TaxTMI 
TaxTMI 
TaxTMI 
2007 (6) TMI 275
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....ng the course of assessment proceedings, the AO noticed that in respect of asst. yr. 2003-04 the capitals of the partners were taken at Rs. 2,58.387 and Rs. 4,08,881 respectively of Smt. Dr. K. Jyothi and Sri Dr. K. Chidambar. Similarly, for the next assessment year, the capitals of the partners were shown at Rs. 2,40,626 and Rs. 4,09,179 respectively and interest was paid to the partners on such capital balance. As could be noticed from the computation of income of the firm, the assessee was not charging depreciation to the P&L a/c, but claimed the same in the computation of total income, thereby creating an artificial increase in the apportioned capitals of the partners. 3. Under the circumstances, the AO was of the view that the capitals of the partners have to be apportioned after reducing the depreciation claimed in the computation of income and by so recomputing, it was noticed that instead of credit balances in the capital accounts, it resulted in debit balances implying thereby that there were withdrawals from the capitals on which the assessee has to charge interest @ 18 per cent per annum. He accordingly disallowed the claim of payment of interest and added back the inte....
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.... any standard accountancy principles and therefore the AO was held to be justified in correcting such error and in recomputing the capitals. Thus, the disallowance of claim of interest payment to partners and the charge of interest on the overdrawals were held to be in accordance with law. 6. With regard to the observations of the Tribunal, Chandigarh Bench, in Sant Shoe Store, upon which the Tribunal, Visakhapatnam Bench, had relied in Ambica Chemical Products, the CIT(A) observed that the case law is distinguishable on facts inasmuch as in the instant case there is no question of rewriting of books of account. The books of account have already been written for all the years. What has been done by the AO is verification of the correctness of the various heads of account, including that of capital balances of partners. In other words, the AO has undertaken an exercise of discovery of the correctness, and on such discovery, gave a finding of fact to the effect that the capital balances of the partners had been artificially inflated so as to claim unwarranted interest expenditure under s. 40(b) which had the result of reducing the taxable incomes for the relevant assessment years. T....
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.... assessee has claimed said deduction in computing its total income. Therefore, the assessee is not permitted to show book profit without claiming depreciation. In other words, the case of the Revenue is that the assessee is not entitled to artificially boost his profits. 9. The learned Departmental Representative has also relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108: (1991) 188 ITR 44 (SC), wherein the Court observed as under: "It is not only the right but the duty of the AO to consider whether or not the books disclose the true state of accounts and the correct income call be deduced therefrom. It is incorrect to say, as contended on behalf of the assessee, that the officer is bound to accept the system of accounting regularly employed by the assessee the correctness of which had not been questioned in the past. There is no estoppel in these matters and the officer is not bound by the method followed in the earlier years." 10. He further contended that in the case of Sant Shoe Store, a sum was credited to capital account of partners on account of revaluation of building owned by assessee firm. The ....
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....wed by the assessee since depreciation was already claimed for the purpose of arriving at the taxable profit for income-tax purposes. However, consistently, the assessee followed the method of not incorporating the same for the purpose of apportionment of profit to the capitals of the partners. He also submitted that accounting standards need not be followed by the firms and if contrary view has to be taken on the issue, the matter requires to be referred to Special Bench in the light of the Division Bench decision of the Tribunal, Visakhapatnam, in the case of Ambica Chemical Products and therefore, he made an alternative request to refer the matter to Special Bench. 14. I have carefully considered the rival submissions and perused the record. The assessee mainly relies upon the decision of Tribunal, Visakhapatnam Bench, in the case of Ambica Chemical Products, which in turn is solely based upon the decision of Tribunal, Chandigarh Bench in Sant Shoe Store and therefore, in order to appreciate the contention of the assessee, the decision in the case of Sant Shoe Store requires to be analysed. In para 12 of the reported decision, the Bench observed as under: "... When capital is ....