TMI Blog2011 (7) TMI 587X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 - - - Dated:- 29-7-2011 - N. Vijayakumaran, Sanjay Arora, JJ. R. Sreenivasan, CA-AR for the Appellant S.R. Senapati, Sr. DR, for the Respondent ORDER Sanjay Arora: These are a set of three Appeals arising out of separate Orders by the Commissioner of Income-tax, Kannur ('CIT' for short) u/s. 263 of the Income-tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2005-06, in respect of three different assesses. The facts of the case as well as the case of the opposing parties before us being the same, the appeals were heard together, and are being disposed of vide a common, consolidated order. 2.1 The brief facts of the case are that the assessee-firm is in the business of finance, primarily on the security of gold ornaments, following cash system of accounting. The assessment stood made u/s. 143(3) of the Act by accepting the returned income. In each of the three assessments, however, the assessee filed its return of income for the relevant previous year, being the financial year ending 31.3.2005, at a non-positive income, being at Nil, minus Rs. 193500/- and minus '90650/- for the three assessee-firms. The Assessing Officer (AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority to redo the same after affording a reasonable opportunity to the assessee, keeping the observations by him in view. Aggrieved, the assessee is in appeal. 3.1 Before us, it was submitted by the ld. AR, the assessee's counsel, that even as stated in the impugned order, the query with regard to the allowance of interest on the partner's capital arose on the basis of a subsequent observation by the internal audit party. A revision is not permissible on that basis, as it is the opinion of the AO as the assessing authority, and not that of any other, that is relevant; it being trite law that a mere change of opinion would not entitle revision, and for which, reference was made by him to the decisions by the apex court in the case of CIT vs. Max India Ltd. (supra) and Malabar Industrial Co. Ltd. vs. CIT (2000) 243 ITR 83 (SC). On merits, it was argued by him that the assessee had received interest, accrued up to 31.3.2004, during the relevant previous year, and which thus constituted the assessee's business income for the year and, as such, the finding by the AO - which was relied upon by the ld. CIT for invoking s. 263, i.e., that there was no business during the year, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lidity of the revisionary proceedings in view of the same being initiated on the basis of a query by the internal audit party is not maintainable. This is for the reason that the internal auditors have not expressed any opinion in the matter, which could only follow on obtaining all the relevant information and facts, but only highlighted a pertinent fact, i.e., of the allowance of interest to the partners on their capital u/s. 36(1)(iii), even as admittedly no business was carried, having been in fact transferred. No doubt, the assessee explains of having collected interest, receivable as on 31/3/2004, so that it was carrying on business to that extent, with the AO having thus taken a view in the matter, which could not be subject to revision u/s. 263 on the revisionary authority holding a different view. So however, the assessee omits to see that the AO has in fact held otherwise. Such a contention could be raised only where the AO had, on inquiry and examination, found the assessee to have transacted business insofar as it relates to realization of interest accrued up to 31/3/2004. Even so, the moot question that would arise, and which remains unaddressed, is: How could the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cause of the assessee. of course, our view would again be based only on the material on record, and any further information or facts may operate to mitigate the same, so that both the parties would be at liberty to meet the same by bringing materials establishing otherwise. 4.2 We having confirmed the assumption of jurisdiction u/s. 263 in the present case, the next issue to consider is the assessee's explanation on merits. It contends to be in fact carrying on business as it was undertaking collection of interest accrued up to the end of the immediately preceding previous year, i.e., 31/3/2004, and thus carrying on business to that extent. We find that there is no finding of fact by the Revenue on this matter. Neither has the same been examined during the assessment proceedings nor has the same been verified by the revisionary authority. The same cannot thus be taken as a fact, and would warrant verification in the set aside proceedings. 4.3 The ld. CIT, however, was of the view that the same would not amount to the conduct of business by the assessee, and the relevant interest income is liable to tax u/s. 176(3A) and not u/s. 28(i). In our view, the matter, before being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same be completely free of cost, in complete deviation with the past; each of the income statements (profit and loss account) for the year ending 31.3.2005 bearing expenditure incurred during the immediately preceding year. Reference in this context is drawn to our finding of absence of any finding qua collection of outstanding interest by the firm in the assessment order at para 4.2 above. Even so, its claim of conduct of business, to the extent of collection of accrued interest and, accordingly, entitled to deduction qua interest on the partner's capital, i.e., a business borrowing, though appealing at first sight, suffers from several fundamental infirmities, which we may delineate as under. 4.4 Firstly, when the business is transferred, the property, both in the principal amount of loans as well as the interest accrued thereon up to the transfer date, stands vested in the transferee-company. We are, as such, unable to understand as to how the interest accrued up to 31.3.2004, i.e., up to immediately before the transfer date (1.4.2004), could be received or realised by the assessee. The Agreement of transfer is explicit on this; the relevant schedule thereto listing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the agreement, so that we take it as so. However, the question is that when the accrued and unrealized income/s, as interest receivable as on 31/3/2004, are not on the assessee's books, in view of its method of accounting, i.e., cash, the consideration received in its respect, being only be a part of the total sale consideration arising on transfer of business, would be over and above the book capital and, consequently, give rise to 'capital gains' to that extent. This is precisely the reason for being questioned in the matter, to, however, no satisfactory answer by the ld. AR. In fact, on the contrary, and quite surprisingly, we observe that there has been a substantial infusion of funds by the partner(s) during the year, which is completely inexplicable inasmuch as there is no question of assuming fresh borrowings when the firm has even transferred its existing business. With reference to this, it may be clarified that it is one thing to say that the funds are invested in business assets, which are not yielding any return or have turned unproductive, and quite another that they no longer represent a business asset, but only a debt on a sale transaction, outside of business, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of interest. The matter clearly warrants further examination, and the resultant findings of fact/s. Our further examination; the ld. CIT having issued observations requiring the AO to frame the assessment/s in light thereof, reveal the assessee's claim/s to be inflicted with several infirmities. How could; the firm having transferred its business as a going concern, left with no operative assets, including personnel, conduct business, and which constitutes its only business. The income realized, if so, could only be for and on behalf of the transferee-company. The same also gives rise to issues of accounting as also capital gains; it having realized more than the book value of the capital, as well. The ld. CIT has found the assessee's claims as not valid, as its income would in any case be subject to be assessed u/s. 176(3A) and, besides, its case to be covered by the decision in the case of Standard Triumph Motor Co. Ltd. vs. CIT (supra). Clearly, only one of the said two findings by the ld. CIT could hold; the latter deeming the credit of income to the assessee's account by the borrower in his accounts as an effective receipt of income by the assessee, even as we have found ..... X X X X Extracts X X X X X X X X Extracts X X X X
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