M/S.MUTHOOT BANKERS V. THE COMMISSIONER OF INCOME TAX

ITA/276/2014

AI Insights

The case involves M/s Muthoot Bankers, a partnership firm, which transferred its assets and liabilities to M/s Muthoot Fincorp Ltd. on April 1, 2004, and subsequently discontinued its business. The firm received certain amounts from customers in the assessment years 2005-06 and 2006-07, which it claimed as income. The firm also claimed deductions for interest paid to its partners, which were initially allowed by the Commissioner of Income Tax (Appeals) but later disallowed by the Income Tax Appellate Tribunal. The main legal issues revolved around the applicability of Section 40(b) and Section 176(3A) of the Income Tax Act, 1961, concerning the deductibility of interest payments to partners after the discontinuance of business.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 764682 (HC-KERALA)
• Appeal Type: Others
• Pronouncement Date: 20-06-2019
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: P K MENON
• Assessee Lawyers: T M SREEDHARAN; DIVYA RAVINDRAN; V P NARAYANAN
• Keywords: Assessment; Deduction; Discontinuance of business; Income tax appeal; Interest Payment to Partners
• Section: 28; 40(b); 176(3A); 189

Judgement Text

"IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, THE 20TH DAY OF JUNE 2019 / 30TH JYAISHTA, 1941 ITA.No.276 of 2014 AGAINST THE ORDER IN ITA 400/201/COCH/2013 of THE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, DATED 18.07.2014 APPELLANT/RESPONDENT/ASSESSEE: M/S.MUTHOOT BANKERS FORT LIGHT COMPLEX, FORT ROAD, KANNUR. BY ADVS. SRI.T.M.SREEDHARAN (SR.) SMT.DIVYA RAVINDRAN SRI.V.P.NARAYANAN RESPONDENT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX 1ST FLOOR, AAYAKAR BHAVAN, NEW ANNEX BUILDING, NORTH BLOCK, MANANCHIRA, KOZHIKODE - 673 001. SRI. P.K.RAVINDRANATHA MENON SR. COUNSEL, GOVERNMENT OF INDIA , (TAXES) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20.06.2019, ALONG WITH ITA.277/2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.No.276 of 2014 & ITA.No.277 of 2014 2 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, THE 20TH DAY OF JUNE 2019 / 30TH JYAISHTA, 1941 ITA.No.277 of 2014 AGAINST THE ORDER IN ITA 401/201/COCH/2013 of THE INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH, DATED 18.07.2014 APPELLANT/RESPONDENT/ASSESSEE: M/S.MUTHOOT BANKERS FORT LIGHT COMPLEX, FORT ROAD, KANNUR. BY ADVS. SRI.T.M.SREEDHARAN (SR.) SMT.DIVYA RAVINDRAN SRI.V.P.NARAYANAN RESPONDENT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX 1ST FLOOR, AAYAKAR BHAVAN, NEW ANNEX BUILDING, NORTH BLOCK, MANANCHIRA, KOZHIKODE- 673 001. SRI. P.K.RAVINDRANATHA MENON SR. COUNSEL, GOVERNMENT OF INDIA , (TAXES) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20.06.2019, ALONG WITH ITA.276/2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA.No.276 of 2014 & ITA.No.277 of 2014 3 'C.R' C.K. ABDUL REHIM & R. NARAYANA PISHARADI, JJ. ----------------------------------------------------- I.T.A Nos. 276 & 277 of 2014 ------------------------------------------------------- Dated this the 20th day of June, 2019 JUDGMENT Abdul Rehim,J Since the parties in both these appeals are common and since both the appeals are filed against a common order of the Tribunal, we have considered both the above appeals together and disposed them through this common judgment. 2. The appellant/assessee, a partnership firm, had effected transfer of its selective assets and liabilities to a company named M/s Muthoot Fincorp Ltd., by virtue of an agreement executed on 01.04.2004. It is not in dispute that the assessee firm had not carried on any business with effect from 01.04.2004. But the assessee firm had receipts of amounts from its customers, to the tune of Rs.17,50,361/- and Rs.2,21,933/-, as gains out of the business conducted earlier, during the ITA.No.276 of 2014 & ITA.No.277 of 2014 4 previous years corresponding to the assessment years 2005-06 and 2006-07. The assessee filed returns claiming deduction of expenses to the tune of Rs.18 lakhs and Rs.5 lakhs, in the respective years, which pertain to interest paid to its partners which were reflected in the capital account of the partners. The deduction claimed in this regard were disallowed by the Assessing Officer, on holding that, eventhough the income received after discontinuance of business of the firm is taxable under Section 176(3A) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short), such receipts cannot be considered as income derived under Section 28 of the Act. Appeals filed by the assessee before the Commissioner of Income Tax (Appeals) were allowed. It was found that the payment of interest made to any of the partners can be disallowed only if it does not relate to any period falling prior to or after the date of the partnership deed or if the payment was not authorised under the terms of the partnership or if it is not in accordance with any earlier partnership deed. Going by the provisions contained in Section 40(b) of the Act, it was also found that, another condition stipulated is that the interest allowable is only upto the ITA.No.276 of 2014 & ITA.No.277 of 2014 5 rate of 12%. Having found that the payment of interest, upon which the deductions were claimed, are not in any manner offending provisions contained in Section 40(b) of the Act, the additions made by the Assessing Officer on account of the disallowance with respect to the interest paid to the partners, was deleted from the assessment for both the years. 3. The revenue took up the matter in further appeal before the Income Tax Appellate Tribunal, Cochin Bench. Through the common order impugned herein the Tribunal had reversed the order of the first Appellate Authority, by holding that, the claim of the assessee for the deduction with respect to payment of interest made to the partners, cannot be allowed under Section 40(b) of the Act. Aggrieved by the said order, the assessee instituted the above appeals. 4. Finding of the tribunal is that, since the assessee has not carried on any business during the previous years of the assessment years concerned, there arises no question of computing the income (receipts) under the head of business income. It was observed that, even if the assessee earned any ITA.No.276 of 2014 & ITA.No.277 of 2014 6 income after closure of the business, it cannot be said that the interest paid to the partners is an allowable deduction, unless it is proved that the money borrowed was for the purpose of a business which is in existence. It was found that the payment of interest made to the partners cannot be considered as an expenditure incurred with respect to its business activities, which was not in existence during the relevant periods. 5. The appellant points out that, the procedure for assessment of income derived after discontinuance of the business is governed under Section 189 as well as under Section 176(3A) of the Act. It is contended that, both these provisions do not preclude the Assessing Authority from allowing deductions under Section 40(b) of the Act. Evidently, the tribunal had disallowed the claim by holding that the receipts of the firm, after discontinuance of its business, cannot be considered as profits or gains arising out of the business and therefore the interest paid to the partners cannot be considered as an expenditure incurred with respect to conduct of the business. Based on the disputed contentions raised as above, the following questions of law arise for consideration :- ITA.No.276 of 2014 & ITA.No.277 of 2014 7 (1). Whether payment of interest made to the partners of the firm, after discontinuance of its business, is an allowable deduction falling within the purview of Section 40(b) of the Act? (2). Whether the claim of deduction with respect to payment of interest made to the partners can be disallowed, with respect to a firm which discontinued its business activity, under Section 176 (3A) of the Act? 6. Heard Adv. Nisha John appearing for the appellant and Sri P.K.Ravindranatha Menon, Senior Counsel for Government of India (Taxes) on behalf of the respondents. 7. Section 189 of the Act provides that, where any business carried on by a firm has been discontinued, the assessment shall be made on the total income of the firm as if no such discontinuance had taken place. It provides that, all the provisions of the Act including the provisions relating to levy of penalty or any other sum chargeable under any provisions of the Act shall apply, so far as may be, to such assessment. Therefore it is evident that, with respect to a firm which ITA.No.276 of 2014 & ITA.No.277 of 2014 8 discontinued its business, the assessment need to be made on the total income of the firm in accordance with the provisions applicable for the normal assessments. Learned Senior Counsel appearing for the revenue had pointed out that, since the income received pertains to the years succeeding the year in which the firm had discontinued its business, more appropriate provision for assessment of the receipts, is Section 176 (3A) of the Act. Sub-section (3A) of Section 176 provides that, wherein the business is discontinued in any year, any sum received after such discontinuance shall be deemed to be income of the recipient and shall be charged to tax in the year of the receipt, if such sum would have been included in the total income of the person who carried on the business, had such sum been received before such discontinuance. Since the discontinuance of the business of the firm in cases at hand was with effect from 1.4.2004, we are in agreement that the assessment of the income received in any subsequent year need to be made in accordance with the procedure contemplated in Section 176 (3A). In the cases at hand, the income was received during the previous years corresponding to the assessment years 2005-06 and 2006-07. ITA.No.276 of 2014 & ITA.No.277 of 2014 9 Therefore, going by Sub-Section (3A) of Section 176, such income shall be deemed to be the income of the recipient, which in the cases at hand is the partnership firm. Further, the said provision stipulates that such income need to be charged to tax in the year of the receipt, which in these cases are the previous years corresponding to the above said assessment years. It is further stipulated that, such sum received should be included in the total income of the firm as if it is the income received before such discontinuance. Therefore there cannot be any dispute that the income received during the relevant years is to be charged to tax in accordance with the provisions contained in Section 176(3A). 8. Question arises as to whether such income received is profit and gains derived out of the business, coming within the purview of Section 28 of the Act. The receipts in the cases at hand are derived by way of income out of the business activities carried on by the firm before its discontinuance. Therefore it has to be construed that the receipts are profits and gains arose out of the business activity of the firm. Hence the finding of the Assessing Authority as well as the Tribunal that it is not an ITA.No.276 of 2014 & ITA.No.277 of 2014 10 income coming within the purview of Section 28 of the Act, as it is not profit or gains arising out of the business, cannot be accepted. Therefore we are inclined to hold that the income charged to tax, which were received in the subsequent years of the discontinuance of the business, can only be treated as profit and gains arose out of the business of the firm, coming within the purview of Section 28 of the Act. 9. Next question to be decided is whether the assessee is entitled to claim deduction on the payments of interest made to the partners, under Section 40(b) of the Act. Section 40 of the Act carves out exemptions with respect to allowable deductions enumerated under Sections 30 to 38 of the Act. Sub-clause (b) (iv) of Section 40 provides that, in the case of a firm which is assessable as such, payment of interest to any partner which is authorised in accordance with the terms of the partnership deed, and relating to any period falling after the date of such partnership deed, cannot be allowed as deduction in so far as such amount exceeds the amount calculated at the rate of 12% simple interest per annum. There is nothing to indicate that in the case of an assessment under Section 176 (3A), such ITA.No.276 of 2014 & ITA.No.277 of 2014 11 deductions are not allowable. However, we notice that, under Section 176(3A) the assessment on income received subsequent to the discontinuance of business need to be charged for tax as if such sum was received before the discontinuance of the business. So also, under Section 189 of the Act, with respect to the assessment of firm which discontinued business, it is provided that, the total income of the firm shall be assessed as if no such discontinuance had taken place. Therefore we are of the considered opinion that, either under Section 189 or under Section 176 (3A), there is no restriction provided against allowing the deductions. Hence, while assessing the tax leviable on the income received by the assessee firm during the years after its discontinuance of business under Section 176(3A), deductions are allowable as contemplated under Section 40(b) of the Act. Hence both the questions of law framed above, are answered in favour of the appellant/assessee and against the revenue. 10. Either from the common order of the Tribunal impugned herein or from the orders of the Assessing Officer or the first Appellate Authority, it is not clearly discernible as to ITA.No.276 of 2014 & ITA.No.277 of 2014 12 whether the deductions claimed with respect to interest paid to the partners of the firm would satisfy all the stipulations and restrictions contained under clause (iv) of Section 40(b) of the Act. Therefore we are of the opinion that the matter requires a remand to the Assessing Officer for recomputing` the extent of deductions allowable with respect to both the years, in terms of Section 40(b)(iv). Under the above mentioned circumstances, both the above appeals are hereby allowed. The impugned common order passed by the Income Tax Appellate Tribunal, Cochin Bench is hereby set aside. The Assessment Orders are remitted back to the Assessing Officer for recomputing the allowable deductions, in terms of the observations and directions contained herein above. Sd/- C.K. ABDUL REHIM, JUDGE. Sd/-R. NARAYANA PISHARADI, JUDGE. lsn ITA.No.276 of 2014 & ITA.No.277 of 2014 13 APPENDIX PETITIONER'S EXHIBITS: ANNX.A: COPY OF THE COMPUTATION OF LOSS FURNISHED ALONG WITH THE RETURN FOR AY-2005-06. ANNX.B: COPY OF THE ASSESSMENT ORDER DATED 29.09.2010 PASSED BY THE INCOME TAX OFFICER, WARD-I, KANNUR, FOR AY-2005-06. ANNX.C: COPY OF THE COMMON ORDER IN I.T.A NO.98/KNR/CIT/CLT/2010-11 DATED 13.3.2013 PASSED BY THE RESPONDENT FOR AY-2005-06. ANNX.D: COPY OF THE SALE AGREEMENT DATED 01.04.2004 EXECUTED BETWEEN M/S MUTHOOT BANKERS & M/S. MUHTOOT FINCORP LTD. ANNX.E: COPY OF THE COMMON ORDER DATED 18.07.2014 IN I.T.A NO. 400/C/13 OF THE ITAT, COCHIN BENCH FOR AY-2005-06 IN ORIGINAL. RESPONDENTS EXHIBITS: NIL ITA.No.276 of 2014 & ITA.No.277 of 2014 14 APPENDIX PETITIONER'S EXHIBITS ANNX.A: COPY OF THE COMPUTATION OF LOSS FURNISHED ALONG WITH THE RETURN FOR AY-2006-07. ANNX.B: COPY OF THE ASSESSMENT ORDER DATED 29.09.2010 PASSED BY THE INCOME TAX OFFICER, WARD-I, KANNUR, FOR AY-2006-07. ANNX.C: COPY OF THE COMMON ORDER IN I.T.A NO.99/KNR/CIT/CLT/2010-11 DATED 13.3.2013 PASSED BY THE RESPONDENT FOR AY-2006-07. ANNX.D: COPY OF THE SALE AGREEMENT DATED 01.04.2004 EXECUTED BETWEEN M/S MUTHOOT BANKERS & M/S. MUHTOOT FINCORP LTD. ANNX.E: COPY OF THE COMMON ORDER DATED 18.07.2014 IN I.T.A NO. 401/C/13 OF THE ITAT, COCHIN BENCH FOR AY-2006-07 IN ORIGINAL. RESPONDENTS EXHIBITS: NIL TRUE COPY P.A TO JUDGE LSN "