ARUN GUPTA Vs. UNION OF INDIA

JUDGEMENT

(1.) In this group of petitions, the petitioner has challenged the notice issued under Section 148 of the Income Tax Act (hereinafter referred to as the "Act"). For facility, the facts of Writ Petition No.2062 of 2008, Arun Gupta vs. Union of India and others is being taken into consideration.

(2.) The petitioner is an individual assessee and derives his income from salary, house property, capital gains, interest, etc. The petitioner is a partner in various registered partnership firms such as Commercial Instalments, Chandra Brothers, Commercial Body Builders, Kailash Traders and Kailash Auto Centres. In the partnership deed there is a specific clause for payment of interest @ 12% p.a. whether the firm is earning profit or loss in that year. That is to say, in the event, there was a profit, the partners were entitled to receive interest on that capital @ 12% p.a. and, in the case of a negative capital balance, partners were to pay interest to the firm @ 12% on such negative balance.

(3.) For the assessment year 2000-01, the petitioner filed his return of income showing a loss of Rs.28,20,280/-. According to the petitioner, the loss was on account of the fact that the capital balance in various partnership firms became negative and the petitioner was obliged to pay interest @ 12% p.a. on such negative capital balance. The above return for the assessment year 2001-02 was taken up for scrutiny and a notice under Section 143(2) and under Section 142 of the Act was issued along with the questionnaire and the petitioner was required to reply to the show cause notice as well as to the questionnaire. One of the questions raised was that the petitioner had paid more interest than earned during the relevant year. The petitioner submitted his reply and explained the reasons for making the payment of interest to various partnership firm owing to the fact that his various partnership firms were reflecting a negative balance and that under the partnership deed there was a contractual obligation to pay interest to the respective partnership firm. The explanation was found to be satisfactory and the return was accepted and completed without any addition by the Income Tax authorities for the assessment years 2001-02. Similar losses was reflected in the assessment year 2002-03 to 2005-06 which were completed under Section 143(1) of the Act wherein similar payment of interest was made by the petitioner to the partnership firm.