Income Tax Appellate Tribunal - Mumbai
Kantilal Manilal & Co. vs Deputy Commissioner Of Income Tax on 17 October, 2001
Equivalent citations: [2002]82ITD354(MUM)
JUDGMENT
G.D. Agarwal, A.M.
1. This appeal by the assessee is directed against the order of CIT(A)-VIII, Mumbai. The grounds of appeal raised in this appeal read as under;
"1. The learned CIT(A) has erred in confirming the order of Dy. CIT disallowing payment of interest of Rs. 5,87,339 to M/s Emjey Enterprises and of Rs. 1,68.119 to Kantilal Manila! & Co. (P) Ltd.
2. The learned CIT(A) has further erred in holding that credit balances obtained in the accounts of M/s. Emjey Enterprises and of M/s Kantilal Manilal and Co. (P) Ltd., by passing the journal entries, should be ignored for the purpose of calculating interest payable to these parties."
2. At the time of hearing before us, it was submitted by the learned counsel for the assessee that the assessee is a partnership firm which derives income from import and export of goods and merchandise. The partners of the assessee-firm had credit balances with the assessee-firm. As on 1st April, 1989, the partners withdrew some money from the firm which was given to two firms which, in turn, advanced the same money to the assessee-firm. The complete particulars of the same are given by the assessee in its paper book as under:
"I. Kantilal Manilal and Co.
Withdrawals by partners from their capital accounts on 1st April, 1989 :
Partners Rs.
1. Mr. Champaklal M. Shah 7,00.000
2. M/s Pankaj P. Shah (HOF) 9,00,000
3. Mr. Anil P. Shah 8,00,000
4. Mr. Vinubhai P. Shah 9,00,000
5. Mr. Pannalal M. Shah 8,00,000 II Loan given to M/s. Emjey Enterprises (sister concern) of Rs. 33,00,000 on 1st April, 1989 by the four partners.
Loan given to M/s. Kantilal & Co. '(P) Ltd. (sister concern) of Rs. 8,00,000 on 1st April, 1989 by Mr. Pannalal M. Shah.
III M/s Emjey Enterprises gave a loan of Rs. 33,00,000 to M/s Kantilal Manilal & Co. on 1st April, 1989 M/s Kantilal Manilal & Co. (P) Ltd. gave a loan to M/s. Kantilal Manilal & Co."
On 30th March, 1990, those two firms made repayments by cheques along with interest. The partners redeposited the money with the firm on 30th March, 1990. He stated that all the above transactions were duly acted upon and were genuine business transactions. In support of his contention, he referred to the capital accounts of the partners and copies of accounts of those two firms have been placed in the paper book. He submitted that Section 11 of the Partnership Act provides that the mutual rights and duties of partners of a firm may be determined by contract between the partners and such contract may be expressed or may be implied by a course of dealing. As per partnership deed, there was no compulsion of providing any specific capital to the firm. The partners of the firm had sufficient credit balances and they had every right to withdraw the money from the firm and deal in any manner with that money. Therefore, when the partners by virtue of their right have withdrawn the money and advanced to other firms, the AO was nobody to object the same, especially when there was implied consent of other partners for such transaction/When a query was put by the Bench to the patner of the assessee-firm as to what business purpose was achieved by the above series of transactions, the reply was that the money of the partners was more secure when it was advanced to other firm because the partners of those firms were liable to return the money. He further submitted that the genuineness of the transactions had been accepted in the income-tax assessments of those firms. Thus, when one side of the transactions had been accepted, the other side of the transactions could not be held to be bogus or sham transactions. He further stated that the decision of Hon'ble apex Court in the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) was not applicable to the facts of this case as in that case the facts were altogether different. He submitted that when the transactions were genuine business transactions duly acted upon, merely because there was saving of tax also, it could not be stated that the transactions were a colourable device for avoidance of tax. In support of this contention, he relied upon the following decisions :
1. CIT v. Nagpur Golden Transport Co. (1998) 233 ITR 389(Del);
2. ITO v. P.K. Industries (1983) 16 TTJ (Asr) 154 ;
3. ITO v. Siee Tirupathi & Co. (1992) 40 ITD 456 (Mad);
4. Banyan and Berry v. CIT (1996) 222 1TR 831 (Guj);
5.. Sutiej Cotton Mills Ltd. v. Asstt. CIT (1993) 46 TTJ (Cal)(SB) 310 : (1993) 199 ITR 164 (AT)(SB); and
6. Kamal Kumar Sahatia v. CIT (1995) 216 ITR 217 (Gau).
He accordingly submitted that the AO was not justified in disallowing interest paid to M/s. Emjey Enterprises and M/s. Kantilal Manilal & Co. (P) Ltd. holding as interest part to the partners under Section 40(b) of the Act. The same should be deleted.
3. The learned Departmental Representative, on the other hand, relied upon the orders of the authorities below. He stated that the facts of the case, i.e., the series of transactions entered into by the assessee, speak themselves that the only purpose was to reduce the profit by avoiding applicability of Section 40(b) of the IT Act. The money was always with the assessee-firm. The money did not move an inch. The transfer took place only by book entry. Thus, the funds remained in the control of the assessee-firm. The total effect of the transactions was only to reduce the profit and thereby reduce the incidence of income-tax. Thus, it was a colourable device adopted by the assessee for avoidance of tax and on these facts the decision of Hon'ble apex Court in the case of McDowell & Co. Ltd. (supra) was applicable on all fours. He stated that it is not the clairn of the Department that the transactions were illegal or the partners had no right to withdraw the money or the transactions were not acted upon. The case of the Revenue was that the entire gamut of the transactions was only for the purpose of avoidance of tax and, therefore, the decision of Hon'ble apex Court in the case of McDowell & Co. Ltd. (supra) was squarely applicable. The AO has rightly applied the same and his order was rightly sustained by the CIT(A). The same should be maintained.
4. We have carefully considered the rival submissions and perused the material placed before us. The simple question in this appeal is whether the series of transactions are bona fide genuine business transactions or they are a colourable device with the intention to avoid the applicability of Section 40(b). The facts of the case in brief are that the assessee is a partnership firm consisting of six partners. There were credit balances in the accounts of various partners. As on 1st April, 1989, two journal entries were passed. By one entry, the accounts of four partners were debited by a total sum of Rs. 33,00,000 with a credit of similar amount to the account of M/s. Emjey Enterprises. By another entry, the account of one partner was debited by a sum of Rs. 8,00,000 and the account of M/s Kantilal Manilal & Co. (P) Ltd. was credited. It is admitted that both M/s Emjey Enterprises ("EE" for short) and M/s Kantilal Manilal & Co. (P) Ltd. ("KM & Co." for short) are sister concerns of the assessee-firm. The assessee-firm paid interest to EE and KM & Co. and these two concerns, in turn, paid interest to the partners of the assessee-firm whose accounts were credited in their books of account. As on 30th March, 1990, the assessee-firm rnade repayment to EE and KM & Co. by cheques. They, in turn, returned the money to the partners with interest by cheques and, in turn, the partners deposited the money with the assessee-firm.
4.1. Let us examine the true nature of the above series of transactions. The money, which was with the assessee-firm due to credit in the accounts of the partners, remained with the assessee-firm. As on 1st April, 1989, only the accounts of the partners were debited by credit to the accounts of EE and KM & Co., but the money did not move an inch. On 30th March, 1990, the .assessee made payments to EE and KM & Co. and on 30th March, 1990 itself the assesses received cheques from partners of the similar amounts. Thus, even on this date also, though the money started from the assessee's hands, it reached the assessee's hands on the same day i.e., 30th March, 1990. The assessee paid interest to EE and KM & Co. and they paid interest to the partners of the assessee-firm. Thus, the money was utilised by the assessee. Interest was also paid by the assessee; but, by inserting the names of EE and KM & Co., the interest appears to have been paid to partners by these concerns and not by the assessee-firm. By this process, the applicability of Section 40(b) is conveniently avoided by the assessee. The learned counsel for the assessee made a marathon effort to justify that the transactions were bona fide genuine business transactions. However, when a question was asked as to what commercial purpose these transactions served, except for avoidance of Section 40(b), the counsel stated that the partners felt more secure by giving the money to outsiders because they had a right to claim the amount from the partners of EE and the directors of KM & Co. However, we are not at all impressed by this explanation. Nobody can feel more secure by giving money to others than utilising it in his own business where he is partner. In any case, the money was not withdrawn from the assessee-firm and it remained in credit with the assessee-firm, though in the accounts of EE and KM & Co. as against the accounts of the partners. If the assessee-firm becomes insolvent, naturally, it will not be able to pay to EE and KM & Co. and which may certainly jeopardize the deposits of partners with that firm. After considering the totality of the facts, we are of opinion that the series of transactions was only with the intention of avoidance of Section 40(b). In the case of McDowell & Co. Ltd. (supra). Lord Justice Chinnappa Reddy at p. 157 has guided how the series of transactions should be considered. We reproduce the same as below :
"The true principle of the decision in Ramsay was that the fiscal consequences of a preordained series of transactions, intended to operate as such, are generally to be ascertained by considering the result of the series as a whole, and not by dissecting the scheme and considering each individual transaction separately."
In the given case, when we consider the result of the series of transactions, we find that the money had always been utilised by the assessee, the money was rotated through the agencies of EE and KM & Co. and interest was paid to the partners of the assessee-firm through the agencies of EE and KM & Co. Thus, the payment of interest, which was in effect to be made by the assessee to the partners, has been shown to have been made by some other persons than the assessee-firm. Obviously, there could be only one intention behind such series of transactions, i.e., avoidance of Section 40(b) of the IT Act which prohibits allowance of interest paid to the partners by the firm in which they are partners.
4.2. The learned counsel for the assessee has heavily relied upon Section 11 of the Partnership Act which provides that the rights and duties of partners of a firm may be determined by the contract between the partners. He stated that by virtue of Section 11, the partners had the right to utilise the amount lying in their credits in any manner they liked. We entirely agree with the learned counsel that the partners have absolute right to deal with the money lying to their credit in the capital account because there is no specific requirement of keeping a minimum capital as per the Partnership Act. We also agree with him that the partners had the right to withdraw the money and utilise it as per their sweet will. But, the question is: had the partners withdrawn or utilised their money ? The partners have not withdrawn the money at all. Only a journal entry was passed so as to show the credit of the amount in the hands of other persons than the partners.
4.3. It was contended by the learned counsel that the transactions had been accepted in the income-tax assessments of EE and KM & Co. and, therefore, the Revenue having accepted one part of the transactions, cannot reject the same in the case of the assessee-firm. We are not impressed with the argument of the learned counsel. Assessment proceedings in the hands of those persons and the assessee are independent. The true intention and the consequences of the transactions can be examined only in the hands of the assessee. Those firms received the interest by one hand and paid interest by other and, therefore, so far as their assessments are concerned, the transactions have almost neutral effect subject to negligible profit or loss only to the extent of difference in the rate of interest charged and paid. It has also been contended by the learned counsel that if the interest paid to EE and KM & Co. is disallowed, it would amount to double taxation because the interest has already been added in the hands of partners by way of receipt of interest from EE and KM & Co. Answer to this contention of the assessee can be very well found in the observations of Lord Howard de Walden, which is quoted by Lord Justice Chinnappa Reddy in the case of McDowell & Co. Ltd. (supra) at p. 153, which reads as under:
"It scarcely lies in the mouth of the taxpayer who plays with fire to complain of burnt fingers."
If the assessee manoeuvers for avoidance of tax by colourable device, all consequences would follow when such device is exposed.
4.4. It has also been contended by the learned counsel that the transactions are genuine and had been actually acted upon by the parties. This argument of the learned counsel is well replied by Hon'ble Justice Chinnappa Reddy and we cannot do better than to reproduce below his observations from p. 159 in the case of McDowell & Co. Ltd, (supra):
"The Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it on fiscal purposes. No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it."
In view of above, we hold that even if the transactions are genuine and have been actually acted upon but if they were with the intention of tax avoidance, then the decision of McDowell & Co. Ltd. (supra) would be squarely applicable. Lord Justice Ranganath Misra, while delivering his judgment in the case of McDowell & Co. Ltd. (supra), has observed at p. 171 of the report as under:
"Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges."
In our opinion, the series of transactions entered into by the assessee were colourable device for avoidance of applicability of Section 40 (b). Therefore, in our opinion, the AO. was fully justified in holding that the payments made by the assessee to EE and KM & Co, were effectively payments made to partners and rightly disallowed the same by invoking Section 40(b) of the IT Act. 5. In the result, the assessee's appeal is dismissed.