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Mahabir Rice and Dal Mills Vs. Income-tax Officer - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Allahabad
Decided On
Judge
Reported in(1982)1ITD788(All.)
AppellantMahabir Rice and Dal Mills
Respondentincome-tax Officer
Excerpt:
.....objections had no force in view of the latest decisions of the allahabad high court in cit v.london machinery co. [1979] 117 itr 111 and cit v. brij mohan das laxman das [1979] 117 itr 121.4. the assessee appealed to the commissioner (appeals). there were two contentions before him. the first was that the audit objection could not be treated as "information" under section 147(b) in view of the decision of the supreme court in indian & eastern newspaper society v.cit [1979] 119 itr 996. the second contention was that even on merits the disallowance of rs. 83,780 under section 40(b) was not justified.the commissioner (appeals) held that the audit had communicated an information on an issue of fact and, therefore, the principle laid down by the supreme court in the aforesaid case.....
Judgment:
1. The assessee is a firm. The original assessment in this case was made on 17-12-1977. There are six partners in this firm, some of whom are in their individual capacities, while others are representing their respective HUFs. While completing the assessment, the ITO had disallowed, in the aggregate, interest of Rs. 30,556 under Section 40(b) of the Income-tax Act, 1961 ("the Act").

2. Subsequently, the audit pointed out to the ITO that the disallowable interest under Section 40(b) amounted to a higher figure by Rs. 83,780.

In this connection, the audit pointed out to the ITO that although he had added back the sum of Rs. 30,557 paid to the partners in their individual capacity, the additional amount of Rs. 83,780 paid to them as kartas of their respective HUFs was not added. The audit also observed that the prohibition contained in Section 40(b) was absolute and made no distinction between payments by way of interest or salary to a partner as a partner and such payments made to him in a different character, e.g., in his personal capacity, when he was a partner in his capacity as the karta of a joint family or in his capacity as the proprietor of an independent concern. In this connection, the audit also invited reference to comments by Kanga and Palkhivala in their treatise "The. Law and Practice of Income-tax", 7th edition, as appearing at pages 511 and 512.

3. The ITO treating the audit objection as the information, initiated action under Section 147(6) of the Act by issuance of a notice under Section 148 of the Act. In response to this notice, the assessee submitted a return. The reassessment was made by the ITO on 2-4-1979 in which he disallowed the interest of Rs. 83,780. He also mentioned in the assessment order that the assessee's objections had no force in view of the latest decisions of the Allahabad High Court in CIT v.London Machinery Co. [1979] 117 ITR 111 and CIT v. Brij Mohan Das Laxman Das [1979] 117 ITR 121.

4. The assessee appealed to the Commissioner (Appeals). There were two contentions before him. The first was that the audit objection could not be treated as "information" under Section 147(b) in view of the decision of the Supreme Court in Indian & Eastern Newspaper Society v.CIT [1979] 119 ITR 996. The second contention was that even on merits the disallowance of Rs. 83,780 under Section 40(b) was not justified.

The Commissioner (Appeals) held that the audit had communicated an information on an issue of fact and, therefore, the principle laid down by the Supreme Court in the aforesaid case had no application and the ITO had jurisdiction to re-open the assessment under Section 147(b). On merits also, he rejected the assessee's contention, following the decision of the Allahabad High Court in the case of London Machinery Co. (Supra).

5. The assessee is now in appeal before us. Before us also, the counsel for the assessee made two submissions. The first was that initiation of proceedings under Section 147(6) was illegal in the light of the principle laid down by the Supreme Court in the case of Indian & Eastern Newspaper Society (supra) and secondly that, in any case, the disallowance of interest even on merits was not correct.

6. The learned counsel for the assessee submitted before us that the decision of the Allahabad High Court in London Machinery Co. (supra) was rendered on 26-10-1978, while the notice under Section 148 read with Section 147(6) was issued by the ITO on 23-9-1978. According to him, therefore, the ITO could not take shelter behind the aforesaid decision of the Allahabad High Court. He further submitted that there was no authority earlier to the above decision holding that the prohibition contained in Section 40(6) of the Act was absolute and made no distinction between payments by way of interest, etc., to a partner as a partner and such payments made to him in a different character, e.g., in his personal capacity or, when he is a partner in his capacity as the karta of a joint family or vice versa. According to him, therefore, the audit communication is an information on a point of law, which could not be regarded as "information" within the meaning of Section 147(6) and, therefore, the re-opening of the assessment was bad in law, 7. The learned departmental representative, on the other hand, relied on the order of the Commissioner (Appeals). He also invited our attention to certain observations made by the Supreme Court in the case of Indian & Eastern Newspaper Society (supra) itself. The observations, which appear at page 1003 of the report, are as under : But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communicator of the law is carefully maintained, the confusion which often results in applying Section 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose.

8. We have carefully considered the submissions placed before us. We are inclined to agree with the submission of the learned departmental representative that the case of the assessee is covered by the principle of the Supreme Court's decision as quoted above.

We find that even earlier to the decision of the London Machinery Co.

(supra) there were several other decisions, which laid down the principle that the prohibition contained in Section 40(b) or in the corresponding Section 10(4)(b) of the 1922 Act was absolute and made no distinction between payments by way of interest, commission, salary, bonus or remuneration made to a partner as a partner and such payments made to him in a different character, e.g., in his personal capacity, when he is a partner in his capacity as the karta of a joint family or in his capacity as the proprietor of an independent concern. These decisions, which have subsequently been followed by the Allahabad High Court in London Machinery Co. (supra) are : A.S.K. Rathnaswamy Nadar Firm v. CIT [1965] 58 ITR 312 (Mad.), Giridharilal Ghasiram v. CIT [1968] 69 ITR 890 (Cal.), Pannalal Girdharilal v. CIT [1971] 81 ITR 624 (Delhi), Anniah & Co. v. CIT [1975] 101 ITR 348 (Kar.), R.A. Goodsir & Co. v. CEPT [1948] 16 ITR 367 (Mad.) and CIT v. Veeriah Reddiar [1969] 73 ITR 162 (Ker.).

Our finding, therefore, is that the audit merely drew the attention of the ITO to the already existing interpretation of Section 40(b). It was this knowledge or awareness of the law, which was communicated by the audit to the ITO. The audit by itself did not suggest any interpretation of Section 40(b). This is also clear from the fact that the audit invited the attention of the ITO to various case laws mentioned at pages 511 and 512 in the commentary by Kanga and Palkhivala referred to above. We, therefore, find no merit in the first contention of the assessee and hold that the reopening of the assessment under Section 147(b) was in accordance with law.

9. The facts available on record are not sufficient to decide the second contention of the assessee that even on merits, the disallowance was not correct. The Commissioner (Appeals) unfortunately has confirmed the disallowance in a summary manner by only relying on the decision of London Machinery Co. (supra). In our opinion, the issue requires somewhat detailed consideration at his hands. We, accordingly, set aside this finding of the Commissioner (Appeals) and restore the matter back to him for fresh consideration in accordance with law.


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