TMI Blog1993 (12) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ears 1984 85 to 1989-90 lay set aside either by CIT (Appeals) or by CIT under section 263 of Income-tax Act, 1961. 3. Without prejudice to above grounds, the learned CIT (Appeals) erred in holding that the credit entries of goodwill, revaluation of machinery and on account of revaluation of shares in the accounts of the partners of the appellant-firm in their profit sharing ratios represented the notional entries or unrealized gains and, therefore, they were to be ignored while considering the actual credit or debit balances in their accounts as on 1-4-1989, i.e., at the beginning of the previous year relevant to the assessment year under appeal. In coming to the above conclusion, the learned CIT(A) Ignored the following facts:-- (a) that the appellant came to own 1,37,95,500 shares of the face value of Rs. 10 each in Jaypee Rewa Cement Ltd. (later renamed as Jaiprakash Industries Limited) on 31-3-1987. The cost of these shares to the appellant was only Rs. 91,97,500 while their face value was Rs. 13,79,55,000. The appellant, therefore, brought them to their face value; (b) that the market value of above shares on Kanpur Stock Exchange was also Rs. 10 per share as on 31-3-198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the following facts as contained in para 7 of his order, required to be taken into consideration for disallowing the interest paid by the appellant to its depositors/creditors:-- (i) the debit balance of Rs. 3,28,93,607 in the accounts of the partners as on 1-4-1989, inasmuch as this amount has not been correctly worked out for the reasons given in the above grounds; (ii) the exclusion of Rs. 1,27,54,489 being the profit of the year under appeal credited to the accounts of the partner; (iii) the borrowings made in earlier years but held as not genuine, as the assessments of earlier years lay set aside; (iv) the exclusion of Rs. 25,50,000 alleged to be fixed capital to be contributed by the partners, when in fact there was no such stipulation of any fixed capital in the Partnership Deed. 10. The reliance on and interpretation of various decided cases by the learned CIT(A) is incorrect and uncalled for on the facts and circumstances of the appellant's case. Hire Charges: 11. The learned CIT(A) has erred in holding that the provisions of section 145(2) of Income-tax Act, 1961 are applicable to amount of machinery hire charges received by the appellant from M/s Jai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s etc., which it gives on hire to the contractors on daily basis. The firm has been running its business for the last several years. It had 91,970 shares each valuing Rs. 100 of Jaiprakash Associates (P.) Ltd. in the assessment year 1986-87. On 31-12-1985, the company M/s Jaiprakash Associates issued bonus shares @ 1 to 1 and thus the accumulation of the shares with the assessee-firm amounted to 1,83,940. The investment in the original shares of the firm was Rs. 91,97,000. Thereafter, J.P. Associates (for brief JPA) was merged into J.P. Rewa Cement Public Limited Co. (for brief JPR). By the order of the Hon'ble High Court, as per terms of agreement, 1 share of JPA was allotted 75 shares of JPR. In this way, the total shares with the firm, on the basis of its holding of shares of JPA, amounted to 3,97,55,000 in JPR. These shares of JPR were of face value of Rs. 10 each and its market value was also slightly higher than Rs. 10 as is evident from page 62 of the compilation. The firm showed its real value amounting to Rs. 13,97,55,000 in the accounts of the firm and after deducting initial investment of Rs. 91,97,000 from the said value, credited the balance amount of Rs. 12,87,58,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lance computed is at Rs. 3,28,93,607, which was nowhere reflected from the accounts. 4. The next limb of argument of the learned counsel for the assessee is that the correct valuation of the shares shown by the assessee in his accounts in the assessment year 1986-87 was nothing but a part of the usual accountancy method. It has not been disputed even by the Department that the value of the share was inflated. The face value of the shares was Rs. 10 and its price as a little higher in the market which is proved by the papers filed at page 62 of the compilation. He has further pointed out that since 1986-87, the alleged valuation of the shares was never disputed by the Department and it is only one fine morning, that is, in the assessment year 1990-91, the Department has woke up and challenged the said valuation which is not warranted by law. He has pointed out that this valuation was in accordance with the principle of accountancy. He has stressed about the actual valuation of the shares, which the firm had received under the orders of the High Court while passing the orders for amalgamation of JPA into JPR vide order dated 30-7-1986. Hence, it was not the re-valuation of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this was the modus operandi of the assessee to get loans from the market and advance it to its partners after making a notional entry about the increase in price of the shares and thereby dilute profits of the firm by claiming interest paid to the creditors, which, in fact, was payable by the partners who had withdrawn the amount from their respective shares on the basis of the notional credit entry on re-valuation of the shares. He has also pointed out that it was not done only this year but it was being done over the years and detected only during this year by the Department and this is why the entire balance sheet was recast by the Assessing Officer and the interest paid on excess withdrawals without taking into consideration the credit entries made on the basis of the re-valuation of the shares was disallowed. He has also pointed out that the interest paid in excess of 20% to relations and friends was also rightly disallowed by the learned CIT(A), as the creditors, who were friends and relations, were more than satisfied about the security of the loans with the assessee-firm and thus the Bank interest of 20% was rightly held to be reasonable. 8. The learned Departmental Repre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave force and the Department appears to have gone on wrong premises and based the entire order on mere surmises and conjectures. The very fact that the assessee is not doing any other business except giving its tippers and dumpers on hire is not borne out from the facts. Admittedly, the assessee-firm is a sub-contractor and it has taken sub-contracts to the extent of crores of rupees and had been doing the said business for years. It may be possible that this year no other sub-contract might have been obtained by the assessee-firm, yet it cannot be said that it has completely ceased to have any such business. From the details of deposits and withdrawals during the year given out at page 1 of the compilation, it is evident that the total borrowings amounted to Rs. 5,92,46,393 while the total payments to the creditors during the year amounted to Rs. 7,75,53,488. It means that the borrowings during the year were less than the payments made to the creditors. We fail to understand that under these circumstances how it can be said that the withdrawals were from the borrowings. In fact, the contention raised by the learned counsel for the assessee has greater force that these borrowings w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 75 shares of JPR and the equity shares of JPR exceeded far in value in the assessment year 1990-91 as compared to its face value of Rs. 10. Over and above all this, the assessee received dividends during the year to the extent of more than Rs. 3 crores which was, in our opinion, far more than the interest paid by the assessee on its borrowings to which it had to resort for distress sale of its shares to repay the interest-free excessive advances received by the firm from Jaiprakash Associates. It has been more often than not held by the Hon'ble Supreme Court in its various decisions that the action/decision taken by a businessman has to be looked with a view of the businessman and not with the view of a bureaucrat/taxing authority sitting in the office. We, therefore, feel that by no stretch of imagination it can be said that the borrowings were not for business purposes and once the borrowings were for business purposes, then the interest on the said borrowings had to be allowed under the law. Now, the only fact to be seen in this case is as to whether the withdrawals by the partners were justified or not. Whether the decision of the Hon'ble High Court in CIT v. H.R. Sugar Fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amily was entitled to withdraw from the capital supplied by it thereby depleting the capital, the fact that part of the amounts borrowed was later on used for personal expenses did not deprive the assessee of the benefit of deduction of the entire interest paid on borrowed capital under section 10(2)(iii) of the Indian Income-tax Act, 1922, and a part of the interest could not, therefore, be disallowed." 14. Likewise, the Hon'ble Madhya Pradesh High Court in the case of Alok Paper Industries's case has observed as under : "The mere fact that there was no plausible explanation for not charging the interest on the debit balance, when interest had been paid by the assessee on the borrowings by itself would not be enough to infer that the borrowings to the extent of the debit balance in the partner's account had not been utilised for business purposes." 15. Even the Income-tax Appellate Tribunal Benches too have been holding that such withdrawal is permissible. Ahmedabad Bench in the case of N. Mansukhram Co. had held that there is no bar against the partners to withdraw their capital as they so chose and as a result of the borrowings or even in order to provide for withdrawals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares had been received in exchange of the old shares after amalgamation of a company into another company, and the shares received in exchange were far in excess of the original value of the shares, then the actual cost of the shares allotted in exchange have got to be reflected in the balance sheet for proper valuation of the assets and liabilities of the firm. As regards the contention of the reserve, it is generally done in the case of companies where the said amount cannot be adjusted against the individual shareholders. In the case of the firm, whether you put it as reserve or credits in the accounts of the partners, it means the same as in truth the reserve belongs to none but the proprietors just as in their capital investment by them in the firm. A reference to that effect can be made to page 246 of the Book 'Advance Accounts' by M.C. Shukla and T.S. Grewal, in which the nature of the reserve has been explained as under: "Nature of Reserve: Reserves are shown on the liability side of a Balance Sheet. It perplexes many a new student of accountancy. He argues that the business owes this sum to no one. Why should it be a liability ? And if a reserve is a liability, what i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no interest was disallowable and the finding to the contrary by the learned CIT(A) is hereby cancelled and the issue is decided in favour of the assessee. 20. Ground Nos. 11 to 15 are regarding the hire charges and disallowing of the depreciation and repair expenses on 14 tippers and one recovery van on the ground that they are not used during the year for the purposes of business. The brief facts are that the assessee had certain dumpers and tippers and had given the same on hire to M/s Friends Constructions Corporation and M/s Jaiprakash Associates. The total receipts disclosed were at Rs. 37,30,000 for the actual number of working days used. The Assessing Officer, applying the provisions of section 145(2), estimated the receipts at Rs. 92,98,000 on the basis of the 360 working days as per agreement in which it was mentioned that the hire charges will be received from the date of the actual use. Besides, the slips prepared daily for the actual use could not be produced by the assessee on the ground that the same had outlined its utility as the same had been entered on a chart and the bills prepared and submitted to the hirers and there being no discrepancy in the bills raised a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 145(2) were rightly attracted. He has also stressed that the interpretation of the agreement made by the Assessing Officer was also correct that the hire charges were to be paid by the hirer from the date of the actual use and not for the days of actual use. He has pointed out that from the words used in the agreement, it is clearly suggested that it is from the date of actual use that the hire charges are to be paid by the hirer. He has pointed out that in earlier years, hire charges were far in excess than the charges shown by the assessee during the year. He has also pointed out that it was only to indirectly help the sister concerns which were hirers of these tippers and dumpers. 23. We have heard the parties at length. As far as the question of depreciation and the repair charges of 14 tippers and one recovery van is concerned, that was allowable. Law as it stands only requires that they should be kept in readiness for use. There is no dispute in the case that these tippers and vans were not provided at the site. If because of the paucity of work, they could not be utilised by the hirers, then law does not permit the disallowance of the depreciation an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egularly employed for him and the profits and gains of the business could be properly completed from his accounts, then there was no necessity of maintaining a laborious process giving out the particulars of the names and addresses of the customers in the case of cash transactions and the absence of such particulars in the said bills would not be a ground for not accepting the books of account of the assessee. The facts of this case were not exactly similar but it is only the principle which has to be looked into and which has been propounded by the Hon'ble Kerala High Court. In fact, what is to be seen in such type of cases is that as to whether the method adopted is the method regularly employed and as to whether the profits can be properly ascertained from it or not. Here in this case, the assessee was maintaining this method regularly over the years and was never objected. No discrepancy was found or detected by the Assessing Officer regarding the payments received by the assessee from the hirers. It is not the case of the Department that these tippers and dumpers were used or hired by somebody else. Once they were used by the hirer company and the hirer company had confirmed p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has also repeated the same arguments and confirmed the same. The assessee being aggrieved has come up in second appeal before us. 29. The learned counsel for the assessee has vehemently argued out that the question of expenditure on repair is not within the powers of the assessee. It depends on various circumstances beyond his control. The expenses on repairs and purchase of spares can never be compared with the amount of receipts towards hire charges from the use of the said tippers and dumpers. It is everyday experience that a vehicle may not need repairs even though for a few hundreds of rupees for a year or two, yet in the third year it might need thousands and it cannot be said that this expenditure of thousands in the third year is disproportionate to the expenditure meted out in the earlier first and second year. He has stressed that there are complete details along with the vouchers of the expenditure on repairs and purchase of spares and not a single voucher has been alleged to be untrue and thus the disallowance of the same merely on the ground that in earlier year the expenses were far less in comparison to this year was not justified in the eyes of law. 30. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been repaired economically as it is a common day experience that if the vehicles are allowed to go to the garage, then the charges are exorbitant. As the hirers were the companies and the assessee was a partnership firm, the assessee had no reason to pay extra to the hirers for the bill raised by them towards repairs and replacement of spare parts. In fact, the majority of the expenses is towards the replacement of tyres and tubes which the assessee itself had provided from purchasing it from the open market. The names and details of the firms, from whom they were purchased, have been given in the compilation and none of the bills were either suspected to be false or proved to be fishy or non-genuine. In absence of any such circumstances, we have no reason that the entire expenditure meted out by the assessee for the repairs and replacement of spares, details of which have been confirmed by the vouchers, was genuine and not inflated. 33. Now, the only point to be seen is as to how far the hirers were responsible for maintenance or repairs of the tippers and dumpers. A little careful scrutiny of the very agreement, copy of which is in the compilation, will show that the hirers wer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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