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income-tax Officer Vs. J.M.P. Enterprises - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Amritsar
Decided On
Judge
Reported in(1993)46ITD104(Asr.)
Appellantincome-tax Officer
RespondentJ.M.P. Enterprises
Excerpt:
.....clear that, even on the score of marble cost, no addition will be justified. consequently, we confirm the decision of the commissioner of income-tax (appeals) in accepting the cost of construction as per books of the assessee. ground no. 1 and its sub-parts of the revenue are rejected.5. the second ground in the revenue's appeal is about the commissioner of income-tax (appeals) allowing deduction of rs. 12,150 on account of interest paid to udyog finance and chit fund pvt. ltd. it is the contention of the departmental representative that loans were raised by the partners of the assessee-firm from that company and the amounts raised by them had been put in as their capital investment and the firm had not taken the loans itself. attention was invited to para 10 of the income-tax.....
Judgment:
1. The appeal of the Revenue for the assessment year 1975-76, and the cross-objection relating thereto are conveniently considered together and disposed of by a common order.

2. The major objection of the Revenue through its first ground is about the cost of construction of a cinema building by the assessee-firm and the addition made on account of unexplained investment. The Income-tax Officer made an addition of Rs. 6,56,186, which represented the difference between the cost of construction as per the Departmental Valuation Officer of Rs. 23,76,505 and the cost of construction as per the assessee's books of Rs. 17,20,320. It was pointed out from para 8 of the order of the Commissioner of Income-tax (Appeals) that the Departmental Valuation Officer made valuation five times and each time the cost of construction worked out was different. The first assessment which was made by the Income-tax Officer by order dated March 28, 1979, was set aside by the Commissioner of Income-tax (Appeals) and in the fresh assessment made by the Income-tax Officer, the cost of construction is taken at Rs. 23,76,505 and this happens to be the third valuation report of the Departmental valuer. It was explained at the time of hearing by assessee's counsel, Shri N.K. Sud, that before the Commissioner of Income-tax (Appeals) and at his instance, the Departmental Valuation Officer twice again examined the question of cost of construction and he by his report dated August 11, 1983, fixed the cost at Rs. 21,17,923. On this basis, the difference between the cost as in the assessee's books and as per the Government valuer comes down to Rs. 3,97,603. In this background, the Revenue's challenge against the deletion of addition of Rs. 6,56,186 is totally misplaced.

According to the fifth valuation, even the Government valuer had adopted the cost at Rs. 21,17,923. The relief to the extent of the difference between Rs. 6,56,185 and Rs. 3,97,603, in our view, in this factual background, cannot be questioned by the Revenue. Again, when the whole issue has been decided by the Income-tax Officer by obtaining the report of the Departmental Valuation Officer about the cost of construction of the cinema building, we fail to see any point in the grounds of appeals Nos. 1A and 1B of the Revenue.

3. On a further consideration of the issue in the light of the submissions made before us, we find that even a substantial part of the difference of Rs. 3,97,603 is to be again reduced due to admissions of the Departmental Valuation Officer before the Commissioner of Income-tax (Appeals) quoted in para 13 of his order as read along with the workings at pages 72 to 81 of the assessee's paper book. At page 72 is the assessee's letter dated October 18, 1983, accompanied by workings of difference in cost of construction. These workings showed the difference in valuation, which was still there in respect of the figure of cost of construction of Rs. 21,17,923. This difference was arrived at in accordance with the actual building material consumed and as per the actual size at site and as per the actual method of construction adopted. The total of these workings of difference in valuation amounted to Rs. 2,32,957 and this figure is duly confirmed by the Departmental Representative. In this connection, now it will be relevant to refer to the concession given by the Departmental Valuation Officer as noted in para 13 of the order of the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) has noted as follows : "In case, the purchase vouchers produced by the assessee are taken into consideration, adjustment is made at 10 per cent. in respect of personal supervision and specifications wrongly mentioned in the drawings in respect of slab thickness are corrected and the consumption of steel is worked out on the basis as mentioned by the assessee and agreed to by the Departmental Valuation Officer at the time of hearing, the difference between the cost of construction as per books of account and as per the Departmental Valuation Officer's report would be negligible which could be ignored as being within tolerable limits." 4. As stated earlier, the difference in valuation of Rs. 2,32,957 is already there. Deducting this from the value of Rs. 3,97,603, the difference will narrow down to about Rs. 1,64,000 in round figures. Out of this, by increasing the contractors' profit to 10 per cent. as held to be reasonable by the Tribunal in Karamjit Electrical Manufacturing Co. (P) Ltd., the assessee will be entitled to a further deduction of Rs. 57,241. It may be pointed out that the Departmental Valuation Officer had taken the contractor's profit at 71/2 per cent. and when the figure is raised to 10 per cent., a further deduction of Rs. 57,241 will be available and that will reduce the margin to Rs. 1,07,000 wrongly. All this figure work has been duly verified from the records by the learned Departmental Representative. Finally, as already noted by the Commissioner of Income-tax (Appeals) in para 13 of his order, there is another decision of the Tribunal in the case of Aan Aam Theatres, where it has been held that the difference in the cost of construction, as per books of account and as per valuation of the Departmental Valuation Officer, could be ignored up to 10 per cent.

Applying this yardstick, the difference between the two figures of cost of construction is much narrower. The cost as per the assessee's books is Rs. 17.20 lakhs and variation of 10 per cent. even on the basis of this figure will be of the order of Rs. 1.72 lakhs. Proceeding on this basis, we find that the approach of the Commissioner of Income-tax (Appeals) is correct and fully justified. We may also clarify the issue about marble purchases referred to in ground No. 1C of the Revenue. It was pointed out by the assessee's counsel, Shri N.K. Sud, that at the time of second valuation by the Departmental Valuation Officer, he had accepted the assessee's stand that the value of marbles purchased should be taken on the basis of the assessee's books and not on the basis of the schedule of rates. It was submitted that despite this having been done by an earlier Departmental Valuation Officer, the Departmental Valuation Officer prepared the fifth report dated August 11, 1983, again departing from that principle. It was also pointed out that the Commissioner of Income-tax (Appeals) had not asked the Departmental Valuation Officer to calculate the cost of "extra items" afresh but had asked him to work out the relief admissible to the assessee in the light of the objections made before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) in his order in para 13 has referred to that aspect in which he mentions about taking into consideration the purchase vouchers produced by the assessee and the variation in cost necessitated by taking those figures. The position of difference on this score can be well understood from the figures given against the heading "Extra items" at page 6 of the order of the Commissioner of Income-tax (Appeals). Taking note of these factors, it becomes clear that, even on the score of marble cost, no addition will be justified. Consequently, we confirm the decision of the Commissioner of Income-tax (Appeals) in accepting the cost of construction as per books of the assessee. Ground No. 1 and its sub-parts of the Revenue are rejected.

5. The second ground in the Revenue's appeal is about the Commissioner of Income-tax (Appeals) allowing deduction of Rs. 12,150 on account of interest paid to Udyog Finance and Chit Fund Pvt. Ltd. It is the contention of the Departmental Representative that loans were raised by the partners of the assessee-firm from that company and the amounts raised by them had been put in as their capital investment and the firm had not taken the loans itself. Attention was invited to para 10 of the Income-tax Officer's assessment order and para 17 of the order of the Commissioner of Income-tax (Appeals) to contend that the Commissioner of Income-tax (Appeals) has noted the facts incorrectly and misapplied the decision of the Tribunal reported in Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767 (ASR). It was next submitted that the position in this case was akin to a recent decision of this Bench dated September 3, 1984, in the case of Mangal Automobiles, Bhatinda v. ITO (ITA No. 106/ (Chandigarh) of 1983) and that decision was relied upon.

We find force in this submission of the Revenue. The Commissioner of Income-tax (Appeals) has not gone into the facts correctly nor considered carefully the decision of the Tribunal dated February 27, 1982, in the case of Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767. In that decision, the Tribunal itself has noted two earlier decisions of the Amritsar Bench against the assessee and has also observed that where the partners themselves raised loans on their policies and put it in their capital accounts, interest paid by the firm, whether to them or to the Life Insurance Corporation, can be held as having been paid to the partners. The case was decided as, according to the Tribunal, the facts of that case were different. Now, in the instant case, no proper enquiry into facts has been made. This Bench in its latest decision in the case of Mangal Automobiles has held that the question of disallowance of interest under Section 40(b) of the Income-tax Act will be governed by the form of transaction entered into. It is also observed that when an assessee chooses to obtain certain benefits by entering into a transaction in a particular manner, he should rightly face the consequences flowing from that mode of transaction. As the question has not been properly appreciated and relevant facts have not been found, we will set aside the findings of the Commissioner of Income-tax (Appeals) on this issue and restore it to his file for fresh disposal. He will also take into account the decisions of the Tribunal.

6. The last ground in the appeal of the Revenue is about the Commissioner of Income-tax (Appeals) treating the fittings, fixtures, electric fittings, etc., as part of machinery and allowing depreciation at 15 per cent. The Commissioner of Income-tax (Appeals) has dealt with the issue in paras 21 to 23 of his order. The Commissioner of Income-tax (Appeals) has no doubt allowed depreciation at 15 per cent.

on electric fittings and other items holding these as part of machinery. It was the contention of the Departmental Representative that electric fittings, etc., should be treated as part of buildings and depreciation was correctly allowed at 10 per cent. On the other hand, the assessee's counsel stated that electric fittings and other items should be treated as "plant" and he relied on the Supreme Court decision in CIT v. Taj Mahal Hotel [1971] 82 ITR 44. It was also stated that, for the assessment years 1976-77 to 1978-79, the Commissioner of Income-tax (Appeals) had allowed depreciation at 15 per cent. and the Revenue has not challenged his decision and further the Income-tax Officer himself allowed depreciation at 15 per cent. for the assessment years 1979-80 to 1983-84.

7. Taking note of the nature of the assessee's business and the submissions of the assessee's counsel to treat the items under consideration as "plant" as per the decision of the Supreme Court in CIT v. Taj Mahal Hotel [1971] 82 ITR 44, we uphold the conclusion of the Commissioner of Income-tax (Appeals) to allow depreciation at 15 per cent. instead of at 10 per cent. This contention of the Revenue is rejected.

8. In the result, the appeal of the Revenue may be treated to be partly allowed for statistical purposes only.

9. Coming to the assessee's cross-objection, the same was not pressed by Shri N.K. Sud, the assessee's counsel. It is dismissed as such.

10. I am unable to accept the finding of my learned brother as contained in para 4 of the order representing interest of Rs. 12,150 paid by the assessee-firm to Udyog Finance and Chit Fund Pvt. Ltd. The Income-tax Officer has recorded his finding in para 10 of his order, which is reproduced as under : "The scrutiny of interest account reveals that the assessee-firm has made interest payment through partners to Udyog Finance and Chit Fund Private Ltd. In fact, the partners have taken personal loans for capital investment in the firm and the firm has not taken the loan itself. Therefore, the interest payment made to the partners amounting to Rs. 900, Rs. 5,850 and Rs. 5,400 by S/Sh. Sudesh Kumar Kapur, Rahesh Kumar Malhotra and Balraj Kapur for payment to Udyog Finance will be disallowed.

This disallowance has also been approved by the Inspecting Assistant Commissioner of Income-tax, Assessment Range, Jalandhar." 11. It is evident from the finding of the Income-tax Officer that he had not discounted the claim of the assessee that payment of interest was made through the partners to Udyog Finance and Chit Fund Pvt. Ltd. on the use of borrowals obtained through the agency of the partner. The Commissioner of Income-tax (Appeals) finding is contained in para 17 of the order, a part of which is also reproduced as under : "...The plea of the assessee is that the action of the Income-tax Officer was contrary to the decision of the Income-tax Appellate Tribunal, Amritsar Bench, Amritsar, reported at Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767. The assessee-firm has raised loans from Udyog Finance and Chit Fund Pvt. Ltd. and paid interest amounting to Rs. 12,150 on the said loans. As the partners of the firm were members of the said company, the loans were advanced in their names. The interest was also paid by the assessee-firm to Udyog Finance and Chit Fund Pvt. Ltd. The Income-tax Officer, however, took the view that the loans had been taken in the names of the partners and the interest paid to Udyog Finance and Chit Fund Pvt. Ltd. must also be treated as interest paid to the partners. The plea of the Authorised Representative is that the decision taken by the Income-tax Officer was incorrect, inasmuch as the Income-tax Appellate Tribunal, Amritsar Bench, had in similar circumstances rejected the Departmental approach in the case reported at Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767. In view of the fact that the Income-tax Appellate Tribunal, Amritsar Bench, in the case reported at Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767 had held under similar circumstances that the interest paid by the firm could not be treated as interest paid to the partners, the addition of Rs. 12,150 made by the Income-tax Officer on this score, therefore, merits deletion." The Revenue raised the contention before us that the Commissioner of Income-tax (Appeals) had noted the facts incorrectly and misapplied the decision of the Tribunal reported in [1982] 1 ITD 767 in the case of Damodar Dass Jai Chand Aggarwal v. ITO, I.T.A. No. 142/ASR of 1981, dated February 27, 1982. In that decision, according to him, the Tribunal itself had noted two earlier decisions of the Amritsar Bench against the assessee and has also observed that where the partners themselves raised loans on their policies and put it in their capital accounts, interest paid by the firm whether to them or to the Life Insurance Corporation can be held as having been paid to the partners.

Therefore, he claimed that the interest was correctly disallowed by the Income-tax Officer under the aegis of provision contained in Section 40(b). On the other hand, learned counsel for the assessee submitted that the case was fully covered by the decision of the Amritsar Bench reported in Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767, where it was observed, "The Income-tax Officer found that this amount of interest had been paid by the assessee-firm to the Life Insurance Corporation of India and this loan had been raised by the partners from the Life Insurance Corporation against their insurance policies. The Income-tax Officer was of the view that, as the loan was raised by the partners of the firm, the payment of interest to the Life Insurance Corporation, on behalf of the partners could not be allowed. He, therefore, added Rs. 2,126 while computing the assessee's income." According to his submission, the facts were almost identical to the facts brought on record in the present appeal. In that case, the partners had raised the loan on the security of their insurance policies and passed on to the firm, while in this case, the partners have raised loans being members of Udyog Finance and Chit Fund Pvt.

Ltd. from the latter for the benefit of the firm. In both these appeals, it was the same contention whether the interest payment made to the creditor through the auspices of the partners was allowable or not under Section 40(b) of the Act.

12. In my consideration, the basic facts are that the assessee-firm had made payment of interest of Rs. 12,150 to Udyog Finance and Chit Fund Pvt. Ltd. for utilisation of funds borrowed through the auspices of the partners. No doubt the borrowings were first credited to the partners' account and then debited to the account of the assessee. But that would not go to dislodge the assessee from the stand that the funds had been used by it and the firm, therefore, paid the amount of interest due on these borrowings in respect of which partners being borrowers prima facie were chargeable. Therefore, I am not able to appreciate how the facts of this case were different from the basic facts of the case reported in Damodar Dass Jain Aggarwal v. ITO [1982] 1 ITD 767, on which the Commissioner of Income-tax had placed reliance. Therefore, the principle followed in the case should also govern the facts of the case on hand.

13. In my further consideration, the controversy between the Department and the assessee is now resolved by Explanation 3 added to Clause (b) of Section 40. This Explanation reads as under : " Explanation 3.--Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person." The purport of the provision is that, if the interest has been received by the partners from a firm on behalf of a third person then such interest will not be considered for the purpose of Section 40(b), that is, for inclusion in the income of the firm. In this case, the best case of the Revenue will be that payment of interest has been made to the partners, although the Income-tax Officer has recorded the finding that the payment was made to the creditor through the partners.

Therefore, applying this provision, it would not be possible to uphold that the disallowance of interest paid to the partners which was ostensibly for the benefit of Udyog Finance and Chit Fund Pvt. Ltd. Both the authorities have agreed that the payment of interest was ultimately made to Udyog Finance and Chit Fund Pvt. Ltd. No doubt, the Income-tax Officer has brought out that the payment was made through the agency of the partners--a state of affairs reflected from the entries appearing in the accounts of the partners. But even the Income-tax Officer had not been able to displace the finding that the ultimate beneficiary of the payment was Udyog Finance and Chit Fund Pvt. Ltd. and the partners had acted as a conduit pipe both for receipt of credit as well as for payment of interest. In such a case, I am unable to see how the effect of the Explanation could be avoided. No doubt, this Explanation had been inserted by the Taxation Laws (Amendment) Act, 1984, with effect from April 1, 1985. But that would not go to change my decision. An Explanation added to the main provision is retrospective in character unless its retrospectivity is limited by specific provision. If the Legislature wanted that the Explanation should not be retrospective, nothing stopped it from amending the main provision contained in Clause (b) of Section 40 of the Income-tax Act, 1961. That the Legislature had kept intact the language of the main provision contained in Clause (b) of Section 40 and has chosen to add an Explanation itself speaks that the intention of the Legislature had been misunderstood by the executive and created the necessity of inserting an Explanation to clarify its intention. If the substantive provision had been amended or a proviso had been added, the thing would have been different but the insertion of an Explanation stands on a different footing. The approach finds support from the Calcutta High Court decision in the case of CIT v. Bejoy Kumar Almal [1977] 106 ITR 743. This approach is not open to the objection that the said Explanation as provided in the Taxation Laws (Amendment) Act, 1984, shall form part of the Income-tax Act, 1961, with effect from April 1, 1985. The Taxation Laws (Amendment) Act is a statute operative after the assent of the President. After this has been notified in the Gazette, Section 56 of the Indian Evidence Act requires the said Act to be judicially noticed. Therefore, one would not be transgressing the frontiers of sound judicial interpretation if the said Explanation clarifying the intention is judicially noticed in a pending proceeding even before April 1, 1975.

14. In my view, on a proper appraisal of the facts of the case and the said Explanation, the controversy has to be resolved in favour of the assessee and I hold that the interest payment to the partners for the benefit of Udyog Finance and Chit Fund Pvt. Ltd. is covered by the said Explanation. Accordingly, the finding of the Commissioner of Income-tax (Appeals) on this issue is upheld.16. As we have a difference of opinion on the following point, we refer the case to the President as provided under Section 255(4) of the Income-tax Act : "Whether the issue of deduction of interest payment of Rs. 12,150 should be restored to the Commissioner of Income-tax (Appeals) for re-examination or whether the deduction is straightaway allowable to the assessee ?" 17. There being a difference of opinion between the learned Accountant Member and the learned Judicial Member, the Hon'ble President has referred the following point for my disposal under Section 255(4) of the Income-tax Act, 1961 : "Whether the issue of deduction of interest payment of Rs. 12,150 should be restored to the Commissioner of Income-tax (Appeals) for re-examination or whether the deduction is straightaway allowable to the assessee ?" The facts of the case briefly stated are that the partners of the assessee-firm, namely, S/Shri Sudesh Kumar Kapur, Rakesh Kumar Malhotra and Balraj Kapur, raised loans from Udyog Finance and Chit Fund Pvt.

Ltd. and paid interest of Rs. 900, Rs. 5,850 and Rs. 5,400, respectively. The loan was claimed to have been utilised by the firm for its business after rotating through the capital accounts of the partners. The interest paid to Udyog Finance and Chit Fund Pvt. Ltd. was claimed as deduction by the assessee-firm. The Assessing Officer was of the view that interest was paid by the firm to the partners, and, therefore, could not be allowed in view of the provisions of Section 40(b) of the Income-tax Act. The deduction was accordingly disallowed.

18. On further appeal, the learned Commissioner of Income-tax (Appeals), taking into account the decision of the Amritsar Bench reported in Damodar Dass Jai Chand Agganval v. ITO [1982] 1 ITD 767, allowed the claim. The Revenue then brought the issue in appeal before the Appellate Tribunal. The learned Members of the Tribunal differed and gave separate decisions on the issue. The learned Accountant Member was of the view that the Commissioner of Income-tax (Appeals) noted the facts incorrectly and misapplied the decision of the Tribunal reported in Damodar Dass Jai Chand Aggarwal v. ITO [1982] 1 ITD 767. In his view, the learned Commissioner of Income-tax (Appeals) should have considered the applicability of the later decision of the Tribunal dated February 27, 1982. As the question, according to the learned Accountant Member, was not properly considered, he set aside the findings of the Commissioner of Income-tax (Appeals) on this issue and restored the matter to his file for fresh disposal.

19. The learned Judicial Member did not share the above view. According to the learned Judicial Member the provision of Section 40(b) was not applicable to the facts of the case and the assessee-firm was entitled to the benefit of interest paid to Udyog Finance and Chit Fund Pvt.

Ltd. The learned Judicial Member accordingly upheld the findings of the Commissioner of Income-tax (Appeals) on this issue.

20. At the request of both the parties, the matter was taken for hearing on July 8, 1993. Shri N.K. Sud, Advocate, learned counsel for the assessee, very fairly conceded that the controversy, which led to the difference of opinion between the learned Members now stands resolved by the decision of the jurisdictional High Court in the case of CIT v. Agra Tannery [1989] 179 ITR 44 (P&H) and as such he has nothing further to argue in support of the order proposed by the Judicial Member. In the abovesaid circumstances, I have no difficulty in agreeing with the view taken by the learned Accountant Member. The matter be now placed before the regular Bench for disposal in accordance with law.


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