COMMISSIONER OF INCOME TAX Vs. MUTHOOT GENERAL FINANCE

JUDGEMENT

(1.) The Revenue is before us in the above appeal. The appeal is admitted for consideration of the following substantial questions of law:

(2.) As a matter of fact the Assessing Officer in respect of the above four additions opined against the assessee which came to be challenged before the Commissioner of Income-tax (Appeals). Before the Commissioner of Income-tax (Appeals) all the four issues went against the assessee in favour of the Revenue. This became the subject matter of challenge before the Income-tax Appellate Tribunal wherein the opinion of the first appellate authority came to be reversed so far as all the four issues answering against the Revenue. Therefore, Revenue is before us in this appeal seeking reversal of the order of the Appellate Tribunal.

(3.) So far as the excess drawings effected by the partners, according to the Assessing Officer, four partners by name Smt. Sara George, Smt. Susan Thomas, Smt. Elizabeth Jacob and Smt. Anna Alexander an amount of Rs. 166.30 crores was found during the course of assessment process. The Assessing Officer sought explanation from the firm why an interest at 12 per cent should not be charged on the excess drawings made by the partners. To which the assessee sent a reply on August 4, 2008, offering explanation saying as there was credit balance in the capital account of the partners during the financial year 2004-05, and since no interest was paid to them during the said financial year to their profit and loss account, hence interest chargeable on the current account as on March 31, 2006, was nil, they have not charged any interest on the over drawings. The said explanation was not accepted by the Assessing Officer for the reason that the assessee was in the habit of paying interest on the money borrowed by the firm and as a matter of fact the borrowed funds were 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 in the previous financial year was irrelevant so far as not charging interest on the overdrawn amounts. Therefore, by calculating interest at 12 per cent per annum the Assessing Officer proceeded to disallow the said amount as interest. However, this came to be viewed from a different angle though Rs. 19,90,753 was made as additional income by the first appellate authority. The first appellate authority, while discussing the first issue, referred to partnership deed of the partners with regard to the provision for interest on excess drawings made by the partners. Though approved the opinion of the Assessing Officer in rejecting the explanation offered by the assessee, the Tribunal considered the matter in a more detailed manner. As the assessee-firm is dealing in money-lending business the specific rate of interest fixed under section 40(b)(iv) being 12 per cent the same rate of interest is payable by the firm on capital borrowings. It was difficult to believe that firm was not charging any interest on the amount drawn in excess by the partners. It also refers to the payment of Rs. 3.27 crores being interest to one of the partners, Sri George Jacob. From this, payment of interest was ascertainable, therefore, according to the first appellate authority, the Assessing Officer was justified in adding a sum of Rs. 19,90,753 being the interest on the excess drawn amounts by the partners. He also opined that the cash system of accounting does not provide any shelter to the explanation made by the assessee. General procedure followed by the professionals where cash system of accounting is followed is also indicated.