Commissioner of Income Tax vs Muthoot Finance Corpn.

S. Sankarasubban, J.—The questions of law are referred to us at the instance of the revenue u/s 256(1) of the income tax Act, 1961 (''the Act''). The questions of law referred are as follows:

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the disallowance of Rs. 6,72,000 out of the claim of interest on borrowings?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in allowing the assessee''s claim of interest, even though the cash system was followed only in respect of that particular item of expenditure?

The assessee, Muthoot Finance Corpn. is a partnership firm dealing in money-lending business. The assessment year in question is 1988-89. The Assessing Officer found that certain amounts were diverted by the partners and for these amounts, the interest was not being paid properly. According to the Assessing Officer, the company was following the mercantile system of accounting. But when it came to the question of interest for the amount which was given on loan to the partners, the firm was of the opinion that it was the cash system that was followed. After looking into the returns and the records, the Assessing Officer took the view that the firm is not in a position to divert funds to its partners without the deposit collected has yielded a total amount of Rs. 7,46,143 by way of interest on borrowed funds. Hence, it disallowed an amount of Rs. 6,72,000 being interest on funds diverted by partners. The appeal filed by the assessee was allowed and against that before the Tribunal, the Assistant Commissioner, Ernakulam, took the matter in appeal. The Tribunal took the view that for the earlier assessment years 1987-88 to 1994-95 payment of interest was verified and that the interest was being accounted for on the advances was given to the partners only on cash basis. On that basis, it was of the view that it is not necessary to take a different view. We heard the counsel for the department as well as the counsel for the revenue.

The counsel for the department submitted that so far as the accounting year 1987-88 is concerned, the matter was not proceeded with because the amount in question was below that prescribed under circulars. He cited before us certain decisions, namely, The Commissioner of Income Tax, Madras Vs. A. Krishnaswami Mudaliar and Others, , Sundaram and Co., Ltd. Vs. Commissioner of Income Tax, Madras, , CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC) to bring the point that the Assessing Officer can under the proviso to section 145 look into the accounts. The Assessing Officer can do so even where the accounts are correct and complete to the satisfaction of the Assessing Officer but the method employed is such that, in the opinion of the Assessing Officer if the income cannot properly be deduced therefrom, then he can compute the income on such basis and in such manner as he determines. During the course of the argument, there was a doubt as to whether the assessee was following the same system of accounting with regard to all the matters. This is because in paragraph 3 of the statement of facts, it is stated as follows:

The case made out by the department is that the claim that the assessee was following the cash system for one item of expenditure alone was not permissible in view of the decision of the Madras High Court in G. Padmanabha Chettiar and Sons Vs. Commissioner of Income Tax, .

But according to the learned counsel for the revenue Shri Mahesh, the firm is having the same system of accounting of all transactions. This matter is not clear from the order of the Tribunal. Further, the counsel for the revenue on the basis of the decision in A. Krishnaswami Mudaliar''s case (supra), Sundaram & Co.''s case (supra) and British Paints India Ltd.''s case (supra) contends that even if in the same system of accounting, the Assessing Officer can exercise the power under the proviso when he finds that the method of accounting is not proper. We may not be able to answer the question referred to us without a decision on the above aspects. Hence, we set aside the order of the Tribunal and direct the Tribunal to reconsider the matter on the basis of the above directions.

ITR is disposed of as above.