TMI Blog2005 (7) TMI 328X X X X Extracts X X X X X X X X Extracts X X X X ..... which he will like to further make in regard to the nexus between the borrowed funds and taxes and accounting treatment." 2. Relevant facts, in brief, are that the assessee which is a partnership firm constituted by Dr. D.C. Srivastava, Dr. (Mrs.) Saroj Srivastava and Dr. R.C. Srivastava, as partners, has been running a 'nursing home' under the name and style of Saroj Nursing Home from the premises owned by several persons which included the above named persons also. Such premises are held by the assessee-firm on rent basis and a small portion of the premises as a whole are used by Dr. D.C. Srivastava and Dr. (Mrs.) Saroj Srivastava, husband and wife, respectively, for their residential purposes. These two persons are the main attending doctors in Saroj Nursing Home. Regular assessment order dt. 9th March, 2004 under s. 143(3) was passed by the AO at an income of Rs. 8,74,050 (as against the returned income of Rs. 8,13,600) after making certain disallowances under the heads "staff welfare expenses", "medicine consumed", "vehicle running expenses" and depreciation thereof. The income so determined in terms of the said assessment order was modified in first appeal by the learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m to the earlier order. In terms of the corrigendum dt. 27th June, 2005, the mistake in mentioning the status of the assessee in the earlier order, which is subject-matter of this appeal, has been rectified. In view of this development, the ground NO.1 is rejected; further reason being that the mistake is noting down the status in the impugned order is covered by the provisions of s. 292B of the Act. 5. Thereafter, Shri S.K. Garg, the learned counsel for the assessee, addressed us at length on each and every issue on which the learned CIT had sought to exercise his revisionary jurisdiction under s. 263 and as are contained in his notice dt. 20th Jan., 2005. He invited our attention to the query letters/order-sheet entries as have been issued/recorded by the AO from time-to-time during the course of regular assessment proceedings, through which detailed enquiries were made with regard to the expenses claimed in the P L a/c under various heads (which included expenses under the sub-heads, related to the building that was used for the purposes of business of the firm) as also foreign trips to US as undertaken by Dr. D.C. Srivastava and Dr. (Mrs.) Saroj Srivastava. In response to suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO) did not include any personal expense. Without bringing any material on record, by way of rebuttal of said contention, the learned CIT could not have exercised his revisionary jurisdiction under s. 263 in this respect. This was moreso in this case "where all such enquiries as were called for on the facts and circumstance of the case had already been considered by the AO, before passing the regular assessment order. 7. As regards expenses on US trip, Shri Garg made a very significant submission. With reference to the material and information on record, it was pointed out that the same related to air ticket expenses only and no expenses whatsoever were claimed for stay in United States as such stay was sponsored by their son, who has been living in USA for a long time. In view of the fact that there was no dispute about the business expediency of foreign trip, no enquiry was called for about the duration thereof. Therefore, unusually long duration of stay abroad could not have been taken as a ground for holding the regular assessment order to be erroneous and prejudicial to the interest of Revenue. This is moreso for the reason that even the learned CIT has nowhere held that f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er s. 158BC. In the wake of such a block assessment order, a huge demand was created. A part of the said demand was adjusted through appropriation of cash found at the time of search and balance payments were made from time-to-time. Such payments were not made voluntarily but were made by the assessee for the purposes of continuing to carryon the business and for preservation thereof. But for such payments, the assessee-firm could not have carried on its business activities properly and smoothly. In any case, by making such payments, the assessee has created a business asset which would yield interest income to it, in the event of realization of such asset through the process of refund. Similarly, the payment of Rs. 1.89,406 was also the income-tax refund and the same is at par with the first payment of Rs. 33,06,339. As regards the advance income-tax of Rs. 4 lakhs, this too was the liability of the firm for the current year and looking to the overall accruals of this year as also of 'interest-free funds' as are appearing on the liability side of the balance sheet, it could not be said that any interest-bearing borrowing had been diverted for the payment of taxes. 10. It was als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wings, the same should have been held to be utilized "for the purposes of business" on the peculiar facts as are on record and accordingly payment of interest to the partners on their credit balances could not have been adversely viewed for the purposes of assessment. Similarly, the case of Deys' Medical Stores Mfg. (P) Ltd. vs. CIT (1986) 53 CTR (Cal) 193.' (1986) 162 CTR 630 (Cal) as has been relied upon by the learned CIT in the notice under s. 263, is not applicable on the facts of the case. There the findings are that an overdraft has been taken from the bank and the same was utilized for the purposes of payment of taxes. Admittedly, such is not the position here. The partners had been making capital contributions and such contributions together with accretion thereto, had to be partly utilized for the purposes of payment of tax demands which had wrongfully been created against it. In any case, the tax payments in the present case are meant "for the purposes of business". Therefore, such payments have no bearing on the assessee's claim for payment of interest on the credit balances in the capital accounts of the partners. 12. Finally, Shri Garg also objected to the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in his supervisory jurisdiction under s. 263, CIT cannot cancel an assessment for taking a chance to find out any error in the regular assessment order. The order is, therefore, illegal and the same deserves to be quashed. In any case, the assessment order dt. 9th March, 2004 got merged with the appellate order dt. 29th June, 2004 and accordingly the learned CIT had lost his revisionary jurisdiction under s. 263. 15. We have carefully considered the rival submissions, perused the extensive paper book as also other records as have been placed before us. As far as merger of the assessment order dt. 9th March, 2004 with the appellate order dt. 9th June, 2004 is concerned, we find that none of the issues as have been raised in the notice under s. 263, were subject-matter of appeal before the learned CIT(A), Lucknow. Some other disallowances as had been made on ad hoc basis, were adjudicated upon by the learned first appellate authority. In view of Expln. 1 to s. 263, which came on the statute book w.e.f. 1st June, 1988, all such issues which were not subject-matter of appeal, can be subjected to revision under s. 263. The plea of the assessee is, therefore, rejected. Now we proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d no such expenses which can be said to be of personal nature has been pointed out, we hold that the regular assessment order dt. 9th March, 2004 as passed by the AO, accorded fully with the provisions of law and no error has been committed by him. After making all the necessary queries and after obtaining all the requisite information in relation thereto, the AO had taken a view about the admissibility of such expenses. Such a view, which is probable too, cannot be treated to be erroneous in view of the principle laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT. 18. There is also force in the alternate submission of the learned counsel to the effect that the two doctors are not only the "working partners" in the firm but also the main doctors attending to the nursing home as was being run by the assessee-firm. Their presence and all time availability at the business premises is essential for the purposes of business of the firm, and at least it goes to enhance the goodwill of the 'nursing home'. Therefore, expenditure incurred on maintenance of building (a small portion of which was in their occupation of the two doctors for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the foreign tours undertaken by them was to acquaint themselves with the developments, changes that had been taking place in the medical science all over the world. This was certainly in the business interest of the assessee-firm to send the two doctors to undertake a study trip abroad, and it is moreso in the present case as the two doctors are not indulging in individual practice. On a totality of the facts and circumstances of the case, we hold that no disallowance was called for out of foreign travelling expenses which related to air tickets only and no error of law has been committed by the AO in this respect, nor any prejudice has been caused to the interests of Revenue. 20. On both the issues as aforesaid, it is also very relevant to mention that, after carrying out necessary examination, the AO had taken a conscious decision in favour of the admissibility of expenses and such a decision is a plausible one also. Different viewpoint of a superior authority cannot take precedence over the view of the AO, if such a view is probable, so as to interfere with the finality of an assessment. It is not the purpose of the provisions of s. 263 to set aside an assessment, which is o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax payments, as appearing under the head "Loans and advances" (Schedule E) appended to the balance sheet as at 31st March, 2002, and made up as under: (i) Income-tax (block assessment) 33,06,339 (ii) Income-tax refundable 1,89,406 (asst. yr. 2001-02) (iii) Advance income-tax 4,00,000 (asst. yr. 2002-03) --------- 38,95,475 --------- In this respect, it is useful to reproduce the findings of the learned CIT : "3.4 So far as interest paid to partners is concerned, the facts have to be seen in proper perspective. First the issue will be dealt in regard to accounting perspective. According to the assessee, as the income-tax demand was disputed, the payment was not routed through the P L a/c. Instead, it was shown as 'loans and advances' in the balance sheet. The consequences of such accounting treatment are far reaching. It is an elementary fact that tax is a cost to business and appropriation of profits is possible only post tax. Hence, it is necessary that tax is debited to P L a/c and profit after tax worked out. That would be the amount availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its true nature. This being the correct position of law regarding the tax treatment of a tax liability. There is no reason why the same should not apply in this case. In this case, a valid assessment under the provisions of the IT Act was made and the amount of tax was paid by the assessee. This being so, there is no escape from the requirement that the amount of tax paid should have been debited to the accounts at the time of payment (since the assessee follows cash system of accounting). As discussed above, this position would not change even if the liability were disputed in appeal or even if the demand were to be waived/reduced eventually in appeal. Had the correct accounting treatment been given to the tax paid, at the time of payment, the profits of the firm for the relevant previous year would have gone down to the extent of tax paid in the books of account. That would have reduced the capital account balance of the partners correspondingly. In other words, the peculiar accounting treatment given by the assessee to the tax paid had the pernicious effect of artificially inflating the partners' capital account balances and thereby inflating the assessee's interest liabilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and accountancy aspects were ignored by the AO who made no inquiry. On the other hand there appears an omission on the part of auditors also. Since the direct result of this wrong accounting treatment was under reporting of the firm's income by substantial amount, it was incumbent on the tax auditor to highlight this matter in the tax audit report (Form 3CD). But, the report is completely silent about it. Instead the auditor has certified that the P L a/c gives a true and fair view of the profit of the assessee for the previous year. I do not agree with Authorised Representative's alternative contention that interest relating to borrowed funds having nexus with tax payments of above nature should not be disallowed because the assessee will get refund finally from the IT Department whether the income-tax payment was a disputed one or whether the assessee gets finally a refund after prolonged litigation makes no difference to the nature of payment which remain "income-tax". The fact that the interest received by the assessee on future refund from IT Department will be taxable in his hands, will also make no difference. Even by this logic, the interest paid by the firm to the partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances. Further, payment of interest to the partners is not an expenditure related to carrying on of business but is an apportionment of profits of business, between the firm and partners (constituting the firm) which has been made permissible by statutory provision of s. 40(b) of the Act, ever since the asst. yr. 1993-94. Admissibility of such an apportionment is not governed by the provision as contained in s. 36(1)(iii) of the Act. 24. On a careful analysis of the rival viewpoints, we feel inclined to accept the pleas taken by the assessee. It is not in dispute that the assessee itself has not made any investment in the form of income-tax payments at its own. The firm is a separate and distinct taxable entity, independent of the partners constituting it. After the block assessment order had been passed in its case, it became imperative for it to discharge the income-tax liability created thereunder. It was solely the liability of the firm itself and for making such payments, it had not resorted to any borrowings. The capital contributions by the partners do not amount to borrowings, as will be discussed by us in details in later part of the order. But, before this, we proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re. (iv) Kishinchand Chellaram vs. CIT 1977 CTR (Bom) 694 : (1978) 114 ITR 654 (Bom) : In this case the Hon'ble Bombay High Court has held that the deduction of interest under s. 10(2)(iii) of the old Act of 1922 corresponding to s. 36(1)(iii) of the "Act" of 1961, can be allowed only where the borrowings are for the purposes of business. As payment of taxes cannot be said to be 'for the purposes of business' interest paid on borrowings made for payment of taxes cannot be allowed as deduction. As against this, in the present case, there are no such "borrowings" and provision of s. 36(1)(iii) are not applicable. On the other hand payment of interest to the partner is specifically governed by s. 40(b) and the same is payable on the credits in the accounts of the partners. (v) Deys' Medical Stores Manufacturing (P) Ltd. VS. CIT : One of the issues involved in this case was as to whether interest paid on bank overdraft attributable to the income-tax payment was admissible as deduction or not. The Court ruled in favour of the Department. Here again the application of s. 36(1)(iii) was not involved and therefore, the said case law is again not relevant or applicable. (vi) CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ple laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India AIR 1971 SC 530, this Court cautioned: 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of this Supreme Court, divorced from its context, as containing a full exposition of the law on a question when the question did not even fall to be answered in that judgment'." On an application of the said caution here, it is evident that none of the case laws as have been referred to and relied upon by the learned CIT, are applicable here, either on facts or in terms of the questions referred to there. We will not be exaggerating, if we go to the extent of saying that the case of Shree Changdeo Sugar Mills Ltd., as has been listed at serial No. (vi) above, can even be cited in favour of the assessee, for its case has all along been that after a huge demand had been raised against it, in the wake of block assessment, it became imperative for it to make payment of the arrear demand. In the eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts as are classified under the head "income-tax (block assessment year)' represent the payment made in pursuance of the block assessment. As regards payments mentioned at s1. No. (C), the same represent income-tax refundable for the asst. yr. 2001-02...." 27. The moot question for consideration now, is as to whether any error of law has been committed by the AO in the matter of allowance of interest on the capital accounts of the partners, so as to confer jurisdiction on the learned CIT to exercise his revisionary powers under s. 263. In the case of a "firm assessable as such", as is the case here, payment of interest to any partner is governed by cl. (iv) of s. 40(b) as has been substituted by the Finance Act, 1992, w.e.f. 1st April, 1993. The said clause reads as under: "(v) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum." (for the year under appeal it was eighteen per cent) 28. In other words, as per the express provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very outset that the credit balances in the account of the partners are not in the nature of borrowings or debt due to the firm and allowability of interest in the capital accounts of the partners, are not governed by the provisions of s. 36(1)(iii). On the other hand, the contribution made by the partners, in the event of dissolution are applied for payment of debts of the firm and the partners are entitled to share the asset of the firm only after a surplus is left. This is amply borne out from s. 49 of the Indian Partnership Act, which is fully applicable to income-tax proceedings as well; the reason being that the IT Act itself does not contain any definition of the 'firm', 'partner' and 'partnership'. Sub-s. (23) of S. 2 says that "firm", "partner" and "partnership" have the meaning respectively assigned to them in the Partnership Act, 1932. Thus, interest in the capital account of the partners was admissible under S. 40(b) of the Act, wholly independent of the provisions contained in S. 36(1)(iii) of the Act. Accordingly, we hold that no error of law has been committed by the AO, in the matter of allowance of interest paid to the partners. 29. The learned CIT has also t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the matter is examined, the view taken by the learned CIT that the disputed tax payment, as is the case here, should have been adjusted in the accounts of the partners through the related P L a/c, is not tenable. Even if it is pleaded successfully by the Department, that sound accounting practice demanded such an adjustment, it cannot be applied for the purposes of computation of income under the IT Act. For the IT Act lays down specific provision as to the manner in which interest under s. 40(b) is to be calculated and allowed to the partners. The accounting practice, howsoever sound and practical it may be, cannot take precedence over the express provisions of law. This is the view expressed by the apex Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 CTR 172 (SC), wherein it has been held that: "In the case before us, the company had surplus funds in its hands. In order to earn income out of the surplus funds, it invested the amount for the purpose of earning interest. The interest thus earned is clearly of revenue nature and will have to be taxed accordingly. The accounts may have taken some other view but accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t while reaching the said conclusion, we have also derived the support and fortification from the decision of Hon'ble Allahabad High Court in the case of CIT vs. Sahara India Savings Investment Corporation (2003) 185 CTR (AD) 136 : (2003) 264 ITR 646 (All) wherein the following proposition has been laid down: "We do not agree. It is a well settled principle of interpretation of taxing statutes that while interpreting a taxing statute we have only to see the words used in the statute and not the intention or the spirit of the statutory provision. In a taxing statute the literal rule of interpretation applies, and it is well settled that if a transaction comes within the letter of the law it has to be taxed, however great the hardship, but if it does not, it cannot be taxed, however great the loss may be to the public exchequer. The view was best expressed by Lord Cairns in Partington vs. Attorney General (1869) 4 LR 100 (HL) as follows: 'If the person sought to be taxed, comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand if the Court seeking to recover the tax, cannot bring the subject within ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items in the definition of the word 'interest'. In our opinion, the only correct interpretation of this provision can be that firstly nothing is interest except interest on loans and advances. Secondly, two other categories are also included in the definition of the word 'interest' as specified in cls. (a) and (b) of s. 2(7). In our opinion, the word 'means' can only have one meaning, that is, it is an exclusive definition vide P. Kasilingam vs. P.S.G. College of Technology (1995) Supp. 2 sec 348. When we say that a word has a certain meaning then by implication we mean that it has no other meaning vide Punjab Land Development Reclamation Corporation Ltd. vs. Presiding Officer, Labour Court (1990) 3 SCC 682. However, when certain other categories are added then it means that only those additional categories will be included within the definition and none others, vide Mahalakshmi Oil Mills vs. State of AP (1989) 1 SCC 164." Applying the said principle in the present case, we further hold that the AO could not have reduced the quantum of interest paid/payable in the accounts of the partners, by resorting to the adjustment of income-tax payment related to the firm, in the absen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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