Ita/276/2014 Of M/S.muthoot Bankers v. The Commissioner Of Income Tax

IN THE HIGH COURT OF KERALA AT ERNAKULAMPRESENT THE HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, THE 20TH DAY OF JUNE 2019 / 30TH JYAISHTA, 1941 ITA.No.276 of 2014 AGAINST THE ORDER IN ITA 400/201/COCH/2013 of THE INCOME TAXAPPELLATE TRIBUNAL,COCHIN BENCH, DATED 18.07.2014 APPELLANT/RESPONDENT/ASSESSEE: M/S.MUTHOOT BANKERSFORT LIGHT COMPLEX, FORT ROAD, KANNUR.BY ADVS.SRI.T.M.SREEDHARAN (SR.)SMT.DIVYA RAVINDRANSRI.V.P.NARAYANAN RESPONDENT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX1ST FLOOR, AAYAKAR BHAVAN, NEW ANNEX BUILDING, NORTH BLOCK, MANANCHIRA, KOZHIKODE - 673 001. SRI. P.K.RAVINDRANATHA MENON SR. COUNSEL, GOVERNMENT OF INDIA , (TAXES) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20.06.2019, ALONG WITH ITA.277/2014, THE COURT ON THE SAME DAYDELIVERED THE FOLLOWING: 2 IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE C.K.ABDUL REHIM & THE HONOURABLE MR. JUSTICE R. NARAYANA PISHARADI THURSDAY, THE 20TH DAY OF JUNE 2019 / 30TH JYAISHTA, 1941 ITA.No.277 of 2014 AGAINST THE ORDER IN ITA 401/201/COCH/2013 of THE INCOME TAXAPPELLATE TRIBUNAL,COCHIN BENCH, DATED 18.07.2014 APPELLANT/RESPONDENT/ASSESSEE: M/S.MUTHOOT BANKERSFORT LIGHT COMPLEX, FORT ROAD, KANNUR. BY ADVS.SRI.T.M.SREEDHARAN (SR.)SMT.DIVYA RAVINDRANSRI.V.P.NARAYANAN RESPONDENT/APPELLANT/REVENUE: THE COMMISSIONER OF INCOME TAX 1ST FLOOR, AAYAKAR BHAVAN, NEW ANNEX BUILDING, NORTH BLOCK, MANANCHIRA, KOZHIKODE- 673 001. SRI. P.K.RAVINDRANATHA MENON SR. COUNSEL, GOVERNMENT OF INDIA , (TAXES) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20.06.2019, ALONG WITH ITA.276/2014, THE COURT ON THE SAME DAY DELIVERED THEFOLLOWING: 'C.R' C.K. ABDUL REHIM &R. NARAYANA PISHARADI, JJ. ----------------------------------------------------- I.T.A Nos. 276 & 277 of 2014 ------------------------------------------------------- Dated this the 20[th] day of June, 2019 JUDGMENT Abdul Rehim,J Since the parties in both these appeals are common and since both the appeals are filed against a common order ofthe Tribunal, we have considered both the above appealstogether and disposed them through this common judgment. 2.The appellant/assessee, a partnership firm, hadeffected transfer of its selective assets and liabilities to acompany named M/s Muthoot Fincorp Ltd., by virtue of anagreement executed on 01.04.2004. It is not in dispute that theassessee firm had not carried on any business with effect from01.04.2004. But the assessee firm had receipts of amounts fromits customers, to the tune of Rs.17,50,361/- and Rs.2,21,933/-,as gains out of the business conducted earlier, during the The appellant/assessee, a partnership firm, had Since the parties in both these appeals are common and since both the appeals are filed against a common order ofthe Tribunal, we have considered both the above appealstogether and disposed them through this common judgment. 2.The appellant/assessee, a partnership firm, hadeffected transfer of its selective assets and liabilities to acompany named M/s Muthoot Fincorp Ltd., by virtue of anagreement executed on 01.04.2004. It is not in dispute that theassessee firm had not carried on any business with effect from01.04.2004. But the assessee firm had receipts of amounts fromits customers, to the tune of Rs.17,50,361/- and Rs.2,21,933/-,as gains out of the business conducted earlier, during the The appellant/assessee, a partnership firm, had previous years corresponding to the assessment years 2005-06and 2006-07. The assessee filed returns claiming deduction ofexpenses to the tune of Rs.18 lakhs and Rs.5 lakhs, in therespective years, which pertain to interest paid to its partnerswhich were reflected in the capital account of the partners. Thededuction claimed in this regard were disallowed by theAssessing Officer, on holding that, eventhough the incomereceived after discontinuance of business of the firm is taxableunder Section 176(3A) of the Income Tax Act, 1961 (hereinafterreferred to as 'the Act' for short), such receipts cannot beconsidered as income derived under Section 28 of the Act.Appeals filed by the assessee before the Commissioner of IncomeTax (Appeals) were allowed. It was found that the payment ofinterest made to any of the partners can be disallowed only if itdoes not relate to any period falling prior to or after the date ofthe partnership deed or if the payment was not authorised underthe terms of the partnership or if it is not in accordance with anyearlier partnership deed. Going by the provisions contained inSection 40(b) of the Act, it was also found that, anothercondition stipulated is that the interest allowable is only upto the rate of 12%. Having found that the payment of interest, upon which the deductions were claimed, are not in any manneroffending provisions contained in Section 40(b) of the Act, theadditions made by the Assessing Officer on account of thedisallowance with respect to the interest paid to the partners,was deleted from the assessment for both the years. 3.The revenue took up the matter in further appealbefore the Income Tax Appellate Tribunal, Cochin Bench. Throughthe common order impugned herein the Tribunal had reversedthe order of the first Appellate Authority, by holding that, theclaim of the assessee for the deduction with respect to paymentof interest made to the partners, cannot be allowed underSection 40(b) of the Act. Aggrieved by the said order, theassessee instituted the above appeals. 4.Finding of the tribunal is that, since the assessee hasnot carried on any business during the previous years of theassessment years concerned, there arises no question ofcomputing the income (receipts) under the head of businessincome. It was observed that, even if the assessee earned any income after closure of the business, it cannot be said that theinterest paid to the partners is an allowable deduction, unless it isproved that the money borrowed was for the purpose of abusiness which is in existence. It was found that the payment ofinterest made to the partners cannot be considered as anexpenditure incurred with respect to its business activities, whichwas not in existence during the relevant periods. 4.Finding of the tribunal is that, since the assessee hasnot carried on any business during the previous years of theassessment years concerned, there arises no question ofcomputing the income (receipts) under the head of businessincome. It was observed that, even if the assessee earned any income after closure of the business, it cannot be said that theinterest paid to the partners is an allowable deduction, unless it isproved that the money borrowed was for the purpose of abusiness which is in existence. It was found that the payment ofinterest made to the partners cannot be considered as anexpenditure incurred with respect to its business activities, whichwas not in existence during the relevant periods. 5.The appellant points out that, the procedure forassessment of income derived after discontinuance of thebusiness is governed under Section 189 as well as under Section176(3A) of the Act. It is contended that, both these provisionsdo not preclude the Assessing Authority from allowing deductionsunder Section 40(b) of the Act. Evidently, the tribunal haddisallowed the claim by holding that the receipts of the firm, afterdiscontinuance of its business, cannot be considered as profits orgains arising out of the business and therefore the interest paidto the partners cannot be considered as an expenditure incurredwith respect to conduct of the business. Based on the disputedcontentions raised as above, the following questions of law arisefor consideration :- The appellant points out that, the procedure for (1). Whether payment of interest made to the partners of the firm, after discontinuance of its business, is anallowable deduction falling within the purview of Section40(b) of the Act? (2). Whether the claim of deduction with respect to payment of interest made to the partners can bedisallowed, with respect to a firm which discontinued itsbusiness activity, under Section 176 (3A) of the Act? 6. Heard Adv. Nisha John appearing for the appellant and Sri P.K.Ravindranatha Menon, Senior Counsel for Government ofIndia (Taxes) on behalf of the respondents. 7. Section 189 of the Act provides that, where any business carried on by a firm has been discontinued, theassessment shall be made on the total income of the firm as if nosuch discontinuance had taken place. It provides that, all theprovisions of the Act including the provisions relating to levy ofpenalty or any other sum chargeable under any provisions of theAct shall apply, so far as may be, to such assessment.Therefore it is evident that, with respect to a firm which discontinued its business, the assessment need to be made onthe total income of the firm in accordance with the provisionsapplicable for the normal assessments. Learned Senior Counselappearing for the revenue had pointed out that, since the incomereceived pertains to the years succeeding the year in which thefirm had discontinued its business, more appropriate provisionfor assessment of the receipts, is Section 176 (3A) of the Act.Sub-section (3A) of Section 176 provides that, wherein thebusiness is discontinued in any year, any sum received after suchdiscontinuance shall be deemed to be income of the recipient andshall be charged to tax in the year of the receipt, if such sumwould have been included in the total income of the person whocarried on the business, had such sum been received before suchdiscontinuance. Since the discontinuance of the business of thefirm in cases at hand was with effect from 1.4.2004, we are inagreement that the assessment of the income received in anysubsequent year need to be made in accordance with theprocedure contemplated in Section 176 (3A). In the cases athand, the income was received during the previous yearscorresponding to the assessment years 2005-06 and 2006-07. Therefore, going by Sub-Section (3A) of Section 176, suchincome shall be deemed to be the income of the recipient, whichin the cases at hand is the partnership firm. Further, the saidprovision stipulates that such income need to be charged to taxin the year of the receipt, which in these cases are the previousyears corresponding to the above said assessment years. It isfurther stipulated that, such sum received should be included inthe total income of the firm as if it is the income received beforesuch discontinuance. Therefore there cannot be any dispute thatthe income received during the relevant years is to be charged totax in accordance with the provisions contained in Section176(3A). 8.Question arises as to whether such income receivedis profit and gains derived out of the business, coming within thepurview of Section 28 of the Act. The receipts in the cases athand are derived by way of income out of the business activitiescarried on by the firm before its discontinuance. Therefore it hasto be construed that the receipts are profits and gains arose outof the business activity of the firm. Hence the finding of theAssessing Authority as well as the Tribunal that it is not an Question arises as to whether such income received income coming within the purview of Section 28 of the Act, as itis not profit or gains arising out of the business, cannot beaccepted. Therefore we are inclined to hold that the incomecharged to tax, which were received in the subsequent years ofthe discontinuance of the business, can only be treated as profitand gains arose out of the business of the firm, coming withinthe purview of Section 28 of the Act. 9.Next question to be decided is whether the assesseeis entitled to claim deduction on the payments of interest madeto the partners, under Section 40(b) of the Act. Section 40 of theAct carves out exemptions with respect to allowable deductionsenumerated under Sections 30 to 38 of the Act. Sub-clause (b)(iv) of Section 40 provides that, in the case of a firm which isassessable as such, payment of interest to any partner which isauthorised in accordance with the terms of the partnership deed,and relating to any period falling after the date of suchpartnership deed, cannot be allowed as deduction in so far assuch amount exceeds the amount calculated at the rate of 12%simple interest per annum. There is nothing to indicate that inthe case of an assessment under Section 176 (3A), such deductions are not allowable. However, we notice that, underSection 176(3A) the assessment on income received subsequentto the discontinuance of business need to be charged for tax asif such sum was received before the discontinuance of thebusiness. So also, under Section 189 of the Act, with respect tothe assessment of firm which discontinued business, it isprovided that, the total income of the firm shall be assessed as ifno such discontinuance had taken place. Therefore we are of theconsidered opinion that, either under Section 189 or underSection 176 (3A), there is no restriction provided againstallowing the deductions. Hence, while assessing the tax leviableon the income received by the assessee firm during the yearsafter its discontinuance of business under Section 176(3A),deductions are allowable as contemplated under Section 40(b) ofthe Act. Hence both the questions of law framed above, areanswered in favour of the appellant/assessee and against therevenue. 10.Either from the common order of the Tribunalimpugned herein or from the orders of the Assessing Officer orthe first Appellate Authority, it is not clearly discernible as to 10.Either from the common order of the Tribunalimpugned herein or from the orders of the Assessing Officer orthe first Appellate Authority, it is not clearly discernible as to whether the deductions claimed with respect to interest paid tothe partners of the firm would satisfy all the stipulations andrestrictions contained under clause (iv) of Section 40(b) of theAct. Therefore we are of the opinion that the matter requires aremand to the Assessing Officer for recomputing` the extent ofdeductions allowable with respect to both the years, in terms ofSection 40(b)(iv). Under the above mentioned circumstances, both the above appeals are hereby allowed. The impugned common orderpassed by the Income Tax Appellate Tribunal, Cochin Bench ishereby set aside. The Assessment Orders are remitted back tothe Assessing Officer for recomputing the allowable deductions,in terms of the observations and directions contained hereinabove. Sd/- C.K. ABDUL REHIM, JUDGE. Sd/-R. NARAYANA PISHARADI, JUDGE. APPENDIX PETITIONER'S EXHIBITS: ANNX.A:COPY OF THE COMPUTATION OF LOSS FURNISHED ALONG WITHTHE RETURN FOR AY-2005-06.ANNX.B:COPY OF THE ASSESSMENT ORDER DATED 29.09.2010 PASSEDBY THE INCOME TAX OFFICER, WARD-I, KANNUR, FOR AY-2005-06. ANNX.C:COPYOFTHECOMMONORDERINI.T.ANO.98/KNR/CIT/CLT/2010-11 DATED 13.3.2013 PASSED BY THERESPONDENT FOR AY-2005-06.ANNX.D:COPY OF THE SALE AGREEMENT DATED 01.04.2004 EXECUTEDBETWEEN M/S MUTHOOT BANKERS & M/S. MUHTOOT FINCORP LTD.ANNX.E:COPY OF THE COMMON ORDER DATED 18.07.2014 IN I.T.A NO.400/C/13 OF THE ITAT, COCHIN BENCH FOR AY-2005-06 IN ORIGINAL. RESPONDENTS EXHIBITS:NIL APPENDIX PETITIONER'S EXHIBITS ANNX.A:COPY OF THE COMPUTATION OF LOSS FURNISHED ALONG WITHTHE RETURN FOR AY-2006-07.ANNX.B:COPY OF THE ASSESSMENT ORDER DATED 29.09.2010 PASSEDBY THE INCOME TAX OFFICER, WARD-I, KANNUR, FOR AY-2006-07.ANNX.C:COPYOFTHECOMMONORDERINI.T.ANO.99/KNR/CIT/CLT/2010-11 DATED 13.3.2013 PASSED BY THERESPONDENT FOR AY-2006-07. ANNX.D:COPY OF THE SALE AGREEMENT DATED 01.04.2004 EXECUTEDBETWEEN M/S MUTHOOT BANKERS & M/S. MUHTOOT FINCORP LTD.ANNX.E:COPY OF THE COMMON ORDER DATED 18.07.2014 IN I.T.A NO.401/C/13 OF THE ITAT, COCHIN BENCH FOR AY-2006-07 IN ORIGINAL. RESPONDENTS EXHIBITS:NIL TRUE COPY P.A TO JUDGE LSN