Inder Sain Sehgal (Huf v. Commissioner Of Income Tax, Jalandhar

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 222 of 2007 (O&M)Date of Decision: 6.4.2011 Inder Sain Sehgal (HUF) Versus Commissioner of Income Tax, Jalandhar ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Pankaj Jain, Advocate for the appellant. Mr. Vivek Sethi, Standing Counsel for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the assessee underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 16.12.2005 passed by the Income Tax AppellateTribunal, Amritsar Bench (hereinafter referred to as “the Tribunal”) inITA No. 398/ASR/2005, relating to the assessment year 2001-02,claiming the following substantial questions of law:- “i.Whether on the true and correct interpretation of theprovisions of Section 36(1)(iii) and the proposition oflaw the disallowance of interest be reversed sincedehors the material?provisions of Section 36(1)(iii) and the proposition oflaw the disallowance of interest be reversed sincedehors the material? ii.Whether the Tribunal's order is perverse since therebeing no nexus between the borrowing and thebeing no nexus between the borrowing and the lending of the funds for the claim of the interest? iii.Whether the claim and the allowance of interest u/s36(1)(iii) is to be made out of business interest fromthe commercial expediency?” 2.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee is engaged in the businessof trading of raw rubber and other chemicals and its sister concern,namely, Sehgal Rubber Udyog, had also having common and identicalinterwoven business of manufacturing of rubber chappals. Theassessee filed the return on 29.10.2001 declaring a total income ofRs.1,56,980/- which was processed under Section 143(1)(a) of the Acton 26.9.2002. During the course of regular assessment, the AssessingOfficer, inter alia, disallowed the interest paid to the coparceners ofHUF-assessee amounting to Rs.1,06,416/- vide order dated31.12.2003. Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [in short “the CIT(A)”] who videorder dated 15.3.2005 partly allowed the appeal deleting some of thedisallowances made by the the Assessing Officer. However, addition ofRs. 1,06,416/- was upheld. On further appeal by the assessee, theTribunal vide order dated 16.12.2005 partly allowed the appeal, but atthe same time on the strength of Apex Court decisions inCommissioner of Income Tax v. Gopal Bansi Lal Inani, (2000) 245ITR 2 and Commissioner of Income Tax v. Venu Gopal Inani, (1999)239 ITR 514, sustained the addition of Rs. 1,06,416/- against theassessee. It may be noticed that the assessee filed an applicationbefore the Tribunal under Section 254(2) of the Act for the rectification of the mistake in its order dated 16.12.2005 and the said applicationwas dismissed on 31.05.2006. Against the order of the Tribunal, theassessee filed ITA No.450 of 2006 and the said appeal is pending.From a perusal of the order of the Tribunal dated 31.5.2006, which isattached as Annexure A/4 with the appeal, it is clear that in theMiscellaneous application filed before the Tribunal, the assessee hadsought to raise a plea that the coparceners/members of the HUF hadadvanced loans to the assessee-HUF from their own funds independentof the funds of the HUF. Another ground which was sought to be raisedwas that interest of Rs.82,746/- was paid to the wife of Shri SanjaySehgal coparcener and Rs.34,615/- to Sehgal & Sehgal-HUF who wasneither coparcener nor member of HUF. The Tribunal while decliningthe Miscellaneous application had noted that the counsel for theassessee had plainly conceded that no such argument had been raisedbefore the Tribunal either in the grounds of appeal or during the courseof arguments. It was also observed that the first ground had not evenbeen taken before the assessing officer. However, subsequently theassessee filed the present appeal after a delay of 356 days, impugningthe order dated 16.12.2005 passed by the Tribunal rejecting the appealof the assessee on merits. Delay of 356 days in filing the present appealwas condoned by this Court on 20.12.008. Learned counsel for theassessee made his submissions in the present appeal challenging theorder of the Tribunal dated 16.12.2005 dismissing the appeal on merits.Accordingly, we proceed to adjudicate the present appeal challengingthe order dated 16.12.2005, on merits. 3.We have heard learned counsel for the parties. 4.The point for consideration in this appeal is whether theamount of interest paid by the assessee who is an HUF on separatefunds taken from its coparceners, was admissible as deduction. 5.Learned counsel for the assessee raised two-foldsubmissions. Firstly, he submitted that the assessee is an HUFwhereas the coparceners are separate entities and, therefore, it cannotbe said that the interest which was paid to the coparceners was by HUFto itself. Secondly, he submitted that the Apex Court while holding thatthe interest to the members could not be allowed in case of HUF andrelied upon the decision in Venu Gopal Irani's case (supra) which wasdealing with the different issue and had no connection with thecontroversy. According to the learned counsel, the Apex Court in theaforesaid decisions Gopal Bansi Lal Inani and Venu Gopal Inani'scases (supra) had not laid down any specific principle of law afterdiscussing the issue in detail. 6.On the other hand, learned counsel for the revenue,supported the order passed by the Tribunal. 7.We have given our thoughtful consideration to therespective submissions made by learned counsel for the parties and donot find any merit in the submissions made by learned counsel for theassessee. 8.The question of law for consideration before the Hon'bleSupreme Court in Gopal Bansi Lal Inani's case (supra) was asunder:- “Whether on the facts and in the circumstances of the case,the income-tax Appellate Tribunal was justified in directing the Income-tax Officer to deduct interest payments made tothe coparceners on the amounts lent by them to the Hinduundivided family?” 9.The Hon'ble Supreme Court while allowing the appeal ofthe revenue had answered the question in the negative i.e. in favour ofthe revenue and against the assessee. In other words, it was held thatinterest paid by an HUF to its members on the amount of loan receivedfrom them was not an admissible expenditure. The Apex Court hadrelied upon its earlier decisions in Venugopal Inani's case (supra) andI.T.O., Calicut Vs. Smt. N.K.Sarda Thampatty (1991) 187 ITR 696. “Whether on the facts and in the circumstances of the case,the income-tax Appellate Tribunal was justified in directing the Income-tax Officer to deduct interest payments made tothe coparceners on the amounts lent by them to the Hinduundivided family?” 9.The Hon'ble Supreme Court while allowing the appeal ofthe revenue had answered the question in the negative i.e. in favour ofthe revenue and against the assessee. In other words, it was held thatinterest paid by an HUF to its members on the amount of loan receivedfrom them was not an admissible expenditure. The Apex Court hadrelied upon its earlier decisions in Venugopal Inani's case (supra) andI.T.O., Calicut Vs. Smt. N.K.Sarda Thampatty (1991) 187 ITR 696. 10.In Venugopal Inani's case (supra) and N.K.SardaThampatty's case (supra) while interpreting Section 171 of the Act, itwas held that in order to claim partition in respect of any property,division of the property is essential and a pre-requisite. It was furtherobserved that a Hindu undivided family cannot say that it standspartitioned in respect of the property and at the same time enjoy theproperty jointly. 11.Adverting to the present case, it is no where the case of theassessee that the members of the petitioner HUF had ever partitionedor separated themselves from the HUF. The assessee had neverraised any plea before the assessing officer, CIT(A) or the Tribunal thatthe funds advanced to the assessee-HUF were their individual fundsthough such a plea for the first time was sought to be agitated beforethe Tribunal by way of miscellaneous application which had beendeclined. The findings of the Tribunal recorded in para 11 are materialwhich read thus:- “I have heard both the parties and given my thoughtfulconsideration to the rival submissions with reference tofacts, evidence and material on record. The undisputedfacts of the case are that the interest has been paid on thedeposits of the members/coparceners of the HUF. Thesame has been disallowed by the authorities below byrelying on the judgment of Supreme Court in the case ofCIT Vs. Gopal Bansi Lal Inani (supra) where the Hon'bleSupreme Court has followed its own judgment in the caseof CIT Vs. Venu Gopal Inani (1999) 239 ITR 514(SC). Inthe case of CIT Vs. Venu Gopal Inani (supra), the SupremeCourt has held that the properties, which are capable ofdivision, were to be actually divided. If the properties arenot divided partial partition under section 171 could not berecognised. The findings recorded by the Supreme Court inthe case of CIT Vs. Venu Gopal Inani (supra) are asunder:- “Held, that this was not a case where the Hinduundivided family itself was carrying on its businessbefore partial partition with these assets. The Hinduundivided family had investments in variousbusiness. Investments in a cooperative society tothe tune of Rs.54,750 or monies deposits withbankers to the tune of Rs.1,20,122.68 were capableof being divided among the joint family members.There were also treasury saving deposit of Rs.11,000/- and annuity deposit of Rs.8,250/-.There was no reason why the parties could notdivided these assets by metes and bounds. Sincethis had not been done the partial partition could notbe recognized for purposes of the Income Tax Act” Now in this case also, the assessee has not beenable to produce any evidence that there was partition of theassets of the HUF and the same was accepted u/s 171 ofthe Act. The assessee has also not produced anyevidence that coparceners/members of the HUF hadseparate funds and income therefrom was separately beingassessed in their hands. In the absence of any suchevidence, the contention of assessee that interest was paid Rs.11,000/- and annuity deposit of Rs.8,250/-.There was no reason why the parties could notdivided these assets by metes and bounds. Sincethis had not been done the partial partition could notbe recognized for purposes of the Income Tax Act” Now in this case also, the assessee has not beenable to produce any evidence that there was partition of theassets of the HUF and the same was accepted u/s 171 ofthe Act. The assessee has also not produced anyevidence that coparceners/members of the HUF hadseparate funds and income therefrom was separately beingassessed in their hands. In the absence of any suchevidence, the contention of assessee that interest was paid on the separate funds of the individual co-parceners/members of the HUF could not be accepted.This is a case of HUF. Interest paid on the amounts ofHUF cannot be allowed as it amounts to interest paid toself. Therefore, I am of the considered opinion that thecase of the assessee is squarely covered by the judgmentsof Hon'ble Supreme Court in the following cases: (i)CIT Vs. Gopal Bansi Lal Inani, 245 ITR 2 (ii)CIT Vs. Venu Gopal Inani 239 ITR 154. Respectfully following the same, I confirm the orderof the CIT(A) and reject this ground of appeal of theRevenue.” In view of the above, we do not find any infirmity in the ITA No. 222 of 2007 -8- order passed by the Tribunal. Accordingly, the appeal is dismissed. (AJAY KUMAR MITTAL) JUDGE April 6, 2011gbs (ADARSH KUMAR GOEL)JUDGE