Thomas George Muthoot, Kozhencherry V. ACIT, Thiruvalla

ITA 583/COCH/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7002 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 15-11-2010
• Court: TRIBUNAL
• Keywords: Recovery proceedings; Business income; Business expenditure

Judgement Text

ITA NO. 583/COCH/2010 (FOR AY 2005-06) 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. NO. 583/COCH/2010 ASSESSMENT YEAR:2005-06 THOMAS GEORGE MUTHOOT, MUTHOOT HOUSE, KOZHENCHERRY. [PAN: ABNPT 4693G] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, THIRUVALLA (ASSESSEE -APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY SHRI R.SREENIVASAN,CA-AR REVENUE BY MS. S. VIJAYAPRABHA, DR DATE OF HEARING 20/07/2011 DATE OF PRONOUNCEMENT 12/08/2011 O R D E R PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE CONTESTING THE O RDER BY THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIVANDRUM (CIT(A) FOR SH ORT) DATED 19.10.2010, AND THE ASSESSMENT YEAR UNDER REFERENCE IS 2005-06. 2. THE ONLY ISSUE ARISING IN THE APPEAL IS THE VALI DITY OF THE DISALLOWANCE OF THE INTEREST PAID BY THE ASSESSEE TO THE VARIOUS FIRMS IN WHICH HE IS A PARTNER, ON ACCOUNT OF APPLICATION OF S. 40(A)(IA) OF THE INCOME-TAX ACT, 1961 ('THE ACT' HEREINAFTER). IT WAS SUBMITTED ON THE ASSESSEES BEHALF THAT A PARTNERSH IP FIRM UNDER THE PARTNERSHIP LAW (INDIAN PARTNERSHIP ACT, 1932), HAS NO LEGAL PERSON ALITY OF ITS OWN, AND IS ONLY AS A COMPENDIUM OF PARTNERS CONSTITUTING IT, AND TOWARD WHICH SEVERAL DECISIONS BY THE APEX COURT WERE CITED. IT IS ONLY BY THE FINANCE ACT, 1 992, W.E.F. 1.4.1993, THAT THE INTEREST AND ITA NO. 583/COCH/2010 (FOR AY 2005-06) 2 SALARY TO THE PARTNERS IS, SUBJECT TO THE PROVISION S OF S. 40 OF THE ACT, ALLOWED AS DEDUCTION IN THE COMPUTATION OF INCOME OF THE PARTNERSHIP FIR MS. AS SUCH, THE PAYMENT OF INTEREST BY THE ASSESSEE TO THE FIRM M/S. MUTHOOT ESTATE INV ESTMENTS, WOULD NOT BE HIT BY THE PROVISIONS OF S. 194A OF THE ACT, WARRANTING DEDUCT ION OF TAX AT SOURCE AND, CONSEQUENTLY, THE DISALLOWANCE UNDER S. 40(A)(IA). FURTHER, THER E HAS BEEN NO SUPPRESSION OF INCOME INASMUCH AS THE FIRM HAD DULY REPORTED THE IMPUGNED INCOME TO THE REVENUE, AND STANDS TAXED THEREON. THE AMOUNT DISALLOWED WOULD, THUS, A MOUNT TO TAXING THE SAME INCOME TWICE. THE SAME DID NOT FIND ACCEPTANCE BY THE ASS ESSING AUTHORITY; A PARTNER AND A PARTNERSHIP FIRM BEING SEPARATE PERSONS UNDER THE A CT. IN FACT S. 194A(3)(IV) SPECIFICALLY PROVIDES EXCLUSION FOR THE INCOME CREDITED OR PAID BY A FIRM TO ITS PARTNER, SO THAT THERE WAS NO REQUIREMENT OF TAX DEDUCTION AT SOURCE IN IT S RESPECT. HOWEVER, THERE WAS NO CORRESPONDING EXCEPTION FOR THE OPPOSITE, I.E., THE INTEREST (INCOME) PAID BY A PARTNER TO THE FIRM IN WHICH HE IS A PARTNER. SECONDLY, THERE IS NO QUESTION OF DOUBLE TAXATION; THE PROCEEDINGS U/S. 201, I.E., FOR THE COLLECTION OF T DS, AND S. 40(A), I.E., THE DISALLOWANCE OF DEDUCTION QUA AN EXPENDITURE IN THE COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION ON ACCOUNT OF NON-D EDUCTION OF TAX AT SOURCE, BEING DISTINCT AND SEPARATE. IN APPEAL, THE SAME STOOD C ONFIRMED BY THE LD. CIT(A). THE NATURE OF THE FIRM AS WELL AS THE PARTNERS UNDER THE PARTN ERSHIP LAW IS IRRELEVANT; THE ACT BEING A SEPARATE CODE IN ITSELF. HERE, ONE OF THE PARTNERS WAS DEALING WITH THE FIRM IN A CAPACITY IN ADDITION TO BEING A PARTNER. THE SAME ATTRACTED THE PROVISION OF S. 194A, WHICH IS NOT COMPLIED WITH, SO THAT THE INTEREST PAID AND CLAIME D AS A DEDUCTION IN THE COMPUTATION OF THE BUSINESS INCOME WOULD ATTRACT THE RIGOUR OF S. 40(A)(IA). AGGRIEVED, THE ASSESSEE IS IN APPEAL. 3. BEFORE US, LIKE SUBMISSIONS STOOD MADE BY EITHER SIDE. 4. WE HAVE HEARD THE PARTIES, AND PERUSED TH E MATERIAL ON RECORD. 4.1 WE MAY FIRSTLY CLARIFY THAT THERE IS NO QU ESTION OF ANY DOUBLE TAXATION. THE SAME WOULD ONLY BE WHERE THE SAME INCOME IS TAXED TWICE IN THE HANDS OF THE SAME PERSON. IF ITA NO. 583/COCH/2010 (FOR AY 2005-06) 3 THE DISALLOWANCE OF ANY EXPENDITURE IS TO BE CONSID ERED AS A CASE OF DOUBLE TAXATION, THE SAME WOULD STAND ATTRACTED IN EVERY CASE OF DISALLO WANCE OF EXPENDITURE WHERE THE CORRESPONDING SUM STANDS INCLUDED IN THE RECEIPT OF THE PAYEE. THE DEDUCTION QUA A BUSINESS EXPENDITURE IS SUBJECT TO THE PROVISIONS O F THE ACT, AND IS INDEPENDENT OF ITS TAXATION OR OTHERWISE IN THE HANDS OF THE PAYEE. FU RTHER, AS CLARIFIED BY THE LD. DR DURING THE HEARING, S. 40(A)(IA), WHICH BECOMES APPLICABLE ONLY WHERE THE DEDUCTION IS OTHERWISE EXIGIBLE, ESSENTIALLY CONCERNS OR REGULATES THE TI MING OF THE DEDUCTION, SO THAT IT WOULD BE ELIGIBLE FOR THE YEAR IN WHICH THE TAX IS DEDUCTED AND CREDITED TO THE ACCOUNT OF THE CENTRAL GOVERNMENT. ALSO, THE PLEA RAISED BY THE LD . AR WITH REFERENCE TO S. 201 OF THE ACT, I.E., RECOVERY OF TAX (UNDER CHAPTER XVII); TH E REVENUE BEING PRECLUDED FROM RECOVERING THE TAX WHERE THE SAME STANDS PAID BY TH E PAYEE, WOULD ALSO NOT HOLD. AS RIGHTLY POINTED OUT BY THE ASSESSING OFFICER (AO), THE TWO PROCEEDINGS ARE DIFFERENT AND INDEPENDENT OF EACH OTHER. EVEN AS POINTED OUT BY T HE TRIBUNAL (COCHIN BENCH) IN THE CASE OF DIVYA SYSTEMS (P.) LTD. VS. ACIT (2011) 43 SOT 155 (COCH), SECTION 40(A) IS A SUBSTANTIVE PROVISION, SO THAT WHERE ITS CONDITIONS ARE MET, THE CONSEQUENCE WOULD FOLLOW. 4.2 COMING TO THE ISSUE INVOLVED, WE FIND THAT THE ASSESSEES PRINCIPAL CASE IS WITH REFERENCE TO A FIRM BEING NOT A LEGAL ENTITY BY ITS ELF, BUT ONLY COMPRISING OF THE PARTNERS THEMSELVES. THE SAME, THOUGH VALID, WOULD BE OF NO MOMENT. THIS IS AS, AS FAR AS THE ACT IS CONCERNED, THE FIRM AND ITS PARTNERS ARE SEPARAT E PERSONS (S. 2(31)). WHY, THE ASSESSEE HIMSELF TREATS IS AS SO, FOR OTHERWISE WHERE IS THE QUESTION OF ONE PAYING INTEREST (INCOME) TO THE OTHER. THOUGH THE SAME IS LARGELY IRRELEVANT , BEING A SUBJECT MATTER OF THE MANNER IN WHICH THE INCOME OF A PARTNERSHIP FIRM AND THE R ESPECTIVE SHARES OF THE PARTNERS THEREIN IS TO BE SUBJECT TO ASSESSMENT THERE-UNDER, THE FACT REMAINS THAT IT (I.E., THE ACT) PROVIDES FOR DEDUCTION IN THE ASSESSMENT OF THE FIR M FOR THE PAYMENTS MADE BY IT TO ITS PARTNERS WHERE AUTHORISED BY AND IN ACCORDANCE WITH THE INSTRUMENT OF PARTNERSHIP, WHICH IS BUT ONLY A CONTRACT REGULATING THE RELATIONSHIP BETWEEN THE PARTNERS INTER SE . SECTION 194A(3)(IV) PROVIDES SPECIFIC EXCLUSION FROM TAX DE DUCTION AT SOURCE IN RESPECT OF ITA NO. 583/COCH/2010 (FOR AY 2005-06) 4 INTEREST CREDITED OR PAID BY A FIRM TO ITS PARTNER. ARGUABLY, THEREFORE, BUT FOR THE EXCLUSION PROVIDED THEREBY, EVEN INTEREST ALLOWED BY A FIRM T O ITS PARTNERS WOULD BE LIABLE FOR DEDUCTION OF TAX AT SOURCE, I.E., WHERE OTHERWISE E XIGIBLE. THE ONLY QUESTION, THEREFORE, THAT COULD ARISE, AND WHICH MERITS CONSIDERATION, I S WHETHER THE SAME WOULD ALSO INCLUDE THE INTEREST PAID BY A PARTNER TO THE FIRM; THE PAY MENTS BEING BETWEEN THE SAME TWO ENTITIES. IN OTHER WORDS, IS IT PERMISSIBLE TO CON SIDER THE TWO AS DISTINCT, I.E., IN NATURE, WITH ONE BEING EXCLUDED FOR TAX DEDUCTION AT SOURCE . PUT SUCCINCTLY, WOULD A PLEA FOR LIKE EXCLUSION OF THE IMPUGNED PAYMENT ON THE GROUND OF PARITY HOLD IN LAW IN THE FACTS OF THE CASE. THAT, TO OUR MIND, IS ONLY THE SCOPE AVAILAB LE FOR ACCEPTING THE ASSESSEES CASE; IT BEING WELL-SETTLED THAT THE FIRM AND ITS PARTNER AR E TWO DIFFERENT ENTITIES UNDER THE ACT. 4.3 WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THIS ASPECT OF THE MATTER, AND ARE OF THE VIEW THAT THE TWO PAYMENTS CANNOT BE EQUATED WITH E ACH OTHER. THE INTEREST TO THE PARTNER WOULD REQUIRE CONTRIBUTION BY WAY OF CAPITAL (FINAN CIAL), AND WHICH IS ONE OF THE RESOURCES CONTRIBUTED BY HIM TO THE FIRM, AND FOR W HICH HE IS ENTITLED TO A SHARE IN THE PROFITS THEREOF; THE INTEREST BEING ONLY A MANNER I N WHICH SUCH SHARE IS OR STANDS TO BE DETERMINED. IT IS FOR THIS REASON ONLY THAT INTERE ST AND, LIKE-WISE, REMUNERATION TO A PARTNER, BEING AGAIN ONLY IN RESPECT OF THE SERVICE S RENDERED BY HIM TO THE FIRM, REPRESENTING A PARTNERS HUMAN CAPITAL (LABOUR) CON TRIBUTED TO ITS BUSINESS, ONLY FORMS A PART OF HIS SHARE IN THE PROFITS OF THE FIRM. IT IS AGAIN FOR THIS REASON ONLY THAT SUCH INTEREST AND REMUNERATION TO THE EXTENT NOT ALLOWED IN THE A SSESSMENT OF THE FIRM, IS TO BE EXCLUDED FROM THE ASSESSMENT OF THE PARTNER CONCERN ED. THE INTEREST PAID BY THE FIRM TO A PARTNER, ON THE OTHER HAND, FORMS A PART OF THE BUS INESS OF THE FIRM, TO DO WHICH THE SAME STANDS CONSTITUTED IN THE FIRST PLACE; IT CHOOSING TO ADVANCE/DEPLOY ITS FUNDS, FOR BUSINESS REASONS, TO/WITH THE `PARTNER. THE SAME DOES NOT ARISE OUT OF THE CONTRACT OF PARTNERSHIP, BUT ONLY AS A RESULT OF OR OUT OF A BUSINESS ARRANG EMENT. THE FIRM COULD WELL HAVE INVESTED OR PLACED ITS FUNDS WITH ANOTHER PERSON, I .E., OTHER THAN THE PARTNER, WHICH, THOUGH NOT BARRED, WOULD RATHER BE OR REPRESENT AN ODDITY INASMUCH AS THE FIRM STANDS CONSTITUTED BY THE PARTNERS THEMSELVES TO DO BUSINE SS, AND WHICH WOULD GENERALLY ITA NO. 583/COCH/2010 (FOR AY 2005-06) 5 SPEAKING - ONLY BE WITH SOMEONE OUTSIDE THEMSELVES. FURTHER, THIS IS PRECISELY WHAT THE LD. CIT(A) IMPLIES/MEANS WHEN SHE SAYS THAT THIS TR ANSACTION/S DENOTES THE BUSINESS DEALINGS OF THE ASSESSEE WITH THE FIRM IN HIS CAPAC ITY IN ADDITION TO THAT OF A PARTNER. THE TWO, I.E., THE INTEREST PAID BY A FIRM TO THE PARTN ER AND VICE VERSA, THUS, BEAR A DIFFERENT CHARACTER, AND CANNOT BE EQUATED WITH EACH OTHER, A ND ONLY MORE SO IN THE FACTS OF THE PRESENT CASE. THE FORMER, I.E., THE INCOME CREDITED OR PAID BY A FIRM TO A PARTNER IS EVEN OTHERWISE SPECIFICALLY EXCLUDED FOR DEDUCTION OF TA X AT SOURCE U/S. 194A(3)(IV) OF THE ACT. 4.4 IN VIEW OF THE FOREGOING, WE DO NOT FIND AN Y MERIT IN THE ASSESSEES CASE; THE IMPUGNED TRANSACTION/S BEING IN CLEAR VIOLATION OF THE RELEVANT PROVISIONS OF LAW AND, CONSEQUENTLY, NO INFIRMITY IN THE ORDERS BY THE AUT HORITIES BELOW, WHICH ARE UPHELD. WE DECIDE ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 12TH AUGUST, 2011 GJ COPY TO: 1. THOMAS GEORGE MUTHOOT, MUTHOOT HOUSE, KOZHENCHER RY. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, THIRUVALLA. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. ITA NO. 583/COCH/2010 (FOR AY 2005-06) 6