ITA No. 222 of 2007 -1- 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) ....Appellant. Versus Commissioner of Income Tax, Jalandhar ...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 under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 16.12.2005 passed by the Income Tax Appellate Tribunal, Amritsar Bench (hereinafter referred to as “the Tribunal”) in ITA 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 the provisions of Section 36(1)(iii) and the proposition of law the disallowance of interest be reversed since dehors the material? ii. Whether the Tribunal's order is perverse since there being no nexus between the borrowing and the ITA No. 222 of 2007 -2- lending of the funds for the claim of the interest? iii. Whether the claim and the allowance of interest u/s 36(1)(iii) is to be made out of business interest from the commercial expediency?” 2. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee is engaged in the business of trading of raw rubber and other chemicals and its sister concern, namely, Sehgal Rubber Udyog, had also having common and identical interwoven business of manufacturing of rubber chappals. The assessee filed the return on 29.10.2001 declaring a total income of Rs.1,56,980/- which was processed under Section 143(1)(a) of the Act on 26.9.2002. During the course of regular assessment, the Assessing Officer, inter alia, disallowed the interest paid to the coparceners of HUF-assessee amounting to Rs.1,06,416/- vide order dated 31.12.2003. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [in short “the CIT(A)”] who vide order dated 15.3.2005 partly allowed the appeal deleting some of the disallowances made by the the Assessing Officer. However, addition of Rs. 1,06,416/- was upheld. On further appeal by the assessee, the Tribunal vide order dated 16.12.2005 partly allowed the appeal, but at the same time on the strength of Apex Court decisions in Commissioner of Income Tax v. Gopal Bansi Lal Inani, (2000) 245 ITR 2 and Commissioner of Income Tax v. Venu Gopal Inani, (1999) 239 ITR 514, sustained the addition of Rs. 1,06,416/- against the assessee. It may be noticed that the assessee filed an application before the Tribunal under Section 254(2) of the Act for the rectification ITA No. 222 of 2007 -3- of the mistake in its order dated 16.12.2005 and the said application was dismissed on 31.05.2006. Against the order of the Tribunal, the assessee 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 is attached as Annexure A/4 with the appeal, it is clear that in the Miscellaneous application filed before the Tribunal, the assessee had sought to raise a plea that the coparceners/members of the HUF had advanced loans to the assessee-HUF from their own funds independent of the funds of the HUF. Another ground which was sought to be raised was that interest of Rs.82,746/- was paid to the wife of Shri Sanjay Sehgal coparcener and Rs.34,615/- to Sehgal & Sehgal-HUF who was neither coparcener nor member of HUF. The Tribunal while declining the Miscellaneous application had noted that the counsel for the assessee had plainly conceded that no such argument had been raised before the Tribunal either in the grounds of appeal or during the course of arguments. It was also observed that the first ground had not even been taken before the assessing officer. However, subsequently the assessee filed the present appeal after a delay of 356 days, impugning the order dated 16.12.2005 passed by the Tribunal rejecting the appeal of the assessee on merits. Delay of 356 days in filing the present appeal was condoned by this Court on 20.12.008. Learned counsel for the assessee made his submissions in the present appeal challenging the order of the Tribunal dated 16.12.2005 dismissing the appeal on merits. Accordingly, we proceed to adjudicate the present appeal challenging the order dated 16.12.2005, on merits. 3. We have heard learned counsel for the parties. ITA No. 222 of 2007 -4- 4. The point for consideration in this appeal is whether the amount of interest paid by the assessee who is an HUF on separate funds taken from its coparceners, was admissible as deduction. 5. Learned counsel for the assessee raised two-fold submissions. Firstly, he submitted that the assessee is an HUF whereas the coparceners are separate entities and, therefore, it cannot be said that the interest which was paid to the coparceners was by HUF to itself. Secondly, he submitted that the Apex Court while holding that the interest to the members could not be allowed in case of HUF and relied upon the decision in Venu Gopal Irani's case (supra) which was dealing with the different issue and had no connection with the controversy. According to the learned counsel, the Apex Court in the aforesaid decisions Gopal Bansi Lal Inani and Venu Gopal Inani's cases (supra) had not laid down any specific principle of law after discussing 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 the respective submissions made by learned counsel for the parties and do not find any merit in the submissions made by learned counsel for the assessee. 8. The question of law for consideration before the Hon'ble Supreme Court in Gopal Bansi Lal Inani's case (supra) was as under:- “Whether on the facts and in the circumstances of the case, the income-tax Appellate Tribunal was justified in directing ITA No. 222 of 2007 -5- the Income-tax Officer to deduct interest payments made to the coparceners on the amounts lent by them to the Hindu undivided family?” 9. The Hon'ble Supreme Court while allowing the appeal of the revenue had answered the question in the negative i.e. in favour of the revenue and against the assessee. In other words, it was held that interest paid by an HUF to its members on the amount of loan received from them was not an admissible expenditure. The Apex Court had relied upon its earlier decisions in Venugopal Inani's case (supra) and I.T.O., Calicut Vs. Smt. N.K.Sarda Thampatty (1991) 187 ITR 696. 10. In Venugopal Inani's case (supra) and N.K.Sarda Thampatty's case (supra) while interpreting Section 171 of the Act, it was held that in order to claim partition in respect of any property, division of the property is essential and a pre-requisite. It was further observed that a Hindu undivided family cannot say that it stands partitioned in respect of the property and at the same time enjoy the property jointly. 11. Adverting to the present case, it is no where the case of the assessee that the members of the petitioner HUF had ever partitioned or separated themselves from the HUF. The assessee had never raised any plea before the assessing officer, CIT(A) or the Tribunal that the funds advanced to the assessee-HUF were their individual funds though such a plea for the first time was sought to be agitated before the Tribunal by way of miscellaneous application which had been declined. The findings of the Tribunal recorded in para 11 are material which read thus:- ITA No. 222 of 2007 -6- “I have heard both the parties and given my thoughtful consideration to the rival submissions with reference to facts, evidence and material on record. The undisputed facts of the case are that the interest has been paid on the deposits of the members/coparceners of the HUF. The same has been disallowed by the authorities below by relying on the judgment of Supreme Court in the case of CIT Vs. Gopal Bansi Lal Inani (supra) where the Hon'ble Supreme Court has followed its own judgment in the case of CIT Vs. Venu Gopal Inani (1999) 239 ITR 514(SC). In the case of CIT Vs. Venu Gopal Inani (supra), the Supreme Court has held that the properties, which are capable of division, were to be actually divided. If the properties are not divided partial partition under section 171 could not be recognised. The findings recorded by the Supreme Court in the case of CIT Vs. Venu Gopal Inani (supra) are as under:- “Held, that this was not a case where the Hindu undivided family itself was carrying on its business before partial partition with these assets. The Hindu undivided family had investments in various business. Investments in a cooperative society to the tune of Rs.54,750 or monies deposits with bankers to the tune of Rs.1,20,122.68 were capable of being divided among the joint family members. There were also treasury saving deposit of ITA No. 222 of 2007 -7- Rs.11,000/- and annuity deposit of Rs.8,250/-. There was no reason why the parties could not divided these assets by metes and bounds. Since this had not been done the partial partition could not be recognized for purposes of the Income Tax Act” Now in this case also, the assessee has not been able to produce any evidence that there was partition of the assets of the HUF and the same was accepted u/s 171 of the Act. The assessee has also not produced any evidence that coparceners/members of the HUF had separate funds and income therefrom was separately being assessed in their hands. In the absence of any such evidence, 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 of HUF cannot be allowed as it amounts to interest paid to self. Therefore, I am of the considered opinion that the case of the assessee is squarely covered by the judgments of 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 order of the CIT(A) and reject this ground of appeal of the Revenue.” 12. 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, 2011 (ADARSH KUMAR GOEL) gbs JUDGE