TaxTMI 
TaxTMI 
2012 (4) TMI 854
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....acts leading to the filing of the tax case (appeals) are as follows: (i) The assessee herein is a partnership firm engaged in the business of photography and videography. In the return of income filed for the asst, yrs. 1996-97 to 2000-01, the assessee claimed deduction under s. 40(b) of the IT Act (for short, "the Act"), towards the payment of interest to the partners on the balances in the capital accounts, which was done in terms of the partnership deed. The assessing authority pointed out that the assessee had apportioned the interest in the P & L a/c, without claiming depreciation and the assessee claimed the same in the adjustment statements enclosed to the return of income. A survey was conducted under s. 133A of the Act on the business premises of the assessee. This led to the reopening of the assessment by issuance of notice under s. 147 of the Act to recompute the profit after deducting depreciation and thereby, rework the capital balances of the partners. The assessee resisted the reopening by contending that the interest payable to the partners was rightly determined on the capital balance computed without providing for depreciation. The assessing authority, ho....
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....that before apportioning any interest to the partners' accounts, the depreciation has to be worked out first and then only the partners would be entitled to have the interest credited to the capital account. Referring to the decision in G.R. Govindarajulu Naidu v. CIT, (1973) 90 ITR 13 (Mad), the first appellate authority held that depreciation being a charge on the profit, if the same is not charged, the P & L a/c would show a distorted picture and only after adjustment of depreciation, whatever is remaining would be available for crediting any interest to the partners' accounts, thus, the first appellate authority dismissed the appeals. (iii) Aggrieved by this, the assessee went on appeals before the Tribunal, which once again confirmed the view of the CIT(A) and the Tribunal held that the assessee's practice is improper so far it claimed depreciation in adjustment for income-tax purposes and not charging it to P & L a/c. Insofar as it resulted in inflating the capital account balance by claiming enhanced interest, the Tribunal rejected the said claim. Aggrieved by this, the assessee is on appeals before this Court. 3. Mr. C.V. Rajan, learned counsel appea....
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.... only after considering the depreciation. 5. Learned counsel for the assessee also brought to our attention the decision of this Court in CIT v. Avrcel Ltd., (2008) 296 ITR 85 (Mad) and 295 ITR 77 [sic-CIT v. Sree Senhavalli Textiles (P) Ltd., (2003) 183 CTR (Mad) 453 : (2003) 259 ITR 77 (Mad), on the question of considering the depreciation claim by the assessing authority, when no such claim was made in the accounts. In the background of the said decisions, learned counsel submitted that the denial of deduction under s. 40(b) of the Act is totally illegal and not supported by any provisions of the Act. The consideration of the claim of the assessee by the AO based on book profit is not supported by any provisions of the Act. 6. Countering the claim of the assessee, Mr. T. Ravikumar, learned standing counsel appearing for the Revenue, however, pointed out the factual situation that the assessee has gone in for working out the depreciation deduction after deducting the expenses and interest charged to their capital account, which ultimately, resulted in the net loss. If depreciation is directly debited to the P & L a/c, ultimately, the assessee might not have had sufficient p....
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.... to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.-Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as 'partner in a representative capacity' and 'person so represented', respectively),- (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.-Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.-For the purpo....
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....e to a book profit as a basis on which an interest has to be paid, unlike in the case of salary, the mere score that depreciation is made a charge on the profit, per se, would not justify the claim of the Revenue that the granting of such relief on the gross profit would lead to distorted figures in the matter of working out the real income of the assessee for the purpose of taxation. 10. In the decision in CIT v. Aircel Ltd. (supra), following the decision of the apex Court in CIT v. Mahendra Mills (supra), this Court held that, where an assessee did not avail the benefit of depreciation that benefit could not be forced upon the assessee. As far as the present case is concerned, the question is not as to whether the assessee desired depreciation or not. The question herein is that, at what point could the interest be worked out and considered to be credited to the capital account of the partners for the purpose of considering the claim for deduction. Given the fact that the partnership deed provided for interest payment and what is disallowed under s. 40(b)(iv) of the Act is the rate of interest exceeding 18 per cent simple interest, as it then stood, in the absence of any clea....