M/s.N.J.Thomas & Co., Kottayam V. DCIT, Kottayam

ITA 669/COCH/2013

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7267 (ITAT-COCHIN)
• Duration Of Justice: 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 24-06-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 04-11-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: LATHA V KUMAR
• Assessee Lawyers: R KRISHNA IYER
• Keywords: Capital asset; Salary income; Charitable institution; Proportionate interest
• Section: 154

Judgement Text

1 ITA NO. 670-672 & 669/COCH/2013 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI CHANDRA PO OJARI (AM) I.T.A NO. 670/COCH/2013 - A.Y. 2006-07 I.T.A NO. 671/COCH/2013 - A.Y. 2006-07 I.T.A NO. 672/COCH/2013 - A.Y. 2008-09 I.T.A NO. 669/COCH/2013 - A.Y. 2005-06 M/S N.J. THOMAS & CO VS THE DY.CIT, CIR.1 MATTEETHARA COLONY KOTTAYAM RANGE, KOTTAYAM YMCA LANE, KOTTAYAM PAN : AAEFN3878P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI R KRISHNA IYER RESPONDENT BY : SMT. LATHA V KUMAR DATE OF HEARING : 24-06-2014 DATE OF PRONOUNCEMENT : 28-08-2014 O R D E R PER N.R.S. GANESAN (JM) ITA NO.672/COCH/2013 IS DIRECTED AGAINST THE ORDER OF CIT(A) CHALLENGING THE QUANTUM ADDITION CONFIRMED BY THE C IT(A). ITA NOS 669 & 671/COCH/2013 ARE DIRECTED AGAINST THE ORDERS OF CI T(A) CONFIRMING THE PENALTY LEVIED U/S 271(1)(C) OF THE ACT. ITA NO.67 0/COCH/2013 ARISES OUT OF ORDER U/S 154 OF THE ACT. SINCE ALL THE APPEALS RELATE TO ONE ASSESSEE WE HEARD ALL THE APPEALS TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER. 2 ITA NO. 670-672 & 669/COCH/2013 2. LET US FIRST TAKE THE QUANTUM APPEAL IN ITA NO.6 72/COCH/2013 FOR THE ASSESSMENT YEAR 2008-09. THE ONLY ISSUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF PROPORTIONATE INTEREST ON THE FUNDS SAID TO BE DIVERTED FOR NON BUSINESS PURPOSE. 3. SHRI R KRISHNA IYER, THE LD.REPRESENTATIVE FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSEE IS A CONTRACTOR ENGAGED IN CIVIL CONSTRUCTION. THE ASSESSING OFFICER DISALLOWED RS.6,13,015 BEING THE INTEREST PAID TO THE BANKERS ON THE BORROWED FUNDS. THE ASSESSING OFFIC ER FOUND THAT THERE WAS EXCESS DRAWINGS IN THE CAPITAL ACCOUNT OF THE R ESPECTIVE PARTNERS AND THIS EXCESS DRAWINGS MAY BE FROM THE BORROWED FUNDS . THE CLAIM OF THE ASSESSEE THAT SUFFICIENT INTEREST FREE FUNDS WERE A VAILABLE FOR PARTNERS DRAWINGS WAS REJECTED BY THE ASSESSING OFFICER. TH E CLAIM OF THE ASSESSEE THAT ACCUMULATED LOSSES OF THE EARLIER YEARS WERE S HOWN AS DRAWINGS OF THE PARTNERS WAS ALSO REJECTED BY THE ASSESSING OFF ICER AS WELL AS THE COMMISSIONER (APPEALS). ACCORDING TO THE LD.REPRES ENTATIVE, CURRENT YEAR LOSS AS PER THE PROFIT & LOSS ACCOUNT IS RS.33,46,0 10. THE ACCUMULATED LOSS OF THE EARLIER YEARS AS PER THE DEBIT IN THE B ALANCE-SHEET IS RS.1,82,77,141. THE LD.REPRESENTATIVE FURTHER SUBM ITTED THAT THE BORROWAL FROM THE BANK BY WAY OF OVERDRAFT AS ON 31-03-2008 IS RS.3,07,34,550. OUT OF THIS, RS.2,72,90,992 WAS USED FOR THE PURPOS E OF BUSINESS. THE FIXED ASSET OF THE ASSESSEE WAS TO THE EXTENT F RS. 47,18,350. THEREFORE, IT 3 ITA NO. 670-672 & 669/COCH/2013 IS OBVIOUS THAT THE ASSESSEE USED THE BORROWED FUND S FROM THE BANK ONLY FOR THE PURPOSE OF BUSINESS. HENCE, THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED. REFERRING TO T HE JUDGMENT OF THE KERALA HIGH COURT IN V.I.. BABY & CO 254 ITR 248 (KER), TH E LD.REPRESENTATIVE SUBMITTED THAT IN THE CASE BEFORE THE HIGH COURT, T HERE WAS A HUGE DEBIT BALANCE IN THE ACCOUNTS OF THE FIRM IN THE NAME OF THE PARTNERS, THEIR RELATIVES AND SISTER CONCERN. THE KERALA HIGH COUR T FOUND THAT THE ADVANCE TO PARTNERS, THEIR RELATIVES AND SISTER CON CERN WAS NOT FOR THE PURPOSE OF BUSINESS. THE HIGH COURT FURTHER FOUND THAT IF THE CASH BALANCES ARE AVAILABLE, THE BORROWING ITSELF IS NOT FOR THE PURPOSE OF BUSINESS. THE ASSESSEE CANNOT CLAIM THAT IT CAN GI VE INTEREST FREE ADVANCE TO PARTNERS AND OTHERS AND THEN BORROW FROM THE BANK ON INTEREST FOR BUSINESS PURPOSE. REFERRING TO JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION 298 ITR 298 (SC), THE L D.REPRESENTATIVE SUBMITTED THAT WHEN SUFFICIENT OPENING CASH BALANCE AND PROFIT WAS AVAILABLE, ADVANCE OF MONEY FROM ASSESSEES OWN FUN DS CANNOT RESULT IN DISALLOWANCE OF ANY INTEREST PAID TO THE BANKS. AC CORDING TO THE LD.REPRESENTATIVE, IN VIEW OF THE JUDGMENT OF THE A PEX COURT IN MUNJAL SALES CORPORATION (SUPRA), THE JUDGMENT OF THE KERA LA HIGH COURT IN V.I.BABY & CO (SUPRA) MAY NOT BE APPLICABLE TO THE FACTS OF THE CASE. 4 ITA NO. 670-672 & 669/COCH/2013 4. ON THE CONTRARY, SMT. LATHA V KUMAR, THE LD.DR S UBMITTED THAT THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT DURING THE PREVIOUS THE CURRENT ACCOUNT OF THE PARTNERS SHOWED A DEBIT BALA NCE OF RS.1,82,77,141. THIS CLEARLY SHOWS THAT THE PARTNERS OF THE FIRM WI THDREW MONEY FROM THE FIRM OVER AND ABOVE THEIR CREDIT BALANCE IN THE BUS INESS. THE OVERDRAWAL BY THE PARTNERS IS TO THE EXTENT OF RS.1,16,41,918. THE ASSESSEE HAS CLAIMED RS.24,40,895 AS EXPENDITURE TOWARDS INTERES T PAYMENT. THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT OUT OF THE BANK OVERDRAFT OF RS.3,07,34,550 AS ON 31-03-2008 A SUM OF RS.2,72,90,992 WAS UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASS ESSEE AND ALSO HAD INTEREST FREE FUNDS TO THE EXTENT OF RS.1,53,53,663 TOWARDS UNSECURED LOAN, SUNDRY CREDITORS, CAPITAL ACCOUNT, CREDIT BALANCE. THEREFORE, THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT SUFFICIEN T FUNDS WERE AVAILABLE. THE ASSESSING OFFICER BY PLACING RELIANCE ON THE JU DGMENT OF THE KERALA HIGH COURT IN V.I. BABY & CO (SUPRA) FOUND THAT IF THE ASSESSEE HAS SUFFICIENT CASH BALANCE, THEN THE BORROWINGS ITSELF IS NOT FOR THE PURPOSE OF BUSINESS, THEREFORE, THE ASSESSING OFFICER DISALLOW ED THE CLAIM OF THE ASSESSEE. THE CLAIM OF THE ASSESSEE THAT THE ACCUM ULATED LOSSES WAS DEBITED IN THE ACCOUNTS OF THE PARTNERS WAS ALSO RE JECTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE OVERDRAFT WAS WORKED OUT ON THE BASIS OF THE DRAWING OF THE YEAR UNDER CONSIDERATION. THE ASSES SING OFFICER FURTHER FOUND THAT THE LOSS OF THE CURRENT YEAR WAS EXCLUDE D WHILE COMPUTING THE 5 ITA NO. 670-672 & 669/COCH/2013 EXCESS DRAWINGS. THE LD.DR FURTHER SUBMITTED THAT THE ASSESSEE HAS ALSO MADE A CLAIM THAT IT OFFERED A SUM OF RS.35 LAKHS O UTSIDE THE BOOKS OF ACCOUNT, THEREFORE, THE DISALLOWANCE HAS TO BE SET OFF BY THAT AMOUNT. IN THE ABSENCE OF ANY BREAK UP, DETAILS REGARDING THE OFFERING OF RS.35 LAKHS, THE ASSESSING OFFICER FOUND THAT WHETHER THE INCOME OFFERED TO THE EXTENT OF RS.35 LAKHS OUTSIDE THE BOOKS OF ACCOUNT HAVE CONNE CTION TO THE EXCESS DRAWING OR NOT WAS KNOWN. THEREFORE, ACCORDING TO THE LD.DR, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE PROPOR TIONATE INTEREST. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSE SSING OFFICER DISALLOWED RS.6,13,015 BEING THE INTEREST PAID TO THE BANK ON THE OVERDRAFT. THE CONTENTION OF THE REVENUE IS THAT THE PARTNERS WITH DREW THE FUNDS OVER AND ABOVE THEIR CAPITAL CONTRIBUTION, THEREFORE, SUCH W ITHDRAWAL IS NOT FOR THE PURPOSE OF BUSINESS. THE CONTENTION OF THE ASSESSE E THAT OUT OF THE BORROWED FUNDS, RS.2,72,90,992 WAS USED FOR THE PUR POSE OF BUSINESS WAS ALSO REJECTED BY THE ASSESSING OFFICER. NO DOUBT, THE KERALA HIGH COURT IN THE CASE OF V.I. BABY & CO (SUPRA) CONSIDERED AN ID ENTICAL ISSUE. THE ASSESSING OFFICER IN THE CASE BEFORE THE KERALA HIG H COURT FOUND HUGE DEBIT BALANCE IN THE ACCOUNT OF THE FIRM IN THE NAM ES OF PARTNERS, RELATIVES AND SISTER CONCERN. THE DEPARTMENT CLAIMED THAT TH ERE WAS DIVERSION OF BORROWED FUNDS. HOWEVER, THE ASSESSEE CONTENDED BE FORE THE HIGH COURT 6 ITA NO. 670-672 & 669/COCH/2013 THAT THERE WAS CASH BALANCE AVAILABLE WITH FIRM FOR SUCH ADVANCE. THE KERALA HIGH COURT OBSERVED THAT IF SUCH CASH BALANC ES ARE AVAILABLE, THE BORROWINGS ITSELF ARE NOT FOR THE PURPOSES OF BUSIN ESS. AN ASSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT CAN GIVE INTEREST FR EE ADVANCE TO THE PARTNERS AND OTHERS AND THEN BORROW FUNDS FROM THE BANKS ON INTEREST FOR BUSINESS PURPOSE. 6. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPR A). IN THE CASE BEFORE THE APEX COURT, THE ASSESSEE ADVANCED INTEREST FREE LOAN TO SISTER CONCERN. THE ASSESSING OFFICER DISALLOWED THE PAYM ENT OF INTEREST ON THE GROUND THAT THE ADVANCES WERE NOT GIVEN FROM THE AS SESSEE FIRMS OWN FUNDS BUT FROM THE INTEREST BEARING LOAN TAKEN BY T HE ASSESSEE FIRM FROM THIRD PARTIES. THE APEX COURT AFTER EXAMINING THE PROVISIONS OF SECTION 36(1)(III) AND 40(B)(IV) FOUND THAT THE ASSESSEE IS ENTITLED FOR DEDUCTION U/S 36(1)(III) R.W.S. 40(B)(IV) IN RESPECT OF INTEREST PAID TO THE BANK. THE APEX COURT FURTHER FOUND THAT THE OPENING BALANCE AS ON 01-04-1994 OF THE FIRM WAS RS.1.91 CRORES AND WHAT WAS ADVANCED AS INTERES T FREE LOAN IS ONLY RS.5 LAKHS. THE APEX COURT FURTHER FOUND THAT THE PROFIT EARNED BY THE ASSESSEE DURING THE RELEVANT YEAR WAS SUFFICIENT TO COVER THE AMOUNT OF RS.5 LAKHS. ACCORDINGLY, THE CLAIM OF THE ASSESSEE WAS ALLOWED BY THE APEX COURT. IN VIEW OF THIS JUDGMENT OF THE APEX C OURT, IT IS NECESSARY TO 7 ITA NO. 670-672 & 669/COCH/2013 FIND OUT WHAT IS THE OPENING BALANCE AS ON 01-04-20 07 AND THE PROFIT OF THE YEAR UNDER CONSIDERATION. IT IS NOT IN DISPUTE THA T DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE SUFFERED LOSS. THE ASSE SSEE CLAIMS THAT THE ACCUMULATED LOSS WAS DEBITED IN THE PARTNERS ACCOU NT WHICH WAS SHOWN AS DRAWINGS. THE ASSESSEE ALSO CLAIMS THAT RS.1,53 ,53,663 WAS AVAILABLE AS ASSESSEES OWN FUNDS. THE LOWER AUTHORITIES, WI THOUT CONSIDERING THIS AVAILABILITY OF FUNDS AS CLAIMED BY THE ASSESSEE RE JECTED THE CLAIM OF THE ASSESSEE. THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THE CONTENTION OF THE ASSESSEE HAS TO BE EXAMINED IN THE LIGHT OF THE JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPR A). IT IS ALSO NECESSARY TO EXAMINE WHETHER THE DEBIT BALANCE SHOWN IN THE C APITAL ACCOUNT OF THE PARTNERS ARE ACCUMULATED LOSSES OF THE FIRM OR IT W AS DRAWING FROM THE CAPITAL ACCOUNT. IT IS ALSO NECESSARY TO TAKE INTO CONSIDERATION THE AMOUNT OF RS.35 LAKHS SURRENDERED BY THE ASSESSEE FOR TAXA TION. THE ASSESSING OFFICER SHALL EXAMINE WHETHER THE AMOUNT SURRENDERE D BY THE ASSESSEE TO THE EXTENT OF RS.35 LAKHS WAS PART OF THE INTEREST PAID ON THE FUNDS SAID TO BE DIVERTED. 7. IN VIEW OF THE ABOVE, THE ORDERS OF THE LOWER AU THORITIES ARE SET ASIDE AND THE ISSUE OF DISALLOWANCE OF INTEREST IS REMITT ED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL RE- EXAMINE THE MATTER IN THE LIGHT OF JUDGMENT OF THE APEX COURT IN MUNJAL SALES CORPORATION (SUPRA) 8 ITA NO. 670-672 & 669/COCH/2013 AND THEREAFTER DECIDE THE ISSUE AFRESH AFTER GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. 8. APPEAL IN I.T.A. NO.672/COCH/2013 IS ALLOWED FOR STATISTICAL PURPOSE. 9. NOW COMING TO APPEAL IN ITA NO.670/COCH/2013, TH E ONLY ISSUE ARISES FOR CONSIDERATION IS EXCLUSION OF INTEREST O N FIXED DEPOSIT, INTEREST ON INCOME-TAX REFUND, PROFIT ON SALE OF MOTOR CAR FROM THE BOOK PROFIT FOR THE PURPOSE OF COMPUTING PARTNERS REMUNERATION. INITI ALLY THE ASSESSING OFFICER ALLOWED THE CLAIM OF THE ASSESSEE. HOWEVER , IN A PROCEEDINGS U/S 154, THE ASSESSING OFFICER FOUND THAT THERE WAS AN APPARENT ERROR ON RECORD FOR ALLOWING THE CLAIM OF REMUNERATION TO PARTNERS ON THE BOOK PROFIT WHICH INCLUDES INTEREST ON FIXED DEPOSIT, INTEREST ON INC OME-TAX REFUND AND PROFIT ON SALE OF CAR. ACCORDING TO THE LD.REPRESENTATIV E, THE ASSESSING OFFICER PLACING RELIANCE ON THE JUDGMENT OF THE APEX COURT IN TUTICORIN ALKALI CHEMICALS & FERTILIZERS VS CIT [1997] 227 ITR 172 ( SC) DISALLOWED THE CLAIM OF THE ASSESSEE. ON APPEAL BY THE ASSESSEE, THE CIT(A) FOUND THAT BOOK PROFIT UNDER EXPLANATION 3 TO SECTION 40(B) HA S TO BE COMPUTED IN A MANNER LAID DOWN IN CHAPTER IVD OF THE ACT, THEREFO RE, ONLY THOSE ITEMS OF RECEIPTS AND PAYMENTS WHICH WAS CREDITED OR DEBITED TO THE PROFIT & LOSS ACCOUNT IN ACCORDANCE WITH PROVISIONS OF CHAPTER IV D OF THE ACT ALONE HAS TO BE CONSIDERED. THE CIT(A) FOUND THAT THE INCOME CHARGEABLE TO TAX 9 ITA NO. 670-672 & 669/COCH/2013 UNDER THE HEAD INCOME FROM HOUSE PROPERTY, INCOM E FROM CAPITAL GAIN AND INCOME FROM OTHER SOURCES HAS TO BE SEGREGATE D AND THE SAME WILL NOT FORM PART OF BOOK PROFIT UNDER EXPLANATION 3 TO SECTION 40(B) OF THE ACT. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT AN IDE NTICAL ISSUE WAS EXAMINED BY THE RAJKOT BENCH OF THIS TRIBUNAL IN AC IT VS SHETH BROTHERS (2006) 99 TTJ (RAJKOT) 189. THE RAJKOT BENCH OF TH IS TRIBUNAL, AFTER EXAMINING THE PROVISIONS OF EXPLANATION 3 TO SECTIO N 40(B) OF THE ACT AND THE JUDGMENT OF THE APEX COURT IN THE CASE OF TUTIC ORIN ALKALI CHEMICALS & FERTILIZERS (SUPRA) FOUND THAT UNDER THE SCHEME OF THE INCOME-TAX ACT, THE WHOLE INCOME OF THE FIRM UNDER DIFFERENT HEADS IS L IABLE TO BE ASSESSED IN THE HANDS OF THE PARTNERS AND THE REMUNERATION TO P ARTNERS DEBITED TO PARTNERS ACCOUNT CANNOT BE BROKEN DOWN INTO DIFFER ENT COMPONENTS, TO BE ALLOCATED TO THE INCOME COMPUTED UNDER DIFFERENT HE ADS. IN VIEW OF THE DECISION OF THE RAJKOT BENCH OF THIS TRIBUNAL, ACCO RDING TO THE LD.REPRESENTATIVE, THE AUTHORITIES BELOW ARE NOT CO RRECT IN REJECTING THE CLAIM OF THE ASSESSEE. EVEN OTHERWISE, THE ISSUE I S DEBATABLE, THEREFORE, IT CANNOT BE SUBJECTED TO SECTION 154 OF THE ACT. THE LD.REPRESENTATIVE FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE MUMBAI BENCH OF THIS TRIBUNAL IN SURESH A SARAF VS JCIT (2013) 114 ITD 1 (MUM); ACIT VS GILAWALA & CO (2010) 133 TTJ 168 AND ALSO THE JUDGM ENT OF THE GUJARAT HIGH COURT IN CIT VS J.J. INDUSTRIES (2013) 216 TAX MAN 162 (GUJARAT). 10 ITA NO. 670-672 & 669/COCH/2013 10. ON THE CONTRARY, SMT. LATHA V KUMAR, THE LD.DR SUBMITTED THAT EXPLANATION 3 TO SECTION 40(B) CLEARLY SAYS THAT BO OK PROFIT HAS TO BE COMPUTED IN A MANNER LAID DOWN UNDER CHAPTER IVD AS INCREASED BY AGGREGATE AMOUNT OF REMUNERATION PAID OR PAYABLE TO ALL THE PARTNERS OF THE FIRM IF SUCH AMOUNT HAS BEEN DEDUCTED WHILE COM PUTING THE NET PROFIT. REFERRING TO CHAPTER IVD, THE LD.DR SUBMITTED THAT CHAPTER IVD SPEAKS ONLY OF PROFIT AND GAINS FROM BUSINESS OR PROFESSIO N. THEREFORE, INCOME UNDER ANY OTHER HEAD CANNOT BE INCLUDED IN THE BOOK PROFIT COMPUTED UNDER CHAPTER IVD OF THE ACT. AS SUCH, ALL OTHER I NCOMES LIKE INCOME FROM HOUSE PROPERTY, INCOME FROM OTHER SOURCES CANNOT FO RM PART OF BOOK PROFIT UNDER CHAPTER IVD OF THE ACT. HENCE, THE ERROR IS VERY OBVIOUS. THE ASSESSEE ADMITTEDLY INCLUDED INTEREST ON FIXED DEPO SIT, INTEREST ON INCOME- TAX REFUND AND PROFIT ON SALE OF CAPITAL ASSET, VIZ . CAR. THESE ITEMS HAVE TO BE EXCLUDED. THEREFORE, THERE IS NO DEBATE INVOLVE D; HENCE, THE ASSESSING OFFICER HAS RIGHTLY RECTIFIED THE ERROR WHICH IS AP PARENT ON THE FACE OF THE RECORD. THE CIT(A) HAS RIGHTLY CONFIRMED THE SAME. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. EXPLANAT ION 3 TO SECTION 40(B) CLEARLY SAYS THAT BOOK PROFIT MEANS THE NET PROFIT AS SHOWN IN THE PROFIT & LOSS ACCOUNT OF THE RELEVANT PREVIOUS YEAR COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IVD AS INCREASED BY AGGREGATE AMOUN T OF REMUNERATION 11 ITA NO. 670-672 & 669/COCH/2013 PAID OR PAYABLE TO PARTNERS OF THE FIRM IF SUCH AMO UNT HAS BEEN DEDUCTED WHILE COMPUTING THE NET PROFIT. AS RIGHTLY SUBMITT ED BY THE LD.DR, CHAPTER IVD SPEAKS ONLY INCOME FROM BUSINESS OR PROFESSION . ANY OTHER INCOME UNDER THE HEADS, INCOME FROM SALARY, INCOME FROM HOUSE PROPERTY AND INCOME FROM CAPITAL GAIN, INCOME FROM OTHER SOUR CES ARE SPECIFICALLY PROVIDED UNDER CHAPTER IVA, IVC, IVE AND IVF, RESPE CTIVELY. SINCE EXPLANATION 3 TO SECTION 40(B) REQUIRES THE ASSESSE E TO COMPUTE THE NET PROFIT AS PER PROCEDURE LAID DOWN IN CHAPTER IVD, O THER INCOMES FROM OTHER HEADS CANNOT FORM PART OF THE NET PROFIT FOR THE PU RPOSE OF BOOK PROFIT. HOWEVER, A CO-ORDINATE BENCH OF THIS TRIBUNAL AT RA JKOT IN SHETH BROTHERS (SUPRA) EXAMINED THIS ISSUE AND FOUND THAT THE WHOL E INCOME OF THE FIRM UNDER DIFFERENT HEADS IS LIABLE TO BE ASSESSED IN T HE HANDS OF THE FIRM AND THAT REMUNERATION TO PARTNERS DEBITED TO PROFIT & L OSS ACCOUNT CANNOT BE BROKEN DOWN INTO DIFFERENT COMPONENTS TO BE ALLOCAT ED TO THE INCOME COMPUTED UNDER DIFFERENT HEADS. IN FACT, THE RAJKO T BENCH OF THIS TRIBUNAL HAS OBSERVED AS FOLLOWS AT PARAGRAPH 8.1 OF THE DEC ISION: 8.1 THUS, S.40(B) IMPOSES CONDITIONS AND FINANCIAL LIMITATIONS FOR DEDUCTION OF REMUNERATION TO PARTNE RS. THE SECTION ADOPTS THE NET PROFIT AS SHOWN IN THE P&L A /C OF THE FIRM AS THE BASE FOR WORKING OUT THE FINANCIAL LIMI TS FOR DEDUCTION. IT IS IN CONSONANCE WITH THE PROVISIONS OF THE IT ACT AS WELL AS THE PROVISIONS OF THE INDIAN PARTNERSHIP ACT THAT FOR 12 ITA NO. 670-672 & 669/COCH/2013 ASSESSMENT OF INCOME FROM OTHER SOURCES WHICH ARE ASSESSABLE UNDER OTHER HEADS ARE ALSO EMBEDDED IN S UCH NET PROFIT. IN ORDER TO ENSURE THAT THE FIGURE OF NE T PROFIT IS NOT ARTIFICIALLY REDUCED BY CLAIMING DEDUCTION FAR IN E XCESS OF LIMITS PERMISSIBLE UNDER SS. 30 TO 43D, S.40(B) REQUIRES T HAT NET PROFIT IS WORKED OUT IN ACCORDANCE WITH CHAPTER IV -D. SEC.40(B) WAS OVERHAULED IN 1993 CONTEMPORANEOUSLY WITH THE FIRM BEING MADE LIABLE TO BE ASSESSED ON THE WH OLE OF ITS INCOME REMAINING AFTER PAYING INTEREST AND REMUNERA TION TO PARTNERS WHILE WORKING OUT THE MAXIMUM AMOUNT OF SU CH REMUNERATION PAYABLE TO PARTNER ON THE PROFIT SHOWN IN THE P&L A/C. THE WORDS BOOK PROFIT HAVE BEEN DEFINED FOR THIS PURPOSE IN EXPLN.3 AS NET PROFIT AS SHOWN IN THE P&L /C FOR THE RELEVANT PREVIOUS YEAR. THIS BRINGS NOT ONLY T HE INCOME COMPUTED UNDER THE HEAD BUSINESS BUT THE NET PRO FIT AS SHOWN IN THE P&L A/C TO THE CENTRESTAGE OF S.40(B). THIS DEFINITION IS, NO DOUBT, FURTHER QUALIFIED BY THE W ORDS COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV-D. THESE QUALIFYING WORDS HAVE BEEN ADVISEDLY USED IN ORDER TO ENSURE THAT INADMISSIBLE OR EXCESSIVE CLAIMS RELATING TO I NCOME TO BE COMPUTED UNDER THE HEAD BUSINESS WHICH ARE EMBEDD ED IN THE BOOK PROFIT ARE EXCLUDED FROM THE BASE FOR LIMI TING REMUNERATION TO PARTNERS. PRIMA FACIE, UNDER S.40( B) THE LEGISLATURE DID NOT AUTHORIZE EXCLUSION OF NON-BUSI NESS RECEIPTS AND EXPENDITURE RECORDED IN THE P&L A/C. THE LEGISLATURE KNEW THAT IN THE SCHEME OF THE IT ACT, THE WHOLE INCOME OF THE FIRM UNDER DIFFERENT HEADS IS LIABLE TO BE ASSESSED IN THE HANDS OF THE FIRM AND THAT REMUNERA TION TO PARTNERS DEBITED TO P&LK AS/C CANNOT BE BROKEN DOWN INTO 13 ITA NO. 670-672 & 669/COCH/2013 DIFFERENT COMPONENTS, TO BE ALLOCATED TO THE INCOME COMPUTED UNDER DIFFERENT HEADS. SUCH EXERCISE FOR BREAKING DOWN REMUNERATION TO PARTNER WITH RESPECT TO DIFFERENT I NCOME EARNED BY THE PARTNERSHIP FIRM HAS NOT BEEN SPELT O UT ANYWHERE IN THE STATUTE. THERE IS ALSO NO DISPUTE TO THE LEGAL POSITION THAT WHATEVER INCOME IS RECEIVED BY THE PA RTNER FROM THE FIRM IN THE NAME OF INTEREST, SALARY, BONUS, CO MMISSION OR REMUNERATION BY WHATEVER NAME CALLED IS CHARGEABLE TO INCOME-TAX UNDER THE HEAD PROFITS AND GAINS OF BUS INESS OR PROFESSION UNDER S.28(V). SUCH REMUNERATION RECEI VED BY PARTNER IS NEITHER EXEMPT NOR ENTITLED TO ANY KIND OF DEDUCTION WHILE COM PUTTING TOTAL INCOME OF THE PARTNER IN HI S INDIVIDUAL HANDS. SUCH REMUNERATION IS ALLOWED TO THE PARTNER FOR ACTIVELY PARTICIPATING IN THE CONDUCT OF FIRMS BUS INESS AND THEREBY PUTTING THE CAPITAL AND OTHER FUNDS OF FIRM FOR COMMERCIAL EXPLOITATION. THE PROFIT EARNED BY FIRM THROUGH SUCH COMMERCIAL EXPLOITATION OF ITS RESOURCES IS CR EDITED TO THE P&L A/C AND PARTNER IS MADE ENTITLED TO REMUNERATIO N AS PER THE CLEAR STIPULATIONS IN THE PARTNERSHIP DEED. 12. IN VIEW OF THE ABOVE FINDING RECORDED BY THE RA JKOT BENCH OF THIS TRIBUNAL, IT APPEARS THAT OTHER VIEW WAS ALSO POSSI BLE. 13. IN A PROCEEDING U/S 154, WHAT IS TO BE RECTIFIE D IS AN ERROR WHICH IS APPARENT ON THE FACE OF THE RECORD. WHETHER THE IN COME FROM OTHER SOURCES AND CAPITAL GAIN ARE TO BE INCLUDED IN THE PROFIT & LOSS ACCOUNT WHILE COMPUTING THE BOOK PROFIT UNDER CHAPTER IVD O R NOT BECOMES A 14 ITA NO. 670-672 & 669/COCH/2013 DEBATABLE ISSUE IN VIEW OF THE DECISION OF THE RAJK OT BENCH OF THIS TRIBUNAL IN SHETH BROTHERS (SUPRA). ONCE IT IS A DEBATABLE ISSUE WITHOUT GOING INTO THE MERIT OF THE MATTER, THIS TRIBUNAL IS OF THE CO NSIDERED OPINION THAT IT CANNOT BE SUBJECT MATTER OF PROCEEDING U/S 154 OF T HE ACT. 14. IN VIEW OF THE ABOVE, WITHOUT EXPRESSING ANY OP INION ON THE MERIT, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE SUBJECT MATTER OF THE PROCEEDING U/S 154 IS A DEBATABLE ONE, THEREFORE, I T IS BEYOND THE SCOPE AND PURVIEW OF SECTION 154 OF THE ACT; HENCE, THE O RDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ADDITION MADE BY THE ASSESSING OFFICER IS DELETED. 15. APPEAL IN ITA NO.670/COCH/2013 IS ALLOWED. 16. NOW COMING TO THE OTHER TWO APPEALS IN ITA NOS 669 & 671/COCH/2014, SHRI R KRISHNA IYER, THE LD.REPRESEN TATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSING OFFICER LEVIED PENALTY ON THE GROUND THAT THE ASSESSEE HAS NOT DISCLOSED THE ENTIRE INCOME. ACCO RDING TO THE LD.REPRESENTATIVE, THE ASSESSEE CONSTRUCTED BUILDIN G OF CHARITABLE INSTITUTIONS WITHOUT ANY PROFIT MOTIVE. THEREFORE, THE CONSTRUCTION MADE FOR CHARITABLE ACTIVITY WAS NOT INCLUDED IN THE RETURN OF INCOME. HOWEVER, THE LOWER AUTHORITIES ESTIMATED THE PROFIT AT 9% ON THE CONSTRUCTION MADE FOR 15 ITA NO. 670-672 & 669/COCH/2013 CHARITABLE INSTITUTION WHICH WAS ALSO CONFIRMED BY THE TRIBUNAL. ACCORDING TO THE LD.REPRESENTATIVE, PENALTY PROCEEDINGS AND A SSESSMENT PROCEEDINGS ARE DIFFERENT. THEREFORE, THE LOWER AUTHORITIES OU GHT TO HAVE RE-APPRECIATED THE MATERIAL ON RECORD TO FIND OUT WHETHER THE ASSE SSEE HAS REALLY EARNED ANY INCOME IN RESPECT OF CONSTRUCTION OF THE BUILDI NG FOR THE CHARITABLE INSTITUTION. MERELY BECAUSE THERE WAS ADDITION ON ESTIMATE BASIS TO THE EXTENT OF 9% OF THE CONTRACT, RECEIPTS FROM THE CHA RITABLE INSTITUTION THAT ALONE CANNOT BE A BASIS FOR LEVY OF PENALTY U/S 291 (1)(C). ACCORDING TO THE LD.REPRESENTATIVE, WITHOUT EXAMINING THE MATERIAL A VAILABLE ON RECORD AND THE CONTENTIONS OF THE ASSESSEE, THE ASSESSING OFFI CER CAME TO THE CONCLUSION THAT THE ASSESSEE FILED INACCURATE PARTI CULARS OF INCOME. ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSEE HA S FURNISHED ALL THE DETAILS. SINCE THERE WAS NO PROFIT IN CONSTRUCTION OF THE BUILDING FOR THE CHARITABLE INSTITUTION, THE SAME WAS NOT DISCLOSED. IN THE ABSENCE OF ANY INCOME, IT CANNOT BE SAID THAT THERE WAS CONCEALMEN T OF INCOME ON THE PART OF THE ASSESSEE. 17. ON THE CONTRARY, SMT. LATHA V KUMAR, THE LD.DR SUBMITTED THAT THE ASSESSEE FAILED TO DISCLOSE THE CONTRACT RECEIPTS I N RESPECT OF 18 TRANSACTIONS, DETAILS OF WHICH ARE AVAILABLE AT PAG E 2 OF THE PENALTY ORDER. IN RESPECT OF QUANTUM ADDITION MADE BY THE ASSESSIN G OFFICER OF THESE CONTRACT RECEIPTS, THE ASSESSING OFFICER ESTIMATED THE PROFIT AT 9%. BOTH 16 ITA NO. 670-672 & 669/COCH/2013 REVENUE AND THE ASSESSEE FILED APPEALS BEFORE THIS TRIBUNAL AND BOTH THE APPEALS WERE DISMISSED BY THE TRIBUNAL CONFIRMING T HE ORDER OF THE CIT(A) ESTIMATING THE PROFIT AT 9%. ACCORDING TO THE LD.D R, THE ASSESSEE OUGHT TO HAVE FURNISHED THE ENTIRE TRANSACTIONS / CONTRACT R ECEIPTS TO THE ASSESSING OFFICER WHILE FILING THE RETURNS OF INCOME. FAILUR E OF THE ASSESSEE TO DISCLOSE THE CONTRACT RECEIPTS IN RESPECT OF 18 MAT TERS AMOUNTS TO FURNISHING OF INACCURATE PARTICULARS. THEREFORE, T HE ASSESSING OFFICER HAS RIGHTLY LEVIED THE PENALTY WHICH WAS CONFIRMED BY T HE ASSESSING OFFICER. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS OF SECTION 271(1)(C) OF THE ACT. THE ASSESSING OFFICER WAS EMPOWERED TO LEVY PENALTY IF HE SATISFI ED THAT THE ASSESSEE HAS CONCEALED ANY PARTICULARS OF INCOME OR FURNISHED IN ACCURATE PARTICULARS OF SUCH INCOME . IN THE CASE BEFORE US, IT IS NOT IN DISPUTE THAT IN RESPECT OF 18 TRANSACTIONS OF CONTRACT, THE ASSESSEE CLAIMS TH AT IT WAS NOT FURNISHED BEFORE THE ASSESSING OFFICER., THE ONLY CONTENTION OF THE ASSESEE IS THAT THESE CONSTRUCTIONS WERE WITH CHARITABLE INSTITUTIO NS AND IT WAS DONE WITHOUT ANY PROFIT, THEREFORE, IT WAS NOT DISCLOSED . THE FACT REMAINS IS THAT THE ASSESSEE HAS FURNISHED INACCURATE PARTICULARS W HILE FILING THE RETURNS OF INCOME. THERE MAY BE PROFIT OR LOSS; STILL, THE AS SESSEE IS EXPECTED TO DISCLOSE ALL THE MATERIAL FACTS BEFORE THE ASSESSIN G OFFICER. AFTER 17 ITA NO. 670-672 & 669/COCH/2013 CONSIDERING THE ENTIRE MATERIAL, THE PROFIT ON SUCH TRANSACTION WAS ESTIMATED AT 9%. THEREFORE, THE CONTENTION OF THE ASSESSEE THAT THERE WAS NO PROFIT WAS REJECTED UPTO THE LEVEL OF TRIBUNAL. IN VIEW OF THE ABOVE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE ASSE SSEE HAS FURNISHED INACCURATE PARTICULARS IN RESPECT OF ITS INCOME. T HEREFORE, THE ASSESSING OFFICER HAS RIGHTLY LEVIED THE PENALTY. THIS TRIBU NAL DO NOT FIND ANY INFIRMITY IN THE ORDERS OF THE LOWER AUTHORITY. ACCORDINGLY, THE SAME ARE CONFIRMED. APPEALS IN ITA NOS.669 & 671/COCH/2013 ARE DISMISSE D. 19. IN THE RESULT, APPEALS IN ITA NO.669 & 671/COCH /2013 ARE DISMISSED AND THE APPEAL IN ITA NO 670/COCH/2013 IS ALLOWED & APPEAL IN ITA NO.672/COCH/2013 IS ALLOWED, FOR STATISTICAL PURPOS E. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH AUGUST, 2014. SD/- SD/- (CHANDRA POOJARI) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 28 TH AUGUST, 2014 PK/- COPY TO: 1. M/S NJ THOMAS & CO, MATTETHARA COLONY, YMCA LANE , KOTTAYAM 2. THE DY.CIT, CIR.1, KOTTAYAM RANGE, KOTTAYAM 3. THE COMMISSIONER OF INCOME-TAX, KOTTAYAM 4. THE COMMISSIONER OF INCOME-TAX(A)-IV, KOCHI 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH