TaxTMI 
TaxTMI 
2016 (12) TMI 866
X X X X Extracts X X X X
X X X X Extracts X X X X
....") read as under:- "1. Ground No-1 The H'ble Commissioner of Income-tax (Appeals)-9 Mumbai [,CIT (A)'] has erred in confirming the addition of interest of Rs. 33,23,178/- without considering the fact that the appellant has neither received any real income nor said interest is materialized in subsequent year from the partnership firm, in which appellant was a partner. 2. Ground No-2 The CIT (A) has erred in considering part of the information and ignored the fact that the partnership firm has not claimed any interest expenses of Rs. 33,23,178/- in its Profit & Loss account. The interest has been capitalized and added to the Work In Progress, which has been reversed in books in the subsequent year. 3. Ground No-3 The CIT (A) has erred in not considering the fact that reversal of entries in the books of the partnership firm in the subsequent year does not result in real income. 4. Ground No-4 The CIT (A) has erred in ignoring the fact that the partnership firm has not claimed deduction in respect of the interest of Rs. 33,23,178/- and in absence of any claim of the interest expenses by the partnership firm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tners Capital introduced Withdrawal Int. on capital Share capital in partnership firm 1 Somnath Project Org. P. Ltd. 7,10,00,000 - 33,23,178 7,43,23,178 2 Ketan A Shah 1,65,000 1,55,000 427 10,427 3 Ramesh C Shah -- 4,00,000 19,587 4,19,857 (debit balance) 4 Jitendra R Jain 1,36,61,000 80,00,000 56,181 57,17,181 The assessee was show caused as to why interest @ 12% amounting to Rs. 33,23,178/- credited by the partnership firm Kamlashri Builders as per clause of the partnership deed should not be added to the total income of the assessee. The assessee in response submitted that the assessee is partner in M/s Kamlashri Builders. The original partnership deed contained the interest payment clause to the partners but the same was amended on 18th January, 2006 w.e.f. the original deed and as per the amended partnership deed the interest was not liable to be paid to partners . As the assessee had not earned any interest income and hence the same was not offered for taxation.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd no actual payment was made for the interest expenses. The partners have also not revised the return of income of the partnership firm but have passed only reverse journal entries in the books of accounts of the next year. According to the assessee, there is no change in the income returned of partnership firm and it will only increase in the value of the work-in-progress, as no expenses were claimed for the interest expenditure provided in the books of the partnership firm 'Kamlashri Builders' but the same were added to the closing WIP. The AO observed that passing of the entries in the next year is not proper way to rectify the mistake or given the effect of revised partnership deed. The A.O. observed that the audit report of the year under consideration requires to be amended , particularly amount of share capital and work-in- progress. It was also observed that if the assessee invested fund not in the partnership firm but elsewhere , then it would have earned interest. If the partnership firm will earn profit from its business activity even though the assessee company will not get much more than its profit sharing ratio. It was observed that the assessee company has introduce....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ently reopened u/s 148 of the Act on the ground that the income had escaped assessment to the tune of Rs. 31.90 lakhs being interest @12% on the capital of Rs. 7.10 crores which was introduced by the assessee in the said partnership firm. The assessee submitted that the said partnership firm has not claimed any interest expenses in its profit and loss account and the interest has been capitalized and added to the closing work in progress which was reversed in subsequent year hence the addition of interest of Rs. 31.90 lacs as made by the AO in the assessment order dated 19.08.2010 passed by the A.O. u/s 143(3) r.w.s. 147 of the Act, should be deleted. It was further submitted , without prejudice, that if it is to be treated as income of the assessee, then the said interest income should not be considered as real income of the assessee , as the same has not been realized or received by the assessee nor the same was materialized subsequently . Thus, it was submitted that the said income should not be taxed in the hands of the assessee. It was submitted that reversal of entries in the subsequent year does not result in real income/expenses. In support, the assessee relied on the follo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s and formed a partnership firm namely "Kamlashri Builders" on 25th August 2005 where the assessee share in profit was 27.50% of the net profit/(loss) of the firm while it has contributed Rs. 7.1 crores towards partner's capital contribution during the year. The case was reopened u/s 147 of the Act while the original assessment was framed u/s 143(3) of the Act. The assessee's case was reopened on 6th November, 2009 which is within 4 years from the end of the assessment year. The ld. Counsel submitted that in the original partnership deed the interest to the partners on their capital contribution was stipulated @ 12% per annum on the capital introduced by the partner. The said interest clause was deleted by amending the partnership deed on 18th January 2006 , hence the assessee has not considered any interest income on the capital introduced in said partnerships firm as partner's contribution in its return of income filed with the Revenue and hence the same was not recognised as income, copy of the revised partnership deed was placed at paper book page 23 to 27. It is submitted that the assessee had finalized its books for the year ended 31st March, 2006, however, interest p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t be said to have accrued to the assessee. Mere journal entries passed in books of accounts cannot lead to accrual of income if actually the income has not materialised , received or realised . The ld. Counsel distinguished the decision of Hon'ble Bombay High Court in the case of Western India Oil distributing Co. v. CIT, 206 ITR 359 relied upon by the ld. CIT(A). The ld. Counsel relied upon the decision of Hon'ble Supreme Court in the case of CIT v. Bokaro Steel Ltd. and contended that reversal of entries in subsequent year implied only hypothetical income in the current year and not real income. The ld. Counsel also distinguished the decision of Hon'ble Supreme Court in the case of State Bank of Travancore v. CIT, (1986)158 ITR 102(SC) relied upon by the ld. CIT(A). 8. The ld. D.R. submitted that interest accrued to the assessee on the date of entering of partnership deed. Interest was debited by the firm although it is debited to the closing WIP. Further, the ld. D.R. supported the orders of the ld. CIT(A). 9. We have considered the rival contentions and also perused the material available on record. We have observed that assessee is engaged in the construction industry as....