Asian Agrico Industries vs Commissioner of Income Tax

R.K. Abichandani, J.—The Income Tax Appellate Tribunal, Ahmedabad Bench ""A"", has referred u/s 256(2) of the Income Tax Act, 1961,

the following questions for the opinion of this court :

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the provisions of the Explanation to

section 271(1)(c) of the Act were attracted and whether the finding of the Tribunal that the assessee has not discharged the burden is against the

evidence and material on record ?

Whether the finding of the Tribunal that the penalty was rightly imposed is reasonable and sustainable or supported by any evidence on record

?

The relevant assessment year is 1972-73. The assessee-firm filed a return of income declaring its total income at Rs. 63,830 on July 19, 1972.

Copies of the trading account, the profit and loss account, etc., were filed along with the return. While scrutinising the books of the assessee, the

Income Tax Officer found that the total amount of interest credited to the accounts of the partners of the firm was Rs. 66,519.

Out of this amount, Rs. 44,030 were credited to the capital account of the partners, Rs. 20,894 to the deposit account of the partners and Rs.

1,595 to the current account of the partners. However, the profit and loss account showed interest paid to the partners only at Rs. 38,353. The

Income Tax Officer found that the assessee had claimed deduction of Rs. 28,163 though not allowable as it was interest paid to the partners on the

plea that this was interest paid to depositors. The Income Tax Officer completed the assessment on October 26, 1974, on a total income of Rs.

1,01,674 adding back, inter alia, interest to partners amounting to Rs. 66,518. The Income Tax Officer also initiated penalty proceedings u/s

271(1)(c) during the course of assessment proceedings and since the minimum penalty imposable on the assessee exceeded the prescribed

difference, he referred the case to the Inspecting Assistant Commissioner of Income Tax u/s 274(2) of the Act. The Inspecting Assistant

Commissioner held that the Explanation to section 271(1)(c) was attracted in the assessee''s case. It was held that the assessee had failed to

explain why the interest to. depositors was shown at Rs. 38,369 which included the amount of interest to partners in their deposit account. The

Inspecting Assistant Commissioner imposed a penalty of Rs. 30,000 on the assessee u/s 271(1)(c) by his order dated March 16, 1977. The

Tribunal confirmed that order in the appeal filed by the assessee, holding that the assessee had not discharged the initial burden cast upon it under

the provisions of the Explanation to section 271(1)(c) of the Act.

At the hearing of this reference, it was urged on behalf of the assessee that the Explanation to section 271(1)(c) was not attracted in the instant

case because on its true construction the total income returned by the assessee would not be less than 80 per cent. of the total income assessed as

reduced by the expenditure incurred bona fide by the assessee as envisaged in the said Explanation. The Explanation to section 271(1)(c) as it

stood at the relevant time read as under :

Explanation. - Where the total income returned by any person is less than eighty per cent. of the total income (hereinafter in this Explanation

referred to as the correct income) as assessed u/s 143 or section 144 or section 147 (reduced by the expenditure incurred bona fide by him for the

purpose of making or earning any income included in the total income but which has been disallowed as a deduction), such person shall, unless he

proves that the failure to return the correct income did not arise from any fraud or any gross or wilful neglect on his part, be deemed to have

concealed the particulars of his income or furnished inaccurate particulars of such income for the purposes of clause (c) of this sub-section.

It is clear from the said Explanation that it can be invoked only where the returned income is less than 80 per cent. of the assessed income after

making certain deductions in the assessed income as provided therein. All expenditure incurred bona fide by an assessee for the purpose of earning

the income is required to be reduced from the total income as assessed even though such expenditure may have been disallowed by the Income

Tax Officer. It appears that the Tribunal and the Inspecting Assistant Commissioner have not taken note of this aspect at all while applying the

Explanation in the case of the assessee. In order to attract the said Explanation the fact which is required to be seen is whether the returned income

is less than eighty per cent. of the total income as assessed after it is reduced by the expenditure bona fide incurred by the assessee for earning the

same, which while making the assessment was for some reason disallowed as deduction. The Explanation for the purpose of reducing the assessed

income takes care of all the expenditure incurred bona fide by the assessee and need not be confined to deductions as are claimable under sections

30 to 43 of the Act. Similar view is taken by the Allahabad High Court in Addl. Commissioner of Income Tax Vs. Modi Rolling Shutter Industries,

and Additional Commissioner of Income Tax Vs. K.S.M. Wazir Mohd. and Sons, and the Gauhati High Court in Sundaram Mahadeo Vs.

Commissioner of Income Tax, .

In the instant case, the income returned by the assessee was Rs. 63,830 and it was assessed by the Assessing Officer at Rs. 1,01,674 and after

appeal, finally at Rs. 98,369. It is not at all disputed that the interest paid to the partners'' deposit account was a bona fide expenditure. The sum

credited to the partners'' deposit account which was disallowed was Rs. 28,163 and having regard to the Explanation to section 271(1)(c) that

amount was required to be reduced from the finally assessed amount of Rs. 98,369 which brought down the figure of assessed income to Rs.

70,206. Eighty per cent. of the said amount would come to Rs. 56,164.80. The assessee had filed the return for a sum of Rs. 63,830. Thus, there

was no question of the assessee filing the return of total income less than eighty per cent. of the total income as assessed and reduced under the

Explanation.

It may also be incidentally noted that the accounts which were filed before the authority disclosed that certain amounts totalling Rs. 5,297.95

were paid by the partners as interest to the firm. As held by the Supreme Court in Keshavji Ravji and Co. v. CIT : [1990]183ITR1(SC) where

two or more transactions on which interest is paid to, or received from, the partner by the firm are shown to have the element of mutuality and are

referable to the funds of the partnership as such, there is no reason why section 40(b) should be so construed as to exclude in quantifying the

interest on the basis of such mutuality. In such circumstances, the interest, if any, paid to a partner by a firm in excess of what is received from the

partner could alone be excluded from deduction u/s 40(b). Reference was made to this amount of Rs. 5,297.95 in order to show that this

explained as to how the figure of Rs. 38,353 of interest paid to partners was arrived at out of the total amount of Rs. 44,030 being the amount

credited to the capital account of the partners. The Tribunal had drawn an adverse inference against the assessee for not being able to explain as to

how the figure of Rs. 38,353 was arrived at. If the mutuality aspect of the transaction is kept into account, then the amount of Rs. 5,297.95 being

the interest paid by the partners to the firm would stand adjusted towards the interest of Rs. 44,030 credited by the firm in the partners'' capital

account.

In view of the above discussion, we hold that the Tribunal was, therefore, not justified in law in holding that the provisions of Explanation to

section 271(1)(c) of the Act were attracted in the case of the assessee. We also hold that the finding of the Tribunal that penalty was rightly

imposed cannot be sustained. The questions referred to us are, therefore, answered in the negative, against the Revenue and in favour of the

assessee.

The reference stands disposed of accordingly with no order as to costs.