TaxTMI 
TaxTMI 
2005 (7) TMI 328
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.... look into all the facts and submissions of the assessee which he will like to further make in regard to the nexus between the borrowed funds and taxes and accounting treatment." 2. Relevant facts, in brief, are that the assessee which is a partnership firm constituted by Dr. D.C. Srivastava, Dr. (Mrs.) Saroj Srivastava and Dr. R.C. Srivastava, as partners, has been running a 'nursing home' under the name and style of Saroj Nursing Home from the premises owned by several persons which included the above named persons also. Such premises are held by the assessee-firm on rent basis and a small portion of the premises as a whole are used by Dr. D.C. Srivastava and Dr. (Mrs.) Saroj Srivastava, husband and wife, respectively, for their residential purposes. These two persons are the main attending doctors in Saroj Nursing Home. Regular assessment order dt. 9th March, 2004 under s. 143(3) was passed by the AO at an income of Rs. 8,74,050 (as against the returned income of Rs. 8,13,600) after making certain disallowances under the heads "staff welfare expenses", "medicine consumed", "vehicle running expenses" and depreciation thereof. The income so determined in terms of the said asses....
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....mbent in the office of the CIT-I, Lucknow, by way of corrigendum to the earlier order. In terms of the corrigendum dt. 27th June, 2005, the mistake in mentioning the status of the assessee in the earlier order, which is subject-matter of this appeal, has been rectified. In view of this development, the ground NO.1 is rejected; further reason being that the mistake is noting down the status in the impugned order is covered by the provisions of s. 292B of the Act. 5. Thereafter, Shri S.K. Garg, the learned counsel for the assessee, addressed us at length on each and every issue on which the learned CIT had sought to exercise his revisionary jurisdiction under s. 263 and as are contained in his notice dt. 20th Jan., 2005. He invited our attention to the query letters/order-sheet entries as have been issued/recorded by the AO from time-to-time during the course of regular assessment proceedings, through which detailed enquiries were made with regard to the expenses claimed in the P&L a/c under various heads (which included expenses under the sub-heads, related to the building that was used for the purposes of business of the firm) as also foreign trips to US as undertaken by Dr. D.C....
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.... as had been claimed through the P&L a/c (and allowed also by the AO) did not include any personal expense. Without bringing any material on record, by way of rebuttal of said contention, the learned CIT could not have exercised his revisionary jurisdiction under s. 263 in this respect. This was moreso in this case "where all such enquiries as were called for on the facts and circumstance of the case had already been considered by the AO, before passing the regular assessment order. 7. As regards expenses on US trip, Shri Garg made a very significant submission. With reference to the material and information on record, it was pointed out that the same related to air ticket expenses only and no expenses whatsoever were claimed for stay in United States as such stay was sponsored by their son, who has been living in USA for a long time. In view of the fact that there was no dispute about the business expediency of foreign trip, no enquiry was called for about the duration thereof. Therefore, unusually long duration of stay abroad could not have been taken as a ground for holding the regular assessment order to be erroneous and prejudicial to the interest of Revenue. This is mor....
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....filed by .the present assessee, against the block assessment order under s. 158BC. In the wake of such a block assessment order, a huge demand was created. A part of the said demand was adjusted through appropriation of cash found at the time of search and balance payments were made from time-to-time. Such payments were not made voluntarily but were made by the assessee for the purposes of continuing to carryon the business and for preservation thereof. But for such payments, the assessee-firm could not have carried on its business activities properly and smoothly. In any case, by making such payments, the assessee has created a business asset which would yield interest income to it, in the event of realization of such asset through the process of refund. Similarly, the payment of Rs. 1.89,406 was also the income-tax refund and the same is at par with the first payment of Rs. 33,06,339. As regards the advance income-tax of Rs. 4 lakhs, this too was the liability of the firm for the current year and looking to the overall accruals of this year as also of 'interest-free funds' as are appearing on the liability side of the balance sheet, it could not be said that any interest-bearing ....
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....the credit balances in the accounts of the partners are treated as borrowings, the same should have been held to be utilized "for the purposes of business" on the peculiar facts as are on record and accordingly payment of interest to the partners on their credit balances could not have been adversely viewed for the purposes of assessment. Similarly, the case of Deys' Medical Stores Mfg. (P) Ltd. vs. CIT (1986) 53 CTR (Cal) 193.' (1986) 162 CTR 630 (Cal) as has been relied upon by the learned CIT in the notice under s. 263, is not applicable on the facts of the case. There the findings are that an overdraft has been taken from the bank and the same was utilized for the purposes of payment of taxes. Admittedly, such is not the position here. The partners had been making capital contributions and such contributions together with accretion thereto, had to be partly utilized for the purposes of payment of tax demands which had wrongfully been created against it. In any case, the tax payments in the present case are meant "for the purposes of business". Therefore, such payments have no bearing on the assessee's claim for payment of interest on the credit balances in the capital accounts ....
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....assessment has been upset by the learned CIT on insufficient grounds. Even in his supervisory jurisdiction under s. 263, CIT cannot cancel an assessment for taking a chance to find out any error in the regular assessment order. The order is, therefore, illegal and the same deserves to be quashed. In any case, the assessment order dt. 9th March, 2004 got merged with the appellate order dt. 29th June, 2004 and accordingly the learned CIT had lost his revisionary jurisdiction under s. 263. 15. We have carefully considered the rival submissions, perused the extensive paper book as also other records as have been placed before us. As far as merger of the assessment order dt. 9th March, 2004 with the appellate order dt. 9th June, 2004 is concerned, we find that none of the issues as have been raised in the notice under s. 263, were subject-matter of appeal before the learned CIT(A), Lucknow. Some other disallowances as had been made on ad hoc basis, were adjudicated upon by the learned first appellate authority. In view of Expln. 1 to s. 263, which came on the statute book w.e.f. 1st June, 1988, all such issues which were not subject-matter of appeal, can be subjected to revision unde....
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....s made on behalf of the assessee before the learned CIT could not be rebutted and no such expenses which can be said to be of personal nature has been pointed out, we hold that the regular assessment order dt. 9th March, 2004 as passed by the AO, accorded fully with the provisions of law and no error has been committed by him. After making all the necessary queries and after obtaining all the requisite information in relation thereto, the AO had taken a view about the admissibility of such expenses. Such a view, which is probable too, cannot be treated to be erroneous in view of the principle laid down by the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. vs. CIT. 18. There is also force in the alternate submission of the learned counsel to the effect that the two doctors are not only the "working partners" in the firm but also the main doctors attending to the nursing home as was being run by the assessee-firm. Their presence and all time availability at the business premises is essential for the purposes of business of the firm, and at least it goes to enhance the goodwill of the 'nursing home'. Therefore, expenditure incurred on maintenance of building (a sm....
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....vities abroad. From a perusal of such details there remains no doubt whatsoever that the foreign tours undertaken by them was to acquaint themselves with the developments, changes that had been taking place in the medical science all over the world. This was certainly in the business interest of the assessee-firm to send the two doctors to undertake a study trip abroad, and it is moreso in the present case as the two doctors are not indulging in individual practice. On a totality of the facts and circumstances of the case, we hold that no disallowance was called for out of foreign travelling expenses which related to air tickets only and no error of law has been committed by the AO in this respect, nor any prejudice has been caused to the interests of Revenue. 20. On both the issues as aforesaid, it is also very relevant to mention that, after carrying out necessary examination, the AO had taken a conscious decision in favour of the admissibility of expenses and such a decision is a plausible one also. Different viewpoint of a superior authority cannot take precedence over the view of the AO, if such a view is probable, so as to interfere with the finality of an assessment. It i....
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....re were debits aggregating Rs. 38,95,745 in the books of the assessee on account of income-tax payments, as appearing under the head "Loans and advances" (Schedule E) appended to the balance sheet as at 31st March, 2002, and made up as under: (i) Income-tax (block assessment) 33,06,339 (ii) Income-tax refundable 1,89,406 (asst. yr. 2001-02) (iii) Advance income-tax 4,00,000 (asst. yr. 2002-03) --------- 38,95,475 --------- In this respect, it is useful to repr....
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....his ratio has been laid down by the Hon'ble Supreme Court in a number of decisions, viz. Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1971) 82 ITR 363 (SC), CIT vs. Kalinga Tubes Ltd. (1996) 131 CTR (SC) 98 : (1996) 218 CTR 164 (SC), Haji Lal Mohd. Biri Works vs. CIT (1997) 140 CTR (SC) 275 : (1997) 224 ITR 591 (SC) , etc. In the case of Kedarnath Jute Mfg. Co., the Hon'ble Supreme Court also held that if, in law, the liability accrued, its accrual will not be defeated or fail by reason of the assessee not making the relevant entries in the books of account. In other words, the accounting treatment giver} by the assessee to a particular item of income or expenditure is not determinative of its true nature. This being the correct position of law regarding the tax treatment of a tax liability. There is no reason why the same should not apply in this case. In this case, a valid assessment under the provisions of the IT Act was made and the amount of tax was paid by the assessee. This being so, there is no escape from the requirement that the amount of tax paid should have been debited to the accounts at the time of payment (since the assessee follows cash system of accounting). As discuss....
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.... balance sheet stand at Rs. 67.33 lakhs. Out of this, a sum of Rs. 62.7 lakhs represents partners' capital (on which interest of Rs. 9.63 lakhs has been paid and allowed by AO). Obviously, almost whole of available funds are in the form of partners' capital. i.e., are interest-bearing. On the other hand application of funds as per balance sheet reveals that funds to the extent of Rs. 39 lakhs (approximately) stood invested in the tax payments to the IT Department mostly as block assessment tax and partly as advance tax. With such a balance sheet available on record even a layman can infer that aforesaid tax payments have direct nexus with the interest bearing borrowed funds. These legal and accountancy aspects were ignored by the AO who made no inquiry. On the other hand there appears an omission on the part of auditors also. Since the direct result of this wrong accounting treatment was under reporting of the firm's income by substantial amount, it was incumbent on the tax auditor to highlight this matter in the tax audit report (Form 3CD). But, the report is completely silent about it. Instead the auditor has certified that the P&L a/c gives a true and fair view of the profit of ....
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....erest-free advances at its own, in the form of income-tax payment. On completion of block assessment in its case, wrongful as it was as found to be by the Tribunal later on in appeal (against the block assessment order), a huge liability was created. Towards such liability, the IT Department itself had appropriated the cash that had been seized at the time of search and later on further payments had to be made as the arrear demand was being enforced for payment. Thus, there was no correlation between the credits as appearing in the capital accounts of the partners on which interest was paid and allowed also in the assessment and the income-tax payments as appearing in the schedule of loans and advances. Further, payment of interest to the partners is not an expenditure related to carrying on of business but is an apportionment of profits of business, between the firm and partners (constituting the firm) which has been made permissible by statutory provision of s. 40(b) of the Act, ever since the asst. yr. 1993-94. Admissibility of such an apportionment is not governed by the provision as contained in s. 36(1)(iii) of the Act. 24. On a careful analysis of the rival viewpoints, we....
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....be made by it. Thereafter, it claimed deduction of sales-tax liability in the year in which it was actually paid. Applying the principle of Ka1inga Tubes Ltd., the apex Court ruled that the liability had accrued in the year in which the notification was issued and such an accrual could not be postponed merely on the ground that the assessee had disputed the same. On this principle, the claim for deduction of sales-tax liability was not allowed. Obviously, none of the facts of the present case are similar to the facts of the case of Hazi La1 Mohd. Biri Works as sales-tax liability is not at par with the income-tax liability. Therefore, the said case law cannot be said to be having any application here. (iv) Kishinchand Chellaram vs. CIT 1977 CTR (Bom) 694 : (1978) 114 ITR 654 (Bom) : In this case the Hon'ble Bombay High Court has held that the deduction of interest under s. 10(2)(iii) of the old Act of 1922 corresponding to s. 36(1)(iii) of the "Act" of 1961, can be allowed only where the borrowings are for the purposes of business. As payment of taxes cannot be said to be 'for the purposes of business' interest paid on borrowings made for payment of taxes cannot be allowed....
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....t in its decision in the case of CIT vs. Sun Engineering Works (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC): "It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete 'law' declared by this Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur vs. Union of India AIR 1971 SC 530, this Court cautioned: 'It is not proper to regard a word, a clause or a sentence occurring in a judgment of this Supreme Court, divorced from its context, as containing a full exposition of th....
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....f. Relevant portion of para 10.2 thereof is reproduced hereunder: "10.2 The facts of the case are that the assessee was arbitrarily subjected to search and seizure action under s. 132(1) of the Act, even though there was no warrant of authorization. Even a block assessment order was passed under s. 158BC of the Act, and in terms of the same, heavy demand of income-tax was created. Even though, whole of the said demand was disputed in the Tribunal, the IT Department brought a lot of pressure to bear upon the assessee-firm to make payment of the same. In order to preserve its business, which itself falls within the phraseology 'for the purposes of business', the assessee had to deposit the demands. All such payments as are classified under the head "income-tax (block assessment year)' represent the payment made in pursuance of the block assessment. As regards payments mentioned at s1. No. (C), the same represent income-tax refundable for the asst. yr. 2001-02...." 27. The moot question for consideration now, is as to whether any error of law has been committed by the AO in the matter of allowance of interest on the capital accounts of the partners, so as to confer jurisdiction ....
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.... borrowings. Therefore, the criterion laid down in s. 36(1)(iii) which allows deduction of interest on borrowings, is not applicable here. From a perusal of the notice dt. 20th Jan., 2005, as also the order dt. 25th Feb., 2005 which is subject-matter of appeal before us, it is noted that the learned CIT has equated the credit balances in the accounts of the partners, with the borrowed funds in relation to which admissibility of interest is governed by s. 36(1)(iii). It is perhaps for this reason that he has referred to various case laws wherein question of admissibility of interest under s. 10(2)(iii) of the old Act, s. 36(1)(iii) of the Act, corresponding to s. 10(2)(iii) of the old Act was involved. It is held at the very outset that the credit balances in the account of the partners are not in the nature of borrowings or debt due to the firm and allowability of interest in the capital accounts of the partners, are not governed by the provisions of s. 36(1)(iii). On the other hand, the contribution made by the partners, in the event of dissolution are applied for payment of debts of the firm and the partners are entitled to share the asset of the firm only after a surplus is left....
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....tative which could mandate that income-tax payment should be routed through the P&L a/c so that the reduced figure of "profit as per P&L a/c" is credited to the accounts of the partners. The "partnership firm assessed as such" is a separate entity and it has to bear its own tax liability. Payments made by it, particularly when the same are of disputed nature, are to be classified separately as its own asset, as the firm itself is entitled to receive back the said payment in the event of a dispute being resolved in its favour. Not only this, interest receivable on such disputed payments, under various provisions of the IT Act, also represent the income of the firm taxable in its own hands. 31. Thus, from whatever angle the matter is examined, the view taken by the learned CIT that the disputed tax payment, as is the case here, should have been adjusted in the accounts of the partners through the related P&L a/c, is not tenable. Even if it is pleaded successfully by the Department, that sound accounting practice demanded such an adjustment, it cannot be applied for the purposes of computation of income under the IT Act. For the IT Act lays down specific provision as to the manner ....
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....all bear interest which will be assessable as income of the partnership firm itself. On the basis of such an analogy, it has to be held that income-tax payments represented interest bearing asset of the firm itself and the same could not have been adjusted against the credit balances appearing in the accounts of the partners. Further, income-tax payments had become necessary in this case in order to preserve the business of the assessee and, therefore, the same were for the purposes of business. For these reasons, payment of interest in the capital accounts of the partners were wholly of independent nature, having no bearing or link with the income-tax payments. 33. Before parting with the matter, we may also mention that while reaching the said conclusion, we have also derived the support and fortification from the decision of Hon'ble Allahabad High Court in the case of CIT vs. Sahara India Savings & Investment Corporation (2003) 185 CTR (AD) 136 : (2003) 264 ITR 646 (All) wherein the following proposition has been laid down: "We do not agree. It is a well settled principle of interpretation of taxing statutes that while interpreting a taxing statute we have only to see the ....
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....legislature contemplated' was made while construing a non-taxing statute. The said rule had only a limited application in interpreting a taxing statute. It follows from this decision that the mischief rule laid down in Heydon's case (1584) 3 Co. Rep 7a has only a limited application to taxing statutes. Hence, there is no question of looking into the legislative intent or spirit of the law in a taxing statute. We have only to see the actual words used. In other words, in a taxing statute we have to go by the letter of the law, and not its spirit or intent. The new definition of the word 'interest' in s. 2(7) is in two parts. Firstly, it says that 'interest' means interest on loans and advances. Secondly, it includes two other items in the definition of the word 'interest'. In our opinion, the only correct interpretation of this provision can be that firstly nothing is interest except interest on loans and advances. Secondly, two other categories are also included in the definition of the word 'interest' as specified in cls. (a) and (b) of s. 2(7). In our opinion, the word 'means' can only have one meaning, that is, it is an exclusive definition vide P. Kasilingam vs. P.S.G.....