Income Tax Appellate Tribunal - Ahmedabad
Income-Tax Officer vs Dilipkumar Manharlal And Co. on 21 May, 1987
Equivalent citations: [1987]22ITD344(AHD)
ORDER
U.T. Shah, Judicial Member
1. Since a common point is involved in these appeals against the consolidated order of the AAC dated 30-9-1985 for the assessment years 1974-75 to 1978-79 and the consolidated order of the Commissioner (Appeals) dated 17-1-1986 for the assessment years 1979-80 and 1980-81, they are disposed of together for the sake of convenience.
2. The common point involved in these appeals pertains to the cancellation of penalty imposed by the ITO Under Section 271(l)(c) of the Act, in each of the years under consideration.
3. The assessee is a firm consisting of three partners in some years and two partners in other years including one Shri Dilip-kumar K. Shah. The assessment years are 1974-75 to 1980-81 and the relevant previous years are S. Ys. 2029 to 2035 respectively.
4. The facts in brief are : The assessee is carrying on business as a shroff. Its main source of income is commission derived from discounting cheques and negotiable instruments. Shri Dilipkumar K. Shah is also carrying on extensive sharafi business in his individual capacity. He has two accounts with the firm viz. Account No. 1, his capital account like the other partners and the Account No. 2, his Sharafi account in respect of the transactions with the assessee in his individual Sharafi business. The assessee had paid interest to him which was credited to these accounts. In its returns of income, the assessee has added back the interest. credited to Account No. 1 in view of the provisions of Section 40(b) of the Act. However, the assessee had claimed deduction in respect of the interest credited to Account No. 2, as according to it, the same was business expenditure to which the provisions of Section 40(b) of the Act were not attracted.
5. On the aforesaid facts in the assessments originally framed Under Section 143(1) of the Act, on 15-3-1975, 10-9-1975 and 14-12-1977, the ITO had accepted the assessee's contention in respect of the assessment years 1974-75,1975-76 and 1977-78 respectively. Similarly, the ITO had accepted such contentions of the assessee in respect of the assessment year 1976-77 originally framed on 8-9-1977 Under Section 143(3) of the Act. During the course of assessment proceedings for the assessment year 1978-79, the ITO, for the first time, was of the view that the interest paid to Shri Dilipkumar K. Shah in Account No. 2 would also come within the purview of Section 40(b) of the Act. He, therefore, framed the assessment accordingly on 6-1-1981 Under Section 143(3) of the Act.
6. Thereafter, the ITO initiated proceedings Under Section 148/147(a) of the Act, in respect of the assessment years 1974-75, 1975-76, 1976-77 and 1977-78 with a view to invoke the provisions of Section 40(b) of the Act in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2 for these years. The assessee, however, resisted the action of the ITO on the ground that the assessments cannot be reopened on mere change of opinion when all the primary facts were furnished to him at the time of original assessment proceedings for these years. Overruling the assessee's resistance, the ITO framed the assessments for these years Under Section 143(3)/147(a) of the Act, on 30-4-1981 and 1-5-1981 wherein, he had added back the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 with the assessee by invoking the provisions of Section 40(b) of the Act. In the assessment years 1979-80 and 1980-81 framed Under Section 143(3) of the Act, on 17-12-1981, the ITO added back the interest paid to Shri Dilipkumar K. Shah in both these accounts by invoking the provisions of Section 40(c) of the Act.
7. Simultaneously with the framing of the assessments in the aforesaid manner, the ITO initiated the proceedings Under Section 274/271(l)(c) of the Act, in each of the years under consideration and called upon the assessee to show cause as to why penalty should not be imposed Under Section 271(l)(c) of the Act, for not adding back the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 under the provisions of Section 40(c) of the Act as was done by it in respect of his Account No. 1. In its reply to the show-cause notices issued by the ITO, the assessee resisted the action of the ITO on the ground that it had neither concealed income nor had furnished inaccurate particulars thereof in the returns filed by it. It was further submitted that since the interest paid to Shri Dilipkumar K. Shah in Account No. 2 was not the interest paid to the partner on contribution of capital, the provisions of Section 40(b) of the Act, could not be attracted as dealings with Shri Dilipkumar K. Shah in Account No. 2 was business dealing in the Sharafi business carried on by the assessee as well as Shri Dilipkumar K. Shah. It was also submitted that at the time of original assessment proceedings themselves, the assessee had submitted all the primary facts which clearly show that interest was paid to Shri Dilipkumar K. Shah in his both the accounts with the assessee. Further, the accounts of the assessee in the books of Shri Dilipkumar K. Shah in his individual business was also furnished to the ITO. Based on such particulars the ITO himself had not thought of applying the provisions of Section 40(b) of the Act, in respect of the assessment year 1976-77 which was framed Under Section 143(3) of the Act. Relying on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Sajjanraj Divan-chand [1980] 126 ITR 654, it was urged that the provisions of Section 40(b) of the Act cannot be invoked in case of interest paid to a partner in different capacity. It was, therefore, urged that the penalty proceedings initiated Under Section 274/271(l)(c) of the Act, should be dropped. It may be mentioned that in some other letters written in compliance with the show-cause notice issued on the assessee, the assessee had elaborated its position by relying on a number of reported decisions both of the Hon'ble Supreme Court as well as other Hon'ble High Courts.
8. The ITO, however, overruled the assessee's objection as he was of the view that the assessee ought to have disclosed this fact in sub-para (B) of Annexure-D of the returns originally filed by it. According to the ITO, the decision in the case of Sajjanraj Diwanchand (supra) had no application to the facts and circumstances obtaining in the instant case. He, therefore, imposed penalty of Rs. 3,840 in the assessment year 1974-75, of Rs. 10,400 in the assessment year 1975-76, of Rs. 22,250 in the assessment year 1976-77, of Rs. 29,485 in the assessement year 1977-78, of Rs. 36,790 in the assessment year 1978-79, of Rs. 39,494 in the assessment year 1979-80 and Rs. 42,350 in the assessment year 1980-81 Under Section 271(l)(c) of the Act.
9. Aggrieved by the action of the ITO, the assessee preferred appeals before the AAC/Commissioner (Appeals). In his written submissions, the learned Advocate (Shri H.D. Panjwani) of the assessee gave full details of the case and urged that this was not a fit case where the ITO could have imposed penalty Under Section 271(l)(c) of the Act. In the said written submissions, the learned Advocate had highlighted the fact that the ITO himself had accepted the assessee's contention regarding different treatment to be accorded to the two accounts of Shri Dilipkumar K. Shah maintained in the books of the assessee while framing the assessments for the assessment years 1974-75, 1975-76 and 1977-78 Under Section 143(1) of the Act and for the A.Y. 1976-77 Under Section 143(3) of the Act. It was also pointed out to the first appellate authority that the assessee had deducted tax at source as contemplated Under Section 194A of the Act, in respect of the interest paid to Shri Dilipkumar K. Shah in his Account No. 2. If the assessee had real intention to defraud the revenue, it would not have deducted the tax at source amounting to Rs. 30,000 (approx.) for all the years under appeal. It was also stated that since the assessee was assessed in the status of Registered Firm, the interest paid to Shri Dilipkumar K. Shah in Account No. 2 were to be added back to the income of the assessee in each of the years under appeal, the tax effect in aggregate would not be more than Rs. 40,000 for all the years under appeal. In other words, it was submitted that for taking an advantage of tax of Rs. 10,000 no body in senses would have invited penalty aggregating to Rs. 1,84,609 imposed by the ITO Undre Section 271(l)(c) of the Act. Relying on various reported decisions mentioned in the written submissions, it was urged that since the interest paid to Shri Dilipkumar K. Shah in the two different accounts were in two different capacities, the provisions of Section 40(b) of the Act could not have been attracted in respect of the interest paid to him in Account No. 2. It was also pointed out that the amendment in Section 40(b) of the Act was made long after the dates on which the assessee had filed its returns of income. It was also urged that since the assessee was under a bona fide belief that the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 was business expenditure, there was no question of invoking the provisions of Section 40(b) of the Act, in this respect. It was, therefore, urged that the penalty imposed by the ITO Undre Section 271(l)(c) of the Act, in each of the years under apppeal, should be cancelled. The AAC in his consolidated order dated 30-9-1985 in respect of the assessment years 1974-75 to 1978-79, cancelled the penalty imposed Undre Section 271(l)(c) of the Act in the following manner :-
15. The analysis of the facts of the present appeals can briefly be put down as under :-
(A) The Appellant firm did not add back interest paid to a partner under Section 40(b).
(B) Provisions of Section 40(b) were not absolutely clear--on the other hand there were various conflicting decisions of the courts. (C) The appellant had disclosed the two separate accounts in the balance sheet as well as separately in greater detail while filing the I.T. Returns. (D) These accounts should be assumed to have been scrutinised by the ITO in A.Y. 1976-77, at least. (E) The same method of accounts continued in A.Y. 1977-78.
(F) The ITO invoked provisions under Section 40(b) for A.Y. 1978-79 and reopened earlier years' assessments. (G) The penalties have been levied on the interest disallowed under Section 40(b) and/or furnishing incorrect particulars of income.
16. I am afraid the decision taken by the Income-tax Officer needs to be reversed. The benefit of doubt should be given to the appellant. In view of the conflicting decisions, the appellant was within his legal rights to claim the interest payment as expenditure in the P. & L. account. It was the ITO's decision to allow or not allow the above claim under Section 40(b). The appellant did not hide the fact of the interest payments made to Shri Dilipkumar K. Shah. In the ultimate analysis the point is whether by making a claim of expenditure which in the ITO's opinion is wrong, can penalty under Section 271(l)(c) be levied ? The answer to this can only be in the negative. The appellant's case in its simplified form will take the shape of the problem contemplated above and, therefore, the answer would also be that penalty under Section 271(l)(c) ought not to have been levied in these years under appeals. The penalties are thus deleted. Appeals for all the years stand fully allowed.
10. For the assessment years 1979-80 and 1980-81, the Commissioner (Appeals) in his consolidated order dated 17-2-1986, following the aforesaid consolidated order of the AAC, cancelled the penalty imposed by the ITO Undre Section 271(l)(c) of the Act.
11. Being aggrieved by the orders of the AAC/Commissioner (Appeals), the revenue has come up in appeal before the Tribunal. The learned representative for the department strongly relied on the orders of the ITO and vehemently argued that the orders of the AAC/Commissioner (Appeals) should be set aside and that of the ITO should be restored. Inviting our attention to Section 194A(3)(iv) of the Act, he submitted that since the assessee was not required to deduct tax at source on the interest paid to a partner, the fact that it had done so would not absolve it from the purview of the provisions of Section 27l(l)(c) of the Act. According to him, the assessee ought to have shown the interest paid to Shri Dilipkumar K. Shah in Account No. 2 in Sub-para (B) of Annexure (D) of the return. Since the assessee had failed to do so, the learned representative for the department went on to argue that to that extent the assessee had furnished inaccurate particulars of its income. Inviting our attention to Section 40(b) of the Act, he submitted that since the provisions of that section are applicable to all types of interest paid to a partner, it was not clear how the assessee could have bona fide belief that the provisions of that section would not be applicable in a case where interest is paid to a partner not in respect of his capital account with the firm but in respect of other account like Account No. 2, in the present case. He also submitted that in respect of the assessment years 1976-77 to 1978-79, Explanation to Section 271(l)(c) of the Act, would also be attracted. In this connection, he stated that the provisions of the said Explanation could be invoked at any stage including at the stage of the Tribunal. In support of his various submissions, he relied on the decision in the cases of Mysore Bangle Works v. CIT [1986] 157 ITR 411 (Kar.), Indo-Aden Salt Mfg. & Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR, 624 (SC), CIT v. Khoday Eswarsa & Sons [1985] 152 ITR 423 (Kar.), CIT v. Suleman Abdul Sattar [1983] 139 ITR 8 (Guj.), CIT v. Imiiaz U. Digmar [1987] 163 ITR 229 (Guj.) and CIT v. Rajeshwar Singh [1986] 162 ITR 173 (Punj. & Har.). He, therefore, urged that the orders of the AAC/Commissioner (Appeals) should be set aside and that of the ITO be restored.
12. The learned counsel for the assessee, on the other hand, strongly supported the orders of the AAC/Commissioner (Appeals). In this connection, he submitted that in order to decide the point at issue we have to keep in mind the nature of business carried on both by the assessee and its partner in his individual capacity. Shri Dilipkumar K. Shah had brought in capital to become a partner in the assessee-firm. The interest paid on such capital has to be added back in computing the total income of the assessee by virtue of the provisions of Section 40(b) of the Act. However, since Shri Dilipkumar K. Shah, who was also carrying on Sharafl business in his individual capacity and had numerous transactions with the assessee in the said capacity, separate account, viz., Account No. 2 was maintained in the books of the assessee. The interest paid on such account, by no stretch of imagination, be added back by invoking the provisions of Section 40(b) of the Act, inasmuch as the interest so paid was a pure and simple business expenditure. In this connection, he invited our attention to the decision of the Hon'ble Gujarat High Court in the case of Chhotalal & Co. v. CIT [1984] 150 ITR 276 (FB) wherein, their Lordships have considered the object and purpose of the provisions of Section 40(b) of the Act. The interest on the capital account was hit by the provisions of that section as it was quite possible for an assessee like the present one to siphon off its profits to the partners in the guise of payment of interest to them. Thereafter, he invited our attention to the statements of income filed along with the returns of income and highlighted the fact that at no stage, the assessee had tried to hide from the department the fact that Shri Dilipkumar K. Shah had two accounts, viz., Account Nos. 1 & 2 with the assessee in respect of his capital contribution and Sharafi business respectively. He further submitted that it is no doubt true that the provisions of Section 194A of the Act, would not be applicable in a case where interest is paid to a partner in respect of his capital account. However, since the assessee was under a bona fide belief that Account No. 2 was having a different character, it had deducted tax at source as contemplated Under Section 194A of the Act, in respect of the interest paid to Shri Dilipkumar K. Shah. In this connection, he invited our attention to the provisions of Sections 13 and 48 of the Indian Partnership Act, 1932 with a view to impress upon us that a partner can have dealing with the firm in which he is a partner as a partner as well as an outsider. It is under this impression that the assessee deducted tax at source Under Section 194A of the Act, in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2. Not only that, the assessee had filed particulars of the T.D.S. Under Section 194A of the Act, with the same very ITO who had framed the assessments in the instant case. Thereafter, he again highlighted the fact that the advantage, if at all, taken by the assessee aggregated to Rs. 10,000 (approximately) as against which the ITO has imposed penalty aggregating to Rs. 1.84 lakhs for all the years under consideration. According to him, since all these aspects have been considered by the AAC/Commissioner (Appeals), their orders should be upheld. The learned counsel for the assessee also highlighted the fact that the decision of the Hon'ble Gujarat High Court in the case of Sajjanraj Divanchand (supra) was holding the field when the assessee had filed its returns originally or in compliance with the notices issued Under Section 148/147(a) of the Act. The learned counsel for the assessee also emphasised the fact that even the ratio laid down in the case of Chhotalal & Co. (supra) would clearly support the stand of the assessee that it could have a bona fide belief that the interest paid to Shri Dilipkumar K. Shah in respect of Account No. 2 would not be hit by the provisions of Section 40(b) of the Act. The learned counsel for the assessee also urged that since the ITO had not invoked the provisions of the Explanation to Section 27l(l)(c) of the Act, the same cannot be invoked at this stage. Even assuming for the sake of argument we have to consider the provisions of the said Explanation, the learned counsel for the assesses went on to argue that by virtue of the proviso to the said Explanation, there was no question of imposing penalty Undre Section 271(l)(c) of the Act, as the assessee had clearly explained its bona fides of not adding back the interest paid to Shri Dilipkumar K. Shah in his Account No. 2, as according to it, the provisions of Section 40(b) of the Act were not applicable in this regard. He, therefore, urged that there is no question of interfering with the orders of the AAC/Commissioner (Appeals).
13. The learned representative for the department, in his reply, submitted that we should not take into consideration the provisions of Sections 13 and 48 of the Indian Partnership Act, 1932 as they are not relevant for deciding the point at issue. Similarly, according to him, the assessee could not get any support from the decision of the Hon'ble Gujarat High Court in the case of Sajjanraj Divanchand (supra) as the same had been overruled by a Full Bench of the same High Court in the case of Chhotalal & Co. (supra).
14. We have carefully considered the rival submissions of the parties as well as the material to which our attention was drawn during the course of hearing and are of the view that this is not a fit case for imposing the penalty Undre Section 271(l)(c) of the Act, and therefore, the AAC/Commissioner (Appeals) were justified in canceling the penalty so imposed by the ITO. On the appreciation of the facts as stated above, it cannot be denied that the assessee could have bona fide belief that the provisions of Section 40(b) of the Act could not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 maintained with it. Not only that the assessee had such belief but the ITO himself had accepted the said position in respect of the assessment years 1974-75 to 1977-78. It is no doubt true that except for the assessment year 1976-77, the ITO had framed the assessment Under Section 143(1) of the Act. However, that fact by itself would not justify the ITO to impose penalty Undre Section 271(l)(c) of the Act, on a mere change of opinion that the interest paid to Shri Dilipkumar K. Shah in Account No. 2 would be hit by the provisions of Section 40(b) of the Act. It is also pertinent to note that for the assessment year 1976-77, the ITO had accepted the assessee's stand in the assessment framed Under Section 143(3) of the Act. We find from the material which was placed before the ITO at the time original assessments for these years that the assessee had furnished all the relevant particulars in respect of the interest paid to Shri Dilipkumar K. Shah in his two different accounts maintained in its books. Not only that the assessee had also furnished copies of the contra entries made in the books of Shri Dilipkumar K. Shah in respect of Sharafi business carried on by him in his individual capacity. After considering all these material placed before him, the ITO originally, had accepted the assessee's stand that the provisions of Section 40(b) of the Act would not be applicable in respect of the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 maintained in its books. It was only when he took up the assessment for the A.Y. 1978-79 that the ITO changed his view and came to the conclusion that the provisions of Section 40(b) of the Act would be applicable even in a case in which the assessee had paid interest to Shri Dilipkumar K. Shah in Account No. 2 maintained in its books. Further, it may be true that the provisions of Section 194A of the Act may not be applicable in a case where interest is paid to a partner. However, that fact by itself would not establish that the assessee had any motive to defraud the revenue as has been held by the ITO. We make this observation as the assessee had deducted tax at source aggregating to Rs. 30,000 and had paid to the treasury with all the necessary particulars furnished before the same very ITO. It is also pertinent to note that even if the interest paid to Shri Dilipkumar K. Shah in respect of Account No. 2 were to be added back to the total income of the assessee in each of the years under appeal, the tax effect, as we are told, would work out to Rs. 40,000 in all (approximately). Therefore, even assuming for the sake of argument that the assessee wanted to keep back Rs. 10,000 by way of tax, it is difficult to believe that any body in his senses would do the same in view of the penalty aggregating to Rs. 1.84 lakhs imposable Undre Section 271(l)(c) of the Act. In other words, it is difficult to brush aside the assessee's stand that it was under bona fide belief that the provisions of Section 40(b) of the Act would not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2 maintained in its books. Again, it is worthwhile to note that the decision in the case of Sajjanraj Divanchand (supra) was pronounced on 21-8-1980, while the assessee had filed its returns of income in the year 1981 either Under Section 139(1) or Under Section 148/139(2) of the Act. The ratio laid down in the said decision would have clearly led to believe the assessee that the interest paid to Shri Dilipkumar K. Shah in Account No. 2 would not be hit by the provisions of Section 40(b) of the Act. The said decision was overruled by the Hon'ble High Court only on 16-4-1984 in the judgment in Chhotalal & Co.'s case (supra). Even on the basis of the latter judgment, the learned counsel for the assessee had tried to make out a case that the provisions of Section 40(b) of the Act would not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2. In any event, the learned counsel for the assessee has clearly established a fact that there could be two opinions regarding the treatment to be accorded to the interest paid to Shri Dilipkumar K. Shah in Account No. 2. This fact itself would justify in taking out the assessee's case from the clutches of the provisions of Section 271(l)(c) of the Act. For all these reasons, we have no hesitation in upholding the orders of the AAC/Commissioner (Appeals).
15. Before we part with this order, we will be failing in our duty, if we do not express our appreciation for the manner in which both the learned representative for the department and the learned counsel for the assessee had argued their respective case.
16. In the result, all the appeals are dismissed.