Appellant In .. All Appeals v. S.muthukarupan

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 11.9.2006 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MR.JUSTICE P.P.S.JANARTHANA RAJA T.C.(A) Nos.2195 to 2197 of 2006 The Commissioner of Income TaxTrichy. Appellant in..all appeals Vs. S.Muthukarupan Respondent in..all appeals PRAYER: Appeals under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, 'C' Bench Chennaidated 9.12.2005 in I.T.A.Nos.219/Mds/2003, 220/Mds/2003 and221/Mds/2003 for the assessment years 1992-93, 1994-95 and 1996-97respectively.For Appellant : Mr.J.Narayanaswamy, Junior Standing Counsel J U D G M E N T(Delivered by P.D.DINAKARAN,J.) The above tax case appeals are directed against the order of theIncome-taxAppellateTribunaldated9.12.2005inI.T.A.Nos.219/Mds/2003, 220/Mds/2003 and 221/Mds/2003 for theassessment years 1992-93, 1994-95 and 1996-97 respectively, raisingthe following substantial questions of law: (i)Merely because as on the date of the determination of therental value of the assessee who is one of the co-sharers ofthe property the rental income returned by the other co-owners were interfered with by the Department could be aground for extending the benefit of legality to the assessee?and (ii)In commercial business business activity, when paymentswere made should it be apportioned to the previous loansoutstanding or to the subsequent ones?While the first substantial question of law deals with the lease rent,the second substantial question of law deals with the interest https://hcservices.ecourts.gov.in/hcservices/ attributable to loans. 2. The facts of the case, so far as they are relevant for thedisposal of these appeals, are as under. 2.1. The Revenue is the appellant. For the assessment years 1992-93, 1994-95 and 1996-97, the returns of income filed by the appellantwere processed under Section 143(1)(a) of the Income Tax Act (forbrevity, "the Act"). On subsequent verification, the Assessing Officerfound that the appellant had claimed for each of these assessment yearssubstantial deductions under the head 'business' even though theappellant had not been engaged in any business activity. The deductionsthus claimed primarily comprised interest payments which related toloans taken by the appellant from M/s.Sethu Finance and First Leasing PLtd., a sister concern, for the construction of his residential house atAbhirapuram, Chennai. The Assessing Officer, thus, came to theconclusion that for the assessment years referred to above income hadescaped assessment and reopened all the three assessments by issuingnotices under Section 148 of the Act. LEASE RENT: 2.2.1. On the issue of lease rent, for all the three assessmentyears, the appellant had admitted income towards his one-sixth share inthe lease rent on account of M/s.Rukmani Theatre. However, the AssessingOfficer held that the net lease rents thus admitted by the appellant,i.e, Rs.6739/- for the assessment year 1992-93, Rs.7279/- for theassessment year 1994-95 and Rs.7793/- for the assessment year 1996-97were low vis-a-vis the prevailing market rents. The Assessing Officer,noting that the lessee was none other than M/s.Sethu Cine Corporation, afirm comprising three partners, one of them being the assessee himself,discarded the lease agreement as per which lease rents had been fixedand estimated the assessee's share in the reasonable lease rent atRs.1,50,000/-, and made additions in all the three assessments. 2.2.2. On appeal by the assessee, the Commissioner of Income Tax(Appeals), though noted that the Assessing Officer has not justified hissuspicions with the help of any material or evidence, agreed that therent as has been admitted could not be regarded as reflective of marketrent and he estimated the rent at Rs.1,30,000/- for the assessment years1992-93 and 1994-95 and Rs.1,50,000/- for the assessment 1996-97. 2.2.2. On appeal by the assessee, the Commissioner of Income Tax(Appeals), though noted that the Assessing Officer has not justified hissuspicions with the help of any material or evidence, agreed that therent as has been admitted could not be regarded as reflective of marketrent and he estimated the rent at Rs.1,30,000/- for the assessment years1992-93 and 1994-95 and Rs.1,50,000/- for the assessment 1996-97. 2.2.3. The Tribunal, on further appeal by the assessee, findingthat in the case of other five co-owners, the return income from thesame property has not been disturbed, held that it would be travesty ofjustice if the assessee, one of the co-owner, is solely picked out andan enhanced income attributed in his hands for the same property, andallowed the assessee's appeal. INTEREST ATTRIBUTABLE TO LOANS: 2.3.1. On the issue of interest attributable to loans, theAssessing Officer, during reassessment for these three assessment years,held that the assessee was not entitled to deduction towards interest tothe extent such interest was attributable to loans taken on hisresidential house. As specific details were not available to work outsuch interest, the Assessing Officer worked out the interest inproportion to the investments made by the assessee, year after year,under various heads and allowed interest in respect of those heads inrespect of which income had been offered and, disallowed the balance. 2.3.2. The Commissioner of Income Tax (Appeals), on appeal by theassessee, laid the proposition to work out allowable and disallowableinterests and held that the earlier loans pending as on 31.3.1991 shouldbe adjusted first and only later on the house loan should be adjusted. 2.3.3. The Tribunal, following the ratio laid down in (i) KotturS.Rangaswamy Mudaliar Estate v. ITO, 42 ITD 711; and (ii) Commissionerof Income Tax v. Ashoka Charity Trust, 135 ITR 556, held that the rightof attribution is available to the tax payer to arrange the matters inthe way most favourable to him and allowed the assessee's appeal. 3. Aggrieved by the above common order the Tribunal dated9.12.2005, the Revenue has filed these appeals on the substantialquestions of law referred to above.4.1. Issue: (1) - Merely because as on the date of thedetermination of the rental value of the assessee who is one of the co-sharers of the property the rental income returned by the other co-owners were interfered with by the Department could be a ground forextending the benefit of legality to the assessee? 4.2. As far as the issue of lease rent is concerned, according tothe assessee the property concerned belongs to six co-owners and in caseof five other owners, the return income has not been distributed. 4.3. In Jaswant Rai v. Commissioner of Wealth Tax, 107 ITR 477, itwas held that determination of the value of property by adopting onemethod may vary the estimate made by adopting another method. Theprinciple that if the language of a taxing provision is ambiguous orcapable of more meanings than one, then the court has to adopt thatinterpretation which favours the assessee, applies with full vigour to acase in which different values of the name property are arrived at byadopting different methods. In such a situation, it is fair and properthat the benefit of the method which is most favourable to the assesseeshould be allowed to him and the choice of the method to be adopted fordetermining the value of property should be left to the assessee, andthat under the Wealth-tax Act, 1957, the incidence of taxation is theownership of net wealth. If during the same assessment year the samequantity of wealth in possession of one-co-sharer is subjected to alower rate of taxation, it would be highly improper to burden a similarly situated co-sharer with a higher rate of tax. If such anaction on the part of the assessing authorities is sanctioned, it wouldmilitate against the principle of equality of laws enshrined in Article14 of the Constitution of India. similarly situated co-sharer with a higher rate of tax. If such anaction on the part of the assessing authorities is sanctioned, it wouldmilitate against the principle of equality of laws enshrined in Article14 of the Constitution of India. 4.4. In the case on hand, the Tribunal, after considering the factsand circumstances of the case and the materials available on record,held that the revenue has not reverted to the fixation of lease rent incase of other five co-owners with respect to the same property and thatit would be travesty of justice if the assessee, one of the co-owner,is solely picked out and an enhanced income is attributed in his handsfor the same property, which, no doubt, in our considered opinion, ispurely a question of fact. 4.5. Of course, a question of fact becomes a question of law, ifthe finding is either without any evidence or material, or the findingis contrary to evidence or is perverse or there is no direct nexusbetween the conclusion and the facts upon which that conclusion isbased. A perverse finding is a finding where there is no evidence tosupport it or it is based on material which is irrelevant or partlyrelevant and partly irrelevant or it is based on conjectures or surmisesor partly on these and partly on evidence, or a finding which is soperverse and unreasonable that no person acting judicially and properlyinstructed in law would have arrived at it. The finding recorded bythe Tribunal that it would be travesty of justice if the assessee, oneof the co-owner, is solely picked out and an enhanced income isattributed in his hands for the same property, was based on a correctappreciation of evidence and therefore, no question of law arises fromthe order passed by it. 5.1. Issue: (2) - In commercial business business activity, whenpayments were made should it be apportioned to the previous loansoutstanding or to the subsequent ones? 5.2. The second issue raised in these appeals pertains to thedisallowance of the interest claimed by the assessee under the head"business". The Assessing Officer as well as the Commissioner of IncomeTax (Appeals) held that the payments made by the assessee, when thereare more than one loan outstanding can only be credited in the firstloan in the commercial business reality and therefore, the claim of theassessee that the previous loans stand unpaid and what has been paidonly in relation to the subsequent loans deserves to be rejected.However, the Tribunal, held that the right of attribution is availableto the tax payer to arrange the matter in the way most favourable to himand allowed the assessee's appeals. 5.3. The doctrine of attribution has been emphatically dealt withby Lord Wright in Paton v. IRC 21 TC 626, as under: "...In the ordinary course, a person paying interest does notgenerally appropriate the payment to income or to any particularpiece of income or any specific asset : he has the general bodyof available funds, say his banking a/c, if he has only one, andhe pays by drawing on that a/c, which may include income,borrowed money, capital and so forth. This is what is meant bypayment out of a mixed fund, or payments made out of the generaltill, or payments made neutrally. The Revenue authorities have noright in such cases to appropriate those payments to non-taxablerather than taxable moneys. Hence the tax-payer is given theright of attribution in the way most favourable to himself. It ispresumed in the absence of evidence to the contrary that paymentsare made out of income." 5.4. In this connection we may here highlight the fact that theCalcutta High Court in the case of CIT v. Ashoka Charity Trust [1982]135 ITR 556, took a similar view and held that even though the assesseereceived voluntary contributions from non-charitable institutions, theexpenditure incurred should be considered to have been met from theincome derived from property held by the assessee under trust. 5.4. In this connection we may here highlight the fact that theCalcutta High Court in the case of CIT v. Ashoka Charity Trust [1982]135 ITR 556, took a similar view and held that even though the assesseereceived voluntary contributions from non-charitable institutions, theexpenditure incurred should be considered to have been met from theincome derived from property held by the assessee under trust. 5.5. In the instant case, the Tribunal based on the material andevidence available on record, allowed the assessee's appeal on thisissue and held that the right of attribution is available to the taxpayer to arrange the matters in the way most favourable to him, and thesaid view, in our considered opinion, does not suffer from legalinfirmity to warrant interference. In view of the above, no substantialquestion of law arises for consideration of this Court. In the result, these appeals are dismissed. No costs.Consequently, M.P.No.1 of 2006 in T.C.No.2196 of 2006 and M.P.No.1 of2006 in T.C.No.2197 of 2006 are closed.sasiSd/Asst.Registrar /true copy/ To: Sub Asst.Registrar 1. The Assistant Registrar, Income-tax Appellate Tribunal, Bench 'C' Rajaji Bhavan, Besant Nagar, Chennai 600 090 Income-tax Appellate Tribunal, Bench 'C' Rajaji Bhavan, Besant Nagar, Chennai 600 090 2. The Commissioner of Income Tax, Tiruchirapalli. Tiruchirapalli. 3. The Commissioner of Income-tax (Appeals), Tiruchirapalli-620 001. Tiruchirapalli-620 001. 4. The Asst. Commissioner of Income Tax,Circle -III Tiruchirapalli. Tiruchirapalli. 5. The Commissionr of Income Tax-I, Tiruchirapalli. Tiruchirapalli. 6. The Addl. Commisioner of Income Tax, Special Range, Tiruchirapalli-1. Special Range, Tiruchirapalli-1. 1 CC TO MR.N. MURALI KUMARAN, ADVOCATE SR 42095 T.C.(A) Nos.2195 to 2197 of 2006 11.9.2006 AVA(CO)BP/27.10