Patna High Court
Commissioner Of Income-Tax, Bihar And ... vs Maharani Lalita Rajya Laxmi Saheba. on 21 December, 1978
Equivalent citations: (1980)11CTR(PAT)215, [1980]121ITR1012(PATNA)
JUDGMENT
S. K. CHOUDHURI J. - In this reference under s. 66(1) of the Indian Income-tax Act, 1922 (hereinafter to be referred to as "the Act"), by the Income-tax Appellate Tribunal, Patna, the following question of law has been stated for the opinion of this court, namely :
"Whether, on the facts and in the circumstances of the case, the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to Messrs. Ramgarh Industries Coal Co. and is taxable in her hands ?"
The assessee is Smt. Lalita Rajya Laxmi (wife of Raja Bahadur Kamakhya Narain Singh of Ramgarh). The assessment year in question is 1956-57. The assessee was a partner of the firm, M/s. Ramgarh Industries Coal Co. This firm was the managing agent of M/s. Bokaro and Ramgarh Ltd. The principle place of business of the firm is located at 124, Karnani Mansions, No. 25-B Park Street, Calcutta. The assessee had 12 annas share, Kumar Chitra Kumar Pal had 3 annas share and Raja Bahadur Kamakhya Narain Singh 1 anna share. This firm was constituted under an indenture dated the 1st March, 1954, which was to continue for 20 days. The partners were to contribute capital in proportion to their shares. Clause (5) of the indenture of partnership reads thus :
"If any partner shall with the consent of the majority of the partners bring in additional working capital to that required to him under the last preceding clause the same shall be considered as a debt due to him from the partners and shall bear interest at the rate of six per cent. per annum payable yearly."
The assessee, in respect of her income was assessed by the ITO, Hazaribagh. For the aforesaid assessment year for which the relevant accounting period ended on the 31st March, 1956, the assessee filed a return showing a loss of Rs. 1,08,600. The ITO noticed that a sum of Rs. 11,19,396 was advanced by the assessee to M/s. Ramgarh Industries Coal Co. on which the assessee did not charge interest. Accordingly, the ITO calculated interest on that amount at 8 per cent. which came to a figure of Rs. 51,834 and included the same under the head as income from other sources in arriving at the total income of the assessee. The ITO found that the opening balance of the amount lent to M/s. Ramgarh Industries Coal Co. was Rs. 1,82,452 and fresh advances during the year were Rs. 13,11,750 while repayments were Rs. 3,80,805. Thus, the ITO estimated the interest receivable on the advance at 8 per cent. and thus included a sum of Rs. 51,834 in her assessment.
Being aggrieved by the said order, the assessee filed an appeal before the AAC of Income-tax of Ranchi Range, Ranchi. It was argued before the AAC on behalf of the assessee that any interest which might possible have been due to the assessee in respect of the loan advanced by her to the firm, was completely relinquished by a release deed dated the 31st March, 1956, executed prior to the assessment year and that consequently no income accrued to her by way of interest on the loan given by her to the firm. The AAC held that interest accrued from day to day on the aforesaid advances that were made by the assessee. He distinguished the case of E. D. Sassoon & Company Ltd. v. CIT [1954] 26 ITR 27 (SC) on the ground that in the case under consideration the remuneration became due and constituted a debt only at the end of each period of service and no remuneration or commission was payable to the managing agents for the broken periods. The AAC held that the ITO was justified in including in the assessment the interest that had accrued to the assessee during the year of accounting on the advances aforesaid. However, the learned AAC reduced the interest from 8 per cent. to 6 per cent. as the assessee was entitled to such rate of interest under the partnership deed.
The assessee, thereafter, took the matter before the Income-tax Appellate Tribunal, Patna. The Tribunal found that the firm in which the assessee was a partner had already been assessed under the assessment order dated February 22, 1960, by the ITO, Dist. III(1), F. Ward, Calcutta, as an unregistered firm and its total income was determined at a net loss of Rs. 3,966. Therefore, according to the Tribunal, under s. 16(1)(b) of the act, the ITO, Hazaribagh, during the assessment proceeding of the assessee for the relevant year, was entitled to take note of the assessees share inclusive of interest as reported by the ITO, Calcutta, who assessed the firm. On this ground the amount of interest receivable by the assessee from the firm was excluded from the assessment of the assessee. It held that it was not open to the ITO, Hazaribagh, to determine separately the alleged amount of interest receivable by the assessee from the firm in which she was a partner.
The department not being satisfied with the order of the Tribunal got the present reference made. I have already given above the question of law referred to this court for its opinion.
It appears that this tax case was listed for hearing before a Bench constituted of the Chief Justice and B. D. Singh J. The said Bench by an order dated 22nd April, 1968, called for a further statement of the case under sub-s. (4) of s. 66 of the Act directing the Tribunal to give a further opportunity to the parties to adduce additional evidence, if so desired, and hear them before submitting the supplementary statement of the case. The Division Bench was of the opinion that the question as formulated could not be answered on the finding arrived at by the Tribunal. It found that the Tribunal had not decided the question of facts as to whether the assessees method of accounting was mercantile or cash basis. The Tribunal had also not decided as to whether any interest accrued to the assessee from the said loan in spite of a deed of release dated the 31st of March, 1966, or on the basis of the argument advanced by the assessee that the money was given as a simple investment without the idea of earning any interest. The Division Bench also found that the Tribunal did not examine the correctness of the reasoning of the AAC that interest on the money advanced accrued from day to day and not at the end of the accounting period. The Division Bench, therefore, was of the opinion that it was not possible to say whether, on the facts and in the circumstances of the case, Rs. 42,596 accrued as interest to the assessee from the firm. The Bench observed that the second question whether it was taxable in the hands of the assessee would obviously depend on the answer to the first question. At this stage it will be relevant to quote the following paragraphs of the judgment of the High Court. They read thus :
"8. It is true that it was open to Tribunal to hold (as it has done in the main order dated 22nd April, 1964) that the question as to whether Rs. 42,595 accrued as interest to the assessee was academic and that the Income-tax Officer of Hazaribagh had no jurisdiction to assess her in respect of that income unless a proper report was sent by the Income-tax Officer of Calcutta, who assessed the unregistered firm. But, in that view, the question formulated for opinion of this court would not arise. The question them should have been formulated differently as a pure question of law arising on the view taken by the Tribunal regarding the jurisdiction of the Income-tax Officer to assess the assessee on the interest that accrued to her from the loan advanced to the unregistered firm. But the question actually formulated (discussed above) shows that this court is called upon to decide whether on the facts and in the circumstances of the case the sum of Rs. 42,595 accrued as interest to the assessee. This question cannot be decided in the absence of further findings on the facts as indicated above. Similarly, the later part of the question whether the said sum is taxable in her hands may become academic if the Tribunal holds that the said sum did not accrue as interest to her.
9. Both questions are mixed questions of law and fact. The final court of fact must first decide on a careful consideration of the deed of release and other circumstances, as to whether any interest had in fact accrued to the assessee or was received by the assessee during the relevant year. This may, to some extent, depend on what the Tribunal will consider to be the proper method of accounting of the assessee i.e., whether it was mercantile or cash basis. It is only after the Tribunal first gives the answer to this question that the subsequent legal question as to whether the Income-tax Officer, Hazaribagh, had jurisdiction to include the amount in the income of the assessee without awaiting a report from the Income-tax Officer, Calcutta, would arise for consideration. I am, therefore, of the opinion that sub-section (4) of section 66 of the Act should be applied, and the case should be sent to the Appellate Tribunal with a direction to decide, firstly, what was the method of accounting adopted by the assessee and, secondly, whether any income by way of interest either accrued to, or was received by, the assessee during the relevant year bearing in mind the deed of release dated the 31st March, 1956. The Tribunal may give the parties a further opportunity to adduce additional evidence, if so desired, and hear them before submitting the supplementary statement of the case as indicated above. Costs will abide the result.
The reference is answered accordingly."
Thus, the view of the aforesaid judgment of the High Court, a supplementary statement of facts was sent to the High Court. In this supplementary statement the following findings have been given :
"1. (a) The assessee not having followed any regular method of accounting a fair estimate of the income was not possible. The ITO under section 13 of the Act estimated the income on the mercantile basis which finding was not challenged either before the Appellate Assistant Commissioner or before the Tribunal and in the circumstance the computation of income by the Income-tax Officer on mercantile basis became final and conclusive.
Thus, it conclude that the assessee has not followed any regular method of accounting and the ITO under section 13 of the Act was entitled to discard the method of accounting adopted by the assessee and computing the income on mercantile basis.
(b) The method of accounting is a relevant factor for considering the point of time at which the income should be charged to tax.
2. (a) The interest income must be held to have accrued as the assessee had acquired the right to receive that income and it was acknowledged as such and treating it as a debt due, the relinquishment deed came to be executed.
(b) The income by way of interest accrued on March 31, 1956.
3. The relinquishment deed was executed because the income had accrued.
4. There was no receipt of income by assessee."
After this statement was received by this court the case was again place for hearing before the Division Bench consisting of Anwar Ahmad and B. D. Singh JJ. After hearing the counsel for the parties the learned judges by their order dated the 7th May, 1973, again called for a further supplementary statement under power of s. 66(4) of the Act with a direction that the Appellate Tribunal "should make a further supplementary statement of all particulars for deciding the question whether the ITO, Hazaribagh, had jurisdiction to assess the assessee on the interest that accrued to her from the loan advanced to the unregistered firm without awaiting a report from the ITO, Calcutta. The learned judges noticed the two paragraphs quoted above by me, namely, paras. 8 and 9 of the previous judgment of this court, and found that the supplementary statement of facts did not give all necessary particulars for determining the question as to whether the ITO, Hazaribagh, had jurisdiction to assessee the amount alleged to have been earned by the assessee as interest on the loan advanced by her in her income for the year 1956-57.
Thereafter, a second supplementary statement was sent to this court by the Appellate Tribunal, Patna. In para. 7 of this statement :
"In view of the above provisions and particularly in the light of section 16(1)(b) of the Indian Income-tax Act, 1922, it has been held by the Tribunal that the amount of interest, if any, would enter into the determination of the total income of the firm and calculation of assessees share therefrom. If the Income-tax Officer, assessing M/s. Ramgarh Industries Coal Co. had allocated the amount of interest to the assessee while allocating the profits of the firm to the various partners, the same could be included by the Income-tax Officer assessing the assessee in respect of the share of income from the above firm. The law does not provide for the inclusion of any income from interest receivable from the firm unless it is so allocated by the Income-tax Officer making assessment on the firm".
The case has now been placed for fresh hearing. It has been contended by Mr. Rajgarhia that the direction given by this court in its first judgment dated 22nd April, 1968, for giving an opportunity to the parties to adduce additional evidence was not justified as under powers of the High Court under s. 66(4) it had no jurisdiction to give such a direction but could call for only a further statement of facts. The learned counsel pointed out that under the said sub-s. (4) "the court may refer the case back to the Appellate Tribunal to make such additions thereto or alterations therein as the court may direct in that behalf" and therefore this court has no power to allow the parties to adduce additional evidence. This objection, in my opinion, does not bear any ground as Mr. Jain, appearing for the assessee-opposite party, pointed out that neither party had adduced any further additional evidence in pursuance of this direction. As such this objection is not necessary to be discussed any further.
It was next argued by Mr. Rajgarhia, that interest having accrued to the assessee is an income, the same was taxable and, therefore, the Tribunal erred in excluding the said interest receivable from the firm, M/s. Ramgarh Industries Coal Co., as a separate item of assessable income. Mr. Jain was fair in contending that the main question in this case is whether the said interest could be included in the taxable income of the assessee. According to the learned counsel if it can be so included then of course he would not challenge the taxability of such income. He was fair enough not to challenge any of the findings of the Tribunal.
It cannot be disputed that the method of accounting is only relevant to find out as to at what point of time the amount under consideration was chargeable to tax. In the cash system of accounting the income attracts tax only when it is received. In this system the income can be charged in the year in which it is received or realised, whereas in the mercantile system the income is taxable when it accrues and not when it is received or realised.
In the present case the ITO, Hazaribagh, in the absence of the assessee not having followed any regular method of accounting, under the proviso of s. 13, exercised his power and accordingly assessed the assessee on mercantile basis. It appears that this method which was adopted by the ITO was not challenged either before the AAC or before the Tribunal. Therefore, according to this method, chargeability of the amount to tax would be determined on its accrual. The Tribunal in a supplementary statement dated March 28, 1970, after elaborate discussion, has come to a finding that the interest accrued to the assessee as the assessee had acquired a right to receive that income and it was acknowledged as such and treating it to be a debt due, a relinquishment deed was executed. It has been pointed out in that statement that as per cls. 5 and 18 of the partnership deed a statement of account as on March 31, 1956, was prepared and the excess capital contributed was worked out and the interest calculated came to Rs. 42,594-15-7. It has also been pointed out that one of the partners of the firm wrote a letter to the assessee on that very day pointing out that the financial position of the firm was in jeopardy and the firm was not earning any profit and, therefore, requesting the assessee to relinquish her claim in the aforesaid interest. A reply was given by the assessee on that very date stating that her accountant has examined the statement and confirmed that a sum of Rs. 42,696-15-7 was due on account of interest from the firm up to date. She, therefore, released her claim for the aforesaid amount of interest in favour of the firm till it was able to earn profits. In these set of circumstances it must be held that interest accrued to the assessee. The finding in the first supplementary statement that interest accrued to the assessee was also not challenged by Mr. Jain and it must be held to have been correctly decided.
The next vital question for determination is as to whether interest which was accrued to the assessee as a partner of the firm could be included in the income of the assessee without awaiting a report from the ITO, Calcutta. In other words, the question is as to whether the ITO, Hazaribagh, could straightway take into consideration the interest which has accrued to the assessee as a partner of the firm and could include it as a separate item of taxable income of the assessee. I have already pointed out above that the Tribunal in its supplementary statement has recorded a finding that the amount of interest which has accrued to the assessee was not received by her. This position has not been disputed by any of the parties at the Bar.
In order to answer the aforesaid question it is necessary to read s. 16(1)(b) of the Act upon which both parties have placed reliance :
"16. Exemptions and exclusions in determining the total income. - (1) In computing the total income of an assessee - ........
(b) when the assessee is a partner of a firm, then, whether the firm has made a profit or a loss, his share (whether a net profit or a net loss) shall be taken to be any salary, interest, commission or other remuneration payable to him by the firm in respect of the previous year increased or decreased respectively by his share in the balance of the profit or loss of the firm after the deduction of any interest, salary, commission or other remuneration payable to any partner in respect of the previous year :
Provided that if his share so computed is a loss, such loss may be set off or carried forward and set off in accordance with the provisions of section 24."
Under this provision the ITO while computing the total income of the assessee as a partner of the firm has to include in his/her share the interest which is payable to him/her by the firm in respect of the previous year increased or decreased respectively by his/her share in the balance of profit or loss of the firm after deducting the interest payable to him/her in respect of the previous year. It is the admitted fact that the firm has been assessed and the total income has been determined by the ITO, Calcutta, at a loss of Rs. 3,966 by order dated February 22, 1960. This assessment has been made by the ITO, Calcutta, in pursuance of the provisions of s. 64 of the Act. It is not disputed that the assessee has been assessed in the previous year and her total income has been determined in the past every year by the ITO, Hazaribagh, and not by the ITO, Calcutta.
The provision for assessment of the firm has been laid down in s. 23 of the Act. Sub-sec. (6) makes a provision for notifying to the firm by an order in writing the amount of the total income on which the determination has been based and the apportionment thereof between the partners, if the unregistered firm is assessed as a registered firm. Thus, s. 6 is not relevant in the present case. I have already pointed out above that the total income of the assessee as a partner of the firm has been determined in the past by the ITO, Hazaribagh, and for the relevant year it has been determined by the same ITO. It is not disputed that the ITO, Calcutta, has not assessed the assessee in any year in her total income. The determination under s. 16(1)(b) of the Act will depend upon the availability of the allotment of the assessees share in the balance of loss of the firm after the deduction of interest payable to her. When this figure is made available to the ITO assessing the assessee only then he would be in a position to determine the item covered by s. 16(1)(b) so as to include the same as a separate item in her total income. The ITO in determining the item covered by s. 16(1)(b) in arriving at the total income of the assessee could not afresh determine the assessees share of loss in the balance of loss of the firm which could be determined only by the ITO assessing the firm. In the present case, however, the total interest calculated at the rate of 6 per cent. has been taken as the assessable income without application of the principle of s. 16(1)(b) of the Act. By no stretch of imagination this could have been done. In my opinion, therefore, the Tribunal cannot be said to have committed any error of law in excluding the amount of interest which has accrued to the assessee. The Tribunal was, therefore, perfectly justified in the absence of an order of allotment from the ITO assessing the firm in excluding the amount of interest which has accrued to the assessee as a partner of the firm as a separate item of assessable income In view of the discussion made above the answer to the first portion of the reference, namely, as to whether in the facts and circumstances of the case, the sum of Rs. 42,595 accrued as interest on the advances made by the assessee to M/s. Ramgarh Industries Coal Co., is in affirmative and against the assessee whereas the second part of the question, namely, as to whether the said amount was taxable in the hands of the assessee, for the reasons recorded above, is answered in the negative and in favour of the assessee. The reference is answered accordingly. As the assessee has succeeded substantially she is entitled to costs. Hearing fee is assessed at Rs. 200.
S. SARWAR ALI J. - I agree.