M/s Muthoot Bankers, Kannur V. Income Tax Officer, Kannur

ITA 160/COCH/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4476 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 4 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 02-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 27-03-2009
• Court: TRIBUNAL
• Department Lawyers: S R SENAPATI
• Assessee Lawyers: R SREENIVASAN CAAR
• Keywords: Capital asset; Business income; Opportunity of being heard; Difference of opinion; Change of opinion; Set aside; Capital Gains
• Section: 143(3); 201; 263

Judgement Text

1 IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH, COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN, JM AND SANJAY AR ORA, AM I.T.A. NOS. 103, 104 & 160/COCH/2009 ASSESSMENT YEAR:2005-06 M/S. MUTHOOT BANKERS, ELLIKKA CENTRE, PIER ROAD, TELLICHERRY- 670 101. [PAN: AAEFM 5249H] M/S. MUTHOOT BANKERS, EMIRATES ARCADE, MAHE. [PAN:AAIFM 4815D] M/S. MUTHOOT BANKERS, PMC- 21/1711, 2 ND FLOOR, CITY BLDGS., OPP. MUNICIPAL BUS STAND, PAYYANNUR-670 307. [PAN:AAEFM 3522B] VS. THE I.T.O., WARD-1(2), KANNUR. THE I.T.O., WARD-1(2), KANNUR. THE I.T.O., WARD-1(4), KANNUR. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) ASSESSEE BY SHRI R.SREENIVASAN, CA-AR REVENUE BY SHRI S.R.SENAPATI, SR.DR O R D E R PER SANJAY ARORA, AM: THESE ARE A SET OF THREE APPEALS ARISING OUT OF SE PARATE ORDERS BY THE COMMISSIONER OF INCOME-TAX, KANNUR (CIT FOR SHORT ) U/S. 263 OF THE INCOME-TAX ACT, 1961 ('THE ACT' HEREINAFTER) FOR THE ASSESSMENT YEA R (A.Y.) 2005-06, IN RESPECT OF THREE DIFFERENT ASSESSES. THE FACTS OF THE CASE AS WELL A S THE CASE OF THE OPPOSING PARTIES BEFORE US BEING THE SAME, THE APPEALS WERE HEARD TO GETHER, AND ARE BEING DISPOSED OF VIDE A COMMON, CONSOLIDATED ORDER. 2 2.1 THE BRIEF FACTS OF THE CASE ARE THAT THE A SSESSEE-FIRM IS IN THE BUSINESS OF FINANCE, PRIMARILY ON THE SECURITY OF GOLD ORNAMENTS, FOLLOW ING CASH SYSTEM OF ACCOUNTING. THE ASSESSMENT STOOD MADE U/S. 143(3) OF THE ACT BY ACC EPTING THE RETURNED INCOME. IN EACH OF THE THREE ASSESSMENTS, HOWEVER, THE ASSESSEE FIL ED ITS RETURN OF INCOME FOR THE RELEVANT PREVIOUS YEAR, BEING THE FINANCIAL YEAR ENDING 31.3 .2005, AT A NON-POSITIVE INCOME, BEING AT NIL, MINUS ` 193500/- AND MINUS ` 90650/- FOR THE THREE ASSESSEE-FIRMS. THE ASSESSING OFFICER (AO) RECORDED A FINDING THAT THE ASSESSEES MONEY LENDING BUSINESS CONTINUED UP TO MARCH, 2004, AND STOOD TAKEN OVER BY M/S. MUTHOO T FINCORP LTD. (MFL), A COMPANY INCORPORATED UNDER THE COMPANIES ACT, 1956, VIDE AG REEMENT DATED 1.4.2004. ACCORDINGLY, THERE WAS NO BUSINESS TRANSACTED BY TH E FIRM/S DURING THE RELEVANT PREVIOUS YEAR. 2.2 THE LD. CIT, ON A PERUSAL OF THE RECORDS, W AS OF THE VIEW THAT THE ALLOWANCE OF INTEREST ON THE PARTNERS CREDIT BALANCE AS STANDIN G IN THE ASSESSEES BOOKS, WHICH STOOD CLAIMED AND ALLOWED AS A BUSINESS DEDUCTION, COULD NOT HAVE BEEN ALLOWED IN ASSESSMENT IN VIEW OF THE NON-CARRYING OF ANY BUSINESS BY THE FIRM/S DURING THE YEAR. ACCORDINGLY, NOTICE/S U/S. 263 WAS ISSUED, QUERYING THE ASSESSEE AS TO WHY SEC. 263 BE NOT APPLIED, AND THE ASSESSMENTS SUBJECT TO REVISION. IT WAS EXPLAI NED BY THE ASSESSEE THAT IT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING, AND HAD RECEIVED THE INT EREST RECEIVABLE AS ON 31.3.2004 DURING THE RELEVANT YEAR. THE SAME CONSTITUTED BUSI NESS INCOME AND, ACCORDINGLY, INTEREST TO THE PARTNERS WAS ALLOWABLE AS A BUSINESS DEDUCTI ON. THE AO HAD IN ANY CASE TAKEN A REASONABLE VIEW OF THE MATTER, SO THAT THE ASSESSME NT WAS NOT LIABLE FOR REVISION IN TERMS OF THE SETTLED LAW, CITING THE DECISION BY THE APEX COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (2007) 295 ITR 282 (SC). THE LD. CIT DID NOT, HOWE VER, FIND THE SAME AS ACCEPTABLE. THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (1993) 201 ITR 391 (SC) HAD CLARIFIED THAT EVEN WHERE THE INCOME I S TAXABLE ON CASH BASIS, IT WOULD BE LIABLE TO BE ASSESSED WHERE THE PAYER HAD CREDITED THE AMOUNT IN HIS BOOKS OF ACCOUNTS TO THE ACCOUNT OF THE PAYEE. AS SUCH, THE INCOME OF T HE ASSESSEE WAS LIABLE TO BE RE-WORKED IN VIEW OF THE SAID DECISION BY THE APEX COURT. FU RTHER, THE AO HAS GIVEN A CATEGORICAL 3 FINDING THAT THE BUSINESS OF THE ASSESSEE-FIRM WAS TAKEN OVER BY A COMPANY OF THE SAME GROUP, AND THUS THERE WAS NO BUSINESS DURING THE YE AR AND, ACCORDINGLY, NO INTEREST TO THE PARTNERS, INCLUDING ON THEIR OPENING CAPITAL, WAS T O BE ALLOWED, AND WAS THEREFORE PRIMA FACIE DISALLOWABLE. THE INTEREST FOR EARLIER YEAR/S REC EIVED DURING THE YEAR WOULD NOT BE ASSESSABLE U/S. 28, BUT U/S. 176(3A). IN VIEW OF T HE SAID FACTUAL AND LEGAL POSITION, WHICH WAS NOT CONSIDERED BY THE AO WHILE FRAMING THE ASSE SSMENT, HE SET ASIDE THE ASSESSMENT/S, DIRECTING THE ASSESSING AUTHORITY TO REDO THE SAME AFTER AFFORDING A REASONABLE OPPORTUNITY TO THE ASSESSEE, KEEPING THE OBSERVATIONS BY HIM IN VIEW. AGGRIEVED, THE ASSESSEE IS IN APPEAL. 3.1 BEFORE US, IT WAS SUBMITTED BY THE LD. AR, THE ASSESSEES COUNSEL, THAT EVEN AS STATED IN THE IMPUGNED ORDER, THE QUERY WITH REGARD TO THE ALLOWANCE OF INTEREST ON THE PARTNERS CAPITAL AROSE ON THE BASIS OF A SUBSEQUEN T OBSERVATION BY THE INTERNAL AUDIT PARTY. A REVISION IS NOT PERMISSIBLE ON THAT BASIS , AS IT IS THE OPINION OF THE AO AS THE ASSESSING AUTHORITY, AND NOT THAT OF ANY OTHER, THA T IS RELEVANT; IT BEING TRITE LAW THAT A MERE CHANGE OF OPINION WOULD NOT ENTITLE REVISION, AND FOR WHICH, REFERENCE WAS MADE BY HIM TO THE DECISIONS BY THE APEX COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (SUPRA) AND MALABAR INDUSTRIAL CO. LTD. VS. CIT (2000) 243 ITR 83 (SC). ON MERITS, IT WAS ARGUED BY HIM THAT THE ASSESSEE HAD RECEIVED INTEREST, ACC RUED UP TO 31.3.2004, DURING THE RELEVANT PREVIOUS YEAR, AND WHICH THUS CONSTITUTED THE ASSESSEES BUSINESS INCOME FOR THE YEAR AND, AS SUCH, THE FINDING BY THE AO - WHICH WA S RELIED UPON BY THE LD. CIT FOR INVOKING S. 263, I.E., THAT THERE WAS NO BUSINESS D URING THE YEAR, WAS FACTUALLY INCORRECT. IF AT ALL, ALL THAT COULD BE SAID IS THAT THERE WAS NO BUSINESS WITH THE PUBLIC DURING THE RELEVANT YEAR. FURTHER ON, IT WAS SUBMITTED BY HIM THAT THE DECISION IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA) WAS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE; THE ASSESSEES ASSESSMENT IN THE PAST BEING CONSISTENTLY MADE ON THE BASIS OF THE ACTUAL RECEIPT AS PER ITS BOOKS OF ACCOUNT. ON BEING QUERIED BY THE BENCH THAT IN THAT CASE, I.E., THE AMOUNTS (INCLUDING INTEREST) RECEIV ABLE AS ON 31.3.2004 NOT FINDING REFLECTION IN AND, THUS, NOT AN ASSET ON THE BOOKS OF THE ASSESSEE; IT FOLLOWING A CASH 4 SYSTEM OF ACCOUNTING, ON WHAT BASIS OR CONSIDERATIO N WAS THE BUSINESS TRANSFERRED? IT WAS EXPLAINED THAT, EVEN SO, THE SAID INTEREST - AS ALS O OTHER RECEIVABLES - WERE TAKEN INTO ACCOUNT IN DETERMINING THE CONSIDERATION FOR THE TA KE-OVER. ON A FURTHER QUERY AS TO HOW THE INTEREST OR OTHER RECEIVABLES/ACCRUED AMOUNTS W ERE RECEIVED BY THE ASSESSEE WHEN IT HAD TRANSFERRED THE BUSINESS FOR A CONSIDERATION; T HE PROPERTY THEREIN NO LONGER BELONGING TO THE ASSESSEE-FIRM, I.E., WITH EFFECT FROM 1.4.20 04, BUT ONLY IN THE TRANSFEREE-COMPANY, IT WAS REPLIED BY HIM THAT WHAT ALONE WAS TRANSFERRED WAS THE RIGHT TO RECEIVE THE INTEREST. 3.2 THE LD. DR, ON THE OTHER HAND, WOULD SUBMI T THAT IT IS APPARENT THAT THE INTEREST ON THE PARTNERS CAPITAL IS DISALLOWABLE, EVEN AS STAT ED BY THE LD. CIT, IN VIEW OF THE CLEAR FINDING IN THE ASSESSMENT ORDER(S) THAT NO BUSINESS WAS TRANSACTED OR UNDERTAKEN BY THE ASSESSEE DURING THE RELEVANT YEAR. THE RECEIPT OF I NTEREST, SINCE ACCRUED AND PAYABLE, WOULD STAND TO FORM PART OF THE TOTAL INCOME AND, A CCORDINGLY, BE ASSESSED, BY VIRTUE OF S. 176(3A), I.E., INDEPENDENT OF S. 28, SO THAT IT WOU LD OBTAIN EVEN WHERE NO BUSINESS IS CARRIED OUT. FURTHER, THE LD. CIT HAD ONLY SET ASI DE THE ASSESSMENT FOR A FRESH ASSESSMENT, TO BE MADE AFTER CONSIDERING ALL THE ASPECTS OF THE CASE, AND AFTER AFFORDING PROPER OPPORTUNITY OF BEING HEARD IN THE MATTER TO THE ASS ESSEE. AS SUCH, THERE WAS THEREFORE NO NECESSITY OR OCCASION TO GO INTO THE MERITS OF THE VARIOUS OBSERVATIONS MADE BY THE LD. CIT PER HIS ORDER. THE IMPUGNED ORDER WOULD THUS ME RIT BEING UPHELD. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE M ATERIAL ON RECORD AS ALSO THE CASE LAW CITED. 4.1 WE MAY FIRSTLY CLARIFY THAT THE ASSESSEES ARGU MENT QUA THE INVALIDITY OF THE REVISIONARY PROCEEDINGS IN VIEW OF THE SAME BEING I NITIATED ON THE BASIS OF A QUERY BY THE INTERNAL AUDIT PARTY IS NOT MAINTAINABLE. THIS IS FOR THE REASON THAT THE INTERNAL AUDITORS HAVE NOT EXPRESSED ANY OPINION IN THE MATTER, WHICH COULD ONLY FOLLOW ON OBTAINING ALL THE RELEVANT INFORMATION AND FACTS, BUT ONLY HIGHLI GHTED A PERTINENT FACT, I.E., OF THE ALLOWANCE OF INTEREST TO THE PARTNERS ON THEIR CAPI TAL U/S. 36(1)(III), EVEN AS ADMITTEDLY NO BUSINESS WAS CARRIED, HAVING BEEN IN FACT TRANSFERR ED. NO DOUBT, THE ASSESSEE EXPLAINS OF 5 HAVING COLLECTED INTEREST, RECEIVABLE AS ON 31/3/20 04, SO THAT IT WAS CARRYING ON BUSINESS TO THAT EXTENT, WITH THE AO HAVING THUS TAKEN A VIE W IN THE MATTER, WHICH COULD NOT BE SUBJECT TO REVISION U/S. 263 ON THE REVISIONARY AUT HORITY HOLDING A DIFFERENT VIEW. SO HOWEVER, THE ASSESSEE OMITS TO SEE THAT THE AO HAS IN FACT HELD OTHERWISE . SUCH A CONTENTION COULD BE RAISED ONLY WHERE THE AO HAD, O N INQUIRY AND EXAMINATION, FOUND THE ASSESSEE TO HAVE TRANSACTED BUSINESS INSOFAR AS IT RELATES TO REALIZATION OF INTEREST ACCRUED UP TO 31/3/2004. EVEN SO, THE MOOT QUESTION THAT W OULD ARISE, AND WHICH REMAINS UNADDRESSED, IS: HOW COULD THE ASSESSEE CARRY ON THE BUSINESS, EVEN TO THE EXTENT OF COLLECTION OF INTEREST ACCRUED FOR THE EARLIER YEAR S, AFTER THE TRANSFER OF BUSINESS ? IS NOT COLLECTION OF INTEREST, IT MAY BE ASKED, AN INTEGRA L PART OF ITS BUSINESS OF FINANCING ? CLEARLY, THERE IS AN APPARENT INCONSISTENCY BETWEEN THE TWO FINDINGS, AND THE MATTER WARRANTS FURTHER EXAMINATION, AND WHICH IT HAS NOT BEEN SUBJECT TO; NO ANSWER FORTHCOMING ON THIS ASPECT OF THE MATTER ON A PERUS AL OF ANY OF THE RELEVANT ASSESSMENT ORDERS. BESIDES, WE OBSERVE INCOME BY WAY OF INTERE ST FROM MFL AS CONSTITUTING A MAJOR PART OF THE TOTAL INCOME, AND THE CHARACTER OF WHIC H HAS NOT BEEN COMMENTED UPON EITHER IN THE ASSESSMENT ORDER OR BY THE ASSESSEE. LACK OF PROPER INQUIRY, WHERE WARRANTED, WOULD BY ITSELF DEEM AN ORDER ERRONEOUS, PREJUDICIA L TO THE INTEREST OF THE REVENUE, AS IS TRITE LAW, AFFIRMED TIME AND AGAIN BY THE HIGHER CO URTS OF LAW, AND TOWARD WHICH WE MAY, FOR READY REFERENCE, CITE CERTAIN DECISIONS, AS, INTER ALIA , IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. V. CIT (SUPRA); GEE VEE ENTERPRISES V. CIT (ADDL.) , 99 ITR 375 (DEL.)[RENDERED ON AN EXTENSIVE REVIEW OF THE CASE LAW IN THE MATT ER BY THE APEX COURT]; RAJALAKSHMI MILLS LTD. V. ITO , 121 ITD 343 (CHENNAI) (SB). `RECORD FOR THE PURPOSES OF S. 263 IS WIDE, AND WOULD INCLUDE THE AUDITORS OBSERVATIONS ON FACTS AS WELL. THE LD. CIT, AS POI NTED OUT BY THE LD. DR, HAS NOT RENDERED ANY DEFINITE FINDINGS, BUT ONLY BROUGHT THE RELEVAN T ISSUES, WHICH HE DEEMED RELEVANT TO BE EXAMINED IN VIEW OF THE ADMITTED FACTS, FOR THE PURPOSE OF FRESH ASSESSMENT DIRECTED BY HIM; THE INCOME, IN HIS VIEW, BEING IN FACT ASSE SSABLE U/S. 176(3A) AND NOT U/S. 28(I). EVEN AS THIS SHOULD NORMALLY BE THE END OF THE MATT ER, I.E., IN CASE OF AN OPEN SET ASIDE TO THE ASSESSING AUTHORITY, WE FIND THAT IN THE INSTAN T CASE THE REVISIONARY AUTHORITY HAS 6 ISSUED SOME OBSERVATIONS, REQUIRING THE AO TO REDO THE ASSESSMENT IN LIGHT OF THE SAME. SECONDLY, THE LD. CIT HAS ALSO DIRECTED FOR A REVIE W OF THE ASSESSMENTS FOR THE EARLIER YEARS IN VIEW OF THE DECISION BY THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). AS SUCH, IT BECOMES INCUMBENT ON US, IN V IEW OF THE CHALLENGE BY THE ASSESSEE TO THE IMPUGNED ORDER/S, TO EXAMINE THE SAID OBSERVATIONS FOR THEIR VALIDITY, AS, IF AND TO THE EXTENT FOUND NOT VALID, THE SAME CANNOT BE ALLOWED TO SUSTAIN, AND PREJUDICE THE CAUSE OF THE ASSESSEE. OF COURSE, OUR VIEW WOULD AGAIN BE BASED ONLY ON THE MATERIAL ON RECORD, AND ANY FURTHER INFORMAT ION OR FACTS MAY OPERATE TO MITIGATE THE SAME, SO THAT BOTH THE PARTIES WOULD BE AT LIBE RTY TO MEET THE SAME BY BRINGING MATERIALS ESTABLISHING OTHERWISE. 4.2 WE HAVING CONFIRMED THE ASSUMPTION OF JURIS DICTION U/S. 263 IN THE PRESENT CASE, THE NEXT ISSUE TO CONSIDER IS THE ASSESSEES EXPLAN ATION ON MERITS. IT CONTENDS TO BE IN FACT CARRYING ON BUSINESS AS IT WAS UNDERTAKING COLLECTI ON OF INTEREST ACCRUED UP TO THE END OF THE IMMEDIATELY PRECEDING PREVIOUS YEAR, I.E., 31/3 /2004, AND THUS CARRYING ON BUSINESS TO THAT EXTENT. WE FIND THAT THERE IS NO FINDING OF FA CT BY THE REVENUE ON THIS MATTER. NEITHER HAS THE SAME BEEN EXAMINED DURING THE ASSESSMENT PR OCEEDINGS NOR HAS THE SAME BEEN VERIFIED BY THE REVISIONARY AUTHORITY. THE SAME CANNOT THUS BE TAKEN AS A FACT, AND WOULD WARRANT VERIFICATION IN THE SET ASIDE PROCEEDINGS . 4.3 THE LD. CIT, HOWEVER, WAS OF THE VIEW THAT THE SAME WOULD NOT AMOUNT TO THE CONDUCT OF BUSINESS BY THE ASSESSEE, AND THE RELEVA NT INTEREST INCOME IS LIABLE TO TAX U/S. 176(3A) AND NOT U/S. 28(I). IN OUR VIEW, THE MATTER , BEFORE BEING SUBJECT TO SUCH CONCLUSIVE FINDINGS, WOULD BE REQUIRED TO BE FACTUA LLY DETERMINED. THIS IS AS S. 176(3A) ONLY DEEMS THE RECEIPT OF INCOME RELATING TO A DISC ONTINUED BUSINESS AS THE INCOME FOR THE YEAR OF RECEIPT NOTHING MORE AND NOTHING LESS. IT DOES NOT DEEM THAT THE BUSINESS IS CARRIED OUT, WHERE NONE IS, AS WHERE IT IS DISCONTI NUED. FACTUALLY SPEAKING, IT IS ONLY THE ACTUAL COLLECTION OF INTEREST THAT WOULD GIVE RISE TO INCOME PER THE ASSESSEES REGULAR METHOD OF ACCOUNTING. IN FACT, EVEN OTHERWISE, I.E ., WHERE THE METHOD OF ACCOUNTING IS 7 ACCRUAL, WHICH DIFFERENCE ONLY MARKS THE POINT OF T IME WHEN AN INCOME IS RECOGNIZED AS SUCH, ITS ULTIMATE RECOVERY IS ESSENTIAL AND INTEGR AL TO THE WORKING OF THE ORGANIZATION. CAN ANY INSTITUTION EXIST OR SUSTAIN ITSELF WITHOUT REALIZING ITS DUES OR ACTUALLY PAYING ITS LIABILITIES? AS SUCH, WITHOUT DOUBT, EVEN DE HORS THE METHOD OF ACCOUNTING, THE COLLECTION OF INTEREST REPRESENTS A VITAL AND FUNDAMENTAL BUSI NESS ACTIVITY AND, THUS, THERE IS A CONDUCT OF BUSINESS TO THAT EXTENT. RATHER, WE ARE SURPRISED ON THE LD. AR CONCEDING TO THE FINDING BY THE AO OF THERE BEING NO BUSINESS DU RING THE YEAR AS CORRECT TO THE EXTENT THAT THERE HAS BEEN NO BUSINESS ACTIVITY WITH THE P UBLIC AT LARGE. WHY, WE WONDER; THE MONEY REALISED BEING ONLY FROM THE PUBLIC/BORROWERS ? HOWEVER, THE ASSESSEES EXPLANATION IS VALID ONLY INSOFAR AS IT RELATES TO INTEREST ACCRUED UP TO 31/3/2004 ON AMOUNTS FINANCED IN THE REGULAR COURSE OF BUSINESS UP TO THAT DATE, I.E., WOULD NOT HOLD FOR INTEREST INCOME FROM MFL, WHICH, AS AFORE-NOTED, CO NSTITUTES THE MAJORITY OF THE INTEREST INCOME CREDITED TO THE INCOME STATEMENT/S. FURTHER, WE FIND ON A PERUSAL OF EACH OF THE THREE BALANCE-SHEETS (AS ON 31.3.2005), THAT THE ASSESSEE HAS NOT INCURRED AN EXPENDITURE W HATSOEVER DURING THE RELEVANT YEAR, I.E., APART FROM ON INTEREST TO PARTNERS? HOW COULD THAT BE? THE ASSESSEE, ADMITTEDLY FOLLOWING CASH SYSTEM OF ACCOUNTING, IT COULD, GIVEN ITS CLAI M OF HAVING COLLECTED THE OUTSTANDING INTEREST, WOULD BE REQUIRED TO INCUR THE SAME EXPEN DITURE, I.E., AS IN THE PAST, ON THE SAID ACTIVITY, WHICH ONLY WOULD, GIVEN ITS METHOD OF ACC OUNTING, RESULT IN ITS REPORTING INCOME. IT COULD BE, AND RATHER WOULD BE, ON A LOWER SCALE, IN CASE OF A DECLINE IN VOLUME, YET, IF IT WERE TO COLLECT ITS REVENUE IN THE SAME MANNER AS I T WAS DOING IN THE PAST, AS CONTENDED BY IT, HOW COULD THE SAME BE COMPLETELY FREE OF COS T, IN COMPLETE DEVIATION WITH THE PAST; EACH OF THE INCOME STATEMENTS (PROFIT AND LOSS ACCO UNT) FOR THE YEAR ENDING 31.3.2005 BEARING EXPENDITURE INCURRED DURING THE IMMEDIATELY PRECEDING YEAR. REFERENCE IN THIS CONTEXT IS DRAWN TO OUR FINDING OF ABSENCE OF ANY F INDING QUA COLLECTION OF OUTSTANDING INTEREST BY THE FIRM IN THE ASSESSMENT ORDER AT PAR A 4.2 ABOVE . EVEN SO, ITS CLAIM OF CONDUCT OF BUSINESS, TO THE EXTENT OF COLLECTION OF ACCRUED INTEREST AND, ACCORDINGLY, ENTITLED TO DEDUCTION QUA INTEREST ON THE PARTNERS CAPITAL, I.E., A BUSINES S BORROWING, 8 THOUGH APPEALING AT FIRST SIGHT, SUFFERS FROM SEVER AL FUNDAMENTAL INFIRMITIES, WHICH WE MAY DELINEATE AS UNDER. 4.4 FIRSTLY, WHEN THE BUSINESS IS TRANSFERRED, THE PROPERTY, BOTH IN THE PRINCIPAL AMOUNT OF LOANS AS WELL AS THE INTEREST ACCRUED THEREON UP TO THE TRANSFER DATE, STANDS VESTED IN THE TRANSFEREE-COMPANY. WE ARE, AS SUCH, UNABLE TO UND ERSTAND AS TO HOW THE INTEREST ACCRUED UP TO 31.3.2004, I.E., UP TO IMMEDIATELY BEFORE THE TRANSFER DATE (1.4.2004), COULD BE RECEIVED OR REALISED BY THE ASSESSEE. THE AGREEMEN T OF TRANSFER IS EXPLICIT ON THIS; THE RELEVANT SCHEDULE THERETO LISTING THE ASSETS TRANSF ERRED ALONG WITH THEIR RESPECTIVE VALUES, I.E., AT WHICH THE SAME STAND SOLD, FOR EACH OF THE THREE FIRMS, BEARING THE ASSET `INTEREST RECEIVABLE, AND SEPARATELY FOR THE HO AND THE BRAN CHES. THE AGREEMENT ALSO DOES NOT CAST ANY RESPONSIBILITY ON THE ASSESSEE TO COLLECT THE SAID INTEREST. ON THE CONTRARY, IT SEEKS TO PROVIDE THE NECESSARY TITLE AND LEGAL BASIS TO T HE `PURCHASER, THE TRANSFEREE-COMPANY, TO PROCEED AGAINST ANY RECALCITRANT DEBTOR FOR RECO VERY OF DUES, EVEN AS CONCEDED TO BY THE LD. AR WHEN HE STATES OF THE RIGHT TO RECEIVE I NTEREST AS HAVING BEEN TRANSFERRED THERE- TO. AS SUCH, THE ASSESSEE HAS NO BUSINESS TO COLLEC T THE SAME, AND CANNOT POSSIBLY CONTEND TO HAVE DONE SO ON ITS OWN BEHALF AND, CONSEQUENTLY , OF BEING ENGAGED IN BUSINESS TO THAT EXTENT; AND IF AT ALL IT DID COLLECT INTEREST, IT I S AND CAN ONLY BE FOR AND ON BEHALF OF THE TRANSFEREE-COMPANY. IN FACT, NOT SO CONSIDERING WO ULD, APART FROM BEING LEGALLY INFIRM, LEAD TO AN ANOMALY AND A CONCOMITANT ACCOUNTING IMB ROGLIO. HOW COULD IT RECEIVE THE SAME DUES TWICE OVER, AND HOW DOES IT ACCOUNT FOR T HE SAME, I.E., ONCE FROM THE CONCERNED BORROWER DIRECTLY, TREATING IT AS ITS INC OME AND, SECONDLY, FROM THE VENDOR (MFL) AS A PART OF THE SALE CONSIDERATION ? THOUGH THIS MAY AND, RATHER, WOULD NOT BE APPARENT FROM THE ASSESSEES ACCOUNTS, BEING WRITTE N ONLY ON THE BASIS OF THE RECEIPT AND PAYMENT, IT WOULD REFLECT IMMEDIATELY AND PATENTLY IN THE ACCOUNTS OF THE PURCHASER, WHICH BEING A COMPANY IS OBLIGED BY LAW TO MAINTAIN ITS ACCOUNTS ON ACCRUAL BASIS. THIS IS AS IT WOULD ONLY CREDIT THE ASSESSEES ACCOUNT I N ITS BOOKS FOR THE SALE CONSIDERATION, INCLUDING INTEREST RECEIVABLE, DEBITING THE CORRESP ONDING ASSET ACCOUNT, I.E., INTEREST 9 RECEIVABLE A/C. HOWEVER, IT WOULD NOT RECEIVE ANY I NTEREST FROM THE BORROWERS, WHICH IS BY THE ASSESSEE, AND OSTENSIBLY ON ITS OWN ACCOUNT, CREDITING INCOME (RECEIVED) ACCOUNT. THIRDLY, EVEN AS QUESTIONED DURING HEARI NG, THE NEXT AND INCIDENTAL QUESTION THAT ARISES IS: HOW HAS THE CONSIDERATION ACCRUING OR ARISING ON TH E TRANSFER OF BUSINESS, A CAPITAL ASSET, BEEN ACCOUNTED FOR OR TREATED IN ITS RETURN BY THE ASSESSEE ? THE LD. AR CLARIFIED THAT THE ACCOUNTS RECEIVABLE, INCLUDING I NTEREST ACCRUED TO DATE (31.3.2004), WERE TAKEN INTO RECKONING FOR DETERMINING THE `TRANSFER CONSIDERATION. THOUGH THE ORDERS ARE SILENT ON THIS, THE SAME IS CONSISTENT WITH THE AGR EEMENT, SO THAT WE TAKE IT AS SO. HOWEVER, THE QUESTION IS THAT WHEN THE ACCRUED AND UNREALIZED INCOME/S, AS INTEREST RECEIVABLE AS ON 31/3/2004, ARE NOT ON THE ASSESSEE S BOOKS, IN VIEW OF ITS METHOD OF ACCOUNTING, I.E., CASH, THE CONSIDERATION RECEIVED IN ITS RESPECT, BEING ONLY BE A PART OF THE TOTAL SALE CONSIDERATION ARISING ON TRANSFER OF BUS INESS, WOULD BE OVER AND ABOVE THE BOOK CAPITAL AND, CONSEQUENTLY, GIVE RISE TO `CAPITAL GA INS TO THAT EXTENT. THIS IS PRECISELY THE REASON FOR BEING QUESTIONED IN THE MATTER, TO, HOWE VER, NO SATISFACTORY ANSWER BY THE LD. AR. IN FACT, ON THE CONTRARY, AND QUITE SURPRISINGL Y, WE OBSERVE THAT THERE HAS BEEN A SUBSTANTIAL INFUSION OF FUNDS BY THE PARTNER(S) DUR ING THE YEAR, WHICH IS COMPLETELY INEXPLICABLE INASMUCH AS THERE IS NO QUESTION OF AS SUMING FRESH BORROWINGS WHEN THE FIRM HAS EVEN TRANSFERRED ITS EXISTING BUSINESS. WI TH REFERENCE TO THIS, IT MAY BE CLARIFIED THAT IT IS ONE THING TO SAY THAT THE FUNDS ARE INVE STED IN BUSINESS ASSETS, WHICH ARE NOT YIELDING ANY RETURN OR HAVE TURNED UNPRODUCTIVE, AN D QUITE ANOTHER THAT THEY NO LONGER REPRESENT A BUSINESS ASSET, BUT ONLY A DEBT ON A SA LE TRANSACTION, OUTSIDE OF BUSINESS, RATHER CONSTITUTING ITS SALE CONSIDERATION ITSELF. 4.5 WE MAY FINALLY ADDRESS THE DIRECTION BY THE LD. CIT WITH REFERENCE TO THE DECISION BY THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). AS ALSO EXPLAINED BY THE TRIBUNAL, ON A SIMILAR PLEA A DVANCED BY THE REVENUE, THAT THE SAID DECISION WOULD BE APPLICABLE IN A SET OF FACTS AND CIRCUMSTANCES WHERE THE AMOUNT IS LYING TO THE CREDIT OF THE ASSESSEES ACCOUNT WITH THE PAYER, WHICH IS OPEN TO BE DRAWN ON DEMAND. THAT IS, IT ENJOYS AN UNFETTERED RIGHT TO R ECEIVE THE AMOUNT AT ITS SOLE DISCRETION. 10 COULD IT BE SAID THEN THAT THE AMOUNT IS NOT AVAILA BLE WITH IT, OR STANDS NOT `RECEIVED BY IT. TO CITE AN EXAMPLE, AS AN ILLUSTRATION, TAKE TH E CASE OF MONIES LYING CREDITED IN THE SAVINGS DEPOSIT ACCOUNT OF THE ASSESSEE WITH THE BA NK. COULD THE NON-WITHDRAWAL OF THE AMOUNT BY THE ASSESSEE BE A VALID GROUND FOR THE NO N-RECEIPT OF THE SAME. THE PROPOSITION WOULD HOLD GOOD, AND EQUALLY, FOR AN ACCOUNT WITH A NON-BANKER AS WELL, I.E., AS LONG AS THE BASIC INGREDIENTS OF THE PROPOSITION ARE MET, I .E., THAT THE AMOUNT IS UNCONDITIONALLY AVAILABLE FOR BEING WITHDRAWN BY THE ASSESSEE. THE APEX COURT HAS ITSELF CLARIFIED, ALSO REFERRING TO ITS EARLIER DECISION IN THE CASE OF RAGHAVA REDDI V. CIT (1962) 44 ITR 720 (SC), THAT UNDER SUCH CIRCUMSTANCES, THERE IS CHANG E IN CHARACTER OF THE `DEBT TO A `DEPOSIT, SO THAT THE AMOUNT REPRESENTED BY THE DE BT CAN ONLY BE CONSIDERED AS `RECEIVED. THERE IS NO FINDING/S BY THE LD. CIT WI TH REGARD TO THE SATISFACTION OF THE CONDITION/S FOR THE APPLICABILITY OF THE SAID DECIS ION IN THE ASSESSEES CASE EITHER FOR THE CURRENT OR FOR THE EARLIER YEARS, IN THE ABSENCE OF WHICH HIS OBSERVATIONS WITH REGARD THERETO CAN NOT HOLD. 5. CONCLUSION 5.1 THE ASSESSEE HAS BEEN ALLOWED INTEREST ON THE CAPITAL TO THE PARTNERS, AS A BUSINESS DEDUCTION, EVEN AS THE ASSESSMENT ORDER/S BEARS A C LEAR FINDING OF THE ASSESSEE HAVING NOT UNDERTAKEN ANY BUSINESS IN VIEW OF THE SAME HAVING BEEN TRANSFERRED ON THE FIRST DAY OF THE YEAR. THOUGH THE ASSESSEE CLAIMS OF HAVING UNDE RTAKEN BUSINESS TO A LIMITED EXTENT, THERE IS NO FINDING WITH REGARD THERETO IN THE ASSE SSMENT ORDER/S, WHICH THUS BEARS A CONTRADICTION TO THAT EXTENT. THIS IS FURTHER ACCEN TUATED BY THE ABSENCE OF ANY OF THE REGULAR EXPENDITURE FOR THE YEAR UNDER REFERENCE, I .E., THAT THE FIRM INCURS TOWARD COLLECTION OF INTEREST. THE MATTER CLEARLY WARRANTS FURTHER EXAMINATION, AND THE RESULTANT FINDINGS OF FACT/S. OUR FURTHER EXAMINATION; THE LD . CIT HAVING ISSUED OBSERVATIONS REQUIRING THE AO TO FRAME THE ASSESSMENT/S IN LIGHT THEREOF, REVEAL THE ASSESSEES CLAIM/S TO BE INFLICTED WITH SEVERAL INFIRMITIES. HOW COUL D; THE FIRM HAVING TRANSFERRED ITS BUSINESS AS A GOING CONCERN, LEFT WITH NO OPERATIVE ASSETS, INCLUDING PERSONNEL, CONDUCT BUSINESS, AND WHICH CONSTITUTES ITS ONLY BUSINESS. THE INCOME REALIZED, IF SO, COULD ONLY 11 BE FOR AND ON BEHALF OF THE TRANSFEREE-COMPANY. THE SAME ALSO GIVES RISE TO ISSUES OF ACCOUNTING AS ALSO CAPITAL GAINS; IT HAVING REALIZE D MORE THAN THE BOOK VALUE OF THE CAPITAL, AS WELL. THE LD. CIT HAS FOUND THE ASSESSEES CLA IMS AS NOT VALID, AS ITS INCOME WOULD IN ANY CASE BE SUBJECT TO BE ASSESSED U/S. 176(3A) AND , BESIDES, ITS CASE TO BE COVERED BY THE DECISION IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). CLEARLY, ONLY ONE OF THE SAID TWO FINDINGS BY THE LD. CIT COULD H OLD; THE LATTER DEEMING THE CREDIT OF INCOME TO THE ASSESSEES ACCOUNT BY THE BORROWER IN HIS ACCOUNTS AS AN EFFECTIVE RECEIPT OF INCOME BY THE ASSESSEE, EVEN AS WE HAVE FOUND, A S AFORE-NOTED, NO FACTUAL FINDING LEADING TO THE APPLICABILITY OF THE SAID DECISION I N THE PRESENT CASE/S. THE QUESTION OF APPLICABILITY OR OTHERWISE OF SEC. 176(3A) WOULD HA VE TO AWAIT DETERMINATION OF THE AFORE-NOTED FACTUAL ISSUES. FURTHER, THE INTEREST R ECEIVED FROM MFL IS ONLY UNDER THE TERMS OF THE TRANSFER AGREEMENT; NEITHER THE ASSESS EES EXPLANATION/S NOR THE FINDING/S BY THE LD. CIT WOULD APPLY TO THIS PART OF THE INCOME. ITS ASSESSMENT AS `BUSINESS INCOME, AND ALLOWANCE OF INTEREST U/S. 36(1)(III) THERE-AGA INST, ARE PATENTLY CONTRARY TO THE FACTS ON RECORD. IN FACT, THE TRANSFER AGREEMENT PROVIDES F OR THE PAYMENT OF THE SALE CONSIDERATION BY MFL DIRECTLY TO EACH OF THE THREE PARTNERS IN EQ UAL RATIO. THAT BEING THE CASE, THE QUESTION THAT WOULD CONSEQUENTLY ARISE IS IF ANY IN TEREST ON THE DELAYED PAYMENT THEREOF (SALE CONSIDERATION), WOULD AT ALL ARISE TO THE TRA NSFEROR-FIRM, AND INURE ONLY TO ITS INDIVIDUAL PARTNERS DIRECTLY. THIS WILL NOT ONLY IM PACT THE ASSESSMENT OF THE FIRM/S, BUT ALSO THAT OF THE INDIVIDUAL PARTNERS, WHO WOULD BE LIABLE TO RECEIVE INTEREST ON THE UNPAID PRINCIPAL DEBT, I.E., DIRECTLY FROM THE VENDOR (MFL ), AND DE HORS THEIR CAPITAL BALANCE IN THE ASSESSEE-FIRM, WHICH HAS RATHER WITNESSED AN IN CREASE IN SOME CASES, GIVING RISE TO A FURTHER SET OF QUESTIONS. HOW IS THE ASSESSEE LIABLE TO INTEREST TO ITS PARTN ERS, I.E., GIVEN THE TERMS OF THE AGREEMENT, AND THE FACT THAT IN AN Y CASE THE SALE CONSIDERATION, THOUGH SUBJECT TO INTEREST ON DELAY IN DISCHARGE, DOES NOT CONSTITUTE A DEBT OF THE FIRM (BUT ONLY OF THE INDIVIDUAL PARTNERS, TO WHOM IT IS DUE), MUCH L ESS ITS BUSINESS ASSET, FOR THE YIELD THEREON TO BE CONSIDERED AS A BUSINESS INCOME ? TWO, TOWARD WHICH BUSINESS ARE THE FRESH BORROWINGS BY THE FIRM FROM THE PARTNERS, I.E., THA T ASSUMED DURING THE YEAR, AGAINST; 12 THERE BEING NO BUSINESS, AND WHICH REPRESENTS THE P RIMARY CONDITION FOR ALLOWANCE OF INTEREST U/S. 36(1)(III) ? 5.2 IN VIEW OF THE FOREGOING, WE, THEREFORE, C ONFIRM THE FINDINGS BY THE LD. CIT, I.E., TO A LIMITED EXTENT, MODIFYING THE BALANCE. THE ASSESS ABILITY OF THE FIRMS INCOME, INCLUDING ITS COMPUTATION, WHICH WOULD INCLUDE ALLOWANCE OF D EDUCTION/S PERMISSIBLE UNDER LAW, WOULD WARRANT EXAMINATION, AND DECISION/S IN ACCORD ANCE WITH LAW BY THE ASSESSING AUTHORITY, WHO WOULD DO SO BY ISSUING SPECIFIC FIND INGS OF FACT, CONSISTENT WITH THE MATERIAL ON RECORD, ON MATTERS IMPINGING THEREON, A S OBSERVED AND SOUGHT TO BE HIGHLIGHTED BY US, AND AFTER ALLOWING A REASONABLE OPPORTUNITY TO THE ASSESSEE/S TO PRESENT ITS CASE. WE DECIDE ACCORDINGLY. 6. IN THE RESULT, THE APPEAL/S BY THE ASSESSEE/ S IS PARTLY ALLOWED. SD/- SD/ - (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 29TH JULY, 2011 GJ COPY TO: 1 . M/S. MUTHOOT BANKERS, ELLIKKA CENTRE, PIER ROAD, TE LLICHERRY-670 101. 2. M/S. MUTHOOT BANKERS, EMIRATES ARCADE, MAHE. 3. M/S. MUTHOOT BANKERS, PMC-21/1711, 2 ND FLOOR, CITY BLDGS., OPP. MUNICIPAL BUS STAND, PAYYANNUR-670 307. 4. THE INCOME TAX OFFICER, WARD-1(2), KANNUR. 5. THE INCOME TAX OFFICER, WARD-1(4), KANNUR 6. THE COMMISSIONER OF INCOME-TAX, KANNUR. 7. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 8. GUARD FILE .