Kali BMH Systems Pvt. Ltd., Kumbakonam V. DCIT, Kumbakonam

CO 28/CHNY/2016

• Counselvise Citation: [2017] 124 COUNSELVISE.COM (IT) 7327 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 29 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 31-10-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 24-07-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 01-02-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T BANUSEKAR
• Assessee Lawyers: ASHISH TRIPATHI JT
• Keywords: Capital asset; Business income; Depreciation; Reasonable cause; Fair market value; Difference of opinion; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 143(3); 147; 148; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH C, CHENNAI , ! ' ! # . $% , & '( ) BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ITA NOS.1186, 1631, 1632 & 1633/MDS/2015 COS. 27 & 28/MDS/2016 (IN ITA NOS. 1631 & 1632/MDS/2015) & * +* / ASSESSMENT YEARS : 2010-11, 2008-09, 2009-10 & 2012 -13 DY. COMMISSIONER OF INCOME TAX, CIRCLE-1, KUMBAKONAM 612 001. VS. KALI BMH SYSTEMS PVT. LTD., NO.42/6, B.2, CHENNAI ROAD, MELACAUVERY, KUMBAKONAM 612 002. [PAN: AADCK 0974H] ( /APPELLANT ) ( / RESPONDENT ) ,- / 0 / APPELLANT BY : SHRI ASHISH TRIPATHI, JT. CIT 12,- / 0 / RESPONDENT BY : SHRI T.BANUSEKAR, C.A ! / 3 / DATE OF HEARING : 02.08.2017 4+ / 3 / DATE OF PRONOUNCEMENT : 31.10.2017 /ORDER PER BENCH : THIS IS A SET OF FOUR APPEALS BY THE REVENUE AND T WO CROSS OBJECTIONS (COS) BY THE ASSESSEE, AGITATING TWO SEPARATE ORDER S BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, TIRUCHIRAPALLI (CIT(A) FO R SHORT) DATED 23.02.2015 & 30.04.2015, ALLOWING THE ASSESSEES APPEALS CONTEST ING ITS ASSESSMENTS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 (THE AC T HEREINAFTER) FOR THE ASSESSMENT YEARS (AYS) 2010-11 & 2012-13, AND U/S. 143(3) R/W S. 147 FOR 2 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) AYS. 2008-09 & 2009-10. THE ASSESSEES COS ARE FOR THE EARLIER YEARS, CHALLENGING THE REOPENING OF THE ASSESSMENTS. 2. AT THE OUTSET, IT WAS OBSERVED THAT THE ASSESSEE S COS ARE DELAYED BY A PERIOD OF 149 DAYS, BEING FILED ON 01.02.2016, EVEN AS THE ACKNOWLEDGMENT- CUM-NOTICE IN RESPECT OF THE APPEALS FILED BY THE R EVENUE IS STATED AS RECEIVED ON 06.08.2015. IT WAS PLEADED BY THE LD. AUTHORIZED REPRESENTATIVE (AR), SHRI T.BANUSEKAR, THAT IT WAS WHILE PREPARING FOR THE A PPEALS IN THE FIRST WEEK OF JANUARY, 2016, THAT HE REALIZED THAT THE REOPENING OF THE ASSESSMENT COULD ALSO BE CHALLENGED. THE CROSS OBJECTIONS WERE ACCORDINGL Y FILED ON 01.02.2016. A PERUSAL OF THE CASE RECORD REVEALS THAT THE HEARING OF THE REVENUES APPEALS WAS FIXED FOR THE FIRST TIME IN JULY, 2015, AND ON REGU LAR INTERVALS THEREAFTER; THE RELEVANT DATES BEING 22.07.2015, 29.09.2015, 30.09. 2015 AND 08.12.2015, I.E., PRIOR TO 01.02.2016. ON EACH OF THESE OCCASIONS, EX CEPT 30.09.2015, THE ASSESSEE SOUGHT ADJOURNMENT THROUGH THE LD. AR (COPY ON RECO RD). FIRSTLY, THEREFORE, THE APPEAL PAPERS WERE COMMUNICATED TO THE ASSESSEE ON 16.06.2015, I.E., AS PER THE ACKNOWLEDGMENT-CUM-NOTICE ON RECORD, SO THAT THE DE LAY WOULD RUN FROM 16.07.2015 ONWARDS, WORKING TO 200 DAYS. WHY, THE A UTHORIZATION ON RECORD FOR REPRESENTING BEFORE THE TRIBUNAL (IN THE FAVOUR OF ITS COUNSEL) IS DATED 18.7.2015, WITH THE FIRST ADJOURNMENT BY THE COUNSE L BEING SOUGHT ON 22.07.2015. IT IS CLEAR THAT THE DECISION BY THE AS SESSEE TO FILE COS WAS TAKEN MUCH LATER/AFTER THE COMMUNICATION OF THE APPEAL PA PERS, PERHAPS SOMETIME IN JANUARY, 2016. THIS COULD NOT BE A VALID GROUND FOR CONDONING A DELAY OF OVER SIX MONTHS OR EVEN, AS STATED, FIVE MONTHS. WE, ACC ORDINGLY, FIND NO REASONABLE CAUSE FOR CONDONING THE DELAY. THE ASSESSEES COS A RE ACCORDINGLY DISMISSED AS NOT MAINTAINABLE. WE ARE, HOWEVER, IMPRESSED BY THE LD. COUNSELS ALT ERNATE PLEA THAT THE ASSESSEE COULD IN ANY CASE SUPPORT THE ORDERS APPEA LED AGAINST (BY THE REVENUE) ON ANY OTHER GROUND, I.E., WHILE DEFENDING THE RESP ONDENTS CASE. AND, THEREFORE, 3 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) ADMIT THE ASSESSEES RIGHT TO PLEAD THE LEGAL ISSUE WHERE THE RELEVANT FACTS ARE ON RECORD AND NOT DISPUTED, AS TO THE NOTICE U/S. 148 BEING BAD IN LAW INASMUCH AS THE RELEVANT MATERIAL IS ON RECORD. THE LAW IN THE MATTER IS WELL SETTLED, AND THE ASSESSEES RELIANCE ON THE DECISION IN DY. CIT V. TURQUOISE INVESTMENT & FINANCE LTD. [2008] 299 ITR 143 (MP) FOR THE PURPOSE, APPOSITE, WITH IN FACT RULES 11 & 27 OF THE INCOME TAX (APPELLATE TRIBUNAL ) RULES, 1963 BEING ALSO ABUNDANTLY CLEAR. 3. THE APPEALS RAISE A SIMPLE, YET INTERESTING ISSU E, WHICH IS A MIXED QUESTION OF FACTS AND LAW, I.E., WHETHER THE DIRECT ORS OF THE ASSESSEE-COMPANY CAN BE SAID TO HAVE LENT MONEYS TO IT, I.E., TO T HE EXTENT OF . 202.8 LACS (OF THE TOTAL OF . 3 CRS., FOR WHICH DEBENTURES STAND ISSUED TO THEM ), ENTITLING IT TO DEDUCTION OF INTEREST IN RESPECT THEREOF, BEING THE PROPORTIONATE PREMIUM ON THE DEBENTURES ISSUED, IN THE COMPUTATION OF BUSINESS I NCOME, WHICH STANDS DISALLOWED IN THE SUM OF . 64.60 LACS, . 62 LACS, . 62 LACS AND . 98 LACS FOR THE FOUR SUCCESSIVE YEARS UNDER APPEAL RESPECTIVELY (WORKING THE SAME AT 2/3 OF THE ASSESSEES TOTAL CLAIM FOR THE RELEVANT YEAR/S) . SURELY, ONCE THE IMPUGNED BORROWING IS VALIDATED, ALLOWANCE OF INTEREST (OR T HE PROPORTIONATE PREMIUM RELATABLE TO EACH YEAR) FOLLOWS WHERE THE BORROWING IS FOR THE PURPOSE OF THE ASSESSEE-COMPANYS BUSINESS, WHICH ASPECT THEREFORE IS THE SECOND ASPECT OF THE MATTER THAT NEEDS TO BE CONSIDERED AND DECIDED. AT THIS STAGE WE MAY INTRODUCE THE BACKGROUND, PR INCIPAL FACTS OF THE CASE, WHICH ARE LARGELY UNDISPUTED; IN FACT, STAND EXPLICITLY EXHIBITED BY THE COMPANY THROUGH A FLOW CHART (OF FUNDS). THE ASSESS EE-COMPANY IS A PART IX (OF THE COMPANIES ACT, 1956) COMPANY, FORMED ON CONVERS ION OF A PARTNERSHIP FIRM M/S. KALI MATERIAL HANDLING SYSTEMS, ON 01.04.2007. PRIOR TO THE CONVERSION, IN MARCH, 2007, THE SAID FIRM REVALUED ITS LAND, INCR EASING ITS VALUE BY . 202.8 LACS, CREDITING . 67.6 LACS TO EACH OF THE THREE PARTNERS. EACH OF THE PARTNERS WAS THEN PAID . 1.1 CR. BY THE FIRM BY OVERDRAWING ON ITS BANK AC COUNT, WHICH 4 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) AMOUNT WAS DEBITED IN THE BOOKS OF THE FIRM TO THEI R RESPECTIVE CAPITAL ACCOUNTS, REDUCING THE CAPITAL OF THE FIRM TO THAT EXTENT, I. E., . 3.30 CR. THIS MONEY WAS DEPOSITED BY THEM IN THEIR SAVING BANK (S/B) ACCOUN TS, WHERE IT STOOD PARKED AS ON 31.03.2007, AND CONTINUED TO BE SO UP TO 27/6/20 07, WHEREAT THE SAME WAS BROUGHT BACK TO THE FIRM (SINCE CONVERTED INTO A CO MPANY THE ASSESSEE), ISSUING THEM DEBENTURES (PARTLY CONVERTIBLE AND PAR TLY NON-CONVERTIBLE) FOR AN AGGREGATE OF . 1 CR. EACH, I.E., FOR . 3 CR. IN THE VIEW OF THE ASSESSING OFFICER (AO), THERE WAS NO FRESH INFUSION OF FUNDS TO THE E XTENT OF . 202.8 LACS. HE, ACCORDINGLY, DISALLOWED 2/3 OF THE ASSESSEES CLAIM FOR THE PROPORTIONATE PREMIUM FOR THE RELEVANT YEAR/S. THESE FACTS CAME T O LIGHT IN THE COURSE OF ASSESSMENT PROCEEDINGS FOR AY 2010-11, SO THAT REAS SESSMENT PROCEEDINGS WERE INITIATED FOR AY 2008-09 AND 2009-10 BY ISSUING NOT ICES U/S. 148 ON 03.06.2013. THE RESPECTIVE CASES 4. AS AFORE-NOTED, THE REVENUE CONSIDERS THE TRANSA CTION OF WITHDRAWAL AND INTRODUCTION OF FUNDS TO THE EXTENT IT RELATES TO T HE REVALUATION OF THE LAND OF THE FIRM ( . 2 CR. APPROX.) AS A MERE GIMMICK, EMPLOYED, THROU GH A SERIES OF DELIBERATE AND PREMEDITATED TRANSACTIONS, TO CREATE AN IMPRESSIONOF BORROWING, WHICH IS ONLY A COLOURABLE DEVICE, SO THAT IT DENIE S THE ASSESSEE-COMPANYS CLAIM FOR INTEREST (PREMIUM) ON DEBENTURES AS RELAT ABLE THERETO (2/3), MAKING REFERENCE TO MCDOWELL & CO. LTD. V. CTO [1985] 154 ITR 148 (SC). IT IS NOT A CASE OF, AS CLAIMED, WITHDRAWAL OF ACCUMULATED PROF ITS, AND ITS REINVESTMENT, SO THAT THERE IS NO INFUSION OF FRESH FUNDS FOR REINVE STMENT IN BUSINESS, FOR A VALID CLAIM FOR DEDUCTION OF INTEREST ON THE BORROWING TO THE EXTENT IT RELATES TO THE REVALUATION OF LAND ( . 202.8 LACS). THE ASSESSEE, ON THE OTHER HAND, CLA IMS, WITH REFERENCE TO THE PHYSICAL FLOW OF FUNDS, I.E., FROM THE FIRMS (BANK) ACCOUNT TO THE PARTNERS S/B ACCOUNTS PRIOR TO 01.04.2007, A ND FROM THE LATTER TO THE COMPANYS BANK ACCOUNT (AFTER 01.04.2007), AS EXHIB ITING AN INFLOW OF FUNDS 5 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) THERETO AFTER ITS FORMATION ON 01.04.2007, SO THAT NO PART OF THE DEBENTURES ISSUED TO THE ERSTWHILE PARTNERS (NOW DIRECTORS) CO ULD BE IMPUGNED, SO AS TO DISALLOW INTEREST (PREMIUM) THEREON TO ANY EXTENT. THAT IS, AS LONG AS THE FUNDS HAVE GONE OUT OF OR FLOWN INTO THE FIRM (COMPANY)S KITTY, IT CANNOT BE CONSIDERED AS A NON INFUSION FUNDS. THERE HAS BEEN NO VIOLATION OF THE PROVISION OF S. 47 (XIII) OF THE ACT. FURTHER, IN-AS-MUCH AS THE ASSESSEE HAD DISCLOSED ALL MATERIAL FACTS IN RELATION TO ITS CLAIM FOR INTERES T (PREMIUM) ON DEBENTURES, NOTWITHSTANDING THAT THE ASSESSMENT FOR AYS 2008- 09 AND 2009-10 WAS U/S. 143(1), THE SAME COULD NOT BE SUBJECT TO REASSESSME NT PROCEEDINGS U/S. 147, RELYING ON THE DECISION IN TANMAC INDIA V. DY. CIT [2017] 78 TAXMANN.COM 155 (MAD). THOUGH THE JURISDICTIONAL ISSUE STANDS R AISED BY THE ASSESSEE FOR THE FIRST TIME BEFORE US (BY WAY OF COS), IN-AS-MUCH AS THE SAME IS A LEGAL ISSUE, WITH THE RELEVANT FACTS BEING NOT IN DISPUTE, THE S AME WAS ADMITTED, EVEN AS THE COS THEMSELVES WERE, FOR THE REASONS STATED EARLIER , NOT. THIS, THEN, FORMS THE THIRD QUESTION WHICH ARISES FOR BEING ANSWERED IN T HE PRESENT CASE. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 WE SHALL TAKE UP THE DISALLOWANCE OF (PROPORTIO NATE) INTEREST (PREMIUM) ON DEBENTURES, I.E., THE MERITS OF THE ISSUE, FIRST . THIS IS AS THE SAME IS IN ANY CASE TO BE DECIDED, I.E., FOR AYS 2010-11 & 2012-13 , AND WHICH WOULD THOUGH HOLD FOR ALL THE FOUR YEARS, BEING INDEPENDENT OF T HE LEGAL ISSUE, RAISING A JURISDICTIONAL QUESTION. THE LD. CIT(A) HAS REGARDE D THE WITHDRAWAL OF THEIR CAPITAL BY THE ERSTWHILE PARTNERS OF THE FIRM AS A SIMPLE CASE OF REDUCTION IN THE FIRMS CAPITAL, I.E., TO THE EXTENT OF THE WITHDRAW AL. THAT IS, AS INDEPENDENT OF THE REVALUATION BY THE FIRM OF ITS LAND, SO THAT THE A O HAD BEEN UNDULY INFLUENCED BY THE SAID REVALUATION, I.E., OF ONE OF ITS CAPIT AL ASSETS BY THE FIRM. DELINKING THE TWO, I.E., THE CREDIT ON ACCOUNT OF REVALUATION AND WITHDRAWAL BY THE PARTNERS OF THEIR CAPITAL, IT IS A CLEAR CASE OF SUCCESSION OF A FIRM BY A COMPANY, WHICH IS NOT REGARDED AS A TRANSFER U/S.47(XIII), SUBJECT TO THE SATISFACTION OF THE 6 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) CONDITIONS STATED THEREIN, PRINCIPALLY BEING THE TA KING OVER OF ALL THE ASSETS AND LIABILITIES OF THE SUCCESSEE-FIRM BY THE SUCCESSOR- COMPANY FOLLOWING THE DUE PROCESS OF LAW. THE MONIES HAVE ACTUALLY GONE OUT O F, AND INTO THE, FIRMS/COMPANYS BANK ACCOUNT, SO THAT THERE IS NOT HING TO DOUBT THE GENUINENESS OF THE TRANSACTIONS. THE DEBENTURES HAVE NOT BEEN ISSUED OUT OF THE REVALUATION RESERVE, AS INFERRED BY THE AO . THIS SUMS UP THE BASIS ON WHICH DEDUCTION TO THE ASSESSEE HAS BEEN ALLOWED BY THE L D. CIT(A). WE FIND THE SAID UNDERSTANDING OF THE LD. CIT(A) TO BE MISCONSTRUED AND MISCONCEIVED, BOTH ON FACTS AND IN LAW. WHAT, WE MAY ASK, IS THE WHOLE PU RPOSE OF THE REVALUATION OF THE FIRMS PROPERTY (LAND), CREDITING THE PARTNERS CAPITAL ACCOUNTS. THAT IS, IF IT WAS NOT FOR BEING WITHDRAWN, OR IF THE CAPITAL OF T HE FIRM WOULD REMAIN POSITIVE, I.E., EVEN SUBSEQUENT TO THE WITHDRAWAL, REPRESENTI NG THE CAPITAL OF THE FIRM AS ON 31.03.2007, WHICH WOULD GET, UPON CONVERSION INTO A COMPANY, TRANSMUTED INTO ITS CAPITAL (EQUITY). THIS IS MORE SO AS SEC. 47(XI II), REPRODUCED AS UNDER, POSTULATES NO CHANGE IN THE CAPITAL STRUCTURE OF TH E FIRM BEING SUCCEEDED: TRANSACTIONS NOT REGARDED AS TRANSFER. 47. NOTHING CONTAINED IN SECTION 45 SHALL APPLY TO THE FOLLOWING TRANSFERS:- ( I ) TO ( XII ) ( XIII ) ANY TRANSFER OF A CAPITAL ASSET OR INTANGIBLE ASS ET BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY A COMPANY IN THE BUSINESS CARRIED ON BY THE FIRM, OR ANY TRANSFER OF A CAPITAL ASSET TO A COMPANY IN THE COURSE OF DEMUTUALISATION OR CORPO RATISATION OF A RECOGNISED STOCK EXCHANGE IN INDIA AS A RESULT OF W HICH AN ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS IS SU CCEEDED BY SUCH COMPANY: PROVIDED THAT (A) ALL THE ASSETS AND LIABILITIES OF THE FIRM OR OF TH E ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS RELATING TO THE BUSINESS IMM EDIATELY BEFORE THE SUCCESSION BECOME THE ASSETS AND LIABILITIES OF THE COMPANY; (B) ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORT ION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FI RM ON THE DATE OF THE SUCCESSION; 7 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) (C) THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDE RATION OR BENEFIT, DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER, OTHE R THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY; AND (D) THE AGGREGATE OF THE SHAREHOLDING IN THE COMPANY OF THE PARTNERS OF THE FIRM IS NOT LESS THAN FIFTY PER CENT OF THE TOT AL VOTING POWER IN THE COMPANY AND THEIR SHAREHOLDING CONTINUES TO BE AS S UCH FOR A PERIOD OF FIVE YEARS FROM THE DATE OF THE SUCCESSION; (E) THE DEMUTUALISATION OR CORPORATISATION OF A RECOGNI SED STOCK EXCHANGE IN INDIA IS CARRIED OUT IN ACCORDANCE WITH A SCHEME FOR DEMUTUALISATION OR CORPORATISATION WHICH IS APPROVE D BY THE SECURITIES AND EXCHANGE BOARD OF INDIA ESTABLISHED UNDER SECTION 3 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, 199 2 (15 OF 1992); WE MAY EXHIBIT THIS BY WAY OF AN EXAMPLE, ASSUMING (FOR THE SAKE OF SIMPLICITY) LAND AS THE ONLY CAPITAL ASSET OF THE F IRM: TABLE 1A CLEARLY, ANY WITHDRAWAL UP TO . 2,000/- (BY ASSUMING BANK CREDIT, OR FROM OTHER SOURCES), DEPICTED AS UNDER, WOULD ONLY IMPLY WITHDRAWAL OF CAPITAL: TABLE 1B ANY WITHDRAWAL BEYOND THIS WOULD RESULT IN NEGATIVE CAPITAL, A CASE OF WITHDRAWAL BY THE PARTNERS OF THE FIRMS RESOURCES (IN EXCESS OF THEIR CONTRIBUTION THERETO). THE CONTRIBUTION TOWARD A FI XED ASSET WOULD, IN NOMINAL TERMS, STAND ENHANCED IN CASE OF REVALUATION, SAY B Y . 4000/- (TABLE 2A), LIABILITIES ( .) ASSETS ( .) CAPITAL 2000 FIXED ASSETS LAND 1000 NET CURRENT ASSETS (NCA) (CURRENT ASSETS CURRENT LIABILITIES) 1000 TOTAL 2000 TOTAL 2000 LIABILITIES ( .) ASSETS ( .) BANK BORROWINGS 2000 FIXED ASSETS LAND 1000 NET CURRENT ASSETS (NCA) (CURRENT ASSETS CURRENT LIABILITIES) 1000 TOTAL 2000 TOTAL 2000 8 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) WITHOUT HAVING ANY MATERIAL IMPACT IN-AS-MUCH AS TH E FIRMS CAPITAL (EQUITY) FINANCES ITS ASSETS, THE PURPOSE OF WHICH (REVALUAT ION) WOULD PRESUMABLY BE TO STATE THE FIRMS ASSETS AND LIABILITIES AT THEIR RE ALISTIC VALUES AND, THUS, REPRESENT MORE TRULY ITS NET WORTH. A CONSIDERATION WHICH BEC OMES LARGELY IRRELEVANT AS THE FIRMS INTRINSIC WORTH REMAINS THE SAME, AND IS NOT TO BE ALTERED IN CASE OF SUCCESSION. WHY, THE REVALUATION COULD AS WELL BE U NDERTAKEN AFTER THE SUCCESSION, INCREASING THE NET-WORTH OF THE TRANSFE REE-COMPANY (IN NOMINAL TERMS) TO THE SAME EXTENT. BE THAT AS IT MAY, THIS ENHANCED NET WORTH WOULD NOT THEREFORE STAND TO REDUCE, EXCEPT BY OPERATION OF E CONOMIC FORCES/REASONS, VIZ. FALL IN THE MARKET PRICE OF LAND; DEPLETION OF CAPI TAL ON ACCOUNT OF BUSINESS LOSSES, ET. AL. IT IS, THEREFORE, THE WITHDRAWAL OF THIS ENHANCED CAPITAL (TABLE 2B) THAT PRESENTS A HOST OF QUESTIONS. TO BEGIN WIT H, IT DEFEATS THE VERY PURPOSE OF REVALUATION. FURTHER ON: COULD, THE REVALUATION CREDIT BE MADE TO THE PARTNERS CAPITAL ACCOUNTS; COULD, ASSUMING SO, THE SAME BE W ITHDRAWN; DOES IT NOT DEFEAT THE VERY PURPOSE OF REVALUATION; WHAT, WHERE PERMIS SIBLE, DOES THE SAID WITHDRAWAL REPRESENT; WOULD THE PARTNERS BE ENTITLE D TO INTEREST UNDER THE PARTNERSHIP LAW AND, CONSEQUENTLY, UNDER THE ACT (W HICH IS ASSESSABLE U/S. 28) ON SUCH ENHANCED CAPITAL; WHAT IS THE ACCOUNTING PR ESCRIPTION INCLUDING ITS RATIONALE, IN THE MATTER, ETC. WE DEPICT THE SAID S CENARIOS AS UNDER: TABLE 2A TABLE 2B LIABILITIES ( .) ASSETS ( .) CAPITAL 6000 FIXED ASSETS 5000 NET CURRENT ASSETS (NCA) 1000 TOTAL 6000 TOTAL 6000 LIABILITIES ( .) ASSETS ( .) CAPITAL NIL FIXED ASSETS 5000 9 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) NOW, SURELY IF THIS (TABLE 2B) POSITION OBTAINS AS ON 31 ST MARCH, I.E., IMMEDIATELY PRIOR TO THE CONVERSION, ANY INTRODUCTI ON OF (UP TO) . 6,000/- COULD NOT BE SAID TO BE NON-INFUSION OF FUNDS, THE NEW BORROWINGS (FROM THE ERSTWHILE PARTNERS) GOING TO EITHER FINANCE ACQUISI TION OF FURTHER ASSETS AND/OR REPAYMENT OF THE FIRMS BORROWINGS TO ANY EXTENT. T HERE SHOULD APPARENTLY BE THEREFORE NO DISALLOWANCE OF INTEREST ON DEBENTURES (SAY) ISSUED AGAINST SUCH INFUSION OF FUNDS (OR BORROWING). THIS IN FACT IS A LSO THE PREMISE OF THE IMPUGNED ORDER. HOWEVER, WE SAY APPARENTLY IN-AS- MUCH AS THE SAME WOULD REQUIRE, APRIORI, EXAMINING THE FACTS AS WELL AS TH E LEGAL POSITION, DELINEATED IN THE FORM OF VARIOUS QUESTIONS, TO NONE OF WHICH THE IMPUGNED ORDER REFERS, MUCH LESS ADDRESSES. COULD, FOR INSTANCE, THE BANK BORROWINGS, WHICH STAND UTILIZED FOR WITHDRAWAL OF CAPITAL, BE SAID AS MADE OR UTILIZED FOR BUSINESS PURPOSES, ENTITLED TO INTEREST DEDUCTION? COULD THE CAPITAL INTRODUCED, RESTORING STATUS ANTE, BE REGARDED AS INFUSION OF CAPITAL? THAT APART, THE FACT OF THE BORROWING BEING FROM THE ERSTWHILE PARTNERS IS INCO NSEQUENTIAL INSOFAR AS THE DEDUCTION OF INTEREST THEREON, AND WHICH IS WHAT TH E PREMIUM ON THE REDEMPTION OF DEBENTURES ESSENTIALLY IS, IS CONCERNED. HOWEVER , ANY WITHDRAWAL IN EXCESS OF . 2,000/- (OR . 6,000/- IN CASE OF REVALUATION) SURELY CANNOT BE REGARDED AS VALID INASMUCH AS THE SAME IS CLEARLY A DIVERSION O F CAPITAL OF THE FIRM FOR PERSONAL (NON-BUSINESS) PURPOSES. THE EXCESS IS ONL Y A WITHDRAWAL BY THE PARTNERS OF THE FIRMS RESOURCES IN EXCESS OF THEIR CONTRIBUTION THERETO, OR AN APPROPRIATION OF ITS LIABILITIES BY THEM, WHICH WE MAY DEPICT AS PER THE TABLES BELOW: BANK BORROWINGS 6000 NET CURRENT ASSETS (NCA) 1000 TOTAL 6000 TOTAL 6000 10 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) TABLE 3A TABLE 3B TABLES 3A & 3B REPRESENT EQUIVALENT SCENARIOS AS, I N EITHER CASE, NO DEBENTURES COULD POSSIBLY BE ISSUED TO THE DIRECTORS (ERSTWHIL E PARTNERS) ON INFUSION OF FUNDS TO THE EXTENT OF .4,000/- (IN OUR EXAMPLE). AS AFORE-NOTED, ANY INFU SION (OF FUNDS BY THE DIRECTORS) IN EXCESS OF . 4,000/-, IN EITHER CASE, MAY BE ELIGIBLE TO THE REGARDED AS, AS PER THE TERMS OF THE INTRODU CTION, EITHER CAPITAL OR BORROWING, WITH THE INTEREST ON THE LATTER BEING OS TENSIBLY ENTITLED FOR DEDUCTION IN CASE OF A COMPANY. WE MAY, THEREFORE, STATE THAT THE IMPUGNED ORDER, IN WHICH THE ASSESSMENT ORDER HAS SINCE MERGED, REQUIR ES TO BE MODIFIED TO STATE THAT ONLY INFUSION IN EXCESS OF THE DEFICIENCY IN C APITAL (WHAT HAD BEEN EARLIER REFERRED TO BY US AS NEGATIVE CAPITAL), . 4000 IN OUR EXAMPLE, THAT MAY ARISE IF THE CAPITAL IS RECKONED WITHOUT REVALUATION IN-AS-M UCH AS THE SAME IS ONLY A CASE OF WITHDRAWAL OF THE FIRMS RESOURCES IN EXCESS OF THE CONTRIBUTION THERETO, APPROPRIATING THUS THE LIABILITY OF THE FIRM, WOULD BE ENTITLED TO DEDUCTION ON ACCOUNT OF INTEREST. WE SHALL REVERT TO TABLE 3B SU BSEQUENTLY AS WELL. WE MAY NOW DWELL ON CERTAIN ASPECTS ARISING FOR CO NSIDERATION, ENUMERATED EARLIER. THE CREDIT OF THE REVALUATION O F THE PARTNERS CAPITAL ACCOUNT LIABILITIES ( .) ASSETS ( .) BANK BORROWINGS 6000 FIXED ASSETS 1000 NET CURRENT ASSETS (NCA) 1000 PARTNERS CAPITAL 4000 TOTAL 6000 TOTAL 6000 LIABILITIES ( .) ASSETS ( .) BANK BORROWINGS 10000 FIXED ASSETS 5000 NET CURRENT ASSETS (NCA) 1000 PARTNERS CAPITAL 4000 TOTAL 10000 TOTAL 10000 11 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) IS INCONSISTENT WITH THE PARTNERSHIP LAW. THIS IS A S NO PARTNER CAN, DURING THE SUBSISTENCE OF A FIRM, CLAIM CREDIT IN RESPECT OF I NCREASED VALUATION (OF ANY OF THE FIRMS ASSETS) TO ANY EXTENT, AS NO PARTNER CAN PREDICATE HIS SHARE IN ANY OF THE ASSETS OF THE FIRM. IT IS ONLY AT THE TIME OF T HE DISSOLUTION OF THE FIRM THAT ITS ASSETS, IN EXCESS OF THAT REQUIRED FOR MEETING ITS LIABILITIES, CAN BE DISTRIBUTED AMONGST THE PARTNERS IN THE RATIO OF THEIR RESPECTI VE CAPITALS. AND WHEREAT, THEREFORE, IN-AS-MUCH AS AN ASSET MAY NOT ADMIT OF PHYSICAL DIVISION OR BE OTHERWISE DESIRABLE, REVALUED TO OBTAIN PARITY BETW EEN THOSE (PARTNER/S) TAKING OVER THE ASSET/S AND THOSE NOT. EQUALLY, A PARTNER, ON RETIREMENT, CAN, SIMILARLY, INSTEAD OF BEING PAID IN CASH, CHOOSE HIS CAPITAL T O BE DISCHARGED, WHOLLY OR PARTLY, BY BEING ALLOTTED A PARTICULAR ASSET/S. A R EVALUATION IN SUCH A CASE MAY FOLLOW; WOULD, RATHER, EVEN AS EXPLAINED IN A.L.A. FIRM V. CIT [1991] 189 ITR 285 (SC), BE DESIRABLE IN-AS-MUCH AS IT ENABLES THE PARTNERS TO SETTLE THEIR ACCOUNTS ON A MORE REALISTIC BASIS. THE (INCOME TAX ) LAW RECOGNIZES SUCH SITUATIONS, CONTEMPLATING IT TO BE A TRANSFER OF TH E SPECIFIED ASSET BY THE FIRM TO THE PARTNER/S (OR VICE-A-VERSA, IN THE EVENT OF INT RODUCTION OF AN ASSET BY A PARTNER IN THE FIRM), DEEMING IN CASE OF DISTRIBUTI ON OR ALLOTMENT THE FAIR MARKET VALUE THEREOF AS ITS TRANSFER CONSIDERATION (SS. 45 (3) AND 45(4)). THERE IS NO QUESTION OF ANY PARTNER IN A FIRM HAVING A DEFINED SHARE IN ANY OF THE FIRMS ASSETS DURING ITS SUBSISTENCE. AS AFORE-NOTED, SUCCESSION OF A PARTNERSHIP FIRM BY A COMPANY IS NOT REGARDED AS A TRANSFER UNDER THE A CT WHERE ITS BUSINESS IS TRANSFERRED AS A GOING CONCERN, PROVIDED, OF COURSE , IT IS NOT A DEVICE TO EVADE TAX BY REALIZING THE VALUE OF THE ASSETS BY ITS PAR TNERS, BY SALE OF SHARES OR OTHERWISE. THE CREDIT ON THE REVALUATION OF THE ASSET BY A FIR M COULD NOT THEREFORE BE MADE TO THE CAPITAL ACCOUNT OF ANY OF ITS PARTNERS (AND, BY IMPLICATION, TO ALL THE PARTNERS), DURING ITS SUBSI STENCE. THIS IS IN VIEW OF THE NATURE OF THE RELATIONSHIP, AND NOTWITHSTANDING THE FACT THAT UNDER PARTNERSHIP LAW THERE IS NO DIFFERENCE BETWEEN A FIRM AND THE P ARTNERS CONSTITUTING IT FOR THE 12 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) TIME BEING; THE PARTNERSHIP ONLY SIGNIFYING A CONTR ACTUAL RELATIONSHIP BETWEEN THEM, AND ITS NAME A COMPENDIOUS MANNER OF REFERRIN G TO THE PARTNERS TOGETHER AND THEIR DEFINED RELATIONSHIP. AS EXPLAINED, SUCH A CREDIT IS NOT ADMISSIBLE UNDER THE ACT AS WELL, WHICH REGARDS PARTNERSHIP AS A DIFFERENT PERSON, SEPARATE AND DISTINCT FROM THE PARTNERS, SO THAT THE TRANSFE R OF AN ASSET BY ONE TO THE OTHER IS LIABLE FOR CAPITAL GAINS U/S. 45. IN VIEW OF THE CLEAR BAR ON SUCH A CREDIT, THE QUESTION OF ITS WITHDRAWAL DOES NOT ARISE . THIS IN FACT IS ALSO THE ACCOUNTING PRESCRIPTION FOR ANY BUSINESS ENTERPRISE. THE CREDI T, ON REVALUATION, WHICH MAY BE UNDERTAKEN FOR ANY BUSINESS PURPOSE, IS TO A SEP ARATE ACCOUNT TITLED REVALUATION RESERVE. THE SAME IS BARRED FOR BEING WITHDRAWN . REFERENCE IN THIS REGARD MAY BE MADE TO PARA 13 OF THE ACCOUNTING STA NDARD (AS)-10, TITLED ACCOUNTING FOR FIXED ASSETS, ISSUED BY THE INSTIT UTE OF CHARTERED ACCOUNTANTS OF INDIA, THE MORE RELEVANT PART OF WHICH READS AS UNDER: 13.3 THE REVALUED AMOUNTS OF FIXED ASSETS ARE PRES ENTED IN FINANCIAL STATEMENTS EITHER BY RESTATING BOTH THE GROSS BOOK VALUE AND ACCUMULATED DEPRECIATION SO AS TO GIVE A NET BOOK VALUE EQUAL T O THE NET REVALUED AMOUNT OR BY RESTATING THE NET BOOK VALUE BY ADDING THEREIN THE NET INCREASE ON ACCOUNT OF REVALUATION. AN UPWARD REVALUATION DOES NOT PROVIDE A BASIS FOR CREDITING TO THE PROFIT AND LOS S STATEMENT THE ACCUMULATED DEPRECIATION EXISTING AT THE DATE OF RE VALUATION . 13.4 DIFFERENT BASES OF VALUATION ARE SOMETIMES USE D IN THE SAME FINANCIAL STATEMENTS TO DETERMINE THE BOOK VALUE OF THE SEPARATE ITEMS WITHIN EACH OF THE CATEGORIES OF FIXED ASSETS OR FO R THE DIFFERENT CATEGORIES OF FIXED ASSETS. IN SUCH CASES, IT IS NECESSARY TO DISCLOSE THE GROSS BOOK VALUE INCLUDED ON EACH BASIS. 13.5 SELECTIVE REVALUATION OF ASSETS CAN LEAD TO UNREPRE SENTATIVE AMOUNTS BEING REPORTED IN FINANCIAL STATEMENTS . ACCORDINGLY, WHEN REVALUATIONS DO NOT COVER ALL THE ASSETS OF A GIVEN CLASS, IT IS APPROPRIATE THAT THE SELECTION OF ASSETS TO BE REVALUED BE MADE ON A SYSTEMATIC BASIS. FOR EXAMPLE, AN ENTERPRISE MAY REVALUE A WHOLE CLAS S OF ASSETS WITHIN A UNIT. 13.6 IT IS NOT APPROPRIATE FOR THE REVALUATION OF A CLASS O F ASSETS TO RESULT IN THE NET BOOK VALUE OF THAT CLASS BEING GR EATER THAN THE RECOVERABLE AMOUNT OF THE ASSETS OF THAT CLASS. 13 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) 13.7 AN INCREASE IN NET BOOK VALUE ARISING ON REVAL UATION OF FIXED ASSETS IS NORMALLY CREDITED DIRECTLY TO OWNER'S INT ERESTS UNDER THE HEADING OF REVALUATION RESERVES AND IS REGARDED AS NOT AVAI LABLE FOR DISTRIBUTION . A DECREASE IN NET BOOK VALUE ARISING ON REVALUATION OF FIXED ASSETS IS CHARGED TO PROFIT AND LOSS STATEMENT EXCEPT THAT, T O THE EXTENT THAT SUCH A DECREASE IS CONSIDERED TO BE RELATED TO A PREVIOUS INCREASE ON REVALUATION THAT IS INCLUDED IN REVALUATION RESERVE, IT IS SOME TIMES CHARGED AGAINST THAT EARLIER INCREASE. IT SOMETIMES HAPPENS THAT AN INCREASE TO BE RECORDED IS A REVERSAL OF A PREVIOUS DECREASE ARISING ON REV ALUATION WHICH HAS BEEN CHARGED TO PROFIT AND LOSS STATEMENT IN WHICH CASE THE INCREASE IS CREDITED TO PROFIT AND LOSS STATEMENT TO THE EXTENT THAT IT OFFSETS THE PREVIOUSLY RECORDED DECREASE. [EMPHASIS, SUPPLIED] FURTHER, DEPRECIATION ON SUCH REVALUED ASSET/S, WHE RE DEPRECIABLE, IS TO BE PROVIDED ON THE ENHANCED VALUE AND, TWO, DEBITED TO THE REVALUATION RESERVE TO THE EXTENT IT RELATES TO THE INCREASED AMOUNT. AND WHICH, IT WOULD BE NOTED, IS CONSISTENT WITH THE PREMISE THAT WHAT ALL IS BEING DONE IS TO RESTATE THE ASSET AT AN ENHANCED VALUE, AND DOES NOT ENTAIL OR INVOLVE ANY FLOW OF FUNDS . THUS, THE WITHDRAWAL OF FUNDS BY THE PARTNERS IN THE PRESENT CASE IS TO BE CONSIDERED DE HORS THE CREDIT ON ACCOUNT OF REVALUATION. THE WITHDRAWAL OF THE CREDIT ON ACCOUNT OF REVALUAT ION (I.E., EVEN GRANTING THE CREDIT) SUFFERS FROM ANOTHER BASIC INFIRMITY IN LAW AS WELL AS ACCOUNTS THE MANDATE OF BOTH OF WHICH WE HAVE AFORE-NOTED, AND W HICH BECOMES APPARENT WHEN ONE CONSIDERS AS TO WHAT DOES THE SAME REPRESE NT, ALSO EXPLAINING INDIRECTLY THE PREMISE OF THE REVALUATION OF A CAPI TAL ASSET FOR AN ECONOMIC ENTITY. THE ASSET, LAND IN THE PRESENT CASE, CONTIN UING TO BE A PART OF THE FIRMS ASSETS, HOW, ONE WONDERS, COULD THE CREDIT OF REVAL UATION BE WITHDRAWN ON PAYMENT OF FUNDS TO THE PARTNERS? EACH ACCOUNTING E NTRY REPRESENTS THE RELEVANT TRANSACTION; ITS PURPORT, AND CONSIDERED ALONG WITH THE NARRATION THERETO, THE PURPOSE THEREOF. THE CREDIT ON ACCOUNT OF REVALUATION REPRESENTS A P ART OF THE VALUE OF THE RELEVANT ASSET . THE ONLY MANNER, THEREFORE, WHEREBY THE SAID CRED IT COULD BE DEBITED (NEUTRALIZED) OR DIMINISHED IS BY TRANSFER OF THE SAID ASSET TO A PARTNER/S WITHDRAWING IT FROM THE FIRM IN WHOLE O R IN PART, AS EXPLAINED EARLIER 14 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) IN THE CONTEXT OF DISSOLUTION OF A PARTNERSHIP OR R ETIREMENT OF A PARTNER/S THERE- FROM. IT COULD NOT BE OTHERWISE. FOR EXAMPLE, IF 50 PER CENT. OF THE LAND IS TRANSFERRED TO A PARTNER/S, HIS ACCOUNT/S WOULD STA ND DEBITED BY 50% OF THE VALUE ( . 5,000/-, IN OUR EXAMPLE), I.E., BY . 2,500/-. A DEBIT BALANCE IN HIS ACCOUNT UPON SUCH DEBIT ONLY MAKES HIM THE FIRMS WHICH N OW HAS ONLY 50 PER CENT. OF THE LAND, DEBTOR TO THAT EXTENT. THE ENTIRE VALUE O F THE ASSET (LAND), AT . 5,000/- IN OUR EXAMPLE, IS ONE, SINGLE AMOUNT, REPRESENTING AND FORMING PART OF THE FIRMS EQUITY (NET WORTH). THE FIRMS CAPITAL TO TH AT EXTENT ( . 5,000/-) WOULD THEREFORE REPRESENT THE SAID ASSET. AS LONG AS THER EFORE THE SAID ASSET OF THE FIRM IS RETAINED BY IT, ITS CAPITAL CANNOT BE REGARDED AS BELOW THE SAID AMOUNT (REFER TABLE-1A/2A). PROCEEDING FURTHER ON THIS CONCEPTUAL FRAMEWORK, WHAT, THEN, DOES THE SCENARIOS AT TABLES 1B/2B REPRESENT? THE F IRM HAS LEVERAGED ITS CAPITAL, RECKONED WITH OR WITHOUT REVALUATION, TO SECURE BOR ROWINGS, AND NO FURTHER. THAT IS, THE WITHDRAWAL BY THE PARTNERS REFLECTS A DIVER SION OF THE FIRMS BORROWINGS BY THEM TO THAT EXTENT, WHICH MAY DEPICT AS UNDER: TABLE 1C TABLE 2C LIABILITIES ( .) ASSETS ( .) PARTNERS CAPITAL BANK BORROWINGS 1000 2000 FIXED ASSETS LAND 1000 NET CURRENT ASSETS (NCA) (CURRENT ASSETS CURRENT LIABILITIES) PARTNERS CAPITAL 1000 1000 TOTAL 3000 TOTAL 3000 LIABILITIES ( .) ASSETS ( .) PARTNERS CAPITAL 1000 FIXED ASSETS 5000 REVALUATION RESERVE 4000 NET CURRENT ASSETS (NCA) 1000 15 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) TABLES 1C AND 2C ARE THUS A MORE CORRECT REPRESENTA TION OF THE SCENARIOS AT TABLES 1B AND 2B RESPECTIVELY. NOT SO CONSIDERING W OULD ONLY IMPLY A TRANSFER OF THE FIXED ASSET/S TO THE PARTNERS, I.E., NOT IN SPECIE, BUT IN EFFECT, REALIZING ITS VALUE BY MONETIZING IT. THIS, IT MAY BE APPRECIATED , IS AN EQUIVALENT MANNER OF TRANSFERRING A CAPITAL ASSET; THE PARTNERS BEING CR EDITED THE DIFFERENCE BETWEEN THE MARKET (TRANSFER) VALUE AND THE BOOK VALUE, AND , THEN WITHDRAW THEIR CAPITAL. THIS, WHERE COUPLED WITH A REORGANIZATION OF THE FIRM, I.E., INTRODUCTION AND RETIREMENT OF PARTNER/S, EVEN IF IN A GRADED MA NNER, AMOUNTS TO A CHANGE OF OWNERSHIP THROUGH THE MEDIUM OF PARTNERSHIP. THE PR ACTICE STANDS CAUTIONED AGAINST TIME AND AGAIN BY THE HON'BLE APEX COURT PE R ITS DECISIONS PRIOR TO THE INTRODUCTION OF SS. 45(3) AND 45(4) (OF THE ACT), W HILE AT THE SAME TIME CONFIRMING THAT THERE COULD BE NO TRANSFER OF AN AS SET BETWEEN A FIRM AND ITS PARTNERS, WHO HAVE AN UNDEFINED SHARE IN EACH OF TH EM, INASMUCH AS THE EXCLUSIVE INTEREST OF A PARTNER GETS CONVERTED INTO A SHARED INTEREST, THE SAME IS NOT CHARGEABLE TO CAPITAL GAINS U/S. 45 (VIZ. SUNIL SIDDARTHABHAI V. CIT [1985] 156 ITR 509 (SC) ON WHICH RELIANCE IS PLACED). TH E WITHDRAWAL OF CAPITAL ATTRIBUTABLE TO A FIXED ASSET, INTENDED TO BE RETAI NED AS PART OF THE CAPITAL STRUCTURE OF THE FIRM, AMOUNTS TO ITS MONETIZATION BY THE PARTNERS FOR THEIR PERSONAL PURPOSES, AND IS CLEARLY IMPERMISSIBLE, BO TH FROM THE STAND-POINT OF CREDIT TO THE PARTNERS CAPITAL ACCOUNT (ON REVALUA TION) AND ITS WITHDRAWAL, CONSIDERED FROM ANY PERSPECTIVE LEGAL, ACCOUNTANC Y, AND ALSO TAX. COMING BACK TO THE FACTS OF THE PRESENT CASE, IT WOULD BE NOW CLEAR AS TO WHAT PRECISELY THE AO MEANS WHEN HE SPEAKS OF NON INFUSION OF FUND S; THE PARTNERS ONLY RESTORING THE VALUE OF THE FIXED ASSETS, SINCE WITH DRAWN, AND WHICH COULD NOT BE REGARDED AS INFUSION OF FRESH CAPITAL IN-AS-MUCH AS THE FIXED ASSET CONTINUES BANK BORROWINGS 6000 PARTNERS CAPITAL 5000 TOTAL 11000 TOTAL 11000 16 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) THROUGHOUT TO BE THE FIRMS PROPERTY. THE OTHER IMP ORT OF THE FOREGOING IS THAT ON AN INTRODUCTION OF . 2,000/- IN SCENARIO 1, DEBENTURES COULD BE ISSUED TO THE PARTNERS ONLY FOR . 1,000/-, THE BALANCE GOING TO NEUTRALIZE (CREDIT) THE NEGATIVE CAPITAL. COULD THE ASSESSEE POSSIBLY BE ENTITLED TO DEDUCTIO N OF INTEREST ON SUCH BORROWINGS, I.E., TO THAT EXTENT THESE REPRESENT TH E INCREASE IN VALUATION OF A FIRMS (ENTITYS) FIXED (CAPITAL) ASSET/S FORMING P ART OF THE CAPITAL STRUCTURE. WE THINK NOT; IT BEING WITHOUT ANY BUSINESS PURPOSE . THAT IS, WHILE THE INFLOW OF FUNDS BY THE DIRECTORS, TO THE EXTENT OF . 2,000/-, SUBSTITUTING BANK BORROWINGS, WOULD QUALIFY FOR DEDUCTION OF INTEREST THEREON (OR , STRICTLY SPEAKING, ON . 1000/-), THAT IN EXCESS, REPRESENTING ONLY AN INCRE ASE IN THE VALUATION BY THE FIRM OF ITS CAPITAL ASSET/S, SHALL NOT; THE SAME BEING SANS ANY BUSINESS PURPOSE, WHICH ALONE WOULD ENTITLE THE BORROWING BY AN ASSESSEE FO R DEDUCTION OF INTEREST THEREON U/S. 36(1)(III). THIS, THUS, ANSWERS THE SE COND QUESTION ARISING IN THE INSTANT CASE (REFER PARA 3). IT MAY NOT BE OUT OF P LACE TO STATE HERE THAT THE DISALLOWANCE OF INTEREST (TO THE PROPORTIONATE EXTE NT), I.E., ON . 4,000/- (I.E., THE ENHANCED VALUATION), HAS NOTHING TO DO EITHER WITH S. 47(XIII) OR THE SWAPPING OF BANK BORROWINGS WITH THAT BY THE DIRECTORS, BEING I SSUED DEBENTURES. IRRESPECTIVE OF THE EXTENT OF THE SWAPPING, THE BORROWING IN EXC ESS OF . 2,000/- (OR, STRICTLY SPEAKING, . 1,000/-), REPRESENTING THE FIRMS ASSETS, SERVES NO BUSINESS PURPOSE AND, ACCORDINGLY, INTEREST THEREON IS DISALLOWABLE U/S. 36(1)(III). THE SAME, IN FACT, REPRESENTS A SWAPPING OF FUNDS BY LEVERAGING THE VALUE OF THE FIRMS ASSET/S. THE POSITION WOULD BE DIFFERENT, WE MAY CLARIFY, WH ERE THE BANK BORROWINGS WERE ASSUMED TO FINANCE GENUINE BUSINESS LOSSES . THOUGH THIS HAS NOTHING IN COMMON WITH OR TO DO WITH REVALUATION OF ASSETS BY A BUSINESS ENTITY, CREDIT ON ACCOUNT OF WHICH AND ITS SUBSEQUENT WITHD RAWAL IS THE ISSUE IN THE PRESENT CASE , WE YET CONSIDER IT RELEVANT TO STATE THIS AS IT M AY WELL BE THAT REVALUATION IN A GIVEN CASE IS RESORTED SO AS TO NO T REFLECT NEGATIVE CAPITAL ON 17 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) ACCOUNT OF OPERATIONAL LOSSES, SINCE FINANCED BY BA NK BORROWINGS. THE BANK BORROWINGS IN SUCH A CASE REPRESENT FINANCING OF SU CH LOSSES; THE FIRMS CAPITAL BEING INSUFFICIENT TO ABSORB THE SAME. THERE IS NO DEPLETION OR WITHDRAWAL OF CAPITAL BY THE EQUITY HOLDERS, AS IN THE PRESENT CA SE, IN SUCH A CASE. THE INFERENCE OF THE BORROWING (DEBENTURES) AS BEING NO T AGAINST REVALUATION RESERVE (FUNDS) BY THE LD. CIT(A) IS CLEARLY MISPLACED; IN FACT, CONTRARY TO THE BASIC FACTS OF THE CASE. THIS IN FACT IS PRECISELY WHY THE SAME HAS BEEN REGARDED AS NOT GENUINE BY THE REVENUE, A GIMMICK, AND, IN ANY CASE , NOT RELATING TO THE BUSINESS OF THE ASSESSEE. WE HAVE ALREADY SHOWN THE MODUS OPERANDI ADOPTED AS BEING IN VIOLATION OF THE ACCOUNTING PRINCIPLES AND THE PARTNERSHIP LAW. THE SAME IS ALSO PROSCRIBED UNDER THE ACT, BEING INCONS ISTENT WITH THE CLEAR TERMS OF THE RELEVANT PROVISION (S.36(1)(III)), WHICH ALLOWS INTEREST ONLY ON THE BORROWINGS MADE FOR BUSINESS PURPOSES, WHILE THE BO RROWING IN THE PRESENT CASE IS MADE ONLY TO ENABLE SIPHONING OF FUNDS UNDER THE GUISE OF ENHANCED CAPITAL. THE FOREGOING WOULD ALSO RESOLVE THE ANOMALY IN SC ENARIO-3, REPRESENTED BY TABLES 3A AND 3B. WHILE TABLE 3A WOULD BAR INTER EST ON BANK BORROWINGS TO THE EXTENT OF . 4,000/-, ALLOWING IT THUS ONLY ON . 2,000/-, TABLE-3B, AGAIN, APPARENTLY ALLOWS INTEREST ON BANK BORROWINGS UP TO . 6,000/-. THE ASSESSEE, THUS, MERELY BY ENHANCING FIXED ASSET/S, IS ABLE TO OBTAIN INTEREST DEDUCTION ON CAPITAL TO THAT EXTENT, I.E., . 4,000/-. AS DISCUSSED HEREINBEFORE, THIS WOULD NO T BE A BUSINESS PURPOSE (EXCEPT WHERE THE FUNDS RELEA SED BY THE BANK ARE DEPLOYED IN BUSINESS, THOUGH LOST THROUGH LOSSES, S O THAT IT DOES NOT RESULT IN ANY INCREASE IN NET CURRENT ASSETS OR THE NET WORTH OF THE COMPANY), AND THEREFORE DISALLOWABLE U/S. 36(1)(III). OUR GRADED APPROACH, HOWEVER, NECESSITATED DRAWING A DISTINCTION BETWEEN THE THREE CATEGORIES/ SCENARIOS, MARKED BY RESPECTIVE TABLES, WHICH WE MAY SUMMARIZE AS UNDER: SCENARIO-1:BORROWING REPRESENTS THE FIRMS CAPITAL (TABLE-1A/1B). SCENARIO-2: BORROWING INCLUDES ENHANCED CAPITAL, O N ACCOUNT OF REVALUATION (TABLE-2A/2B). 18 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) SCENARIO-3: BORROWING INCLUDES DIVERSION OF CAPITA L, I.E., EVEN IN EXCESS OF CAPITAL/ENHANCED CAPITAL (TABLE-3A/3B). CLEARLY, ONLY THE BORROWING, BE IT FROM BANK OR THA T BY THE DIRECTORS, AS REFLECTED UNDER SCENARIO-1, MORE CORRECTLY REPRESENTED BY TAB LE 1C, WOULD BE ELIGIBLE FOR DEDUCTION OF INTEREST THEREON. CONSIDERED THUS, THE PROPOSITION ADVANCED FOR BEING ACCEPTED BY US IS IN PRINCIPLE VERY SIMPLE. S HORN OF ALL NUANCES, REGARD FOR WHICH HOWEVER HAD TO BE MADE BY US, THE SIMPLE QUES TION THAT ARISES FOR ANSWER IN THE PRESENT CASE CAN BE PRESENTED, WITH REFERENC E TO A PARTNERSHIP FIRM, WHICH ENTITY IS ENTITLED TO DEDUCTION OF INTEREST ON PART NERS CAPITAL, AS: WHETHER THE INTEREST ON PARTNERS CAPITAL COULD BE ALLOWED IN C OMPUTING THE FIRMS BUSINESS INCOME TO THE EXTENT THE SAID CAPITAL CONSISTS OF I NCREASED VALUATION OF THE FIRMS FIXED ASSET/S? THAT IS, COULD, FOR EXAMPLE, A FIRM CLAIM INTEREST ON ENHANCED PARTNERS CAPITAL MERELY BY REVALUING AN ASSET? THI S IS AS, IF, YES, THERE IS NO REASON FOR NOT ALLOWING DEDUCTION OF INTEREST ON TH E ENTIRE DEBENTURES ISSUED IN THE PRESENT CASE. THE ANSWER TO THE TWO QUESTIONS I S THOUGH CLEARLY IN THE NEGATIVE, AND FOR THE SAME REASONS DISCUSSED AT LEN GTH IN THIS ORDER. IT IS ONLY THE PARTNERS CAPITAL, WHICH IS BY DEFINITION THE POSIT IVE DIFFERENCE BETWEEN THE FIRMS ASSETS AND LIABILITIES, WHICH COULD BE REGAR DED AS THE FIRMS CAPITAL, ON WHICH DEDUCTION OF INTEREST, SUBJECT TO THE RELEVAN T CONDITIONS, IS ALLOWABLE UNDER THE ACT (S. 36(1)(III) R/W. S. 40(B)(IV)). TH E FIRMS ASSETS ARE RECORDED AT COST, DEFINED U/S. 43(1), SUBJECT TO THE EXCEPTIONS LAID U/S. 43A AND PROVISO TO S. 36(1)(III). THE SAME, AS SHALL BE NOTED, ARE LARGEL Y IN AGREEMENT WITH THE ACCOUNTING STANDARDS, BEING AS-10. IT IS IN VIEW OF THIS SETTLED POSITION OF LAW THAT WE ALSO ENDORSE THE AOS CONSTRUING THE ASSESS EES CLAIM, REFERRING TO MCDOWELL & CO. LTD. (SUPRA), AS LARGELY AN EXERCISE IN TAX EVASION. THE REVALUATION IN THE PRESENT CASE HAS NO PURPOSE EXCE PT TO CLAIM TAX DEDUCTION ON INTEREST ON A HIGHER LEVEL OF BORROWINGS. AN ANALOG Y, TO OUR MIND, WOULD BE A FIRM (OR ANY ENTITY) CLAIMING DEPRECIATION ON THE E NHANCED VALUE OF AN ASSET, 19 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) OTHERWISE ELIGIBLE FOR DEPRECIATION UNDER THE ACT, USING THE TAX NEUTRAL EVENT OF SUCCESSION, AS U/S. 47(XIII), FOR THE PURPOSE. THE LD. CIT(A) CLEARLY HAS MISDIRECTED HIMSELF IN THE INSTANT CASE. WE, IN VIEW OF THE FOREGOING, ACCORDINGLY, UPHOLD T HE AOS ACTION QUA THE DISALLOWANCE OF THE INTEREST (PREMIUM) ON THE D EBENTURES, I.E., AS RELATABLE TO THE REVALUATION OF LAND BY THE SUCCESSEE FIRM, KALI MATERIAL HANDLING SYSTEMS. 5.2 WE NEXT CONSIDER THE JURISDICTIONAL ISSUE RAISE D BY THE ASSESSEE FOR AYS. 2008-09 AND 2009-10. THE ASSESSEES GRIEVANCE, AS P ROJECTED BY THE LD. AR DURING HEARING, IS THAT AS THE PARTICULARS IN RESPE CT OF THE ASSESSEES CLAIM FOR PREMIUM ON DEBENTURES ARE ON RECORD, THE ASSESSMENT S FOR THOSE YEARS COULD NOT BE REOPENED, PLACING RELIANCE ON THE DECISION IN TANMAC INDIA (SUPRA). WE HAVE PERUSED THE REASONS RECORDED BY THE AO (COPY O N RECORD), AS WELL AS THE CITED DECISION BY THE HON'BLE JURISDICTIONAL HIGH C OURT. THE REASONS RECORDED BRING FORTH THE BACKGROUND FACTS OF THE CASE WHICH, AS AFORE-STATED, CAME TO SURFACE ONLY DURING THE COURSE OF ASSESSMENT PROCEE DINGS FOR AY 2010-11, WHILE VERIFYING THE ASSESSEES CLAIM FOR THAT YEAR. THE ASSESSMENT FOR THAT YEAR WAS FINALIZED ONLY ON 28.03.2013, DISALLOWING THE C LAIM FOR THAT YEAR. THE MODUS OPERANDI ADOPTED BY THE ASSESSEE-COMPANY FOR ISSUING DEBENT URES TO ITS DIRECTORS FOR . 3 CR. IN JUNE, 2007 WAS DISCOVERED ONLY DURING TH E SAID PROCEEDINGS WHILE VERIFYING THE ASSESSEES CLAIM FO R INTEREST ON DEBENTURES FOR THAT YEAR. IT IS ON THE BASIS OF THESE FACTS, DETAI LED IN THE REASONS RECORDED, THAT THE AO DISALLOWED THE ASSESSEES CLAIM FOR THAT YEA R AS NOT GENUINE BUT A COLORABLE DEVICE AND, IN ANY CASE, THE INTEREST EXP ENDITURE INCURRED IN ITS RESPECT AS NOT RELATING TO THE ASSESSEES BUSINESS. DE HORS THESE REASONS, BASED ON THE FACTS THAT CAME TO LIGHT SUBSEQUENTLY, THE AO COULD NOT ENTERTAIN ANY REASON TO BELIEVE, WHICH IS A PREREQUISITE, A THRESHOLD CONDI TION, FOR ASSUMING JURISDICTION TO INITIATE PROCEEDINGS U/S. 147. IT IS TRITE LAW T HAT THERE SHOULD BE A DIRECT NEXUS BETWEEN THE MATERIAL COMING TO THE NOTICE OF THE AO AND THE FORMATION OF THE 20 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) BELIEF THAT THERE IS AN ESCAPEMENT OF INCOME FROM A SSESSMENT (REFER, INTER ALIA, ITO V. LAKHMANI MEWAL DAS [1976] 103 ITR 437 (SC)). HOW, WE WONDER, THEN, IS THE ASSESSEES CHARGE VALID? RATHER, IN THE FACT S OF THE CASE, THE RETURNS FOR THE RELEVANT YEARS, I.E., AYS. 2008-09 AND 2009-10, WER E ONLY PROCESSED U/S. 143(1), WHICH PROCEDURE BARS THE EXAMINATION OF THE ASSESSE ES RETURN OR THE CLAIMS PREFERRED THEREBY, WITH AS MUCH AS EVEN THE PRIMA FACIE ADJUSTMENTS, I.E., ON THE BASIS OF A RETURN AND THE ACCOMPANYING MATERIAL, AL SO BARRED W.E.F. 01.06.1999. THE DISALLOWANCE UNDER REFERENCE, AS AFORE-STATED, IS EVEN OTHERWISE NOT A SUBJECT MATTER OF A PRIMA FACIE ADJUSTMENT, ENTAILS AS IT DOES, A COMPLETE UNDERSTANDING AND KNOWLEDGE OF THE PRIMARY FACTS LE ADING TO THE ISSUE OF THE DEBENTURES TO THE DIRECTORS OF THE ASSESSEE-COMPANY , WHO, AS IT TRANSPIRES, ARE THE ERSTWHILE PARTNERS OF THE SUCCESSEE-FIRM. AND, ACCORDINGLY, THERE IS NO QUESTION ON EITHER FORMATION OF REASON TO BELIEVE O R AN OPINION BY THE AO IN THE MATTER, AND WHICH, AS APPARENT FROM ITS READING, G UIDED THE DECISION IN TANMAC INDIA (SUPRA). RATHER, AS AFORE-STATED, ANY ISSUE OF NOTI CE U/S. 148 WITHOUT THE KNOWLEDGE OF THE RELEVANT FACTS WOULD B E VIOLATIVE OF S.147, BEING NOT SUPPORTED BY ANY REASON/S TO BELIEVE. THE CHARG E OF CHANGE OF OPINION, WHICH IS THE BASIS OF THE ASSESSEES LEGAL PLEA, IS MISPLACED IN VIEW OF THE ADMITTED POSITION THAT THE RELEVANT FACTS ALONG WIT H THE MATERIALS CAME TO LIGHT ONLY DURING THE COURSE OF THE ASSESSMENT PROCEEDING S FOR AY 2010-11. FURTHER, THE CLAIM OF FORMATION OF OPINION IN S. 143(1) PROC EEDINGS IS, AGAIN, UNFOUNDED, BOTH IN FACTS AND IN LAW. AS CLARIFIED IN CIT (ASST.) V. RAJESH JHAVERI STOCK BROKERS (P.) LTD. [2007] 291 ITR 500 (SC), THE SAME CANNOT BE REGARD ED AS AN ASSESSMENT AS NO OPPORTUNITY TO THE ASSESSEE IS CON TEMPLATED THEREUNDER. AND, FURTHER, A FAILURE TO TAKE STEPS U/S. 143(3) WOULD NOT RENDER THE AO POWERLESS TO INITIATE REASSESSMENT PROCEEDINGS WHEN THE RETURN H AD BEEN EARLIER SUBJECT TO PROCESSING U/S. 143(1). THE AMBIT OF THE TWO PROCED URES IS COMPLETELY DIFFERENT. THE DECISION IN TANMAC INDIA (SUPRA), AS ALSO AFORE-NOTED, IS ON THE BASIS OF A 21 ITA NOS. 1631 -33 & 1186/MDS/2015 & COS.27-28/2016 DY. CIT V. KALI BMH SYS TEMS PVT. LTD. (AYS 2008-09 TO 2010-11 & 2012-13) CHANGE OF OPINION ON THE BASIS OF THE SAME MATERIAL , ALREADY ON RECORD, AND WHICH THE HON'BLE COURT REFERS TO AS STALE MATERIAL (REFER PARA 12). THERE IS NO REFERENCE TO ANY MATERIAL IN THE PRESENT CASE. IT I S IN FACT NOBODYS CASE THAT THE BACKGROUND FACTS, UNEARTHED OR REVEALED DURING ASSE SSMENT PROCEEDINGS FOR AY 2010-11; THE ASSESSEE ITSELF SUBMITTING DETAILED FL OW CHARTS AND SUBMISSIONS, WERE EITHER NOT REQUIRED OR ALREADY ON RECORD, MUCH LESS PERUSED, OR EVEN SUBJECT TO EXAMINATION, FOR THE SAID DECISION TO AP PLY IN THE PRESENT CASE. THE ASSESSEES LEGAL PLEA IS WITHOUT MERIT AND, ACCORDI NGLY, NOT MAINTAINABLE. WE DECIDE ACCORDINGLY, REJECTING THE ASSESSEES LEGAL ISSUE, AND ANSWERING THUS THE THIRD QUESTION ARISING IN THE PRESENT CASE BY VALID ATING THE INITIATION OF REASSESSMENT PROCEEDINGS. WE DECIDE ACCORDINGLY. 6. IN THE RESULT, THE REVENUES APPEALS ARE ALLOWED , AND THE ASSESSEES COS ARE DISMISSED AS NOT MAINTAINABLE. ORDER PRONOUNCED ON OCTOBER 31, 2017 AT CHENNAI . SD/- SD/- ( ! ' ! # . $% ) (DUVVURU RL REDDY) & /JUDICIAL MEMBER ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, 5 /DATED, OCTOBER 31, 2017 EDN 6 / 1&378 98+3 /COPY TO: 1. ,- /APPELLANT 2. 12,- /RESPONDENT 3. ! :3 ( )/CIT(A) 4. ! :3 /CIT 5. 8 ;< 1&3& /DR 6. <%* = /GF