assessment order for Asst. Year 2008-09 available at Paper Book Page 30 reveals that in the case of the firm M/s. MSN Enterprises the said interest has been assessed as income of the firm. Having considered the rival submissions, reasoning of the lower authorities and material on record, we are of the considered view that the claim of the assessee is emanating out of contractual obligation and is in consonance with the provisions of law. D.R. could not bring before us any contrary fact or case law which may justify departure from the above finding of the Tribunal given in the case of other partner of the firm namely Mr. Hansat Maneklal Savani. So respectfully following the same, for the sake of consistency, this issue is allowed in favour of the assessee. Issues:1. Treatment of income declared during survey proceedings under Section 133A as 'Income from Other Sources' instead of business income.2. Disallowance of interest paid to the firm in which the assessee is a partner.Issue 1 - Treatment of Income:The appellant declared an income of Rs. 1.25 crores during a survey under section 133A, offering it as business income. However, the Assessing Officer (AO) treated it as 'Income from Other Sources' due to the appellant's failure to describe the exact nature of business. The Commissioner of Income Tax (Appeals) upheld this decision. The appellant argued that the income should be treated as business income. The Tribunal referred to a similar case involving the brother/partner of the appellant, where the income declared during survey proceedings was treated as business income. The Tribunal found no reason to disbelieve the appellant's claim and directed the income to be treated as 'Business income,' following the previous decision.Issue 2 - Disallowance of Interest:The AO disallowed interest of Rs. 37.79 lakhs paid by the appellant to the firm in which he was a partner, stating it was paid on debit balances arising from the firm's losses. The CIT(A) confirmed this disallowance. The appellant contended that a similar issue was decided in favor of the brother/partner of the firm in a previous case. The Tribunal reviewed the previous decision, where interest paid on overdrawn balance was allowed as a business loss. The Tribunal found the claim to be based on contractual obligation and in line with the law, overturning the lower authorities' decision. As there was no contrary evidence presented by the Revenue, the Tribunal allowed the issue in favor of the appellant.In conclusion, the Tribunal allowed the appeal of the assessee, directing the treatment of the income declared during survey proceedings as 'Business income' and overturning the disallowance of interest paid to the firm.