Ita/87/2011 Of The Commissioner Of Income Tax,Tvm v. M/S. Muthoot General Finance,Tvm

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR &THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE WEDNESDAY, THE 29TH DAY OF JANUARY 2014/9TH MAGHA, 1935 ITA.No. 87 of 2011 ---------------------AGAINST THE ORDER IN ITA 132/COCH/2010 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 25-11-2010 .............. APPELLANT/RESPONDENT :------------------------------ THE COMMISSIONER OF INCOME TAX, THIRUVANANTHAPURAM BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT/APPELLANT :------------------------------ M/S.MUTHOOT GENERAL FINANCE, PATTOM P.O., THIRUVANANTHAPURAM-695004 BY ADV. SRI.T.M.SREEDHARAN (SR.) SMT.NISHA JOHN SRI.V.P.NARAYANAN SMT.BOBY M.SEKHAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 29-01-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Manjula Chellur, C.J. & A.M. Shaffique, J.- - - - - - - - - - - - - - - - - - - - - - - - - - - - I.T.A. No. 87 OF 2011 - - - - - - - - - - - - - - - - - - - - - - - - - - - - Dated this the 29[th] day of January, 2014 Manjula Chellur, C.J. JUDGMENT The Revenue is before us in the above appeal. The appeal is admitted for consideration of following substantialquestions of law: “1. Whether, on the facts and in the circumstances of the case and in the absence of any material producedto show that the purpose of drawing was to promotebusiness and in view of the failure of the assessee toprove that the funds were given to partners onaccount of “Commercial Expediency” the Tribunal isright in law and fact in deleting the addition ofRs.19,90,753/- sustained by the Commissioner ofIncome Tax (Appeals) ? 2. Whether, on the facts and in the circumstances ofthe case and also in view of the fact that the amountof Rs.3.27 Crores(Rs.3,27,00,000/-) was not creditedto the drawings account of Shri George Jacob andthat the income disclosed in the Return of Incomefiled by Shri George Jacob is not correct - a. did not the Tribunal err in disallowinginterest of Rs.3.27 Crores paid to partnerShri.George Jacob ? b. Did not the Tribunal err in disallowinginterest of Rs.3,27,00,000/- paid to partner ShriGeorge Jacob ? 3. Whether, on the facts and in the circumstances ofthe case, did not the Tribunal err in deleting theadditions made under Sections 40A(3) and 40(a)(ia) ? 4. (a) Whether, on the facts and in the circumstancesof the case and also for the reasons given by theAssessing Officer and the CIT(A) read with Ground G,the Tribunal is right in law and fact in deleting theaddition of Rs.12,18,00,000/- (Twelve Crores eighteenlakhs) made under Sec.68 of the I.T. Act ? (b) In the absence of detailed fund flow statement of the partner along with his balance sheet and netwealth statement being produced, the Tribunal is rightin law and fact in concluding that the partner utilizedthe funds withdrawn from the other two firms fordepositing in the assessee's firm and is not such afinding and conclusion perverse and based on surmisesand conjectures ? 5. Whether, on the facts and in the circumstances ofthe case and the concept of Keyman Insurance being ashighlighted in Ground 'I', the Tribunal is right in law andfact in deleting the premium of Rs.61,29,162/- on“Keyman Insurance Policy” ? 6. Whether, on the facts and in the circumstances ofthe case- a. are not the consideration of variousdisallowances and deletions by the ITAT by wronglyputting the burden of proof b. should not the ITAT have put the assessee toproof ? ” ITA No. 87 of 2011 -:3:- 2. The facts that led to the present appeal in brief are as 5. Whether, on the facts and in the circumstances ofthe case and the concept of Keyman Insurance being ashighlighted in Ground 'I', the Tribunal is right in law andfact in deleting the premium of Rs.61,29,162/- on“Keyman Insurance Policy” ? 6. Whether, on the facts and in the circumstances ofthe case- a. are not the consideration of variousdisallowances and deletions by the ITAT by wronglyputting the burden of proof b. should not the ITAT have put the assessee toproof ? ” ITA No. 87 of 2011 -:3:- 2. The facts that led to the present appeal in brief are as under. The assessee is a partnership concern engaged in thebusiness of money lending and we are concerned with theassessment year 2006-07.Totally four additions made by theAssessing Officer became the subject matter of adjudication beforethe first appellate authority and the second appellate authoritywhich are as under: 1. Interest chargeable on excess drawings effected by thepartners of the firm amounting to `19,90,753/-. 2. Interest paid to one of the partners by name Sri.GeorgeJacob disallowed i.e., `3,27,00,000/-. 3. Introduction of money by Mr.George Jacob, `12,18,00,000/- one of the partners assessed, asincome underother source. 4. Premium of`61,29,162/- paid towards KeymanInsurance which came to be disallowed by the assessing officer. 3. As a matter of fact the assessing officer in respect of the above four additions opined against the assessee whichcame to be challenged before CIT(Appeals). Before CIT(Appeals) ITA No. 87 of 2011 all the four issues went against the assessee in favour ofRevenue. This became the subject matter of challenge beforethe Income Tax Appellate Tribunal wherein the opinion of thefirst appellate authority came to be reversed so far as all the fourissues answering against the Revenue. Therefore, revenue isbefore us in this appeal seeking reversal of the order of theappellate tribunal. 4. So far as the excess drawings effected by thepartners, according to the assessing officer, four partners byname Smt.Sara George, Smt.Susan Thomas, Smt.Elizabath Jacoband Smt. Anna Alexander an amount of `166.30 Crores wasfound during the course of assessment process. The assessingofficer sought explanation from the firm why an interest at 12%should not be charged on the excess drawings made by thepartners. To which the assessee sent a reply on 04.08.2008offering explanation saying as there was credit balance in thecapital account of the partners during the financial year 2004-05,and since no interest was paid to them during the said financialyear to their Profit and Loss account, hence interest chargeable on the current account as on 31.03.2006 was nil, they have notcharged any interest on the over drawings. The said explanationwas not accepted by the assessing officer for the reason that theassessee was in the habit of paying interest on the moneyborrowed by the firm and as a matter of fact the borrowed fundswere diverted for the personal use of the partners, therefore,such expenditure incurred was not used for the business purpose.Hence Section 37(1) of the Income Tax Act has to be applied.He also opined that non payment of interest to the partners inthe previous financial year was irrelevant so far as not charginginterest on the overdrawn amounts. Therefore, by calculatinginterest at 12% per annum assessing officer proceeded todisallow the said amount as interest. However, this came to beviewed from a different angle though `19,90,753/- was made asadditional income by first appellate authority. First appellateauthority while discussing the first issue, referred to partnershipdeed of the partners with regard to the provision for interest onexcess drawings made by the partners. Though approved theopinion of the assessing officer in rejecting the explanation offered by the assessee, Tribunal considered the matter in amore detailed manner. As the assessee firm is dealing in moneylending business the specific rate of interest fixed under Section40(b)(iv) being 12%, same rate of interest is payable by the firmon capital borrowings. It was difficult to believe that firm wasnot charging any interest on the amount drawn in excess by thepartners. It also refers to payment of `3.27 Crores being interestto one of the partners, Sri.George Jacob. From this, payment ofinterest was ascertainable, therefore, according to the firstappellate authority, the assessing officer was justified in adding asum of `19,90,753/- being the interest on the excess drawnamounts by the partners. He also opined that the cash system ofaccounting does not provide any shelter to the explanation madeby the assessee. General procedure followed by theprofessionals where cash system of accounting is followed is alsoindicated. 5. So far as this issue is concerned, he refers to theopinion of the assessing officer and also first appellate authorityin paragraphs, 4, 5 and 6. Paragraph 7 refers to the argumentsplaced before the Tribunal with reference to paper book which ITA No. 87 of 2011 -:7:- was produced for the first time before the Tribunal by theassessee. At paragraph 8 of the order, Tribunal opines that ongoing through the supporting documents filed, the additioncannot be sustained and further opines that the over drawingsmade by the partners should not have been charged withinterest. In other words, it was compensated on account of non-payment of interest against the capital account of the partners inthe previous year. Tribunal also opines that so far as the groupconcern cash system of accounting supports their stand thereforeinterest can be taxed only when it is actually received. Hence,deleted addition of `19,90,753/-. 6. Then coming to the second issue, disallowance of interest paid to one of the partners, Mr.George Jacob i.e.`3,27,00,000/-, the assessing officer opined that there is a debitto the Profit and Loss account of the assessee which indicatestotal interest payment made by them and it amounts to`3,29,86,356/-. Out of this total amount of interest a hugechunk of interest amounting to `3.27 Crores was paid toMr.George Jacob, one of the partners. This was on the basis ofcredit balance appearing in the partner’s current account. But, ITA No. 87 of 2011 however, interest was not seen credited to his drawing account.Further, interest receipt was not disclosed by the assessee in thereturn of income submitted by him for the assessment year2006-07 before the Deputy Commissioner of Income Tax, CircleI, Thiruvalla. On account of this factual situation the claim of theassessee was rejected, therefore this claim of payment ofinterest expenditure `3,27,00,000/- was disallowed. In the Profitand Loss account for the year ending with 31.03.2006, thisamount of `3,27,00,000/- was not shown as income ofMr.George Jacob. So far as the expenditure and incomepertaining to the present assessee, other details are given in theCIT(Appeals) orders. 7. So far as the second issue is concerned, theamounts actually shown as the capital amount of one of thepartners, Sri.George Jacob, were the amounts routed throughother firms and according to the appellate authority, this musthave been done only to circumvent the provisions of Section 40A(3), 40(a) (ia) etc; as all the entries for interest are only in cashentries and no payment reached through the Bank. The entiremoney gone to the other firms only through the device of 7. So far as the second issue is concerned, theamounts actually shown as the capital amount of one of thepartners, Sri.George Jacob, were the amounts routed throughother firms and according to the appellate authority, this musthave been done only to circumvent the provisions of Section 40A(3), 40(a) (ia) etc; as all the entries for interest are only in cashentries and no payment reached through the Bank. The entiremoney gone to the other firms only through the device of partners' account and according to the appellate authority, it isall created for the purpose of avoiding the above provision. Fromthis exercise undertaken by the assessee firm, they draw twosituations which could have been the intention of the assesseefirm. i.e., though the partner has received `3.27 Crores, he didnot offer the same for tax and second, partner has not factuallyreceived the money. According to the first Appellate Authority,it was only in the absence of non-compliance of provisions ofSection 40A(3) etc, such conclusion alone is possible, thereforeaffirms the opinion of the assessing officer in disallowing theinterest expenditure. So far as this aspect of the matter,Tribunal at paragraph 9 onwards discusses the same and opinesthat the term expenditure under Section 40A(3) should not begiven an interpretation so as to adversely affect the assessee andtherefore interest payment to the partners are not covered underSection 40A(3). So far as 40(a)(ia) he accpets the stand of theassessee and according to the Tribunal the interest has beenoffered by the partner in his individual return, therefore, therewas no justification for the assessing officer to disallow theinterest expenditure paid to this partner. ITA No. 87 of 2011 -:10:- 8. Then coming to the thrid issue, introduction of`12.18 Crores by Sri.George Jacob, he refers to the explanationoffered by the assessee to the query made by the assessingofficer, how these amounts are reflected and the explanationwas these amounts are amounts either received back or drawingseffected from sister concern. The explanation was rejected bythe assessing officer for want of proper explanation underSection 68 of the Income Tax Act. So far as the opinion of thefirst Appellate Authority, he refers to the admission made by theassessee that Mr.George Jacob has admittedly introduced capitalto the tune of `12.18 Crores in the appellant firm and thisamount was brought into account by cash shown as drawing fromother firms. The respondent/assessee did not furnish any detailswith regard to the firm from where the said amounts weredrawn, therefore, the assessing officer was justified in suspectingthat genuineness of the transaction and credit worthiness of thesaid firm. According to the first appellate authority, though thestand of the appellant assessee was that these amounts came tothe hand of one of the partners or through other firms i.e.Muthoot Bankers and Muthoot Properties, but no balance sheet ITA No. 87 of 2011 pertaining to these two financial years were filed in support ofthe contention of the respondent/assessee. On the other hand,perusal of the file pertaining to Muthoot Properties and MarGeorge Memorial Medical Centre, the appellant firm has drawndisallowance for investment in the appellant firm. Surprisinglythis `12.18 Crores did not find a place in the books of account ofthe appellant firm. The copy of the current account filed wasrejected and was not taken into consideration. According to thefirst Appellate Authority, the respondent/assessee was under anobligation to establish how this `12.18 Crores came to theacocunt of the appellant firm as the facts were not matchingwith the stand of the assessee, therefore assessing officer wasjustified in opiniing the same as income of the appellant firm. 9. According to the Tribunal, on perusal of records sofar as one of the partners introducing `12.18 Crores with theassessee firm, the various sources of drawings made by himfrom the other firms like Muthoot Bankers and Muthoot Buildershave been filed before the assessing officer, therefore, theassessee was able to establish the stand, since the assessingofficer did not attempt to verify such explanation of the assessee, -:12:- he was not satisfied with the genuineness of the credit. It furtheropines, the assessing officer could have ascertained these factsby verifying the records pertaining to Muthoot Bankers andMuthoot Builders. 10. Then coming to the 4[th] issue with regard todisallowance of premium paid towards Keyman Insurance, theassessing officer opined that the Keyman Insurance policy meansa life insurance policy taken by the person on the life of anotherperson or for the employee of the person who took the policy orwhich was connected in any manner whatsoever with thebusiness of the person who took the policy. Therefore the policybeing taken in the name of partners and in the absence ofpolicies being taken either in the name of employees or anyperson engaged in any manner whatsoever with the business ofthe firm cannot be allowed as expenditure. The Assessing Officeralso opines that since no material was forthcoming indicatingthat the benefit of the policy would ultimately go to therespondent/assessee, the expenditure towards payment ofpremium was disallowable. This opinion of the assessing officerwas confirmed by the first appellate authority by referring to the ITA No. 87 of 2011 -:13:- judgment of Mumbai Bench in the case of Modi Motors. Referringto Section 40B the remuneration payable to the partners andalso Section 31(1)(b) the claim of the respondent/assessee was,there was no impediment to take the policy in the name of thepartners of the firm, therefore, the opinion of the assessingofficer and the first appellate authority was not justified. Inother words, if the policy is taken in the name of a partner, notfor the personal benefit but for the benefit of the firm, it could beconsidered as expenditure to be allowed. Aggrieved by thesefindings of the Tribunal, the Revenue is before us. 11. What we notice from the orders of the firstappellate authority and the appellate Tribunal is that the firstappellate authority as well as the assessing officer did not havethe benefit of checking any of the records which were producedbefore the Tribunal as a paper book. Some of the documentswhich were part of the paper book produced before the Tribunalare placed before us as additional documents by filing anInterlocutory Application. Additional documents are, copies ofaccount of four partners, copy of the common order in the caseof Muthoot Bankers, Trivandrum in ITAT Cochin Bench, ITA No. 87 of 2011 computation of income of Shri.George Jacob and Profit and LossAccount and Balance Sheet of Shri George Jacob, true copy ofthe account of Shri George Jacob, true copy of the account ofShri George Jacob in Muthoot General Finance, true copy of theaccount of Shri George Jacob in Muthtoot bankers and true copyof the account of Shri George Jacob in Muthoot Builders. 12. According to learned Standing Counsel for the ITA No. 87 of 2011 computation of income of Shri.George Jacob and Profit and LossAccount and Balance Sheet of Shri George Jacob, true copy ofthe account of Shri George Jacob, true copy of the account ofShri George Jacob in Muthoot General Finance, true copy of theaccount of Shri George Jacob in Muthtoot bankers and true copyof the account of Shri George Jacob in Muthoot Builders. 12. According to learned Standing Counsel for the appellant/revenue, the additional documents now brought onrecord cannot be taken into consideration as they were not partof material produced before the assessing officer as well as CIT(Appeals). According to him, this argument is based on thediscussion made by the assessing officer and also CIT(Appeals)especially with reference to the explanation given by the assesseeto many queries with regard to the above four issues. He alsobrought to our notice certain discrepencies found in the additionaldocuments contending that these documents do not reflect thecorrect and genuine picture supporting the stand of therespondent/assessee, therefore, no reliance could be placed onthese documents. ITA No. 87 of 2011 -:15:- 13. It is noticed from the orders of the assessingofficer, CIT(Appeals) and the Tribunal that the entire system ofaccounting maintained by the respondent/assessee is by way ofcash. It is also to be noted that similar accounting system ismaintained so far as the sister firms and also the accounts of thepartners including Mr.George Jacob. The stand of therespondent/assessee before both the appellate authorities was,the funds coming to the respondent/assessee was belonging toone of the partners, i.e. Shri.George Jacob and the funds reachedhim through other sister firms, therefore, there is properexplanation so far as `12.18 Crores. So far as non-payment ofinterest on excess amounts drawn by the partners of the firmthey claim that certain capital amounts were available with thefirm in respect of each of the four partners who had drawnexcess amount, and as no interest was paid in the previousfinancial year, they did not charge any interest for theassessment year in question. Similarly payment of `3.27 Croresof interest to one of the partners is also inter-related to the otherissue i.e. Whether Shri George Jacob one of the partners hadbrought `12.18 Crores to the firm. So far as non charging of ITA No. 87 of 2011 interest on `19,90,753/- lakhs overdrawn amount by a partner,the explanation offered by the respondent/assessee at theearliest opportunity before the assessing officer and theexplanation now given also have to be taken into consideration.Now the explanation is, no interest was paid in the previous year,therefore, they need not charge any interest. The first threeissues are interconnected with each other which have to be dealtwith reference to several accounts apart from the account of therespondent/assessee. 14. In order to arrive at a conclusion whether the four partners had excess amount in their account which attractedpayment of interest, was there book adjustment of payment ofinterest has to be analysed with reference to the source ofamounts brought in by those four persons to the respondentfirm. Similarly source for `12.18 Crores as explained by therespondent/assessee has to be analysed with reference to theaccounts of other sister concern firms and personal income taxfile of Mr.George Jacob. 15. In the light of Tribunal placing reliance on paperbook filed by the respondent/assessee in question which never ITA No. 87 of 2011 -:17:- 14. In order to arrive at a conclusion whether the four partners had excess amount in their account which attractedpayment of interest, was there book adjustment of payment ofinterest has to be analysed with reference to the source ofamounts brought in by those four persons to the respondentfirm. Similarly source for `12.18 Crores as explained by therespondent/assessee has to be analysed with reference to theaccounts of other sister concern firms and personal income taxfile of Mr.George Jacob. 15. In the light of Tribunal placing reliance on paperbook filed by the respondent/assessee in question which never ITA No. 87 of 2011 -:17:- was the subject matter of consideration before the assessingofficer and the first appellate authority, we are unable to analysethe controversial issues raised before us with reference to thefactual situation. Even otherwise, this Court need not go into theveracity and genuineness of the facts placed on record now. Inthe light of absence of these additional documents forconsideration before the assessing officer and CIT(Appeals), onecannot conclude that the opinion of the assessing officer and CIT(Appeals) were erroneous. Similarly Tribunal refers to severaldocuments which persuaded reversal of the opinion of theassessing officer and CIT(Appeals).16. In the light of above factual situation, in theinterest of justice the matter is to be remanded back to theassessing officer, who has opportunity of seeking explanation andalso the material available with the explanation of the assessee,to consider the entire matter afresh with reference to thedocuments filed in the form of paper book before the Tribunal.This exercise would bring to light whether the additionaldocuments produced before the Tribunal were part of the recordsavailable before the assessing officer or not and it would also ITA No. 87 of 2011 assist the assessing officer to appreciate the stand of theassessee. Thereafter either accept the explanation or reject thesame depending upon the facts and circumstances whileconsidering the matter afresh on merits. 17. With these observations we set aside the orders of the assessing officer, CIT(Appeals) and the Tribunal. Theassessing officer is directed to proceed with the assessmentproceedings afresh in the light of the above observations takinginto consideration the paper book produced by therespondent/assessee before the Tribunal. Manjula Chellur, Chief Justice. A.M. Shaffique, Judge.