ACIT, Patiala V. M/s Amar Electronics, Patiala

ITA 884/CHANDI/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8438 (ITAT-CHANDIGARH)
• Duration Of Justice: 5 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 26-08-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: I C VERMA
• Keywords: Business income; Diversion of income; Rule of consistency; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI G. S.PANNU, ACCOUNTANT MEMBER AND MS.SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.884/CHANDI/2009 ( A.Y. 2006-07 ) A.C.I.T., VS. M/S AMAR ELECTRONICS, CIRCLE PATIALA DHARAM PURA BAZAR, PATIALA. PAN: AABFA 5972A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI N.K.SAINI RESPONDENT BY : SHRI I.C.VERMA O R D E R PER G. S. PANNU, AM : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (A) DATED 24.06.2 009 PERTAINING TO ASSESSMENT YEAR 2006-07. ALTHOUGH TH E REVENUE HAS RAISED MULTIPLE GROUNDS OF APPEAL BUT ESSENTIAL LY THE SOLITARY DISPUTE RELATES TO AN ADDITION OF RS.35,14 ,011/- MADE BY THE ASSESSING OFFICER OUT OF INTEREST PAID TO TH E PARTNERS. THE ADDITION MADE BY THE ASSESSING OFFICER HAS SINC E BEEN DELETED BY THE COMMISSIONER OF INCOME-TAX (A), AGAI NST WHICH THE REVENUE IS IN APPEAL BEFORE US. 2 2. IN BRIEF, THE RELEVANT FACTS ARE THAT THE ASSESS EE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF WHOLESA LE TRADING OF ELECTRONIC AND ELECTRIC GOODS. THE RETURN OF IN COME WAS FILED FOR THE STATED ASSESSMENT YEAR ON 30.10.2006 DECLARING AN INCOME OF RS.1,29,48,947/-. IN THE COURSE OF AS SESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE A SSESSEE HAD PAID INTEREST TO ITS PARTNERS AMOUNTING TO RS.1,01, 49,026/-. THE ASSESSING OFFICER DISALLOWED A PORTION OF INTER EST PAID TO THE PARTNERS AMOUNTING TO RS.35,14,011/- ON THE GRO UND THAT THE CAPITAL BORROWED FROM THE PARTNERS WAS NOT UTIL IZED FOR THE PURPOSES OF BUSINESS. THE ASSESSING OFFICER HAS GI VEN VARIED REASONS TO MAKE THE DISALLOWANCE. PRIMARILY, THE A SSESSING OFFICER NOTED THAT THE ASSESSEE BORROWED CAPITAL FR OM THE PARTNERS ON WHICH 12% INTEREST WAS BEING PAID, WHER EAS THE SAME WAS DIVERTED TO NON-BUSINESS PURPOSES I.E. INV ESTED IN FDRS WITH THE BANK WHICH CARRIED INTEREST @ 6% TO 7 %. THE ASSESSING OFFICER ALSO NOTED THAT BY PAYING INTERES T AT A HIGHER RATE (I.E. 12%) ON CAPITAL BORROWED FROM THE PARTNERS WHILE INVESTING THE SURPLUS FUND IN FDRS CARRYING I NTEREST RATE OF 6% TO 7% ONLY THE ASSESSEE REDUCED ITS TAX LIABILITY BY DIVERTING THE INCOME TO THE PARTNERS. THE ASSESSI NG OFFICER HAS MADE A DETAILED DISCUSSION AT PAGES 24 TO 37 OF THE ASSESSMENT ORDER. AS PER THE ASSESSING OFFICER, A MODUS OPERANDI HAS BEEN ADOPTED BY THE ASSESSEE TO EVADE TAXES BY RAISING CAPITAL FROM THE PARTNERS WHICH WAS NOT UTI LIZED FOR 3 BUSINESS BUT INVESTED IN FDRS EARNING 6% INTEREST W HEREAS IT PAID INTEREST TO THE PARTNERS @ 12%. AS PER THE A SSESSING OFFICER, THERE WAS NO DISTINCTION BETWEEN CAPITAL C ONTRIBUTED BY THE PARTNERS AND MONIES BORROWED FROM ANY ONE EL SE. AS PER THE ASSESSING OFFICER, SECTION 40(B)(IV) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) PERMITS DEDUCTION OF INTEREST PAID TO THE PARTNERS ONLY IF IT IS EXCLUSIVELY USED FOR THE BUSINESS. FOR ALL THE ABOVE REASONS, THE ASSESSING OFFICER HELD THAT OUT OF THE TOTAL CAPITAL CONTRIBUTED BY THE PARTNERS AS ON 31.3.2006 AMOUNTING TO RS.10,05,83,281/-, A S UM OF RS.5,85,66,853/- HAD NOT BEEN USED FOR THE PURPOSES OF ASSESSEES BUSINESS. THEREFORE, DIFFERENTIAL RATE OF INTEREST @ 6% (I.E. RATE OF INTEREST @12% PAID TO THE PARTNERS MINUS RATE OF INTEREST EARNED ON FDRS @ 6%) WAS TO BE DISALLOW ED, WHICH WAS COMPUTED AT RS.35,14,011/-. THUS, OUT OF THE T OTAL INTEREST PAID TO THE PARTNERS AMOUNTING TO RS.1,01, 49,026/-, AN AMOUNT OF RS.35,14,011/- HAS BEEN DISALLOWED. 3. BEFORE THE COMMISSIONER OF INCOME-TAX (A), ASSES SEE CONTENDED THAT THE ASSESSING OFFICER WAS NOT JUSTIF IED IN MAKING THE IMPUGNED DISALLOWANCE EITHER ON FACTS OR IN LAW. IN LAW, IT WAS CONTENDED THAT THE DISALLOWANCE CONT EMPLATED IN TERMS OF SECTION 36(1)(III) OF THE ACT COULD NOT BE APPLIED TO INTEREST PAID BY A FIRM TO ITS PARTNERS IN TERMS OF PARTNERSHIP DEED, THE ADMISSIBILITY OF WHICH WAS GOVERNED BY SE CTION 40(B)(IV) OF THE ACT. ACCORDING TO THE ASSESSEE, THE CAPITAL 4 CONTRIBUTED BY THE PARTNERS IS QUITE DIFFERENT FROM A BORROWED LOANED CAPITAL IN AS MUCH AS THE CAPITAL CONTRIBUTI ON BY THE PARTNERS ALONGWITH THE ACCUMULATED PROFITS STANDING TO THE CREDIT OF THE PARTNERS DO NOT CONSTITUTE BORROWED C APITAL AND, THEREFORE, PROVISIONS OF SECTION 36(1)(III) OF THE ACT COULD NOT BE INVOKED TO DISALLOW INTEREST PAID ON THE PARTNER S CAPITAL. IN THIS REGARD, RELIANCE WAS PLACED ON THE DECISION OF THE LUCKNOW BENCH OF TRIBUNAL IN THE CASE OF SAROJ NURS ING HOME VS. DCIT (2005) 98 TTJ 1051 (LUCKNOW) AND ALSO THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. BAZPUR CO-OPERATIVE SUGAR FACTORY LTD., 177 ITR 469 (SC) A ND THAT OF THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS . SRI RAJAGOPAL TRANSPORTS (PVT.) LTD., 144 ITR 573 (MAD) . ON FACTS ALSO, IT WAS CONTENDED THAT THE FDRS PLACED WITH TH E BANK REPRESENTED BUSINESS RECEIPTS IN AS MUCH AS THE SAM E WERE PLEDGED WITH THE BANK, WHENEVER NEEDED TO OBTAIN OV ERDRAFT LIMIT OR TERM LOANS. IT WAS THUS CONTENDED THAT TH E FDRS WERE MAINTAINED FOR COMMERCIAL EXPEDIENCY AND THE S AME COULD NOT BE CONSIDERED AS NON-BUSINESS ASSETS, AS DONE BY THE ASSESSING OFFICER. ALTERNATIVELY, IT WAS POINT ED OUT TO THE COMMISSIONER OF INCOME-TAX (A) THAT THE CAPITAL CON TRIBUTED BY THE PARTNERS IN THE PAST YEARS HAS NOT BEEN UTIL IZED TO MAKE THE IMPUGNED FDRS. THIRDLY, IT WAS ALSO SUBMI TTED THAT THE INTEREST WAS PAID TO THE PARTNERS AT THE SAME R ATE AS IN THE EARLIER YEARS AND IN THE ASSESSMENTS FRAMED U/S 143(3) OF THE ACT IN THE PAST YEARS, THERE HAS BEEN NO SUCH DISALLOWANCE. THE COMMISSIONER OF INCOME-TAX (A) V ERIFIED THE 5 PARTNERSHIP DEED, COPIES OF INCOME-TAX RETURNS OF T HE PARTNERS AND COPIES OF FDRS PLEDGED WITH THE BANK F OR OBTAINING OVERDRAFT LIMIT, ETC. AFTER VERIFYING TH E MATERIAL AND OBTAINING THE COMMENTS OF THE ASSESSING OFFICER, TH E COMMISSIONER OF INCOME-TAX (A) HAS OBSERVED THAT TH E INTEREST IN QUESTION HAS BEEN PAID TO THE PARTNERS IN TERMS OF PARTNERSHIP DEED AND EVEN THE PARTNERS WERE EARNING TAXABLE INCOME WHICH FELL IN THE HIGHEST TAX BRACKET I.E. 3 0% AND THE PARTNERS WERE PAYING TAX ON THE ENTIRE AMOUNT OF IN TEREST RECEIVED FROM THE ASSESSEE FIRM. ACCORDINGLY, THE COMMISSIONER OF INCOME-TAX (A) HAS CONCLUDED THAT T HERE COULD NOT BE ANY MOTIVE OF TAX EVASION BY DIVERTING THE INCOME OF THE FIRM BY PAYING 12% INTEREST TO THE PARTNERS. THE COMMISSIONER OF INCOME-TAX (A) HAS ALSO CONCLUDED T HAT THE INVESTMENT OF FUNDS FOR FDRS WITH THE BANK PROVED T HE BUSINESS USE THEREOF. IN PARA 3.10 OF THE ORDER TH E ISSUE HAS BEEN CONCLUDED AS UNDER :- 3.10 CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES OF THE CASE, I AM OF THE OPINION THAT THERE WAS NO ATTEMPT TO DIVERT THE INCOME BY ALLOWING 12% INTEREST TO THE PARTNERS, NOR THERE COULD BE ANY MOTIVE FOR THAT. ON THE OTHER HAND THE INTEREST WAS PAID IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND THE TERMS OF INSTRUMENTS OF PARTNERSHIP AND WAS REASONABLE. MOREOVER, THE INTEREST PAID AT THE SAME RATE WAS ALLOWED BY THE A. O. IN THE EARLIER YEARS EVEN IN THE ASSESSMENTS FRAMED U/S 143(3) AND THERE BEING NO CHANGE IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS 6 COMPARED TO THOSE OF THE EARLIER YEARS THERE WAS NO REASON FOR DEVIATING FROM THAT ACTION. OF COURSE, THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE IN INCOME TAX MATTERS BUT AS HAS BEEN HELD BY THE JUDICIAL AND APPELLATE AUTHORITIES, THE RULE OF CONSISTENCY MUST BE FOLLOWED ESPECIALLY IN SUCH A CASE AS THAT OF THE ASSESSEE WHERE THERE WAS NO CHANGE IN THE FACTS OF THE CASE AS COMPARED TO THE EARLIER YEAR WHEN THE INTEREST AT THE SAME RATE WAS ALLOWED BY THE A.O. THEREFORE, ON FACTS ALSO, THE DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER IS UNWARRANTED AND UNJUSTIFIED. 4. FURTHERMORE, THE COMMISSIONER OF INCOME-TAX (A) HAS NOTED THAT THE CAPITAL CONTRIBUTION MADE BY THE PAR TNERS DID NOT CONSTITUTE BORROWED CAPITAL AS ENVISAGED IN SEC TION 36(1)(III) OF THE ACT. IT WAS FURTHER HELD THAT AL LOWABILITY OF INTEREST PAID TO THE PARTNERS IS NOT GOVERNED BY SE CTION 36(1)(III) OF THE ACT BUT BY SECTION 40(B)(IV) OF T HE ACT READ ALONGWITH THE RELEVANT TERMS OF THE PARTNERSHIP DEE D. THE RELEVANT CONCLUSION IN THIS REGARD IS CONTAINED IN PARA 3.6 OF THE IMPUGNED ORDER WHICH READS AS UNDER :- 3.6 I HAVE HEARD BOTH THE PARTIES AND PERUSED THE RELEVANT RECORDS AND EVIDENCE PRODUCED BEFORE THE A.O. AS WELL AS BEFORE ME. THE LEGAL ARGUMENTS OF THE COUNSEL HAVE SUBSTANTIAL FORCE. THE CONTRIBUTION OF CAPITAL MADE BY THE PARTNERS OF THE FIRM DID NOT CONSTITUTE BORROWED CAPITAL AS ENVISAGED IN SECTION 36(1)(III) OF THE I.T. ACT AND AS SUCH THE ALLOWABILITY OF INTEREST PAID TO THE PARTNERS IS NOT TO BE GOVERNED 7 BY THAT SECTION BUT BY SECTION 40(B)(IV) OF THE I.T.ACT READ WITH RELEVANT TERMS OF PARTNERSHIP DEED. THIS VIEW DERIVES SUPPORT FROM THE DECISIONS OF HON'BLE SUPREME COURT AND MADRAS HIGH COURT AND THE ISSUE INVOLVED IS SQUARELY COVERED BY THE DECISION OF THE HON'BLE LUCKNOW BENCH (SUPRA) WHICH ALSO SUPPORTS THE CASE OF THE ASSESSEE AND THE RELEVANT EXTRACT WHEREOF HAS BEEN REPRODUCED BY HIM IN THE WRITTEN SUBMISSIONS. IT IS, THEREFORE, HELD THAT THE DISALLOWANCE OF INTEREST MADE BY THE LD.A.O. U/S 36(1)(III) OUT OF INTEREST PAID TO PARTNERS IS NOT IN ACCORDANCE WITH THE RELEVANT PROVISIONS OF THE ACT AND AS SUCH IT DESERVES TO BE DELETED ON THIS GROUND ALONE. 5. AGAINST THE AFORESAID DECISION OF THE COMMISSION ER OF INCOME-TAX (A), REVENUE IS IN APPEAL BEFORE US. 6. BEFORE US, THE LEARNED D.R. HAS REITERATED THE S TAND OF THE ASSESSING OFFICER BY PLACING RELIANCE ON THE AS SESSMENT ORDER. AS PER THE LEARNED D.R., THE COMMISSIONER OF INCOME- TAX (A) HAS ERRED IN DELETING THE ADDITION WITHOUT APPRECIATING THE FACTS IN APPROPRIATE PERSPECTIVE. THE LEARNED D.R. REITERATED THAT THE ASSESSEE HAD PARKED ITS SURPLUS FUNDS WHICH INCLUDED CAPITAL BORROWED FROM THE PARTNERS, IN THE FDRS WHICH EARNED INTEREST ONLY @ 6% TO 7%, WHEREAS INTEREST @ 12% WAS PAID TO THE PARTNERS ON THE CAPITAL BORRO WED. THUS, THERE WAS NO BUSINESS EXPEDIENCY FOR PAYMENT OF INTEREST TO THE PARTNERS AND IN THIS REGARD, RELIAN CE WAS PLACED ON THE JUDGMENT OF THE HIGH COURT JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LT D., 286 ITR 8 1 (P&H). IT IS ALSO ARGUED BY THE LEARNED D.R. THA T THE COMMISSIONER OF INCOME-TAX (A) WAS NOT CORRECT IN S TATING THAT THE INTEREST PAID TO THE PARTNERS WAS ALLOWABL E ONLY IN TERMS OF SECTION 40(B)(IV) OF THE ACT AND NOT IN TE RMS OF SECTION 36(1)(III) OF THE ACT. ACCORDING TO THE LE ARNED D.R., SECTION 40(B)(IV) OF THE ACT WAS ONLY RESTRICTING S ECTION AND DEDUCTION ON ACCOUNT OF INTEREST PAID TO THE PARTNE RS OR TO ANY OTHER PERSON WAS ALLOWABLE ONLY IN SECTION 36(1 )(III) OF THE ACT. FOR THESE REASONS, THE LEARNED D.R. HAS ASSAI LED THE ORDER OF THE COMMISSIONER OF INCOME-TAX (A). 7. ON THE OTHER HAND, THE LEARNED COUNSEL FOR RESPO NDENT- ASSESSEE VEHEMENTLY DEFENDED THE ORDER OF THE COMMI SSIONER OF INCOME-TAX (A). IT IS SUBMITTED THAT THE ASSESS ING OFFICER WAS NOT JUSTIFIED IN EQUATING THE CAPITAL CONTRIBUT ED BY THE PARTNERS WITH BORROWED CAPITAL. IT IS SUBMITTED TH AT THE CAPITAL CONTRIBUTED BY THE PARTNERS DOES NOT CONSTI TUTE BORROWED CAPITAL WITHIN THE MEANING OF SECTION 36(1 )(III) OF THE ACT AND AS SUCH, THE ALLOWANCE OF INTEREST PAID TO THE PARTNERS CANNOT BE GOVERNED BY SUCH PROVISION. A REFERENCE WAS INVITED TO THE PARITY OF REASONING LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF BAZPUR CO-OPERATIVE SU GAR FACTORY LTD. (SUPRA) TO POINT OUT THAT THE CAPITAL CONTRIBUTED BY THE PARTNERS ON WHICH INTEREST WAS BEING PAID, W ILL NOT SHOW A RELATIONSHIP OF BORROWER AND LENDER BETWEEN A PARTNERSHIP FIRM AND ITS PARTNERS. THEREFORE, INTE REST PAID BY A PARTNERSHIP FIRM TO ITS PARTNERS WAS NOT COVERED BY THE 9 PROVISIONS OF SECTION 36(1)(III) OF THE ACT. IN TH E COURSE OF HEARING, RELIANCE WAS ALSO PLACED ON THE JUDGMENT O F HON'BLE MADRAS HIGH COURT IN THE CASE OF SRI RAJAGOPAL TRAN SPORTS (PVT.) LTD. (SUPRA). THUS, IT WAS SUBMITTED THAT T HE INTEREST PAID @ 12% TO THE PARTNERS IN TERMS OF PARTNERSHIP DEED WAS ALLOWABLE IN TERMS OF SECTION 40(B)(IV) OF THE ACT AND THE PROVISIONS OF SECTION 36(1)(III) ARE NOT APPLICABLE . RELIANCE WAS REITERATED ON THE DECISION OF THE HON'BLE LUCKN OW HIGH COURT IN THE CASE OF SAROJ NURSING HOME (SUPRA). O N FACTS ALSO, IT WAS CONTENDED BY THE LEARNED COUNSEL THAT NO DISALLOWANCE WAS MERITED. IT WAS POINTED OUT THAT EVEN IF THE TESTS LAID DOWN U/S 36(1)(III) ARE TO BE APPLIED, N O DISALLOWANCE WAS CALLED FOR SINCE THE ENTIRE BORROW ED CAPITAL WAS UTILIZED FOR THE PURPOSES OF BUSINESS. IT WAS ALSO POINTED OUT THAT THERE WAS NO EVASION OF TAX LIABILITY SINC E THE PARTNERSHIP FIRM AND ITS PARTNERS WERE PAYING TAX A T THE HIGHEST TAX RATE OF 30%. THE INCIDENCE OF TAX IN B OTH THE CASES WAS THE SAME AND, THEREFORE, BY PAYING INTERE ST TO THE PARTNERS @ 12% THERE WAS NO DIVERSION OF INCOME IN AS MUCH AS THE TOTAL TAX PAID REMAINED THE SAME. FOR ALL T HE ABOVE REASONS, IT WAS SUBMITTED THAT THE COMMISSIONER OF INCOME- TAX (A) MADE NO MISTAKE IN DELETING THE ADDITION MA DE BY THE ASSESSING OFFICER. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY. THE FIRST MOOT ISSUE WHICH ARISES FOR CONSIDERATION IS WHETHER THE INTEREST PAID BY THE ASSESSEE FIRM TO ITS PARTNERS CAN BE 10 SUBJECT TO THE TESTS LAID DOWN IN SECTION 36(1)(III ) OF THE ACT. SECTION 36(1)(III) OF THE ACT ALLOWS DEDUCTION FOR INTEREST PAID IN RESPECT OF THE CAPITAL BORROWED FOR THE PURPOSES OF BUSINESS OR PROFESSION, WHILE COMPUTING BUSINESS INCOME. AS PER THE REVENUE, EVEN IN RESPECT OF THE CAPITAL BORROWED FR OM THE PARTNERS, THE PROVISIONS OF SECTION 36(1)(III) APPL Y IN AS MUCH AS THE INTEREST PAID TO THE PARTNERS CAN BE ALLOWED ONLY IF IT IS UTILIZED FOR THE PURPOSES OF THE BUSINESS OR PROFES SION. 9. ON THE CONTRARY, AS PER THE RESPONDENT-ASSESSEE, WHICH HAS ALSO BEEN UPHELD BY THE COMMISSIONER OF INCOME- TAX (A), THE CREDIT BALANCES IN THE CAPITAL ACCOUNTS OF THE PARTNERS CANNOT BE CONSTRUED AS A CAPITAL BORROWED WITHIN THE MEANING OF SECTION 36(1)(III) OF THE ACT. 10. IN THE CASE OF BAZPUR CO-OPERATIVE SUGAR FACTOR Y LTD. (SUPRA), THE ASSESSEE WAS A CO-OPERATIVE SOCIETY WH ICH HAD RECEIVED CERTAIN CONTRIBUTIONS FROM ITS MEMBERS IN A LOSS EQUALIZATION AND CAPITAL REDEMPTION RESERVE FUND. THE FUND WAS USED BY THE ASSESSEE FOR THE PURPOSES OF I TS BUSINESS AND INTEREST PAID TO THE MEMBERS ON THEIR CREDIT BALANCES STANDING IN THE SAID FUND WAS CLAIMED AS D EDUCTION U/S 36(1)(III) OF THE ACT. THE CLAIM OF THE ASSESS EE WAS THAT THE FUND REPRESENTED CAPITAL BORROWED BY THE ASSE SSEE FOR THE PURPOSES OF ITS BUSINESS WITHIN THE MEANING OF SECTION 36(1)(III) OF THE ACT. AS PER THE HON'BLE SUPREME COURT, THE CREDIT BALANCES IN THE RESERVE FUND COULD NOT BE CO NSTRUED AS A BORROWED MONEY WITHIN THE MEANING OF SECTION 3 6(1)(III) OF 11 THE ACT. ACCORDING TO THE HON'BLE SUPREME COURT, I N ORDER THAT THERE BE BORROWED MONEY, THERE MUST BE A BORRO WER AND A LENDER RELATIONSHIP. THAT IT SHOULD BE CONSIDERED WHETHER IN ORDINARY COMMERCIAL USAGE, THE RELATIONSHIP WAS THA T OF A BORROWER AND A LENDER AND WHETHER THE TRANSACTIONS WERE LOAN TRANSACTIONS. THE HON'BLE SUPREME COURT ALSO NOTED THAT A LOAN TRANSACTION NECESSARILY SUPPOSED A RETURN OF T HE MONEY LOANED. AS PER THE HON'BLE SUPREME COURT, ON THE ABOVE PRINCIPLES, THE RECEIPT OF MONEY FROM THE MEMBERS I N THE RESERVE FUND, COULD NOT BE TREATED AS BORROWED CAP ITAL WITHIN THE MEANING OF SECTION 36(1)(III) OF THE ACT . CONSIDERING THE SAME PARITY OF REASONING, THE CREDI T BALANCES STANDING IN THE PARTNERS CAPITAL ACCOUNT, CANNOT B E CONSTRUED AS A LOAN TRANSACTION BETWEEN A PARTNERSHIP FIRM AN D THE PARTNERS. IN FACT, CAPITAL CONTRIBUTED BY THE PART NERS DOES NOT NECESSARILY SUPPOSE A RETURN OF THE SAME, AS IS ENVISAGED IN A LOAN TRANSACTION. THEREFORE, THE CAPITAL CONT RIBUTED BY THE PARTNERS INCLUDING ACCUMULATION BY WAY OF PROFI TS EARNED THEREON, CANNOT BE CONSIDERED AS A BORROWED CAPITA L WITHIN THE MEANING OF SECTION 36(1)(III) OF THE ACT. IN FACT, INTEREST PAID TO THE PARTNERS IS GOVERNED BY SECTION 40(B)(I V) OF THE ACT WHICH READS AS UNDER :- 40[(B) IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH, (I) ---------------------------------------------- ---------------- (II) --------------------------------------------- ----------------- (III) -------------------------------------------- ------------------ (IV) ANY PAYMENT OF INTEREST TO ANY PARTNER WHICH IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, 12 THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR AS SUCH AMOUNT EXCEEDS THE AMOUNT CALCULATED AT THE RATE OF [TWELVE] PER CENT SIMPLE INTEREST PER ANNUM 11. THE SAID PROVISION HAS BEEN EXPLAINED BY OUR CO ORDINATE BENCH IN THE CASE OF SAROJ NURSING HOME (SUPRA) AS UNDER :- FROM A PERUSAL OF THE OVERALL SCHEME RELATED TO THE ASSESSMENT OF :FIRM ASSESSED AS SUCH, IT IS EVIDENT THAT PAYMENT OF INTEREST AND REMUNERATION, ETC., TO THE PARTNERS AMOUNTS TO APPORTIONMENT OF PROFITS OF THE FIRM, AND THE INTEREST AND REMUNERATION TO THE PARTNERS SO APPORTIONED IS ASSESSABLE AS INCOME IN THE HANDS OF THE RESPECTIVE PARTNERS UNDER S.28. AS THE INTEREST AND REMUNERATION, ETC., AS PAID TO THE PARTNERS HAVE BEEN MADE ASSESSABLE IN THE HANDS OF THE PARTNERS THEMSELVES AS BUSINESS INCOME, THE SAME ARE TAKEN OUT OF THE TAXABLE PROFIT OF THE FIRM SO AS TO MEET THE LONG STANDING DEMAND OF THE TAXPAYERS THAT SAME INCOME SHOULD NOT BE SUBJECTED TO TAX TWICE; ONCE IN THE HANDS OF THE FIRM AND AGAIN IN THE HANDS OF THE PARTNERS. ON THIS ANALOGY ITSELF, THE PROFITS OF THE FIRM, AS ARRIVED AND AFTER APPORTIONMENT OF THE SAME IS ALSO NOT ASSESSED IN THE HANDS OF THE PARTNERS, BY VIRTUE OF S.10(2A) OF THE ACT. FROM THIS ANALYSIS, IT FOLLOWS THAT DEDUCTION ON ACCOUNT OF PAYMENT OF INTEREST IS ALLOWED BY VIRTUE OF THE SPECIALLY ENACTED PROVISIONS OF S.40(B) OF THE ACT, WHICH CAME INTO FORCE W.E.F. 1 ST APRIL, 1993 ONLY. IT ALSO FOLLOWS, SIDE BY SIDE, THAT PAYMENT MADE TO THE PARTNERS, BY WAY OF INTEREST, IS NOT TREATED AS PAYMENT OF INTEREST ON BORROWINGS. THEREFORE, 13 THE CRITERION LAID DOWN IN S.36(1)(III) WHICH ALLOW S DEDUCTION OF INTEREST ON BORROWINGS, IS NOT APPLICABLE HERE. FROM A PERUSAL OF THE NOTICE DT.20 TH JAN., 2005, AS ALSO THE ORDER DT.25 TH FEB., 2005 WHICH IS SUBJECT-MATTER OF APPEAL BEFORE US, IT IS NOTED THAT THE LEARNED CIT HAS EQUATED THE CREDIT BALANCES IN THE ACCOUNTS OF THE PARTNERS, WITH THE BORROWED FUNDS IN RELATION TO WHICH ADMISSIBILITY OF INTEREST IS GOVERNED BY S.36(1)(III). IT IS PERHAPS FOR THIS REASON THAT H E HAS REFERRED TO VARIOUS CASE LAWS WHEREIN QUESTION OF ADMISSIBILITY OF INTEREST UNDER S.10(2)(III) OF THE OLD ACT, S.36(1)(III) OF THE AC T, CORRESPONDING TO S.10(2)(III) OF THE OLD ACT WAS INVOLVED. IT IS HELD AT THE VERY OUTSET THAT THE CREDIT BALANCES IN THE ACCOUNT OF THE PARTNERS ARE NOT IN THE NATURE OF BORROWINGS OR DEBT DUE TO THE FIRM AND ALLOWABILITY OF INTEREST IN THE CAPITAL ACCOUNTS OF THE PARTNERS, ARE NOT GOVERNED BY THE PROVISIONS OF S.36(1)(III). ON THE OTHER HAND, THE CONTRIBUTION MADE BY THE PARTNERS, IN THE EVENT OF DISSOLUTION ARE APPLIED FOR PAYMENT OF DEBTS OF THE FIRM AND THE PARTNERS ARE ENTITLED TO SHARE THE ASSET OF THE FIRM ONLY AFTER A SURPLUS IS LEFT. TH IS IS AMPLY BORNE OUT FROM S.49 OF THE INDIAN PARTNERSHIP ACT, WHICH IS FULLY APPLICABLE TO INCOME-TAX PROCEEDINGS AS WELL; THE REASON BEING THAT THE IT ACT ITSELF DOES NOT CONTAIN ANY DEFINITION OF THE FIRM PARTNER AND PARTNERSHIP . SUB-S. (23) OF S.2 SAYS THAT FIRM, PARTNER AND PARTNERSHIP HAVE THE MEANING RESPECTIVELY ASSIGNED TO THEM IN THE PARTNERSHIP ACT, 1932. THUS, INTEREST IN THE CAPITAL ACCOUNT OF THE PARTNERS WAS ADMISSIBLE UNDER S.40(B) OF THE ACT, WHOLLY INDEPENDENT OF THE PROVISIONS CONTAINED IN S.36(1)(III) OF THE ACT. 14 12. FROM THE AFORESAID, IT IS EVIDENT THAT THE COMM ISSIONER OF INCOME-TAX (A) MADE NO MISTAKE IN HOLDING THAT T HE CREDIT BALANCES IN THE ACCOUNT OF THE PARTNERS ARE NOT IN THE NATURE OF BORROWINGS AS UNDERSTOOD FOR THE PURPOSES OF SEC TION 36(1)(III) OF THE ACT. THUS, WE FIND NO MERIT IN T HE PLEA OF THE REVENUE THAT THE TESTS ENVISAGED IN SECTION 36(1)(I II) VIS--VIS THE PAYMENT OF INTEREST ARE TO BE APPLIED IN THE PR ESENT CASE ALSO. IN THE INSTANT CASE, THE INTEREST IN QUESTI ON IS PAID TO THE PARTNERS OF THE FIRM AND THE SAME IS GOVERNED B Y THE PROVISIONS OF SECTION 40(B)(IV) OF THE ACT READ WIT H THE PARTNERSHIP DEED AND CANNOT BE SUBJECT TO DISALLOWA NCE IN TERMS OF SECTION 36(1)(III) OF THE ACT. THERE IS NO OBJECTION TAKEN BY THE REVENUE AT ANY STAGE THAT THE PAYMENT OF IMPUGNED INTEREST IS NOT IN ACCORDANCE WITH THE PRO VISIONS OF SECTION 40(B)(IV) OF THE ACT READ WITH THE PARTNERS HIP DEED. THEREFORE, WE FIND NO JUSTIFICATION TO INTERFERE WI TH THE CONCLUSION OF THE COMMISSIONER OF INCOME-TAX (A) IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER. 13. APART FROM THE AFORESAID, WE ALSO FIND THAT THE COMMISSIONER OF INCOME-TAX (A) HAS NOTED, AND TO WH ICH THERE IS NO NEGATION FROM THE REVENUE, THAT EVEN IN THE A SSESSMENTS FRAMED U/S 143(3) OF THE ACT IN THE EARLIER YEARS, INTEREST WAS PAID AT THE SAME RATE AND STOOD ALLOWED BY THE ASSE SSING OFFICER. THE COMMISSIONER OF INCOME-TAX (A) HAS FU RTHER NOTED THAT THERE IS NO CHANGE IN THE FACTS AND CIRC UMSTANCES OF THE INSTANT YEAR AS COMPARED TO THOSE OF THE EAR LIER YEARS. 15 IN THE FACE OF THE AFORESAID SITUATION, WE FIND NO JUSTIFICATION WITH THE REVENUE TO DEVIATE FROM THE PAST HISTORY. THE PRINCIPLES OF CONSISTENCY CLEARLY SUPPORT THAT THE IMPUGNED DISALLOWANCE IS NOT JUSTIFIED. 14. CONSIDERED IN THE LIGHT OF THE MATERIAL ON RECO RD AND THE AFORESAID DISCUSSION, WE UPHOLD THE ACTION OF THE COMMISSIONER OF INCOME-TAX (A) IN DELETING THE IMPU GNED ADDITION AND THE APPEAL OF THE REVENUE IS HEREBY DI SMISSED. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON ------------- -- (SUSHMA CHOWLA) (G.S.PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED 25 TH FEBRUARY, 2010 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/THE CIT/THE D R.