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Commissioner of Income-tax Vs. A.V. Joshi and Sons - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberIncome-tax Reference No. 232 of 1980
Judge
Reported in[1986]158ITR71(Cal)
ActsIncome Tax Act, 1961 - Section 40
AppellantCommissioner of Income-tax
RespondentA.V. Joshi and Sons
Excerpt:
- .....under section 68 of the finance act, 1965, by the partners was not once again includible in the firm's assessment. the appellate assistant commissioner held as follows :'i have also gone through the contents of the disclosure petition submitted by the appellant and have found that the partners making the disclosure have surrendered for taxation under section 68 of the finance act, 1965, the interest on the loans brought into this firm and other firm's accounts in the garb of inclusion of the interest on bogus hundi loans amounting to rs. 34,895 in pursuance of the reassessment proceedings under section 147(a) of the income-tax act, 1961, was unjustified (sic).'he, therefore, deleted the said addition.2. the department preferred an appeal before the tribunal. the tribunal followed its.....
Judgment:

A.K. Sengupta, J.

1. The assessee is a registered-firm. The original assessment of the assessee-firm was completed on October 31, 1962. In the original assessment, the assessee-firm claimed interest of Rs. 34,895 on hundi loans appearing in the books of the assessee. The said interest was allowed while completing the original assessment. Thereafter, materials came into the possession of the Income-tax Officer that the said hundi loans were not genuine and fictitious. Accordingly, the assessment was reopened under Section 147(a) of the Income-tax Act, 1961 ('the Act'). In response to the notice under Section 148 of the Act, the assessee filed a return showing total income of Rs. 99,113 being the income determined in the original assessment as modified on appeal. Before the Income-tax Officer, it was stated by the assessee that the hundi loans were disclosed by the partners of the firm with interest under Section 68 of the Finance Act, 1965. However, the Income-tax Officer rejected the contention of the assessee and held that since the payment of interest on bogushundi loans has been claimed in the assessment of the firm, the interest must be added back in computing the total income of the firm. The Income-tax Officer also observed that the addition of such interest was upheld in earlier years by the Appellate Assistant Commissioner. The Income-tax Officer, therefore, added back the sum of Rs. 34,895 to the income of the assessee. The assessee preferred an appeal before the Appellate Assistant Commissioner, The Appellate Assistant Commissioner followed the order of the Tribunal in the case of Vijay Industries, Calcutta, where the Tribunal held that the interest disclosed under Section 68 of the Finance Act, 1965, by the partners was not once again includible in the firm's assessment. The Appellate Assistant Commissioner held as follows :

'I have also gone through the contents of the disclosure petition submitted by the appellant and have found that the partners making the disclosure have surrendered for taxation under Section 68 of the Finance Act, 1965, the interest on the loans brought into this firm and other firm's accounts in the garb of inclusion of the interest on bogus hundi loans amounting to Rs. 34,895 in pursuance of the reassessment proceedings under Section 147(a) of the Income-tax Act, 1961, was unjustified (sic).'

He, therefore, deleted the said addition.

2. The Department preferred an appeal before the Tribunal. The Tribunal followed its order in Income-tax Appeal No. 3762 (Cal) of 1969 and held that the contentions of the representative of the parties are the same which were raised in the said appeal and so were the facts and circumstances in that case as in the present one. Therefore, the Tribunal followed the said order and dismissed the appeal of the Department.

3. At the instance of the Commissioner, the following questions of law have been referred to this court under Section 256(2) of the Act :

'1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the sum of Rs. 34,395 (Rupees thirty-four thousand three hundred and ninety-five only) being the interest paid by the assessee to its partners in respect of bogus hundi loans is an allowable deduction in computing the income of the assessee, a registered firm, on the ground that the said amount had been subjected to tax as a result of disclosures made by the partners ?

2. Whether, on the facts and in the circumstances of the case and in view of the provisions of Section 40(b) of the Income-tax Act, 1961, the Tribunal was right in law in allowing the interest paid by the assessee-firm to its partners ?'

4. It is well settled that under the general law, a firm is not a legal person or juridical entity but the technical view of the nature of the part-nership under the general law does not hold good in income-tax proceedings. For the purpose of income-tax, a firm is treated as an entity distinct and separate from the partners who constituted the firm. A firm is a unit of assessment. Firm and the partners are assessed separately. Section 182 of the Act prescribes the procedure for the assessment of registered firms.

5. Under Section 182, the income-tax payable by the registered firm itself is determined and the share of each partner in the income of the firm shall be included in his total income and assessed to tax accordingly. Under Section 158 of the Act, the Income-tax Officer has to make the allocation of income of a registered firm which forms the basis of assessment of the partners. In making the assessment of the firm, the Income-tax Officer cannot overlook the provisions of Section 40(b) of the Act. It provides that notwithstanding anything to the contrary in sections 30 to 39 of the Act, any payment of interest, silary, bonus, commission or remuneration paid by the firm to any partner of the firm shall not be deducted in computing the total income chargeable under the head 'Profits and gains of business or profession'. Originally, the assessee-firm claimed that the loans had been obtained from third parties. Accordingly, interest claimed on the said loans was allowed by the Income-tax Officer. The partners of the assessee-firm made a disclosure petition under Section 68 of the Finance Act, 1965, declaring the amount covered by the said loans to the assessee-firm as their concealed income. By reason of the said declaration, the said loans must be deemed to have been advanced to the assessee-firm by its partners. If the loans were not genuine, the interest on such loans would not be allowable. If the loans are genuine in the sense that such loans have come from the partners, the prohibition of Section 40(b) would apply. The language of Section 40(b) is clear and enacts an absolute prohibition. The test to be applied is as to whether the interest is paid to the partners. It is admitted that the assessee paid the interest to the creditors being the partners and such interest has been disclosed in their voluntary disclosure. It is immaterial whether the interest income received by the partners on the said loans has been shown by the partners in their individual assessments. The Income-tax Officer assessing the firm cannot ignore the provisions of Section 40(b). The assessment year involved is 1961-62. The Income-tax Officer has to proceed on the facts and circumstances as appearing during the relevant previous year. A declaration made in 1965 cannot change the nature and character of the credits appearing in the books of the assessee-firm. If the loans were bogus and fictitious, the Income-tax Officer has to disallow the interest on such loans and to add the amounts represented by cash credits as the income of the assessee-firm. If, on the other hand, the case made out by the assesseethat such credits represented the concealed income of the partners is accepted, in that event, the amounts represented by the cash credits would not be added to the income of the assessee-firm but only the interest will be disallowed in view of the prohibition of Section 40(b). The Income-tax Officer accepted that the loans came from the partners and, therefore, disallowed the interest under Section 40(b).

6. Under the provisions of the Act, a registered firm bears the tax direct as also its partners are separately assessed in respect of the share of profits allocated to them out of the income of the registered firm. Section 67 of the Act provides the method of computing and allocating a partner's share in the assessed income of the firm. After the total income of the firm is computed, any interest, salary, commission or other remuneration paid to any partner is to be deducted from the total income of the firm and the balance is apportioned among the partners according to their respective shares. The amount of interest, salary, commission or other remuneration paid to a partner is to be added to the apportioned amount or adjusted against the apportioned amount depending on whether the apportioned amount represents profit or loss. In making an assessment of the share income of a partner, the Income-tax Officer assessing the partner is bound by the allocation made in the partner's name by the Income-tax Officer assessing the firm. It will be for the partners to claim the benefit, if any, of the declaration made under Section 68 of the Finance Act, 1965, in their individual assessments but whether the interest income received by the partners is covered by the disclosure or not, in our opinion, will not affect the assessment of the registered firm.

7. In that view of the matter, we answer both the questions in this reference in the negative and in favour of the Revenue.

8. There will be no order as to costs.

Sen, J.

9. I agree.


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