Muthoot Bankers, Thalassery v. Income Tax Officer, Kannur

ITA 103/COCH/2009 | 2005-2006
Pronouncement Date: 29-07-2011

Appeal Details

RSA Number 10321914 RSA 2009
Assessee PAN AAEFM5249H
Bench Cochin
Appeal Number ITA 103/COCH/2009
Duration Of Justice 2 year(s) 1 month(s) 10 day(s)
Appellant Muthoot Bankers, Thalassery
Respondent Income Tax Officer, Kannur
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Bench Allotted DB
Tribunal Order Date 29-07-2011
Date Of Final Hearing 02-06-2011
Next Hearing Date 02-06-2011
Assessment Year 2005-2006
Appeal Filed On 19-06-2009
Judgment Text
1 IN THE INCOME TAX APPELLAT E TRIBUNAL COCHIN BEN CH COCHIN BEFORE S/SHRI N.VIJAYAKUMARAN JM AND SANJAY AR ORA AM I.T.A. NOS. 103 104 & 160/COCH/2009 ASSESSMENT YEAR:2005-06 M/S. MUTHOOT BANKERS ELLIKKA CENTRE PIER ROAD TELLICHERRY- 670 101. [PAN: AAEFM 5249H] M/S. MUTHOOT BANKERS EMIRATES ARCADE MAHE. [PAN:AAIFM 4815D] M/S. MUTHOOT BANKERS PMC- 21/1711 2 ND FLOOR CITY BLDGS. OPP. MUNICIPAL BUS STAND PAYYANNUR-670 307. [PAN:AAEFM 3522B] VS. THE I.T.O. WARD-1(2) KANNUR. THE I.T.O. WARD-1(2) KANNUR. THE I.T.O. WARD-1(4) KANNUR. (ASSESSEE -APPELLANT) (REVENUE-RESPONDENT) ASSESSEE BY SHRI R.SREENIVASAN CA-AR REVENUE BY SHRI S.R.SENAPATI SR.DR O R D E R PER SANJAY ARORA AM: THESE ARE A SET OF THREE APPEALS ARISING OUT OF SE PARATE ORDERS BY THE COMMISSIONER OF INCOME-TAX KANNUR (CIT FOR SHORT ) U/S. 263 OF THE INCOME-TAX ACT 1961 ('THE ACT' HEREINAFTER) FOR THE ASSESSMENT YEA R (A.Y.) 2005-06 IN RESPECT OF THREE DIFFERENT ASSESSES. THE FACTS OF THE CASE AS WELL A S THE CASE OF THE OPPOSING PARTIES BEFORE US BEING THE SAME THE APPEALS WERE HEARD TO GETHER AND ARE BEING DISPOSED OF VIDE A COMMON CONSOLIDATED ORDER. 2 2.1 THE BRIEF FACTS OF THE CASE ARE THAT THE A SSESSEE-FIRM IS IN THE BUSINESS OF FINANCE PRIMARILY ON THE SECURITY OF GOLD ORNAMENTS FOLLOW ING CASH SYSTEM OF ACCOUNTING. THE ASSESSMENT STOOD MADE U/S. 143(3) OF THE ACT BY ACC EPTING THE RETURNED INCOME. IN EACH OF THE THREE ASSESSMENTS HOWEVER THE ASSESSEE FIL ED ITS RETURN OF INCOME FOR THE RELEVANT PREVIOUS YEAR BEING THE FINANCIAL YEAR ENDING 31.3 .2005 AT A NON-POSITIVE INCOME BEING AT NIL MINUS ` 193500/- AND MINUS ` 90650/- FOR THE THREE ASSESSEE-FIRMS. THE ASSESSING OFFICER (AO) RECORDED A FINDING THAT THE ASSESSEES MONEY LENDING BUSINESS CONTINUED UP TO MARCH 2004 AND STOOD TAKEN OVER BY M/S. MUTHOO T FINCORP LTD. (MFL) A COMPANY INCORPORATED UNDER THE COMPANIES ACT 1956 VIDE AG REEMENT DATED 1.4.2004. ACCORDINGLY THERE WAS NO BUSINESS TRANSACTED BY TH E FIRM/S DURING THE RELEVANT PREVIOUS YEAR. 2.2 THE LD. CIT ON A PERUSAL OF THE RECORDS W AS OF THE VIEW THAT THE ALLOWANCE OF INTEREST ON THE PARTNERS CREDIT BALANCE AS STANDIN G IN THE ASSESSEES BOOKS WHICH STOOD CLAIMED AND ALLOWED AS A BUSINESS DEDUCTION COULD NOT HAVE BEEN ALLOWED IN ASSESSMENT IN VIEW OF THE NON-CARRYING OF ANY BUSINESS BY THE FIRM/S DURING THE YEAR. ACCORDINGLY NOTICE/S U/S. 263 WAS ISSUED QUERYING THE ASSESSEE AS TO WHY SEC. 263 BE NOT APPLIED AND THE ASSESSMENTS SUBJECT TO REVISION. IT WAS EXPLAI NED BY THE ASSESSEE THAT IT WAS FOLLOWING CASH SYSTEM OF ACCOUNTING AND HAD RECEIVED THE INT EREST RECEIVABLE AS ON 31.3.2004 DURING THE RELEVANT YEAR. THE SAME CONSTITUTED BUSI NESS INCOME AND ACCORDINGLY INTEREST TO THE PARTNERS WAS ALLOWABLE AS A BUSINESS DEDUCTI ON. THE AO HAD IN ANY CASE TAKEN A REASONABLE VIEW OF THE MATTER SO THAT THE ASSESSME NT WAS NOT LIABLE FOR REVISION IN TERMS OF THE SETTLED LAW CITING THE DECISION BY THE APEX COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (2007) 295 ITR 282 (SC). THE LD. CIT DID NOT HOWE VER FIND THE SAME AS ACCEPTABLE. THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (1993) 201 ITR 391 (SC) HAD CLARIFIED THAT EVEN WHERE THE INCOME I S TAXABLE ON CASH BASIS IT WOULD BE LIABLE TO BE ASSESSED WHERE THE PAYER HAD CREDITED THE AMOUNT IN HIS BOOKS OF ACCOUNTS TO THE ACCOUNT OF THE PAYEE. AS SUCH THE INCOME OF T HE ASSESSEE WAS LIABLE TO BE RE-WORKED IN VIEW OF THE SAID DECISION BY THE APEX COURT. FU RTHER THE AO HAS GIVEN A CATEGORICAL 3 FINDING THAT THE BUSINESS OF THE ASSESSEE-FIRM WAS TAKEN OVER BY A COMPANY OF THE SAME GROUP AND THUS THERE WAS NO BUSINESS DURING THE YE AR AND ACCORDINGLY NO INTEREST TO THE PARTNERS INCLUDING ON THEIR OPENING CAPITAL WAS T O BE ALLOWED AND WAS THEREFORE PRIMA FACIE DISALLOWABLE. THE INTEREST FOR EARLIER YEAR/S REC EIVED DURING THE YEAR WOULD NOT BE ASSESSABLE U/S. 28 BUT U/S. 176(3A). IN VIEW OF T HE SAID FACTUAL AND LEGAL POSITION WHICH WAS NOT CONSIDERED BY THE AO WHILE FRAMING THE ASSE SSMENT HE SET ASIDE THE ASSESSMENT/S DIRECTING THE ASSESSING AUTHORITY TO REDO THE SAME AFTER AFFORDING A REASONABLE OPPORTUNITY TO THE ASSESSEE KEEPING THE OBSERVATIONS BY HIM IN VIEW. AGGRIEVED THE ASSESSEE IS IN APPEAL. 3.1 BEFORE US IT WAS SUBMITTED BY THE LD. AR THE ASSESSEES COUNSEL THAT EVEN AS STATED IN THE IMPUGNED ORDER THE QUERY WITH REGARD TO THE ALLOWANCE OF INTEREST ON THE PARTNERS CAPITAL AROSE ON THE BASIS OF A SUBSEQUEN T OBSERVATION BY THE INTERNAL AUDIT PARTY. A REVISION IS NOT PERMISSIBLE ON THAT BASIS AS IT IS THE OPINION OF THE AO AS THE ASSESSING AUTHORITY AND NOT THAT OF ANY OTHER THA T IS RELEVANT; IT BEING TRITE LAW THAT A MERE CHANGE OF OPINION WOULD NOT ENTITLE REVISION AND FOR WHICH REFERENCE WAS MADE BY HIM TO THE DECISIONS BY THE APEX COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (SUPRA) AND MALABAR INDUSTRIAL CO. LTD. VS. CIT (2000) 243 ITR 83 (SC). ON MERITS IT WAS ARGUED BY HIM THAT THE ASSESSEE HAD RECEIVED INTEREST ACC RUED UP TO 31.3.2004 DURING THE RELEVANT PREVIOUS YEAR AND WHICH THUS CONSTITUTED THE ASSESSEES BUSINESS INCOME FOR THE YEAR AND AS SUCH THE FINDING BY THE AO - WHICH WA S RELIED UPON BY THE LD. CIT FOR INVOKING S. 263 I.E. THAT THERE WAS NO BUSINESS D URING THE YEAR WAS FACTUALLY INCORRECT. IF AT ALL ALL THAT COULD BE SAID IS THAT THERE WAS NO BUSINESS WITH THE PUBLIC DURING THE RELEVANT YEAR. FURTHER ON IT WAS SUBMITTED BY HIM THAT THE DECISION IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA) WAS NOT APPLICABLE IN THE FACTS OF THE PRESENT CASE; THE ASSESSEES ASSESSMENT IN THE PAST BEING CONSISTENTLY MADE ON THE BASIS OF THE ACTUAL RECEIPT AS PER ITS BOOKS OF ACCOUNT. ON BEING QUERIED BY THE BENCH THAT IN THAT CASE I.E. THE AMOUNTS (INCLUDING INTEREST) RECEIV ABLE AS ON 31.3.2004 NOT FINDING REFLECTION IN AND THUS NOT AN ASSET ON THE BOOKS OF THE ASSESSEE; IT FOLLOWING A CASH 4 SYSTEM OF ACCOUNTING ON WHAT BASIS OR CONSIDERATIO N WAS THE BUSINESS TRANSFERRED? IT WAS EXPLAINED THAT EVEN SO THE SAID INTEREST - AS ALS O OTHER RECEIVABLES - WERE TAKEN INTO ACCOUNT IN DETERMINING THE CONSIDERATION FOR THE TA KE-OVER. ON A FURTHER QUERY AS TO HOW THE INTEREST OR OTHER RECEIVABLES/ACCRUED AMOUNTS W ERE RECEIVED BY THE ASSESSEE WHEN IT HAD TRANSFERRED THE BUSINESS FOR A CONSIDERATION; T HE PROPERTY THEREIN NO LONGER BELONGING TO THE ASSESSEE-FIRM I.E. WITH EFFECT FROM 1.4.20 04 BUT ONLY IN THE TRANSFEREE-COMPANY IT WAS REPLIED BY HIM THAT WHAT ALONE WAS TRANSFERRED WAS THE RIGHT TO RECEIVE THE INTEREST. 3.2 THE LD. DR ON THE OTHER HAND WOULD SUBMI T THAT IT IS APPARENT THAT THE INTEREST ON THE PARTNERS CAPITAL IS DISALLOWABLE EVEN AS STAT ED BY THE LD. CIT IN VIEW OF THE CLEAR FINDING IN THE ASSESSMENT ORDER(S) THAT NO BUSINESS WAS TRANSACTED OR UNDERTAKEN BY THE ASSESSEE DURING THE RELEVANT YEAR. THE RECEIPT OF I NTEREST SINCE ACCRUED AND PAYABLE WOULD STAND TO FORM PART OF THE TOTAL INCOME AND A CCORDINGLY BE ASSESSED BY VIRTUE OF S. 176(3A) I.E. INDEPENDENT OF S. 28 SO THAT IT WOU LD OBTAIN EVEN WHERE NO BUSINESS IS CARRIED OUT. FURTHER THE LD. CIT HAD ONLY SET ASI DE THE ASSESSMENT FOR A FRESH ASSESSMENT TO BE MADE AFTER CONSIDERING ALL THE ASPECTS OF THE CASE AND AFTER AFFORDING PROPER OPPORTUNITY OF BEING HEARD IN THE MATTER TO THE ASS ESSEE. AS SUCH THERE WAS THEREFORE NO NECESSITY OR OCCASION TO GO INTO THE MERITS OF THE VARIOUS OBSERVATIONS MADE BY THE LD. CIT PER HIS ORDER. THE IMPUGNED ORDER WOULD THUS ME RIT BEING UPHELD. 4. WE HAVE HEARD THE PARTIES AND PERUSED THE M ATERIAL ON RECORD AS ALSO THE CASE LAW CITED. 4.1 WE MAY FIRSTLY CLARIFY THAT THE ASSESSEES ARGU MENT QUA THE INVALIDITY OF THE REVISIONARY PROCEEDINGS IN VIEW OF THE SAME BEING I NITIATED ON THE BASIS OF A QUERY BY THE INTERNAL AUDIT PARTY IS NOT MAINTAINABLE. THIS IS FOR THE REASON THAT THE INTERNAL AUDITORS HAVE NOT EXPRESSED ANY OPINION IN THE MATTER WHICH COULD ONLY FOLLOW ON OBTAINING ALL THE RELEVANT INFORMATION AND FACTS BUT ONLY HIGHLI GHTED A PERTINENT FACT I.E. OF THE ALLOWANCE OF INTEREST TO THE PARTNERS ON THEIR CAPI TAL U/S. 36(1)(III) EVEN AS ADMITTEDLY NO BUSINESS WAS CARRIED HAVING BEEN IN FACT TRANSFERR ED. NO DOUBT THE ASSESSEE EXPLAINS OF 5 HAVING COLLECTED INTEREST RECEIVABLE AS ON 31/3/20 04 SO THAT IT WAS CARRYING ON BUSINESS TO THAT EXTENT WITH THE AO HAVING THUS TAKEN A VIE W IN THE MATTER WHICH COULD NOT BE SUBJECT TO REVISION U/S. 263 ON THE REVISIONARY AUT HORITY HOLDING A DIFFERENT VIEW. SO HOWEVER THE ASSESSEE OMITS TO SEE THAT THE AO HAS IN FACT HELD OTHERWISE . SUCH A CONTENTION COULD BE RAISED ONLY WHERE THE AO HAD O N INQUIRY AND EXAMINATION FOUND THE ASSESSEE TO HAVE TRANSACTED BUSINESS INSOFAR AS IT RELATES TO REALIZATION OF INTEREST ACCRUED UP TO 31/3/2004. EVEN SO THE MOOT QUESTION THAT W OULD ARISE AND WHICH REMAINS UNADDRESSED IS: HOW COULD THE ASSESSEE CARRY ON THE BUSINESS EVEN TO THE EXTENT OF COLLECTION OF INTEREST ACCRUED FOR THE EARLIER YEAR S AFTER THE TRANSFER OF BUSINESS ? IS NOT COLLECTION OF INTEREST IT MAY BE ASKED AN INTEGRA L PART OF ITS BUSINESS OF FINANCING ? CLEARLY THERE IS AN APPARENT INCONSISTENCY BETWEEN THE TWO FINDINGS AND THE MATTER WARRANTS FURTHER EXAMINATION AND WHICH IT HAS NOT BEEN SUBJECT TO; NO ANSWER FORTHCOMING ON THIS ASPECT OF THE MATTER ON A PERUS AL OF ANY OF THE RELEVANT ASSESSMENT ORDERS. BESIDES WE OBSERVE INCOME BY WAY OF INTERE ST FROM MFL AS CONSTITUTING A MAJOR PART OF THE TOTAL INCOME AND THE CHARACTER OF WHIC H HAS NOT BEEN COMMENTED UPON EITHER IN THE ASSESSMENT ORDER OR BY THE ASSESSEE. LACK OF PROPER INQUIRY WHERE WARRANTED WOULD BY ITSELF DEEM AN ORDER ERRONEOUS PREJUDICIA L TO THE INTEREST OF THE REVENUE AS IS TRITE LAW AFFIRMED TIME AND AGAIN BY THE HIGHER CO URTS OF LAW AND TOWARD WHICH WE MAY FOR READY REFERENCE CITE CERTAIN DECISIONS AS INTER ALIA IN THE CASE OF MALABAR INDUSTRIAL CO. LTD. V. CIT (SUPRA); GEE VEE ENTERPRISES V. CIT (ADDL.) 99 ITR 375 (DEL.)[RENDERED ON AN EXTENSIVE REVIEW OF THE CASE LAW IN THE MATT ER BY THE APEX COURT]; RAJALAKSHMI MILLS LTD. V. ITO 121 ITD 343 (CHENNAI) (SB). `RECORD FOR THE PURPOSES OF S. 263 IS WIDE AND WOULD INCLUDE THE AUDITORS OBSERVATIONS ON FACTS AS WELL. THE LD. CIT AS POI NTED OUT BY THE LD. DR HAS NOT RENDERED ANY DEFINITE FINDINGS BUT ONLY BROUGHT THE RELEVAN T ISSUES WHICH HE DEEMED RELEVANT TO BE EXAMINED IN VIEW OF THE ADMITTED FACTS FOR THE PURPOSE OF FRESH ASSESSMENT DIRECTED BY HIM; THE INCOME IN HIS VIEW BEING IN FACT ASSE SSABLE U/S. 176(3A) AND NOT U/S. 28(I). EVEN AS THIS SHOULD NORMALLY BE THE END OF THE MATT ER I.E. IN CASE OF AN OPEN SET ASIDE TO THE ASSESSING AUTHORITY WE FIND THAT IN THE INSTAN T CASE THE REVISIONARY AUTHORITY HAS 6 ISSUED SOME OBSERVATIONS REQUIRING THE AO TO REDO THE ASSESSMENT IN LIGHT OF THE SAME. SECONDLY THE LD. CIT HAS ALSO DIRECTED FOR A REVIE W OF THE ASSESSMENTS FOR THE EARLIER YEARS IN VIEW OF THE DECISION BY THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). AS SUCH IT BECOMES INCUMBENT ON US IN V IEW OF THE CHALLENGE BY THE ASSESSEE TO THE IMPUGNED ORDER/S TO EXAMINE THE SAID OBSERVATIONS FOR THEIR VALIDITY AS IF AND TO THE EXTENT FOUND NOT VALID THE SAME CANNOT BE ALLOWED TO SUSTAIN AND PREJUDICE THE CAUSE OF THE ASSESSEE. OF COURSE OUR VIEW WOULD AGAIN BE BASED ONLY ON THE MATERIAL ON RECORD AND ANY FURTHER INFORMAT ION OR FACTS MAY OPERATE TO MITIGATE THE SAME SO THAT BOTH THE PARTIES WOULD BE AT LIBE RTY TO MEET THE SAME BY BRINGING MATERIALS ESTABLISHING OTHERWISE. 4.2 WE HAVING CONFIRMED THE ASSUMPTION OF JURIS DICTION U/S. 263 IN THE PRESENT CASE THE NEXT ISSUE TO CONSIDER IS THE ASSESSEES EXPLAN ATION ON MERITS. IT CONTENDS TO BE IN FACT CARRYING ON BUSINESS AS IT WAS UNDERTAKING COLLECTI ON OF INTEREST ACCRUED UP TO THE END OF THE IMMEDIATELY PRECEDING PREVIOUS YEAR I.E. 31/3 /2004 AND THUS CARRYING ON BUSINESS TO THAT EXTENT. WE FIND THAT THERE IS NO FINDING OF FA CT BY THE REVENUE ON THIS MATTER. NEITHER HAS THE SAME BEEN EXAMINED DURING THE ASSESSMENT PR OCEEDINGS NOR HAS THE SAME BEEN VERIFIED BY THE REVISIONARY AUTHORITY. THE SAME CANNOT THUS BE TAKEN AS A FACT AND WOULD WARRANT VERIFICATION IN THE SET ASIDE PROCEEDINGS . 4.3 THE LD. CIT HOWEVER WAS OF THE VIEW THAT THE SAME WOULD NOT AMOUNT TO THE CONDUCT OF BUSINESS BY THE ASSESSEE AND THE RELEVA NT INTEREST INCOME IS LIABLE TO TAX U/S. 176(3A) AND NOT U/S. 28(I). IN OUR VIEW THE MATTER BEFORE BEING SUBJECT TO SUCH CONCLUSIVE FINDINGS WOULD BE REQUIRED TO BE FACTUA LLY DETERMINED. THIS IS AS S. 176(3A) ONLY DEEMS THE RECEIPT OF INCOME RELATING TO A DISC ONTINUED BUSINESS AS THE INCOME FOR THE YEAR OF RECEIPT NOTHING MORE AND NOTHING LESS. IT DOES NOT DEEM THAT THE BUSINESS IS CARRIED OUT WHERE NONE IS AS WHERE IT IS DISCONTI NUED. FACTUALLY SPEAKING IT IS ONLY THE ACTUAL COLLECTION OF INTEREST THAT WOULD GIVE RISE TO INCOME PER THE ASSESSEES REGULAR METHOD OF ACCOUNTING. IN FACT EVEN OTHERWISE I.E . WHERE THE METHOD OF ACCOUNTING IS 7 ACCRUAL WHICH DIFFERENCE ONLY MARKS THE POINT OF T IME WHEN AN INCOME IS RECOGNIZED AS SUCH ITS ULTIMATE RECOVERY IS ESSENTIAL AND INTEGR AL TO THE WORKING OF THE ORGANIZATION. CAN ANY INSTITUTION EXIST OR SUSTAIN ITSELF WITHOUT REALIZING ITS DUES OR ACTUALLY PAYING ITS LIABILITIES? AS SUCH WITHOUT DOUBT EVEN DE HORS THE METHOD OF ACCOUNTING THE COLLECTION OF INTEREST REPRESENTS A VITAL AND FUNDAMENTAL BUSI NESS ACTIVITY AND THUS THERE IS A CONDUCT OF BUSINESS TO THAT EXTENT. RATHER WE ARE SURPRISED ON THE LD. AR CONCEDING TO THE FINDING BY THE AO OF THERE BEING NO BUSINESS DU RING THE YEAR AS CORRECT TO THE EXTENT THAT THERE HAS BEEN NO BUSINESS ACTIVITY WITH THE P UBLIC AT LARGE. WHY WE WONDER; THE MONEY REALISED BEING ONLY FROM THE PUBLIC/BORROWERS ? HOWEVER THE ASSESSEES EXPLANATION IS VALID ONLY INSOFAR AS IT RELATES TO INTEREST ACCRUED UP TO 31/3/2004 ON AMOUNTS FINANCED IN THE REGULAR COURSE OF BUSINESS UP TO THAT DATE I.E. WOULD NOT HOLD FOR INTEREST INCOME FROM MFL WHICH AS AFORE-NOTED CO NSTITUTES THE MAJORITY OF THE INTEREST INCOME CREDITED TO THE INCOME STATEMENT/S. FURTHER WE FIND ON A PERUSAL OF EACH OF THE THREE BALANCE-SHEETS (AS ON 31.3.2005) THAT THE ASSESSEE HAS NOT INCURRED AN EXPENDITURE W HATSOEVER DURING THE RELEVANT YEAR I.E. APART FROM ON INTEREST TO PARTNERS? HOW COULD THAT BE? THE ASSESSEE ADMITTEDLY FOLLOWING CASH SYSTEM OF ACCOUNTING IT COULD GIVEN ITS CLAI M OF HAVING COLLECTED THE OUTSTANDING INTEREST WOULD BE REQUIRED TO INCUR THE SAME EXPEN DITURE I.E. AS IN THE PAST ON THE SAID ACTIVITY WHICH ONLY WOULD GIVEN ITS METHOD OF ACC OUNTING RESULT IN ITS REPORTING INCOME. IT COULD BE AND RATHER WOULD BE ON A LOWER SCALE IN CASE OF A DECLINE IN VOLUME YET IF IT WERE TO COLLECT ITS REVENUE IN THE SAME MANNER AS I T WAS DOING IN THE PAST AS CONTENDED BY IT HOW COULD THE SAME BE COMPLETELY FREE OF COS T IN COMPLETE DEVIATION WITH THE PAST; EACH OF THE INCOME STATEMENTS (PROFIT AND LOSS ACCO UNT) FOR THE YEAR ENDING 31.3.2005 BEARING EXPENDITURE INCURRED DURING THE IMMEDIATELY PRECEDING YEAR. REFERENCE IN THIS CONTEXT IS DRAWN TO OUR FINDING OF ABSENCE OF ANY F INDING QUA COLLECTION OF OUTSTANDING INTEREST BY THE FIRM IN THE ASSESSMENT ORDER AT PAR A 4.2 ABOVE . EVEN SO ITS CLAIM OF CONDUCT OF BUSINESS TO THE EXTENT OF COLLECTION OF ACCRUED INTEREST AND ACCORDINGLY ENTITLED TO DEDUCTION QUA INTEREST ON THE PARTNERS CAPITAL I.E. A BUSINES S BORROWING 8 THOUGH APPEALING AT FIRST SIGHT SUFFERS FROM SEVER AL FUNDAMENTAL INFIRMITIES WHICH WE MAY DELINEATE AS UNDER. 4.4 FIRSTLY WHEN THE BUSINESS IS TRANSFERRED THE PROPERTY BOTH IN THE PRINCIPAL AMOUNT OF LOANS AS WELL AS THE INTEREST ACCRUED THEREON UP TO THE TRANSFER DATE STANDS VESTED IN THE TRANSFEREE-COMPANY. WE ARE AS SUCH UNABLE TO UND ERSTAND AS TO HOW THE INTEREST ACCRUED UP TO 31.3.2004 I.E. UP TO IMMEDIATELY BEFORE THE TRANSFER DATE (1.4.2004) COULD BE RECEIVED OR REALISED BY THE ASSESSEE. THE AGREEMEN T OF TRANSFER IS EXPLICIT ON THIS; THE RELEVANT SCHEDULE THERETO LISTING THE ASSETS TRANSF ERRED ALONG WITH THEIR RESPECTIVE VALUES I.E. AT WHICH THE SAME STAND SOLD FOR EACH OF THE THREE FIRMS BEARING THE ASSET `INTEREST RECEIVABLE AND SEPARATELY FOR THE HO AND THE BRAN CHES. THE AGREEMENT ALSO DOES NOT CAST ANY RESPONSIBILITY ON THE ASSESSEE TO COLLECT THE SAID INTEREST. ON THE CONTRARY IT SEEKS TO PROVIDE THE NECESSARY TITLE AND LEGAL BASIS TO T HE `PURCHASER THE TRANSFEREE-COMPANY TO PROCEED AGAINST ANY RECALCITRANT DEBTOR FOR RECO VERY OF DUES EVEN AS CONCEDED TO BY THE LD. AR WHEN HE STATES OF THE RIGHT TO RECEIVE I NTEREST AS HAVING BEEN TRANSFERRED THERE- TO. AS SUCH THE ASSESSEE HAS NO BUSINESS TO COLLEC T THE SAME AND CANNOT POSSIBLY CONTEND TO HAVE DONE SO ON ITS OWN BEHALF AND CONSEQUENTLY OF BEING ENGAGED IN BUSINESS TO THAT EXTENT; AND IF AT ALL IT DID COLLECT INTEREST IT I S AND CAN ONLY BE FOR AND ON BEHALF OF THE TRANSFEREE-COMPANY. IN FACT NOT SO CONSIDERING WO ULD APART FROM BEING LEGALLY INFIRM LEAD TO AN ANOMALY AND A CONCOMITANT ACCOUNTING IMB ROGLIO. HOW COULD IT RECEIVE THE SAME DUES TWICE OVER AND HOW DOES IT ACCOUNT FOR T HE SAME I.E. ONCE FROM THE CONCERNED BORROWER DIRECTLY TREATING IT AS ITS INC OME AND SECONDLY FROM THE VENDOR (MFL) AS A PART OF THE SALE CONSIDERATION ? THOUGH THIS MAY AND RATHER WOULD NOT BE APPARENT FROM THE ASSESSEES ACCOUNTS BEING WRITTE N ONLY ON THE BASIS OF THE RECEIPT AND PAYMENT IT WOULD REFLECT IMMEDIATELY AND PATENTLY IN THE ACCOUNTS OF THE PURCHASER WHICH BEING A COMPANY IS OBLIGED BY LAW TO MAINTAIN ITS ACCOUNTS ON ACCRUAL BASIS. THIS IS AS IT WOULD ONLY CREDIT THE ASSESSEES ACCOUNT I N ITS BOOKS FOR THE SALE CONSIDERATION INCLUDING INTEREST RECEIVABLE DEBITING THE CORRESP ONDING ASSET ACCOUNT I.E. INTEREST 9 RECEIVABLE A/C. HOWEVER IT WOULD NOT RECEIVE ANY I NTEREST FROM THE BORROWERS WHICH IS BY THE ASSESSEE AND OSTENSIBLY ON ITS OWN ACCOUNT CREDITING INCOME (RECEIVED) ACCOUNT. THIRDLY EVEN AS QUESTIONED DURING HEARI NG THE NEXT AND INCIDENTAL QUESTION THAT ARISES IS: HOW HAS THE CONSIDERATION ACCRUING OR ARISING ON TH E TRANSFER OF BUSINESS A CAPITAL ASSET BEEN ACCOUNTED FOR OR TREATED IN ITS RETURN BY THE ASSESSEE ? THE LD. AR CLARIFIED THAT THE ACCOUNTS RECEIVABLE INCLUDING I NTEREST ACCRUED TO DATE (31.3.2004) WERE TAKEN INTO RECKONING FOR DETERMINING THE `TRANSFER CONSIDERATION. THOUGH THE ORDERS ARE SILENT ON THIS THE SAME IS CONSISTENT WITH THE AGR EEMENT SO THAT WE TAKE IT AS SO. HOWEVER THE QUESTION IS THAT WHEN THE ACCRUED AND UNREALIZED INCOME/S AS INTEREST RECEIVABLE AS ON 31/3/2004 ARE NOT ON THE ASSESSEE S BOOKS IN VIEW OF ITS METHOD OF ACCOUNTING I.E. CASH THE CONSIDERATION RECEIVED IN ITS RESPECT BEING ONLY BE A PART OF THE TOTAL SALE CONSIDERATION ARISING ON TRANSFER OF BUS INESS WOULD BE OVER AND ABOVE THE BOOK CAPITAL AND CONSEQUENTLY GIVE RISE TO `CAPITAL GA INS TO THAT EXTENT. THIS IS PRECISELY THE REASON FOR BEING QUESTIONED IN THE MATTER TO HOWE VER NO SATISFACTORY ANSWER BY THE LD. AR. IN FACT ON THE CONTRARY AND QUITE SURPRISINGL Y WE OBSERVE THAT THERE HAS BEEN A SUBSTANTIAL INFUSION OF FUNDS BY THE PARTNER(S) DUR ING THE YEAR WHICH IS COMPLETELY INEXPLICABLE INASMUCH AS THERE IS NO QUESTION OF AS SUMING FRESH BORROWINGS WHEN THE FIRM HAS EVEN TRANSFERRED ITS EXISTING BUSINESS. WI TH REFERENCE TO THIS IT MAY BE CLARIFIED THAT IT IS ONE THING TO SAY THAT THE FUNDS ARE INVE STED IN BUSINESS ASSETS WHICH ARE NOT YIELDING ANY RETURN OR HAVE TURNED UNPRODUCTIVE AN D QUITE ANOTHER THAT THEY NO LONGER REPRESENT A BUSINESS ASSET BUT ONLY A DEBT ON A SA LE TRANSACTION OUTSIDE OF BUSINESS RATHER CONSTITUTING ITS SALE CONSIDERATION ITSELF. 4.5 WE MAY FINALLY ADDRESS THE DIRECTION BY THE LD. CIT WITH REFERENCE TO THE DECISION BY THE APEX COURT IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). AS ALSO EXPLAINED BY THE TRIBUNAL ON A SIMILAR PLEA A DVANCED BY THE REVENUE THAT THE SAID DECISION WOULD BE APPLICABLE IN A SET OF FACTS AND CIRCUMSTANCES WHERE THE AMOUNT IS LYING TO THE CREDIT OF THE ASSESSEES ACCOUNT WITH THE PAYER WHICH IS OPEN TO BE DRAWN ON DEMAND. THAT IS IT ENJOYS AN UNFETTERED RIGHT TO R ECEIVE THE AMOUNT AT ITS SOLE DISCRETION. 10 COULD IT BE SAID THEN THAT THE AMOUNT IS NOT AVAILA BLE WITH IT OR STANDS NOT `RECEIVED BY IT. TO CITE AN EXAMPLE AS AN ILLUSTRATION TAKE TH E CASE OF MONIES LYING CREDITED IN THE SAVINGS DEPOSIT ACCOUNT OF THE ASSESSEE WITH THE BA NK. COULD THE NON-WITHDRAWAL OF THE AMOUNT BY THE ASSESSEE BE A VALID GROUND FOR THE NO N-RECEIPT OF THE SAME. THE PROPOSITION WOULD HOLD GOOD AND EQUALLY FOR AN ACCOUNT WITH A NON-BANKER AS WELL I.E. AS LONG AS THE BASIC INGREDIENTS OF THE PROPOSITION ARE MET I .E. THAT THE AMOUNT IS UNCONDITIONALLY AVAILABLE FOR BEING WITHDRAWN BY THE ASSESSEE. THE APEX COURT HAS ITSELF CLARIFIED ALSO REFERRING TO ITS EARLIER DECISION IN THE CASE OF RAGHAVA REDDI V. CIT (1962) 44 ITR 720 (SC) THAT UNDER SUCH CIRCUMSTANCES THERE IS CHANG E IN CHARACTER OF THE `DEBT TO A `DEPOSIT SO THAT THE AMOUNT REPRESENTED BY THE DE BT CAN ONLY BE CONSIDERED AS `RECEIVED. THERE IS NO FINDING/S BY THE LD. CIT WI TH REGARD TO THE SATISFACTION OF THE CONDITION/S FOR THE APPLICABILITY OF THE SAID DECIS ION IN THE ASSESSEES CASE EITHER FOR THE CURRENT OR FOR THE EARLIER YEARS IN THE ABSENCE OF WHICH HIS OBSERVATIONS WITH REGARD THERETO CAN NOT HOLD. 5. CONCLUSION 5.1 THE ASSESSEE HAS BEEN ALLOWED INTEREST ON THE CAPITAL TO THE PARTNERS AS A BUSINESS DEDUCTION EVEN AS THE ASSESSMENT ORDER/S BEARS A C LEAR FINDING OF THE ASSESSEE HAVING NOT UNDERTAKEN ANY BUSINESS IN VIEW OF THE SAME HAVING BEEN TRANSFERRED ON THE FIRST DAY OF THE YEAR. THOUGH THE ASSESSEE CLAIMS OF HAVING UNDE RTAKEN BUSINESS TO A LIMITED EXTENT THERE IS NO FINDING WITH REGARD THERETO IN THE ASSE SSMENT ORDER/S WHICH THUS BEARS A CONTRADICTION TO THAT EXTENT. THIS IS FURTHER ACCEN TUATED BY THE ABSENCE OF ANY OF THE REGULAR EXPENDITURE FOR THE YEAR UNDER REFERENCE I .E. THAT THE FIRM INCURS TOWARD COLLECTION OF INTEREST. THE MATTER CLEARLY WARRANTS FURTHER EXAMINATION AND THE RESULTANT FINDINGS OF FACT/S. OUR FURTHER EXAMINATION; THE LD . CIT HAVING ISSUED OBSERVATIONS REQUIRING THE AO TO FRAME THE ASSESSMENT/S IN LIGHT THEREOF REVEAL THE ASSESSEES CLAIM/S TO BE INFLICTED WITH SEVERAL INFIRMITIES. HOW COUL D; THE FIRM HAVING TRANSFERRED ITS BUSINESS AS A GOING CONCERN LEFT WITH NO OPERATIVE ASSETS INCLUDING PERSONNEL CONDUCT BUSINESS AND WHICH CONSTITUTES ITS ONLY BUSINESS. THE INCOME REALIZED IF SO COULD ONLY 11 BE FOR AND ON BEHALF OF THE TRANSFEREE-COMPANY. THE SAME ALSO GIVES RISE TO ISSUES OF ACCOUNTING AS ALSO CAPITAL GAINS; IT HAVING REALIZE D MORE THAN THE BOOK VALUE OF THE CAPITAL AS WELL. THE LD. CIT HAS FOUND THE ASSESSEES CLA IMS AS NOT VALID AS ITS INCOME WOULD IN ANY CASE BE SUBJECT TO BE ASSESSED U/S. 176(3A) AND BESIDES ITS CASE TO BE COVERED BY THE DECISION IN THE CASE OF STANDARD TRIUMPH MOTOR CO. LTD. VS. CIT (SUPRA). CLEARLY ONLY ONE OF THE SAID TWO FINDINGS BY THE LD. CIT COULD H OLD; THE LATTER DEEMING THE CREDIT OF INCOME TO THE ASSESSEES ACCOUNT BY THE BORROWER IN HIS ACCOUNTS AS AN EFFECTIVE RECEIPT OF INCOME BY THE ASSESSEE EVEN AS WE HAVE FOUND A S AFORE-NOTED NO FACTUAL FINDING LEADING TO THE APPLICABILITY OF THE SAID DECISION I N THE PRESENT CASE/S. THE QUESTION OF APPLICABILITY OR OTHERWISE OF SEC. 176(3A) WOULD HA VE TO AWAIT DETERMINATION OF THE AFORE-NOTED FACTUAL ISSUES. FURTHER THE INTEREST R ECEIVED FROM MFL IS ONLY UNDER THE TERMS OF THE TRANSFER AGREEMENT; NEITHER THE ASSESS EES EXPLANATION/S NOR THE FINDING/S BY THE LD. CIT WOULD APPLY TO THIS PART OF THE INCOME. ITS ASSESSMENT AS `BUSINESS INCOME AND ALLOWANCE OF INTEREST U/S. 36(1)(III) THERE-AGA INST ARE PATENTLY CONTRARY TO THE FACTS ON RECORD. IN FACT THE TRANSFER AGREEMENT PROVIDES F OR THE PAYMENT OF THE SALE CONSIDERATION BY MFL DIRECTLY TO EACH OF THE THREE PARTNERS IN EQ UAL RATIO. THAT BEING THE CASE THE QUESTION THAT WOULD CONSEQUENTLY ARISE IS IF ANY IN TEREST ON THE DELAYED PAYMENT THEREOF (SALE CONSIDERATION) WOULD AT ALL ARISE TO THE TRA NSFEROR-FIRM AND INURE ONLY TO ITS INDIVIDUAL PARTNERS DIRECTLY. THIS WILL NOT ONLY IM PACT THE ASSESSMENT OF THE FIRM/S BUT ALSO THAT OF THE INDIVIDUAL PARTNERS WHO WOULD BE LIABLE TO RECEIVE INTEREST ON THE UNPAID PRINCIPAL DEBT I.E. DIRECTLY FROM THE VENDOR (MFL ) AND DE HORS THEIR CAPITAL BALANCE IN THE ASSESSEE-FIRM WHICH HAS RATHER WITNESSED AN IN CREASE IN SOME CASES GIVING RISE TO A FURTHER SET OF QUESTIONS. HOW IS THE ASSESSEE LIABLE TO INTEREST TO ITS PARTN ERS I.E. GIVEN THE TERMS OF THE AGREEMENT AND THE FACT THAT IN AN Y CASE THE SALE CONSIDERATION THOUGH SUBJECT TO INTEREST ON DELAY IN DISCHARGE DOES NOT CONSTITUTE A DEBT OF THE FIRM (BUT ONLY OF THE INDIVIDUAL PARTNERS TO WHOM IT IS DUE) MUCH L ESS ITS BUSINESS ASSET FOR THE YIELD THEREON TO BE CONSIDERED AS A BUSINESS INCOME ? TWO TOWARD WHICH BUSINESS ARE THE FRESH BORROWINGS BY THE FIRM FROM THE PARTNERS I.E. THA T ASSUMED DURING THE YEAR AGAINST; 12 THERE BEING NO BUSINESS AND WHICH REPRESENTS THE P RIMARY CONDITION FOR ALLOWANCE OF INTEREST U/S. 36(1)(III) ? 5.2 IN VIEW OF THE FOREGOING WE THEREFORE C ONFIRM THE FINDINGS BY THE LD. CIT I.E. TO A LIMITED EXTENT MODIFYING THE BALANCE. THE ASSESS ABILITY OF THE FIRMS INCOME INCLUDING ITS COMPUTATION WHICH WOULD INCLUDE ALLOWANCE OF D EDUCTION/S PERMISSIBLE UNDER LAW WOULD WARRANT EXAMINATION AND DECISION/S IN ACCORD ANCE WITH LAW BY THE ASSESSING AUTHORITY WHO WOULD DO SO BY ISSUING SPECIFIC FIND INGS OF FACT CONSISTENT WITH THE MATERIAL ON RECORD ON MATTERS IMPINGING THEREON A S OBSERVED AND SOUGHT TO BE HIGHLIGHTED BY US AND AFTER ALLOWING A REASONABLE OPPORTUNITY TO THE ASSESSEE/S TO PRESENT ITS CASE. WE DECIDE ACCORDINGLY. 6. IN THE RESULT THE APPEAL/S BY THE ASSESSEE/ S IS PARTLY ALLOWED. SD/- SD/ - (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 29TH JULY 2011 GJ COPY TO: 1 . M/S. MUTHOOT BANKERS ELLIKKA CENTRE PIER ROAD TE LLICHERRY-670 101. 2. M/S. MUTHOOT BANKERS EMIRATES ARCADE MAHE. 3. M/S. MUTHOOT BANKERS PMC-21/1711 2 ND FLOOR CITY BLDGS. OPP. MUNICIPAL BUS STAND PAYYANNUR-670 307. 4. THE INCOME TAX OFFICER WARD-1(2) KANNUR. 5. THE INCOME TAX OFFICER WARD-1(4) KANNUR 6. THE COMMISSIONER OF INCOME-TAX KANNUR. 7. D.R. I.T.A.T. COCHIN BENCH COCHIN. 8. GUARD FILE .