TaxTMI 
TaxTMI 
2011 (7) TMI 587
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....being the financial year ending 31.3.2005, at a non-positive income, being at Nil, minus Rs. 193500/- and minus '90650/- for the three assessee-firms. The Assessing Officer (AO) recorded a finding that the assessee's money lending business continued up to March, 2004, and stood taken over by M/s. Muthoot Fincorp Ltd. (MFL), a company incorporated under the Companies Act, 1956, vide agreement dated 1.4.2004. Accordingly, there was no business transacted by the firm/s during the relevant previous year. 2.2 The ld. CIT, on a perusal of the records, was of the view that the allowance of interest on the partner's credit balance as standing in the assessee's books, which stood claimed and allowed as a business deduction, could not have been allowed in assessment in view of the non-carrying of any business by the firm/s during the year. Accordingly, notice/s u/s. 263 was issued, querying the assessee as to why sec. 263 be not applied, and the assessments subject to revision. It was explained by the assessee that it was following cash system of accounting, and had received the interest receivable as on 31.3.2004 during the relevant year. The same constituted business income and, ac....
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....ee's business income for the year and, as such, the finding by the AO - which was relied upon by the ld. CIT for invoking s. 263, i.e., that there was no business during the year, was factually incorrect. If at all, all that could be said is that there was no business with the public during the relevant year. Further on, it was submitted by him that the decision in the case of Standard Triumph Motor Co. Ltd. vs. CIT (supra) was not applicable in the facts of the present case; the assessee's assessment in the past being consistently made on the basis of the actual receipt as per its books of account. On being queried by the Bench that in that case, i.e., the amounts (including interest) receivable as on 31.3.2004 not finding reflection in and, thus, not an asset on the books of the assessee; it following a cash system of accounting, on what basis or consideration was the business transferred? It was explained that, even so, the said interest - as also other receivables - were taken into account in determining the consideration for the take-over. On a further query as to how the interest or other receivables/accrued amounts were received by the assessee when it had transferred the bu....
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....ave transacted business insofar as it relates to realization of interest accrued up to 31/3/2004. Even so, the moot question that would arise, and which remains unaddressed, is: How could the assessee carry on the business, even to the extent of collection of interest accrued for the earlier years, after the transfer of business? Is not collection of interest, it may be asked, an integral part of its business of financing? Clearly, there is an apparent inconsistency between the two findings, and the matter warrants further examination, and which it has not been subject to; no answer forthcoming on this aspect of the matter on a perusal of any of the relevant assessment orders. Besides, we observe income by way of interest from MFL as constituting a major part of the total income, and the character of which has not been commented upon either in the assessment order or by the assessee. Lack of proper inquiry, where warranted, would by itself deem an order erroneous, prejudicial to the interest of the Revenue, as is trite law, affirmed time and again by the higher courts of law, and toward which we may, for ready reference, cite certain decisions, as, inter alia, in the case of Malaba....
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.... of the view that the same would not amount to the conduct of business by the assessee, and the relevant interest income is liable to tax u/s. 176(3A) and not u/s. 28(i). In our view, the matter, before being subject to such conclusive findings, would be required to be factually determined. This is as s. 176(3A) only deems the receipt of income relating to a discontinued business as the income for the year of receipt - nothing more and nothing less. It does not deem that the business is carried out, where none is, as where it is discontinued. Factually speaking, it is only the actual collection of interest that would give rise to income per the assessee's regular method of accounting. In fact, even otherwise, i.e., where the method of accounting is accrual, which difference only marks the point of time when an income is recognized as such, its ultimate recovery is essential and integral to the working of the organization. Can any institution exist or sustain itself without realizing its dues or actually paying its liabilities? As such, without doubt, even de hors the method of accounting, the collection of interest represents a vital and fundamental business activity and, thus, the....
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....ued up to 31.3.2004, i.e., up to immediately before the transfer date (1.4.2004), could be received or realised by the assessee. The Agreement of transfer is explicit on this; the relevant schedule thereto listing the assets transferred along with their respective values, i.e., at which the same stand sold, for each of the three firms, bearing the asset 'interest receivable', and separately for the HO and the Branches. The Agreement also does not cast any responsibility on the assessee to collect the said interest. On the contrary, it seeks to provide the necessary title and legal basis to the 'purchaser', the transferee-company, to proceed against any recalcitrant debtor for recovery of dues, even as conceded to by the ld. AR when he states of the right to receive interest as having been transferred thereto. As such, the assessee has no business to collect the same, and cannot possibly contend to have done so on its own behalf and, consequently, of being engaged in business to that extent; and if at all it did collect interest, it is and can only be for and on behalf of the transferee-company. In fact, not so considering would, apart from being legally infirm, lead to an anomaly a....
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....e invested in business assets, which are not yielding any return or have turned unproductive, and quite another that they no longer represent a business asset, but only a debt on a sale transaction, outside of business, rather constituting its sale consideration itself. 4.5 We may finally address the direction by the ld. CIT with reference to the decision by the apex court in the case of Standard Triumph Motor Co. Ltd. vs. CIT (supra). As also explained by the tribunal, on a similar plea advanced by the Revenue, that the said decision would be applicable in a set of facts and circumstances where the amount is lying to the credit of the assessee's account with the payer, which is open to be drawn on demand. That is, it enjoys an unfettered right to receive the amount at its sole discretion. Could it be said then that the amount is not available with it, or stands not 'received' by it. To cite an example, as an illustration, take the case of monies lying credited in the savings deposit account of the assessee with the bank. Could the non-withdrawal of the amount by the assessee be a valid ground for the non-receipt of the same. The proposition would hold good, and equally, fo....
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....rly, only one of the said two findings by the ld. CIT could hold; the latter deeming the credit of income to the assessee's account by the borrower in his accounts as an effective receipt of income by the assessee, even as we have found, as afore-noted, no factual finding leading to the applicability of the said decision in the present case/s. The question of applicability or otherwise of sec. 176(3A) would have to await determination of the afore-noted factual issues. Further, the interest received from MFL is only under the terms of the transfer agreement; neither the assessee's explanation/s nor the finding/s by the ld. CIT would apply to this part of the income. Its assessment as 'business' income, and allowance of interest u/s. 36(1)(iii) there-against, are patently contrary to the facts on record. In fact, the transfer agreement provides for the payment of the sale consideration by MFL directly to each of the three partners in equal ratio. That being the case, the question that would consequently arise is if any interest on the delayed payment thereof (sale consideration), would at all arise to the transferor-firm, and inure only to its individual partners directly. This will....