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income-tax Officer Vs. Mahesh Trading Co. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtDelhi High Court
Decided On
Case NumberIT APPEAL NO. 166 (DELHI) OF 1981 AND C. O. NO. 90 (DELHI) OF 1981 [ASSESSMENT YEAR 1976-77]
Reported in[1982]2ITD445(Delhi)
Appellantincome-tax Officer
RespondentMahesh Trading Co.
Excerpt:
.....the assessed firm. thus, there was no question of a particular individual being a partner in the assessed firm in one capacity and his receiving interest payment in another capacity. further, an association of person is not a legal entity even though it is separate assessable unit under income tax act, and this could imply that payment of the interest by the assessed-firm though shown in the books as being made to association of persons was, in fact, payment to various individuals constituting the respective association of persons. the disallowance was, thereforee, justified. application : also to current assessment years. however, for the purposes of disallowance provisions of section 40(ba) are applicable. income tax act 1961 s.40(b) - - nor are we satisfied that the assessed..........section 37(2b) of the income-tax act, 1961 (the act). the said disallowance was deleted by the learned commissioner vide para 6 of his order. the commissioners reasoning was that as the supreme court had in the case of cit v. allied publishers & sons (p.) ltd. dismissed the special leave petition against a decision of the bombay high court, the bombay high courts view as regards meaning of the expression expenditure in the nature of entertainment expenses, stands approved by the supreme court.5. the revenue is aggrieved from the aforesaid finding of the learned commissioner. we are unable to agree with the learned commissioner that simply from the fact that special leave petition in the aforesaid case was dismissed by the supreme court, the view of the bombay high court as regards.....
Judgment:
ORDER

Per Shri O. P. Garg, Judicial Member - The revenue has preferred this appeal against the order dated 23-10-1980 of the Commissioner (Appeals). The assesseds Cross-objection filed in the said appeal was also heard simultaneously. The matters were heard ex parte, as none of the assessed appeared despite service.

2. 1976-77 is the assessment year concerned. Financial year is the previous year. The assessed is a registered firm, consisting of four partners, namely, Usha Devi, Madhu Bala, Kanti Prasad and Raj Kishan. The assessment was completed by the ITO as per order dated 31-3-1979, determining total income at Rs. 1,30,320.

3. In the assesseds cross-objection as many as three grounds, including the Ground No. 3, which is general in nature, have been raised. Learned departmental representative has pointed out, with reference to para 7 of the Appellate Commissioners order, that none of the grounds mentioned in the Ground No. 2 of the cross-objection was pressed before the Appellate Commissioner. That being the position, we hold the cross-objection to that extent to be incompetent. Nor are we satisfied that the assessed had not been duly heard by the Appellate Commissioner.

4. ENTERTAINMENT EXPENSES - The assessed had claimed deduction in respect of miscellaneous expenses amounting to Rs. 13,790. The ITO disallowed Rs. 4,000 out of the said expenses on estimate basis under section 37(2B) of the Income-tax Act, 1961 (the Act). The said disallowance was deleted by the learned Commissioner vide para 6 of his order. The Commissioners reasoning was that as the Supreme Court had in the case of CIT v. Allied Publishers & Sons (P.) Ltd. dismissed the special leave petition against a decision of the Bombay High Court, the Bombay High Courts view as regards meaning of the expression expenditure in the nature of entertainment expenses, stands approved by the Supreme Court.

5. The revenue is aggrieved from the aforesaid finding of the learned Commissioner. We are unable to agree with the learned Commissioner that simply from the fact that special leave petition in the aforesaid case was dismissed by the Supreme Court, the view of the Bombay High Court as regards the meaning and scope of the expression in question stood approved by the Supreme Court. Present assessment arose within the territorial jurisdiction of the Allahabad High Court. That being the position, ruling of the Allahabad High Court, in the case of Brij Raman Das & Sons v. CIT : [1976]104ITR541(All) continues to hold the field. We, thereforee, reverse the learned Commissioners finding and restore the add back as made by the ITO.

6. DISALLOWANCE UNDER SECTION 40(b) - The assessed-firm had claimed deduction in respect of certain expenditure incurred by it, by way of payment of interest. The ITO made an add back of Rs. 36,000 out of the said expenditure on the reasoning that various amounts of interest totalling to that figure had been, in fact, paid by the assessed-firm to its various partners, even though payments had been shown in the assessed-firms books as have been made not to the partners as such directly, but to as many as five AOPs. Actually, the assessed-firm had paid, by way of interest, Rs. 9,000 to each of the five AOPs. Details of add back appears as under :

1.

Raj Kishan Investors Union

Rs.

Usha Devi

3,600

Raj Kishan

5,400

2.

Hari Kishan Investors Union

Usha Devi

1,800

Madhu Bala

1,800

3.

Narendra Pd. Investors Union

Kanti Prasad

3,600

Raj Kishan

3,600

4.

Kanti Pd. Investors Union

Madhu Bala

3,600

Kanti Pd.

5,400

5.

Madhu Usha Investors Union

Usha Devi

1,800

Madhu Bala

1,800

Kanti Pd.

1,800

Raj Kishan

1,800

36,000

In the assessment, the ITO had noted that the assessments of the said various AOPs were pending and that the genuineness of the AOPs remained to be proved.

7. assessed challenged the said add back in appeal before the Commissioner. The learned Commissioner deleted the add back in question relying on the case of Ram Lal & Sons v. CIT : [1980]124ITR157(All) . the learned Commissioner found that the ITO had since completed assessments on the various AOPs concerned on protective basis and that the said various AOPs had been constituted as per (a single and composite) memorandum of agreement of AOPs.

8. The assessed is aggrieved. The learned departmental representative raised two points, firstly, it was urged that Ram Lal & Sons case (supra) was distinguishable on facts and, secondly, it was emphasised that there was in substance no difference between the AOPs, on the one hand, and constituent members on the other and that, thereforee, the payment of interest made by the assessed-firm, though technically made to the AOPs, was in fact made to various partners and one outsider, viz., Hari Kishan. The learned departmental representative also submitted that the case of CIT v. London Machinery Co. : [1979]117ITR111(All) and CIT v. Brij Mohan Dass Laxman Das : [1979]117ITR121(All) were applicable to the facts of the present case. The cases of CIT v. Hind Construction Ltd. : [1972]83ITR211(SC) and CIT v. Dewas Cine Corporation : [1968]68ITR240(SC) were also cited in the revenues side. Hind Construction Ltd.s case (supra) was cited for the proposition that any contribution of capital made by a partner to a partnership firm, in the form of an asset, did not bring about a sale as such, even if the cost was entered into the books of the firm at a figure higher than the market value of that asset. Dewas Cine Corporations case (supra) was cited for the proposition that no balancing charge arose for taxation under section 41(2) of the Act when on the retirement of a partner or on dissolution of partnership, the partnership accounts were adjusted by payment of cash or by handing over to a partner any partnership asset at a valuation. From this, it was sought to be argued by the revenue that even a firm was in law not considered to be an entity distinct from the partners constituting it.

9. Copies of the assessment orders in the cases of the five AOPs in question are not available on our record. There is an indication available from the assessment order in the present assesseds case that according to the ITO during the pendency of the assessments of those AOPs, the genuineness of the associations remained to be proved. Merely from the fact that the ITO later completed assessments on the AOPs on a protective basis (as noted by the AAC) it cannot be necessarily inferred that the associations in question were found by the ITO to be genuine. In substance, the ITO held the interest amount received from the present assessed-firm to be taxable in the hands of the various individuals, including four partners of the assessed-firm and Hari Kishan, the outsider. Thus, protective assessments on the AOPs could naturally have been made only to protect the revenues interest in case ultimately any higher forum holds that the interest receipts in question were not taxable in the hands of the individuals concerned. Copy of memorandum of agreement dated 4-4-1975 evidence the constitution of the five associations. It is not clear to us as to why a single memo of agreement was made when five different associations were being constituted. Further, as per the recital all the five associations are stated to have been formed 'for the purposes of earning profits and carrying on business in trading in various commodities by actual purchase and sale, or by settlement and also to work as investors and to earn profits as an association, being separate an independent of each other'. There is no material on record to indicate as to whether any of the said five associations carried on any activity over and above advancing loan to the instant assessed-firm.

10. With a view to appreciate the legal controversy it is necessary to mention that in the present case none of the four partners purported to represent any other entity, like the HUF or AOP in the assessed-firm. Thus, there is no question of a particular individual being a partner in the assessed-firm in one capacity and his receiving interest payment in another capacity. The question for decision is as to whether the interest payment made by the assessed-firm to the various AOPs can be said to have been made to the respective constituent members of the AOPs. From Kanga and Palkhivalas The Law and Practice of Income-tax, 7th edition, at page 9, we infer that in a case, like the instant one, there is only one passage of money is the form of that income and it is subject to tax but once. It is trite that an AOP is not a legal entity even though it is a separate assessable unit under the Income-tax Act. that, according to us, would imply that payment of interest by the assessed firm, though shown in the books as being made to AOPs, is in fact payment to the various individuals constituting the respective AOPs. In CIT v. R. Dhandayutham : [1978]113ITR602(Mad) , their Lordships held that an assessment having been made on one of the members of an AOP the assessment made on the association thereafter was not legal. Their Lordships further held in that case that even though the ITO, who assessed the individual, was different from the ITO who assessed the association, by the action of the first officer the option in the department to assessed either the association or its individual members must be deemed to have been exercised and the second officer would be bound by the action of the first officer. The said conclusions of their Lordships also clearly suggest, firstly, that there is only a single passage of money and that the department having once exercised its option cannot go back on it in the matter of taxing an AOP as such or its individual constituents. In the present case that option stands exercised by the department in the form of individual constituents of the AOPs being substantively assessed. An AOP is not legal person in the eye of law. For all these reasons, we reverse the learned Commissioners finding and restore the finding of the ITO regarding the add back in question.

11. The revenues appeal is allowed. The assesseds cross-objection is dismissed.


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