TaxTMI 
TaxTMI 
2017 (11) TMI 632
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....yed by a period of 149 days, being filed on 01.02.2016, even as the acknowledgmentcum- notice in respect of the appeals filed by the Revenue is stated as received on 06.08.2015. It was pleaded by the ld. Authorized Representative (AR), Shri T.Banusekar, that it was while preparing for the appeals in the first week of January, 2016, that he realized that the reopening of the assessment could also be challenged. The Cross Objections were accordingly filed on 01.02.2016. A perusal of the case record reveals that the hearing of the Revenue's appeals was fixed for the first time in July, 2015, and on regular intervals thereafter; the relevant dates being 22.07.2015, 29.09.2015, 30.09.2015 and 08.12.2015, i.e., prior to 01.02.2016. On each of these occasions, except 30.09.2015, the assessee sought adjournment through the ld. AR (copy on record). Firstly, therefore, the appeal papers were communicated to the assessee on 16.06.2015, i.e., as per the acknowledgment-cum-notice on record, so that the delay would run from 16.07.2015 onwards, working to 200 days. Why, the authorization on record for representing before the Tribunal (in the favour of its' counsel) is dated 18.7.2015, with the fi....
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.... is a Part IX (of the Companies Act, 1956) company, formed on conversion of a partnership firm M/s. Kali Material Handling Systems, on 01.04.2007. Prior to the conversion, in March, 2007, the said firm revalued its' land, increasing its value by Rs. 202.8 lacs, crediting Rs. 67.6 lacs to each of the three partners. Each of the partners was then paid Rs. 1.1 cr. by the firm by overdrawing on its bank account, which amount was debited in the books of the firm to their respective capital accounts, reducing the capital of the firm to that extent, i.e., Rs. 3.30 cr. This money was deposited by them in their saving bank (s/b) accounts, where it stood parked as on 31.03.2007, and continued to be so up to 27/6/2007, whereat the same was brought back to the firm (since converted into a company - the assessee), issuing them debentures (partly convertible and partly non-convertible) for an aggregate of Rs. 1 cr. each, i.e., for Rs. 3 cr. In the view of the Assessing Officer (AO), there was no fresh infusion of funds to the extent of Rs. 202.8 lacs. He, accordingly, disallowed 2/3 of the assessee's claim for the proportionate premium for the relevant year/s. These facts came to light in the co....
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....stion which arises for being answered in the present case. 5. We have heard the parties, and perused the material on record. 5.1 We shall take up the disallowance of (proportionate) interest (premium) on debentures, i.e., the merits of the issue, first. This is as the same is in any case to be decided, i.e., for AYs 2010-11 & 2012-13, and which would though hold for all the four years, being independent of the legal issue, raising a jurisdictional question. The ld. CIT(A) has regarded the withdrawal of their capital by the erstwhile partners of the firm as a simple case of reduction in the firm's capital, i.e., to the extent of the withdrawal. That is, as independent of the revaluation by the firm of it's land, so that the AO had been unduly influenced by the said revaluation, i.e., of one of its' capital assets by the firm. Delinking the two, i.e., the credit on account of revaluation and withdrawal by the partners of their capital, it is a clear case of succession of a firm by a company, which is not regarded as a transfer u/s.47(xiii), subject to the satisfaction of the conditions stated therein, principally being the taking over of all the assets and liabilities of the su....
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....e firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession; (e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);' We may exhibit this by way of an example, assuming (for the sake of simplicity) land as the only capital asset of the firm: Table - 1A Liabilities (Rs.) Assets (Rs.) Capital 2000 Fixed Assets - Land 1000 Net Current Assets (NCA) (current assets - current liabilities) 1000 Total 2000 Total 2000 Clearly, any withdrawal up to Rs. 2,000/- (by assuming bank credit, or from other sources), depicted as under, would only imply withdrawal of capital: Table - 1B Liabilities (Rs.) Assets (Rs.) Bank Borrowings 2000 Fixed Assets - Land 1000 Net Current Asset....
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....arch, i.e., immediately prior to the conversion, any introduction of (up to) Rs. 6,000/- could not be said to be non-infusion of funds, the 'new' borrowings (from the erstwhile partners) going to either finance acquisition of further assets and/or repayment of the firm's borrowings to any extent. There should apparently be therefore no disallowance of interest on debentures (say) issued against such infusion of funds (or borrowing). This in fact is also the premise of the impugned order. However, we say 'apparently' in-as-much as the same would require, apriori, examining the facts as well as the legal position, delineated in the form of various questions, to none of which the impugned order refers, much less addresses. Could, for instance, the bank borrowings, which stand utilized for withdrawal of capital, be said as made or utilized for business purposes, entitled to interest deduction? Could the capital introduced, restoring status ante, be regarded as infusion of capital? That apart, the fact of the borrowing being from the erstwhile partners is inconsequential insofar as the deduction of interest thereon, and which is what the premium on the redemption of debentures essential....
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....tent, as no partner can predicate his share in any of the assets of the firm. It is only at the time of the dissolution of the firm that its' assets, in excess of that required for meeting its liabilities, can be distributed amongst the partners in the ratio of their respective capitals. And whereat, therefore, in-as-much as an asset may not admit of physical division or be otherwise desirable, revalued to obtain parity between those (partner/s) taking over the asset/s and those not. Equally, a partner, on retirement, can, similarly, instead of being paid in cash, choose his capital to be discharged, wholly or partly, by being allotted a particular asset/s. A revaluation in such a case may follow; would, rather, even as explained in A.L.A. Firm v. CIT [1991] 189 ITR 285 (SC), be desirable in-as-much as it enables the partners to settle their accounts on a more realistic basis. The (Income Tax) law recognizes such situations, contemplating it to be a transfer of the specified asset by the firm to the partner/s (or vice-a-versa, in the event of introduction of an asset by a partner in the firm), deeming in case of distribution or allotment the fair market value thereof as its transfe....
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....he same financial statements to determine the book value of the separate items within each of the categories of fixed assets or for the different categories of fixed assets. In such cases, it is necessary to disclose the gross book value included on each basis. 13.5 Selective revaluation of assets can lead to unrepresentative amounts being reported in financial statements. Accordingly, when revaluations do not cover all the assets of a given class, it is appropriate that the selection of assets to be revalued be made on a systematic basis. For example, an enterprise may revalue a whole class of assets within a unit. 13.6 It is not appropriate for the revaluation of a class of assets to result in the net book value of that class being greater than the recoverable amount of the assets of that class. 13.7 An increase in net book value arising on revaluation of fixed assets is normally credited directly to owner's interests under the heading of revaluation reserves and is regarded as not available for distribution. A decrease in net book value arising on revaluation of fixed assets is charged to profit and loss statement except that, to the extent that su....
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....he firm's - which now has only 50 per cent. of the land, debtor to that extent. The entire value of the asset (land), at Rs. 5,000/- in our example, is one, single amount, representing and forming part of the firm's equity (net worth). The firm's capital to that extent (Rs. 5,000/-) would therefore represent the said asset. As long as therefore the said asset of the firm is retained by it, its' capital cannot be regarded as below the said amount (refer Table-1A/2A). Proceeding further on this conceptual framework, what, then, does the scenarios at Tables 1B/2B represent? The firm has leveraged its capital, reckoned with or without revaluation, to secure borrowings, and no further. That is, the withdrawal by the partners reflects a diversion of the firm's borrowings by them to that extent, which may depict as under: Table - 1C Liabilities (Rs.) Assets (Rs.) Partner's capital Bank Borrowings 1000 2000 Fixed Assets - Land 1000 Net Current Assets (NCA) (current assets - current liabilities) Partner's capital 1000 1000 Total 3000 Total 3000 Table - 2C Liabilities (Rs.) Assets (Rs.) ....
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.... to neutralize (credit) the negative capital. Could the assessee possibly be entitled to deduction of interest on such borrowings, i.e., to that extent these represent the increase in valuation of a firm's (entity's) fixed (capital) asset/s forming part of the capital structure. We think not; it being without any business purpose. That is, while the inflow of funds by the directors, to the extent of Rs. 2,000/-, substituting bank borrowings, would qualify for deduction of interest thereon (or, strictly speaking, on Rs. 1000/-), that in excess, representing only an increase in the valuation by the firm of its capital asset/s, shall not; the same being sans any business purpose, which alone would entitle the borrowing by an assessee for deduction of interest thereon u/s. 36(1)(iii). This, thus, answers the second question arising in the instant case (refer para 3). It may not be out of place to state here that the disallowance of interest (to the proportionate extent), i.e., on Rs. 4,000/- (i.e., the enhanced valuation), has nothing to do either with s. 47(xiii) or the swapping of bank borrowings with that by the directors, being issued debentures. Irrespective of the extent of th....
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.... the bank are deployed in business, though lost through losses, so that it does not result in any increase in net current assets or the net worth of the company), and therefore disallowable u/s. 36(1)(iii). Our graded approach, however, necessitated drawing a distinction between the three categories/scenarios, marked by respective tables, which we may summarize as under: Scenario-1:Borrowing represents the firm's capital (Table-1A/1B). Scenario-2: Borrowing includes enhanced capital, on account of revaluation (Table-2A/2B). Scenario-3: Borrowing includes diversion of capital, i.e., even in excess of capital/enhanced capital (Table-3A/3B). Clearly, only the borrowing, be it from bank or that by the directors, as reflected under Scenario-1, more correctly represented by Table 1C, would be eligible for deduction of interest thereon. Considered thus, the proposition advanced for being accepted by us is in principle very simple. Shorn of all nuances, regard for which however had to be made by us, the simple question that arises for answer in the present case can be presented, with reference to a partnership firm, which entity is entitled to deduction of int....
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....recorded by the AO (copy on record), as well as the cited decision by the Hon'ble jurisdictional High Court. The reasons recorded bring forth the background facts of the case which, as afore-stated, came to surface only during the course of assessment proceedings for AY 2010-11, while verifying the assessee's claim for that year. The assessment for that year was finalized only on 28.03.2013, disallowing the claim for that year. The modus operandi adopted by the assessee-company for issuing debentures to its directors for Rs. 3 cr. in June, 2007 was discovered only during the said proceedings while verifying the assessee's claim for interest on debentures for that year. It is on the basis of these facts, detailed in the reasons recorded, that the AO disallowed the assessee's claim for that year as not genuine but a colorable device and, in any case, the interest expenditure incurred in its respect as not relating to the assessee's business. De hors these reasons, based on the facts that came to light subsequently, the AO could not entertain any reason to believe, which is a prerequisite, a threshold condition, for assuming jurisdiction to initiate proceedings u/s. 147. It is tri....