M/s. Modern Electricals, Thrissur V. ACIT, Trichur

ITA 3/COCH/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52283 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 13-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 01-01-2010
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: R LOKANATHANCAAR
• Keywords: Business income
• Section: 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND SANJAY AROR A, AM I.T.A NO. 03/COCH/2010 ASSESSMENT YEAR: 2006-07 MODERN ELECTRICALS, KURUPPAM ROAD, TRICHUR-680 001. [PAN: AAEFM 0541N] VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2(1), TRICHUR. (ASSESSEE-APPELLANT) (REVENUE- RESPONDENT) ASSESSEE BY SHRI R.LOKANATHAN,CA-AR REVENUE BY MS. S.VIJAYAPRABHA, JR. DR DATE OF HEARING 13/10/2011 DATE OF PRONOUNCEMENT 30/11/2011 O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-V, KOCHI (THE CIT(A) FOR S HORT) DATED 26.10.2009, AND THE ASSESSMENT YEAR (A.Y.) UNDER REFERENCE IS 2006-07. 2. A MARGINAL DELAY OF TWO (2) DAYS ATTENDS THE PREFERENCE OF THE INSTANT APPEAL BY THE ASSESSEE. THE SAME STANDS SUITABLY EXPLAINED BY THE APPELLANT PER AN AFFIDAVIT DATED 15/1/2010 BY ITS MANAGING PARTNER, SH. JOSE MATHEW. WE, ACCORDINGLY, CONDONING THE DELAY, PROCEEDED TO HEAR THE APPEAL AFTER HEARING T HE LD. DR IN THE MATTER, WHO FAIRLY DID NOT RAISE ANY SERIOUS OBJECTION THERETO. I.T.A. NO. 03/COCH/2010 MODERN ELECTRICALS V. ASSTT. CIT, TRICHUR 2 3. THE FIRST ISSUE IS WITH REGARD TO THE DISALLOWAN CE IN THE SUM OF ` 3,26,000/- EFFECTED U/S. 36(1)(III) OF THE INCOME TAX ACT, 1961 (THE 'A CT' HEREINAFTER) IN RESPECT OF INTEREST, WHICH STOOD CLAIMED BY THE ASSESSEE AT AN AGGREGATE OF ` 9.15 LAKHS IN RESPECT OF VARIOUS LOANS FROM THE BANK, AGGREGATING TO ` 131.85 LAKHS (EXCLUDING VEHICLE LOANS). THE DISALLOWANCE WAS FOR THE REASON THAT THERE WAS A TO TAL WITHDRAWAL FOR ` 49.64 LAKHS IN THE PARTNERS ACCOUNTS, AS AGAINST THE COMBINED CAPITAL , I.E., OF THE TWO PARTNERS, AT ` 34.31 LAKHS. THE DECISION BY THE HONBLE JURISDICTIONAL H IGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO. , 254 ITR 248 (KER.) WAS CLEARLY APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE; THE WITHDRAWALS BEING ADMITTEDLY FOR NON- BUSINESS PURPOSES. THE RELIANCE BY THE ASSESSEE ON THE DECISION IN THE CASE OF APOLLO TRADE LINKS VS. ITO (1994) 48 ITD 159 (DEL.TRIB.), TOWARD THE PROPOSITION THAT A PARTNER COULD BE PERMITTED TO WITHDRAW, I.E., WITHOUT CHARGING ANY INTEREST THERE-FROM, WITH THE CONSENT OF THE OTHER PARTNERS HAVING A CREDIT BALANCE, WAS FOUND BY HIM AS NOT APPLICABLE, AS IT IS ONLY WHERE THE OTHER PARTNERS HAVE SUFFICIENT CREDIT BALANCE THAT THE SAID PROPOS ITION WOULD APPLY. IN THE INSTANT CASE, THE WITHDRAWAL WAS CLEARLY MORE THAN THE COMBINED C REDIT BALANCE, AND THE MEAGRE POSITIVE BALANCE OF ` 1.18 LAKHS, REFLECTED AS THE FIRMS CAPITAL PER ITS BALANCE-SHEET AS ON 31.3.2006, WAS ONLY ON ACCOUNT OF THE CREDIT OF INT EREST AND SALARY TO THE PARTNERS CAPITAL ACCOUNTS. ACCORDINGLY, THE TOTAL WITHDRAWAL OF ` 48.97 LAKHS IN THE ACCOUNT OF SHRI C.M. JOSE, PARTNER, WORKING TO 37.22% OF THE TOTAL BANK CREDIT, I.E., EXCLUDING QUA VEHICLE LOANS, WAS CONSIDERED BY THE ASSESSING OFFICER (AO) AS DIVERTED FOR NON-BUSINESS PURPOSES, AND INTEREST THEREON, WORKED OUT PROPORTI ONATELY AT ` 3.26 LAKHS, DISALLOWED. THE LD. CIT(A) CONFIRMED THE SAME IN APPEAL; THE DE CISION BY THE AO BEING IN TERMS OF THE DECISION BY THE HONBLE JURISDICTIONAL HIGH COU RT IN THE CASE OF CIT VS V.I. BABY & CO. (SUPRA). AGGRIEVED, THE ASSESSEE IS IN SECOND APPE AL. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE PRINCIPAL ISSUE WHICH WE NEED TO ADDRESS; THE LAW IN THE MATTER HAV ING BEEN CLARIFIED BY THE HIGHER COURTS OF LAW, AS IN THE CASE OF V. I. BABY & CO. (SUPRA), IS WHETHER THERE HAS BEEN, IN FACT, A DIVERSION OF THE FIRMS CAPITAL FOR NON-BUSINESS PU RPOSES DURING THE YEAR, AND IF SO, ITS EXTENT. THE ANSWER TO THE FIRST LIMB OF THE QUESTI ON IS IN THE AFFIRMATIVE, BEING RATHER AN I.T.A. NO. 03/COCH/2010 MODERN ELECTRICALS V. ASSTT. CIT, TRICHUR 3 ADMITTED FACT. AS REGARDS THE EXTENT, WE FIND THAT THE REVENUE HAS TOTALLY MIS-APPLIED ITSELF IN THE MATTER. THIS IS AS THE DIVERSION OF FUNDS COULD ONLY BE RECKONED ON THE WITHDRAWAL IN EXCESS OF THE CAPITAL (CREDIT) BALANC E, WHICH STANDS CLAIMED BY THE LD. AR TO BE POSITIVE THROUGHOUT THE YEAR, I.E., IF THE CO MBINED CAPITAL OF BOTH THE PARTNERS, WHETHER IN THEIR CURRENT OR CAPITAL ACCOUNT/S, IS T AKEN INTO RECKONING, AND FOR WHICH HE HAS ADDUCED A STATEMENT, PLACED AT PGS. 7 TO 13 OF THE ASSESSEES PAPER-BOOK (PB). NO DOUBT, THIS IS A MATTER ON WHICH THERE BEING NO SATISFACTO RY FINDING BY THE AUTHORITIES BELOW, WOULD REQUIRE VERIFICATION BY THE REVENUE. SO, HOWE VER, WE FIND THAT THE ASSESSEE HAS CREDITED INTEREST ON CAPITAL TO THE ACCOUNT OF BOTH THE PARTNERS. THIS WOULD MEAN THAT THERE IS - ON AN AVERAGE - A POSITIVE BALANCE, AS O THERWISE INTEREST COULD NOT WORK OUT TO BE A POSITIVE FIGURE. SO, HOWEVER, THIS CANNOT BE A SUBJECT MATTER OF PRESUMPTION, AND WOULD REQUIRE VERIFICATION AT THE END OF THE AO. I F AND TO THE EXTENT THE COMBINED CAPITAL OF BOTH THE PARTNERS, TAKEN TOGETHER (IN BOTH THEIR CAPITAL AND CURRENT ACCOUNTS), REPRESENTING THE FIRMS CAPITAL (OR THE PARTNERS F UNDS AVAILABLE WITH THE FIRM FOR BEING USED FOR ITS BUSINESS PURPOSES), WORKS TO A POSITIV E SUM, I.E., WITHOUT ANY CREDIT FOR INTEREST DURING THE YEAR , NO DISALLOWANCE COULD BE MADE. NO CREDIT ON ACCOU NT OF PROFIT, WHICH ONLY ACCRUES AT THE END OF THE YEAR, AND WHIC H WE FIND AS ALSO `ALLOWED ON MONTHLY BASIS, COULD BE MADE, THOUGH THAT IN RESPEC T OF SALARY, BEING ONLY TOWARD REMUNERATION FOR WORKING, AS ELIGIBLE IN TERMS OF T HE PARTNERSHIP DEED, WHERE ACTUALLY ALLOWED, COULD BE. WHERE NOT, I.E., THE COMBINED (O R THE FIRMS) CAPITAL DOES NOT WORK OUT TO A POSITIVE SUM, PROPORTIONATE DISALLOWANCE ON AC COUNT OF INTEREST WOULD DEFINITELY BE WARRANTED; THERE BEING A DIVERSION OF INTEREST BEAR ING FUNDS TO THAT EXTENT AND PERIOD. FURTHER, THE EXACT AMOUNT OF DISALLOWANCE WOULD BE WITH REFERENCE TO THE INTEREST RATE/S ACTUALLY ALLOWED TO THE BANK/S, AND FOR WHICH THERE IS NO REFERENCE OR MENTION IN THE ORDERS OF THE AUTHORITIES BELOW. IN CASE OF LOANS BEARING DIFFERENT AND/OR VARYING INTEREST RATES, AGAIN, AVERAGE (WEIGHTED) FOR THE YEAR WOULD HAVE TO BE TAKEN INTO ACCOUNT. THIS WOULD ALSO MEET THE ASSESSEES RELIANCE ON THE DECI SIONS IN THE CASE OF APOLLO TRADE LINKS VS. ITO (SUPRA) AND CIT VS. PREM HEAVY ENGINEERING WORKS (P) LTD . 285 ITR 554 (ALLAHABAD). WE MAY ALSO ADD THAT OUR DECISION IS I N CONFORMITY WITH THE LAW AS I.T.A. NO. 03/COCH/2010 MODERN ELECTRICALS V. ASSTT. CIT, TRICHUR 4 EXPLAINED BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF V.I. BABY & CO. (SUPRA). WE DECIDE ACCORDINGLY. 5. THE NEXT ISSUE AGITATED BY THE ASSESSEE IS IN R ESPECT OF DISALLOWANCE QUA THE REMUNERATION ALLOWED TO IT WORKING PARTNER, EFFECTE D IN THE SUM OF ` 3 LAKHS, AS AGAINST THE CLAIMED AMOUNT OF ` 6 LAKHS. THIS IS, AS, THOUGH THE CLAIMED AMOUNT FEL L WITHIN THE MAXIMUM AMOUNT PERMISSIBLE UNDER LAW (S. 37(1) R.W. S. 40(B)(V)), I.E., WHEN RECKONED IN AGGREGATE FOR BOTH THE PARTNERS, IT WAS ACTUALLY AL LOWED TO ONLY ONE OF THEM, THOUGH THE PARTNERSHIP DEED STIPULATES AN EQUAL (50%) SHARE FO R BOTH THE PARTNERS. 6. THE ASSESSEES CASE IS THAT THE PARTNERSHIP DEED STATES THAT ANY CHANGES THEREIN WOULD BE DULY REFLECTED IN THE MINUTE BOOK. HOWEVE R, THE TWO PARTNERS BEING HUSBAND AND WIFE, THERE WAS LAXITY IN THE MATTER AND, THERE FORE, THE MINUTES WERE OMITTED TO BE RECORDED. THE ENTIRE SALARY WAS ALLOWED TO THE ONL Y WORKING PARTNER, SHRI JOSE MATHEW. THE SAME WAS FOUND UNACCEPTABLE BY THE REVENUE, BEI NG CLEARLY AND ADMITTEDLY NOT IN TERMS OF THE PARTNERSHIP DEED, PER WHICH ONLY THE C LAIM IN LAW HAS TO BE ALLOWED, SUBJECT OF COURSE TO THE LIMITS PRESCRIBED THEREIN. 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MAT ERIAL ON RECORD. WE FIND THE ASSESSEE TO HAVE NO CASE AT ALL. THE ISSUE IS NOT WHETHER SHRI C.M. JOSE IS THE ONLY WORKING PARTNER OR NOT, TOWARD WHICH, AGAIN, NO EVI DENCE HAS BEEN LED. IN FACT, IF THAT BE SO, THE PARTNERSHIP DEED, PRESCRIBING REMUNERATION FOR BOTH THE PARTNERS, IS INCONSISTENT THEREWITH. IT IS ONLY THE CHANGES AS REFLECTED PER A WRITTEN INSTRUMENT, FILED ALONG WITH THE RETURN OF INCOME FOR THE RELEVANT YEAR, THAT CAN BE TAKEN COGNIZANCE OF UNDER LAW AND, AGAIN, ONLY WITH EFFECT FROM THE DATE THE CHANGE CO MES INTO EFFECT. SALARY AND INTEREST TO THE PARTNERS, IT MAY BE APPRECIATED, ONLY FORM A PA RT OF THEIR SHARE IN THE PROFITS OF THE FIRM, SO THAT ANY CHANGE THEREIN AMOUNTS TO A CHANG E IN THE TERMS OF THE PARTNERSHIP DEED. IN FACT, THE PROVISIONS OF LAW (S. 40(B)(V)) ARE CL EAR AND EXPLICIT IN THE MATTER. WE, THEREFORE, FIND THE ACTION OF THE REVENUE IN ALLOW ING SALARY IN THE ASSESSMENT OF THE FIRM AT 50% OF THE AMOUNT OTHERWISE EXIGIBLE IN TERMS OF THE PARTNERSHIP DEED FOR BOTH THE I.T.A. NO. 03/COCH/2010 MODERN ELECTRICALS V. ASSTT. CIT, TRICHUR 5 PARTNERS PUT TOGETHER, HAVING IN FACT BEEN ALLOWED TO ONLY ONE PARTNER, AS IN CONFORMITY WITH THE PROVISIONS OF LAW AND ONLY A REASONABLE VI EW OF THE MATTER. SO, HOWEVER, WE MAY ADD; THE LD. AR PLEADING THAT THE CONCERNED PAR TNER HAS RETURNED THE ENTIRE SALARY ` 6 LAKHS AS HIS INCOME, THAT THE PROVISIONS OF SEC. 28 ARE CLEAR IN THE MATTER, AND THAT ONLY THE SALARY (AS ALSO INTEREST) AS ACTUALLY ALLOWED IN TH E ASSESSMENT OF THE BUSINESS INCOME OF THE FIRM IS TO BE TREATED AS ELIGIBLE FOR BEING TAX ED IN THE HANDS OF ITS RESPECTIVE PARTNER/S. ACCORDINGLY, BOTH THE SALARY AND THE INTEREST IN TH E HANDS OF SHRI JOSE MATHEW, PARTNER, HAS NECESSARILY, AND WITHOUT HE BEING REQUIRED TO M OVE AN APPLICATION U/S. 154 IN THIS REGARD, TO BE MODIFIED CORRESPONDINGLY TO ACCORD WI TH THE PROVISIONS OF THE ACT. WE DECIDE ACCORDINGLY. 8. GROUND NOS. 4 & 5 RAISING MINOR ISSUES WERE NOT PRESSED BY THE LD. AR DURING THE HEARING, AND ARE ACCORDINGLY DISMISSED AS NOT PRESS ED. 9. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSED. SD/- SD/- (N.R.S.GANESAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 30TH NOVEMBER, 2011 GJ COPY TO: 1. M/S. MODERN ELECTRICALS, KURUPPAN ROAD, TRICHUR- 680001. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -2(1), TRICHUR. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-V, KOCH I. 4. THE COMMISSIONER OF INCOME-TAX, TRICHUR. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE .