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Sugar Dealers Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAllahabad High Court
Decided On
Case NumberIncome-tax Reference No. 677 of 1977
Judge
Reported in[1980]122ITR826(All)
ActsIncome Tax Act, 1961 - Sections 40 and 154
AppellantSugar Dealers
RespondentCommissioner of Income-tax
Appellant AdvocateR.S. Agarwal, Adv.
Respondent AdvocateR.K. Gulati and ;A. Gupta, Advs.
Excerpt:
- - appeals before the aac and the tribunal have failed......not a receipt from self '2. the reference relates to the assessment years 1968-69 to 1970-71. the assessee-firm consisted of 4 partners, three of whom had credit balance in their accounts and were paid interest by the firm on these credit accounts. the fourth partner, mahabir prasad juthalal, had a debit balance and was charged interest on the same by the firm. in the original assessment for the assessment year 1968-69, the ito added a sum of rs. 32,856, being the interest paid by the firm to the three partners. in that year, the assessee had realised rs. 30,814 as interest from mahabir prasad juthalal, the fourth partner. subsequently, he revised the assessment under section 154 and reduced the addition by the amount of rs. 30,814, being the interest realised by the firm from mahabir.....
Judgment:

C.S.P. Singh, J.

1. The Income-tax Appellate Tribunal, Allahabad Bench, Allahabad, has referred the following three questions for the opinion of this court :

' 1. Whether it was a mistake to set off the interest received by the firm from Shri Mahabir Prasad Juthalal against the interest paid to theother partners for working out the amount to be disallowed u/s. 40(b) of the Income-tax Act

2. If the answer to the above question is in the affirmative, whether the abovementioned mistake was a mistake apparent from the record which could be rectified u/s. 154 of the Income-tax Act

3. Whether the Tribunal was correct in holding that interest charged by the firm from a partner was its income and not a receipt from self '

2. The reference relates to the assessment years 1968-69 to 1970-71. The assessee-firm consisted of 4 partners, three of whom had credit balance in their accounts and were paid interest by the firm on these credit accounts. The fourth partner, Mahabir Prasad Juthalal, had a debit balance and was charged interest on the same by the firm. In the original assessment for the assessment year 1968-69, the ITO added a sum of Rs. 32,856, being the interest paid by the firm to the three partners. In that year, the assessee had realised Rs. 30,814 as interest from Mahabir Prasad Juthalal, the fourth partner. Subsequently, he revised the assessment under Section 154 and reduced the addition by the amount of Rs. 30,814, being the interest realised by the firm from Mahabir Prasad Juthalal. As a result, the net amount of addition on account of the interest paid to the partners worked out at Rs. 2,042. For the assessment years 1969-70, 1970-71 and 1971-72, the ITO added only that amount which was arrived at after deducting the amount of interest paid by the firm to the three partners reduced by the amount of interest realised from the fourth partner. Subsequently, the successor ITO felt that the order passed by his predecessor was apparently erroneous, inasmuch as the amount of interest realised from the fourth partner could not be deducted from the amount of interest paid to the other three partners and as such issued notice under Section 154 of the Act. The assessee urged that there was no mistake apparent in the order sought to be rectified and, secondly, that the amount of interest charged from Mahabir Prasad Juthalal was not its income as it had been received from one of its partners. In this context, it was urged that as the firm was only a collective name for all its partners and the assessee-firm could not receive income from its partners. The ITO, however, repelled these contentions and rectified the order. Appeals before the AAC and the Tribunal have failed.

3. Coming to the first question, a bare perusal of Section 40(b) indicates that interest paid by the firm to its partners has to be disallowed. As the assessee-firm had paid interest to its three partners who had credit balance, the payments made had to be disallowed in view of Section 40(b). So far as the adjustment of the amount of interest received by the assessee from its fourth partner, Mahabir Prasad Juthalal, that constituted its income as has been laid down by this court in the case of Sri Ram Mahadeo Prasad v. CIT : [1953]24ITR176(All) and had to be included in the income of the assessee-firm. The Madhya Pradesh High Court has taken a similar view in the case of Chhotalal Keshavram : [1978]115ITR347(MP) . We fully subscribe to the view expressed in these cases. As the amount of interest received from the fourth partner constituted the income of the firm, and there being no provision in the Act which permitted an adjustment of the amount of interest received from a partner against interest paid to other partners, the ITO rightly added the amount of interest paid to the three partners without adjusting the amount of interest received from the fourth partner.

4. Counsel for the assessee urged that inasmuch as this court in Sri Ram Mahadeo Prasad : [1953]24ITR176(All) has laid down that the amount of interest paid to a partner has to be disallowed is to be worked out after adjusting the amount of interest received from that partner and the amount of interest paid to him, the principle should be extended to cases where interest has been received by the firm from only one of the partners while it has paid interest to other partners. We see no legal or statutory basis for accepting this contention, for, if this principle is accepted, it will render the provisions of Section 40(b) ineffective.

5. Coming now to the second question, the ITO had committed a clear error of law in adjusting the amount of interest received from the fourth partner from the amount of interest paid to the three partners for the reasons already indicated. It is settled that such a palpable mistake could be corrected under Section 154 of the Act.

6. The third question is covered by the reasoning given by us while answering the first question.

7. We, accordingly, answer all the three questions in the affirmative, in favour of the department and against the assessee. The department is entitled to its costs which we assess at Rs. 200. Counsel's fee is also assessed at the same figure.


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