SUN PHARMA EXPORTS, MUMBAI v. DCIT CEN CIR 32, MUMBAI

ITA 5373/MUM/2009 | 2006-2007
Pronouncement Date: 29-07-2011 | Result: Dismissed

Appeal Details

RSA Number 537319914 RSA 2009
Assessee PAN AAAFS1160M
Bench Mumbai
Appeal Number ITA 5373/MUM/2009
Duration Of Justice 1 year(s) 10 month(s) 4 day(s)
Appellant SUN PHARMA EXPORTS, MUMBAI
Respondent DCIT CEN CIR 32, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted E
Tribunal Order Date 29-07-2011
Date Of Final Hearing 27-06-2011
Next Hearing Date 27-06-2011
Assessment Year 2006-2007
Appeal Filed On 24-09-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY ACCOUNTANT MEMBER ITA NO. 5373/MUM./2009 (ASSESSMENT YEAR : 2006-07 ) DATE OF HEARING 27.6.2011 SUN PHARMA EXPORTS F.P. 145 RAM MANDIR ROAD VILE PARLE (EAST) MUMBAI 400 057 PAN AAAFS1160M .. APPELLANT V/S DY. COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-32 MUMBAI .... RESPONDENT ASSESSEE BY : MR. FAROOKH V. IRANI A/W MR. VIJAY MEHTA REVENUE BY : MR. B. JAYA KUMAR O R D E R PER J. SUDHAKAR REDDY A.M. THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED AGAINST THE IMPUGNED ORDER 28 TH JULY 2009 PASSED BY THE COMMISSIONER (APPEALS)-VI II MUMBAI FOR ASSESSMENT YEAR 2006-07. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE A P ARTNERSHIP FIRM FILED ITS RETURN OF INCOME ON 29 TH OCTOBER 2006 FOR ASSESSMENT YEAR 2006-07 DECLARING NIL INCOME. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS NO BUSINESS ACTIVITY. THE ASSESSEE IN RESPONSE TO A Q UERY RAISED BY THE ASSESSING OFFICER REPLIED THAT THE BALANCE SHEET O F THE PARTNERSHIP FIRM SUN PHARMA EXPORTS ITA NO.5373/M/2009 2 CONTINUES TO BE WHAT WAS IN THE PRECEDING YEAR. IT WAS FURTHER STATED THAT THE ASSESSEE FIRM HAD ASSIGNED ITS BUSINESS AS A GO ING CONCERN INCLUDING ASSETS AND LIABILITIES VIDE AGREEMENT DATED 12 TH MAY 1998 TO SANKALP LABORATORIES PVT. LTD. WHOSE NAME WAS SUBSEQUENTLY CHANGED TO SUN PHARMACEUTICAL EXPORTS LTD. WHICH WAS LATER MERGED WITH SUN PHARMACEUTICAL INDUSTRIES LTD. (HEREIN AFTER FOR SH ORT SPIL ) HENCE THE UNDISPUTED FACT IS THAT THERE IS NO BUSINESS ACTIVI TY IN THE FIRM SINCE THE DATE OF ASSIGNMENT I.E. 12 TH MAY 1998. 3. ON 7 TH DECEMBER 1998 A SEARCH AND SEIZURE OPERATION WAS CONDUCTED AT THE PREMISES OF THE ASSESSEE. CONSEQUENT TO BLOC K ASSESSMENT A DEMAND OF APPROXIMATELY ` 9 46 41 273 WAS RAISED. AS THE DEMAND HAD TO BE P AID AND AS THE FIRM DID NOT HAVE THE FINANCIAL RESOURCE S IT IS STATED THAT THERE WAS AN AGREEMENT THAT SPIL WOULD PROVIDE NECESSARY LOAN TO THE ASSESSEE TO ENABLE IT TO PAY THE TAX DEMAND. 4. A SUPPLEMENTARY DEED OF PARTNERSHIP DATED 5 TH JANUARY 2001 WAS ENTERED. THE ASSESSEE CLAIMS THAT AS PER THE SUPPL EMENTARY PARTNERSHIP DEED THE FUNDS WERE TO BE GRANTED BY WAY OF A LOAN FROM THE PARTNER SPIL AND THAT THE LOAN SHOULD BE UTILIZED SOLELY FOR MEE TING THE TAX DEMAND AND IN CASE THE TAX DEMAND IS REDUCED OR CANCELLED AND IN TEREST IS PAID BY THE TAX DEPARTMENT THE PARTNER WHICH PROVIDED THE FUND I.E . SPIL WOULD BE ENTITLED TO THE INTEREST. THE INTEREST ENTITLEMENT WOULD BE LOWER THAN THE FOLLOWING TWO FIGURES VIZ. (A) INTEREST RECEIVED BY THE ASSES SEE FROM THE TAX DEPARTMENT ON THE REFUND GRANTED; (B) INTEREST PAYA BLE AT A RATE PRESCRIBED UNDER SECTION 40(B)(IV) OF THE INCOME TAX ACT 1961 (FOR SHORT THE ACT ). IN CASE TAX DEMAND IS NOT REDUCED THEN ALL PARTNERS SHOULD BEAR THE DEMAND PROPORTIONATELY IN THEIR RESPECTIVE PROFIT SHARING RATIO. 5. THE ASSESSEE HAD RECEIVED CERTAIN FUNDS FROM SPIL A ND PAID THE TAX DEMAND. LATER THE TRIBUNAL DELETED THE TAX DEMAND AND THE ASSESSEE WAS REFUNDED THE TAX ALONG WITH THE INTEREST OF ` 2 71 69 134. THE ASSESSEE SUBMITTED THAT THE INTEREST INCOME WAS OFFERED BY I T TO TAX IN THE YEAR OF RECEIPT AND AS THE ASSESSEE WAS LIABLE TO PAY INTER EST ON THE FUND RECEIVED SUN PHARMA EXPORTS ITA NO.5373/M/2009 3 FROM SPIL AS PER THE TERMS OF SUPPLEMENTARY PARTNE RSHIP DEED INTEREST PAYABLE WAS WORKED OUT AND CLAIMED AS A DEDUCTION. THE INTEREST PAYABLE WAS RESTRICTED BY THE ASSESSEE IN VIEW OF THE PROVI SIONS OF SECTION 40(B)(IV) WHICH WAS CLAIMED AS DEDUCTION. THE ASSESSING OFFIC ER DISALLOWED THE CLAIM OF INTEREST BY HOLDING AS FOLLOWS:- 5. THE SUBMISSIONS GIVEN BY THE ASSESSEE ARE PERUSE D BUT NOT FOUND TENABLE DUE TO FOLLOWING REASONS:- I) WHILE GOING THROUGH THE BALANCE SHEET OF THE ASS ESSEE IT IS SEEN THAT THERE IS CAPITAL OF ` 12 49 76 576 IN THE NAME OF M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. AS A PARTNER OF THE FIRM. THE SAID AMOUNT IS NOT REFLECTED IN THE RETURN OF INCOME IN THE EARLIER YEARS. SO IT HAS TO BE TREATED AS THE CAPITAL INTRODUCED BY T HE PARTNER DURING THE YEAR. II) AFTER GOING THROUGH THE RETURN IT IS SEEN THAT THE SAID AMOUNT IS NOT SHOWN AS LOAN SO THE CLAIM OF THE ASSESSEE THAT THE LOAN IS TAKEN FROM THE PARTNER IS NOT CORRECT. III) IN THE A.Y. 2005-06 THE CAPITAL IN THE NAME O F M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. WAS ONLY ` 152. IT IS ALSO SEEN FROM THE EARLIER RECORDS THAT THERE IS NO INTEREST PAID ON T HE CAPITAL OF THE PARTNERS. IV) FROM THE RECORDS OF THE EARLIER YEARS IT IS SEE N THAT THE ASSESSEE HAD SUBMITTED THE PARTNERSHIP DEED DATED 1.10.1994. AFTER PERUSING THE SAME IT IS SEEN THAT THERE IS NO PROVISION FOR THE INTEREST PAYMENT ON PARTNERS CAPITAL ACCOUNT. V) THE INTEREST PAYMENT TO THE PARTNERS HAS TO BE M ADE ACCORDING TO SECTION 40(B)(IV) OF THE ACT AND THE SAME HAS TO BE INCORPORATED IN THE PARTNERSHIP DEED. IF THERE IS NO SUCH PROVISION IN THE PARTNERSHIP THEN THE INTEREST CANNOT BE PAID TO THE PARTNERS. VI) THE CLAIM OF THE ASSESSEE THAT THE INTEREST PAY MENT IS ACCORDING TO SECTION 40(B) IS NOT CORRECT BECAUSE AS PER THE PARTNERSHIP DEED THERE IS NO CLEAR PROVISION REGARDING THE INTEREST PAYMENT ON PARTNERS CAPITAL ACCOUNT. IN ABSENCE OF THE SAME INTEREST C ANNOT BE ALLOWED ON THE SAID AMOUNT. VII) FURTHERMORE IT IS TO BE MENTIONED HERE THAT TH E ASSESSEE HAS ADMITTED THAT THE SAID AMOUNT WAS BROUGHT IN BY THE PARTNER FOR THE PAYMENT OF TAXES. THE BORROWED FUNDS ARE NOT UTILIZ ED FOR THE BUSINESS OF THE ASSESSEE BUT FOR THE PAYMENT OF TAXES. HENCE THE SAME IS NOT ALLOWABLE AS BUSINESS EXPENDITURE UNDER SECTION 36( 1)(III) OF THE ACT. SUN PHARMA EXPORTS ITA NO.5373/M/2009 4 6. HE RELIED ON THE FOLLOWING CASE LAWS FOR THE PROPOS ITION THAT WHEN BORROWED FUNDS ARE UTILISED FOR THE PAYMENT OF TAX THEN THE INTEREST ON SUCH FUNDS IS NOT ALLOWABLE AS BUSINESS EXPENDITURE . ROOPCHAND CHABILDAS & SONS & ORS. V/S CIT (1967) 63 ITR 166 (MAD.) EAST INDIA PHARMACEUTICAL WORKS LTD. V/S CIT (1997) 224 ITR 627 (SC) 7. HE ALSO REJECTED THE SUBMISSIONS OF THE ASSESSEE TH AT AS THE INTEREST INCOME WAS OFFERED FOR TAXATION BY SPIL IN THEIR RE TURN OF INCOME CORRESPONDING EXPENDITURE SHOULD BE ALLOWED IN ASSE SSEES CASE BY HOLDING THAT THEY ARE TWO DIFFERENT ENTITIES AND DO NOT HAV E BEARING IN EACH OTHERS INCOME. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL WITHOUT ANY SUCCESS. FURTHER AGGRIEVED THE ASSESSEE IS IN APPE AL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUNDS. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE LEARNED CIT(A) GROSSLY ERRED IN UPHOLDING THE A CTION OF THE ASSESSING OFFICER IN ASSESSING INTEREST ON REFUND A S INCOME OF THE APPELLANT WITHOUT APPRECIATING THAT THE SAID INCOME WAS DIVERTED BY OVERRIDING TITLE TO THE PARTNER. 2. WITHOUT PREJUDICE TO THE ABOVE ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED C IT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN DI SALLOWING INTEREST EXPENDITURE ON LOAN TAKEN FROM THE PARTNER M/S. SU N PHARMACEUTICAL INDUSTRIES LTD. WITHOUT APPRECIATING THAT THE INTER EST PAYMENT WAS COVERED WITHIN THE AMBIT OF SECTION 40(B) AND WAS A UTHORISED BY THE SUPPLEMENTARY DEED OF PARTNERSHIP. 8. THE ASSESSEE FILED AN ADDITIONAL GROUND OF APPEAL W HICH READS AS FOLLOWS:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW IF THE INTEREST INCOME IS ASSESSED AS INCOME FROM OTHER SO URCES THEN THE INTEREST PAID TO THE PARTNER OUGHT TO BE ALLOWED AS A DEDUCTION AS EXPENDITURE INCURRED TO EARN THE INTEREST INCOME. SUN PHARMA EXPORTS ITA NO.5373/M/2009 5 9. LEARNED COUNSEL MR. FAROOKH V. IRANI ALONG WITH M R. VIJAY MEHTA APPEARING ON BEHALF OF THE ASSESSEE SUBMITS THAT T HE ADDITION GROUND IS A LEGAL GROUND AND IN TERMS OF THE JUDGMENT OF HON'BL E SUPREME COURT IN NATIONAL THERMAL POWER CO. LTD. V/S CIT (1998) 229 ITR 383 (SC) THE SAME SHOULD BE ADMITTED. ON MERITS HE SUBMITS THE FOLLO WING PROPOSITIONS (A) THE FIRST PROPOSITION IS THAT THE AMOUNT IN QUE STION IS ALLOWABLE AS DEDUCTION UNDER SECTION 57(III) OF THE ACT. THE LEARNED COUNSEL SUBMITS THAT INTEREST ON INCOME TAX REFUND IS TAXABLE ONLY UNDER THE HEAD INCOME FROM OTHER SOURCES . HIS CASE IS THAT THE AMOUNT WAS BORROWED TO PAY THE INCOME TAX DEMAND AND THE INTEREST PAID HAS A DIREC T NEXUS WITH THE INTEREST EARNED. REFERRING TO THE JUDGMENTS REL IED UPON BY THE ASSESSING OFFICER THE LEARNED COUNSEL SUBMITS THAT IN THE CASE OF ROOPCHAND CHABILDAS & SONS & ORS. (SUPRA) A ND IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. THE H ONBLE COURTS WERE DEALING WITH THE ALLOWABILITY OF A CLAIM UNDER SECTION 36(1)(III) AND NOT A CLAIM UNDER SECTION 57(III); (B) THE SECOND PROPOSITION IS THAT NO INCOME ACCRU ES TO THE ASSESSEE UNDER REAL INCOME THEORY. LEARNED COUNSEL SUBMITS THAT IN REALITY THE ASSESS EE HAS NOT EARNED ANY INCOME AND APPLYING THE PROPOSITION LAID DOWN BY HON'BLE SUPREME COURT IN GODHRA ELECTRICITY CO. LTD. V/S CIT (1997) 225 ITR 746 (SC) NO INCOME HAS ACCRUED OR A RISING TO THE ASSESSEE; AND (C) THE THIRD PROPOSITION IS THAT NO INCOME ACCRUE S TO THE ASSESSEE DUE TO APPLICATION OF DOCTRINE OF DIVERSIO N OF INCOME BY OVERRIDING TITLE. SUN PHARMA EXPORTS ITA NO.5373/M/2009 6 LEARNED COUNSEL SUBMITS THAT WHAT WAS AGITATED BEFO RE THE HIGHER APPELLATE AUTHORITIES WAS DISPUTED LIAB ILITY AND NOT PAYMENT OF TAX LIABILITY. BY VIRTUE OF SUPPLEMENTAR Y AGREEMENT THE INTEREST EARNED ON THE INCOME TAX REFUNDS HAS T O BE NECESSARILY HANDED OVER TO SPIL AND THUS THE INCO ME HAS NOT AT ANY DATE ACCRUED TO THE ASSESSEE. FOR THIS PROP OSITION HE RELIED ON THE FOLLOWING CASE LAWS:- MATHUBHAI C. PATEL V/S CIT (1982) 133 ITR 303 (GUJ.); AND AMAINTIT INTERNATIONAL HOLDING LTD. IN RE AUTHORI TY FOR ADVANCE RULINGS (2010) 322 ITR 678. 10. LEARNED COUNSEL ALSO SUBMITS THAT THE COMMISSIONER (APPEALS) HAS WRONGLY RELIED UPON SECTION 188A OF THE ACT. HE REF ERRED TO SECTION 188A AND SUBMITS THAT THERE IS A JOINT AND SEVERAL LIABI LITIES OF PARTNERS FOR PAYMENT OF TAX OF A PARTNERSHIP FIRM AND THIS HAS N OTHING TO DO WITH THE THEORY OF DIVERSION OF INCOME BY OVERRIDING TITLE O R THE REAL INCOME THEORY. HE EMPHASISED ON THE DOCTRINE OF OVERRIDING TITLE A ND SUBMITS THAT THE APPEAL OF THE ASSESSEE SHOULD BE ALLOWED. 11. LEARNED DEPARTMENTAL REPRESENTATIVE MR. B. JAYA KU MAR ON THE OTHER HAND SUBMITS THAT THE ASSESSEE HAS FILED AN ADDITI ONAL GROUND FOR ALLOWING THE EXPENDITURE UNDER SECTION 57(III). HE POINTS OU T THAT IN THE COMPUTATION OF INCOME THE INTEREST WAS CLAIMED UNDER SECTION 3 6(1)(III) AND WAS MADE SUBJECT TO THE PROVISIONS OF SECTION 40(B). HE SUBM ITS THAT THE UNDISPUTED FACT IS THAT THE BUSINESS OF THE ASSESSEE HAS BEEN COMPLETELY CLOSED DOWN AND THE ASSESSEE ALSO STOPPED FILING OF RETURN OF I NCOME. HENCE HE SUBMITS THAT NO BUSINESS LOSS CAN BE ALLOWED AS THERE IS NO BUSINESS. REGARDING SECTION 188A HE SUBMITS THAT THE ACT PROVIDES THAT THE INCOME TAX IS THE PERSONAL LIABILITY OF EACH OF THE PARTNERS ALONG WI TH THAT OF THE FIRM AND SUCH LIABILITY CANNOT BE TRANSFERRED. HE TOOK THIS BENCH TO PARA-3 TO 3.7 OF THE COMMISSIONER (APPEALS)S ORDER AND ARGUED THAT THE ASSESSEES CLAIM UNDER SUN PHARMA EXPORTS ITA NO.5373/M/2009 7 THE REAL INCOME THEORY IS NOT SUSTAINABLE AS IT CAN NOT BE SAID THAT THERE IS NO ACCRUAL OF INCOME TO THE ASSESSEE. HE SUBMITS THAT THE SOLE ISSUE IS WHETHER OR NOT A PARTICULAR DEDUCTION CAN BE ALLOWED UNDER THE ACT. HE DISTINGUISHED THE CASE LAWS RELIED UPON BY THE ASSESSEE. ON THE I SSUE OF DOCTRINE OF OVERRIDING TITLE HE SUBMITS THAT PAYMENT OF TAX WA S ALSO THE LIABILITY OF THE PARTNERS. HE POINTED OUT THAT THE TAXES WERE PAID B Y THE FIRM AND THE INTEREST IS INCOME OF THE FIRM ONLY. REGARDING THE CLAIM UNDER SECTION 57(3) LEARNED DEPARTMENTAL REPRESENTATIVE REFERRED TO SEC TION 58(1)(A)(I) WHICH PROHIBITS ALLOWANCE OF PERSONAL EXPENDITURE AND SUB MITS THAT PAYMENT OF TAXES IS A PERSONAL LIABILITY AND INTEREST PAID ON BORROWED FUNDS FOR PAYMENT OF INCOME TAX IS NOT ALLOWABLE. HE DISTINGUISHED EA CH OF THE CASE LAWS RELIED UPON BY THE ASSESSEE. HE EMPHASISED THE POINT THAT THE AMOUNT HAS BEEN BROUGHT INTO THE PARTNERSHIP FIRM ONLY BY WAY OF IN DUCTION OF CAPITAL BY SPIL AND THIS IS NOT A LOAN FUND. 12. LEARNED COUNSEL IN THE REJOINDER SUBMITS THAT SEC TION 188A LAYS DOWN A GENERAL PRINCIPLE ONLY. HE SUBMITS THAT LIABILITY TO PAY TAX HAS NOT BEEN DIVERTED AND ONLY INTEREST HAS BEEN DIVERTED. ON SE CTION 58(A)(I) OF THE ACT HE SUBMITS THAT THIS IS NOT A PERSONAL EXPENDITURE. 13. RIVAL CONTENTIONS HEARD. ON A CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND ON PERUSAL OF THE PAP ERS ON RECORD AS WELL AS THE CASE LAWS CITED BEFORE US WE HOLD AS FOLLOWS:- I) THE ASSESSEE ALONG WITH RETURN OF INCOME HAS FILE D THE FOLLOWING STATEMENT OF TOTAL INCOME:- STATEMENT OF TOTAL INCOME NET PROFIT AS PER PROFIT & LOSS ACCOUNT NIL LESS: INTEREST INCOME CONSIDERED SEPARATELY ` 2 71 69 134 BUSINESS LOSS ` (2 71 69 134) INCOME FROM OTHER SOURCES INTEREST INCOME ` 2 71 69 134 TOTAL INCOME NIL SUN PHARMA EXPORTS ITA NO.5373/M/2009 8 II) THE ASSESSING OFFICER IN HIS ORDER HAS BROUGHT OU T THAT SPIL HAS INTRODUCED CAPITAL IN THE ASSESSEES FIRM AS A PART NER. THERE WAS NO LOAN GIVEN BY SPIL TO THE ASSESSEE FIRM. FOR A.Y. 2005-0 6 THE CAPITAL BALANCE IN THE NAME OF SPIL WAS ONLY ` 152 AND WHEREAS FOR THE ASSESSMENT YEAR 2006-07 IT WAS ` 12 49 76 576. THE INTEREST ON THIS CAPITAL BALANCE WAS AGREED TO BE CHARGED WITHIN THE LIMITS STIPULATED U NDER SECTION 40(B). ON THIS FACTUAL MATRIX WE ARE NOW EXAMINING THE ARGUMENTS OF THE LEARNED COUNSEL. III) THE FIRST ARGUMENT IS THAT THE INTEREST PAID TO SP IL IS ALLOWABLE AS DEDUCTION UNDER SECTION 57(III) OF THE ACT. THIS AR GUMENT CANNOT BE ACCEPTED FOR THE REASON THAT WHAT IS PAID IS THE INTEREST ON PARTNERS CAPITAL. THIS IS NOT A CASE WHERE THE ASSESSEE HAS TAKEN A LOAN. IN FACT IT WAS AGREED BETWEEN THE PARTNERS THAT THE RATE OF INTEREST ON O UTSTANDING CAPITAL SHOULD NOT BE MORE THAN WHAT IS STIPULATED UNDER SECTION 4 0(B)(IV) OF THE ACT. THE ASSESSEE HAS CLAIMED EXPENSES UNDER SECTION 36(1)(I II) IN THE RETURN OF INCOME. INTEREST ON PARTNERS CAPITAL ACCOUNT IS N OT PAID FOR THE PURPOSE OF EARNING INTEREST INCOME. HENCE IN OUR OPINION THE CLAIM FOR DEDUCTION 57(III) IS DEVOID OF MERIT. IV) THE NEXT CONTENTION IS THAT REAL INCOME THEORY WOU LD APPLY. UNDER THE REAL INCOME THEORY THE COURTS HAVE HELD THAT THE A SSESSEE SHOULD HAVE EARNED INCOME IN THE REAL SENSE. IT HAS BEEN HELD T HAT THE ASSESSEE HAS TO HAVE RIGHT TO RECEIVE A PARTICULAR INCOME AND THEN ONLY IT CAN BE SAID THAT THERE IS ACCRUAL OF INCOME. PROFITS HAVE TO BE ARRI VED ON COMMERCIAL PRINCIPLES SUBJECT TO THE PROVISIONS OF THE ACT. I T IS WELL SETTLED THAT INCOME DOES NOT RESULT AT ALL THERE CANNOT BE A TAX EVEN THOUGH IN BOOK KEEPING ENTRIES ARE MADE ABOUT HYPOTHETICAL INCOME WHICH DO ES NOT MATERALISE AT ALL. IN THE CASE ON HAND THE INCOME BY WAY OF INTEREST ON INCOME TAX REFUND HAS ACCRUED TO THE ASSESSEE AND IN FACT THE ASSESS EE HAS RECEIVED THE SAME. THE ASSESSEE HAS RECOGNISED ACCRUAL OF INCOME AND H AS FILED A RETURN OF INCOME OFFERING THE INCOME TO TAX. HENCE THE QUEST ION OF INVOKING REAL INCOME THEORY DOES NOT ARISE AT ALL. YOU CANNOT FIL E A RETURN OF INCOME SUN PHARMA EXPORTS ITA NO.5373/M/2009 9 DECLARING CERTAIN INCOME AS ACCRUED AND THEN ARGUE THAT NO INCOME ACCRUED UNDER THE REAL INCOME THEORY. V) THE ONLY ISSUE IS WHETHER THE CLAIM OF THE ASSESSE E FOR DEDUCTION OF INTEREST PAID ON CAPITAL BALANCES UNDER SECTION 36( 1)(III) IS ALLOWABLE UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE. IN OUR OPI NION REAL INCOME THEORY CANNOT BE INVOKED UNDER SUCH CIRCUMSTANCES. INCOME HAS ACCRUED TO THE ASSESSEE AND HE IT OFFERING THE SAME TO TAX UNDER T HE HEAD INCOME FROM OTHER SOURCES . A SEPARATE CLAIM HAS BEEN MADE OF INTEREST PAID U NDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION . WE ARE CONCERNED WITH THE CLAIM OF INTEREST DEDUCTION MADE UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION AND AS THE INTEREST IN QUESTION HAS BEEN PAID ON CAPITAL CONTRIBUTION THE ALLOWABILITY OF THE SAME HAS TO BE EXAMINED FROM THE FACT THAT THE ASSESSEE HAS DISCONTINUED BUSINES S FROM A VERY LONG TIME AND HAS NO INCOME UNDER THE HEAD PROFITS & GAINS OF BUSINESS OR PROFESSION . WE THUS REJECT THE REAL INCOME THEORY INVOKED B Y THE ASSESSEE. VI) WE NOW CONSIDER THE SUBMISSIONS THAT THE INTEREST I NCOME IS DIVERTED BY THE DOCTRINE OF OVERRIDING TITLE. FIRSTLY WE FI ND THAT THE ASSESSEE SUO-MOTO DISCLOSED INTEREST INCOME FROM INCOME TAX REFUND AS ITS OWN INCOME IN THE RETURN OF INCOME FILED. THE TAX LIABILITY IS THAT O F THE ASSESSEE AND JUST BECAUSE THE PARTNERS CONTRIBUTED CAPITAL FOR DISCHA RGE OF THIS TAX LIABILITY IT DOES NOT RESULT IN INTEREST INCOME EARNED ON INCOME TAX REFUND BEING DIVERTED AT SOURCE TO THE PARTNERS WHO ARE CONTRIBU TED CAPITAL ON THE DOCTRINE OF OVERRIDING TITLE. THE CASE LAWS RELIED UPON BY T HE ASSESSEE ARE DISTINGUISHABLE. VII) IN MATHUBHAI C. PATEL (SUPRA) THE HONBLE GUJARAT HIGH COURT WAS CONSIDERING THE CASE WHERE THE ASSESSEE INHERITED A SSETS AS WELL AS LIABILITIES FROM HER FATHER. THE LIABILITY WAS OF ` 2 47 000 IN RESPECT OF OVER DRAFT FROM THE BANK TAKEN BY THE ASSESSEES FATHER FOR THE PUR POSE OF PAYING TAX LIABILITIES. SHARES HAVE BEEN PLEDGED WITH THE BANK BY ASSESSEES FATHER AS SECURITY FOR THE OVER DRAFT. THE ASSESSEES CLAIM O F DEDUCTION OF INTEREST SUN PHARMA EXPORTS ITA NO.5373/M/2009 10 PAYMENT TO THE BANK FROM THE INCOME EARNED FROM THE ASSETS INHERITED. THE ITO REJECTED THE CLAIM. HONBLE GUJARAT HIGH COURT HELD THAT THE INTEREST WHICH THE ASSESSEE HAD TO PAY TO THE BANK WHICH IS A SECURED CREDITOR REPRESENTED A PART OF REVENUE RECEIPTS WHICH WERE D IVERTED FROM THE ASSESSEE AND WERE DIRECTED TO THE SECURED CREDITORS . IT WAS HELD THAT WHAT WAS RECEIVED BY THE SECURED CREDITORS WAS NOT THE A SSESSEES INCOME. IN THE CASE BEFORE US THERE IS NO SUCH CIRCUMSTANCES WHER E THE ASSESSEE HAS CERTAIN RECEIPTS FROM A PARTICULAR SOURCE AND THE E XPENDITURE IS ALSO CONNECTED WITH THE SOURCE AND ONLY THE NET AMOUNT I S TO BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE. AS ALREADY POINTED OUT THE CAPITAL WAS BROUGHT IN BY THE PARTNERS AND INTEREST ON CAPITAL IS ONLY A M ODE OF APPROPRIATION OF PROFIT. IN THE CASE OF AMAINTIT INTERNATIONAL HOLDI NG LTD. (SUPRA) THE FACTS AND CIRCUMSTANCES ARE THAT THE SHARES WERE TRANSFE RRED WITHOUT CONSIDERATION AND IN SUCH CIRCUMSTANCE IT WAS HELD THAT THERE IS NO ACCRUAL OF INCOME. COMING TO THE JUDGMENT HON'BLE JURISDICT IONAL HIGH COURT IN CIT V/S TATA SONS LTD. THE COURT WAS CONSIDERING A CAS E WHERE THE MANAGING AGENCY OF THE COMPANY WERE ENTITLED UNDER THE MANAG ING AGENCY AGREEMENT TO RECEIVE COMMISSION BASED ON PROFITS. AS THERE WA S A FINANCIAL CRUNCH MR. DINSHAW AGREED TO LEND ` 1 00 00 000 TO TATA IRON & STEELS CO. LTD. ON A CONDITION THAT THE ASSESSEE GAVE AND ASSIGNED TO HI M A SHARE OF SIX ANAS IN A RUPEE IN THE COMMISSION AND OTHER REMUNERATION WHIC H THE ASSESSEE MIGHT BE ENTITLED TO RECOVER FROM THE TATA IRON & STEEL C O. LTD. THE HONBLE COURT HELD THAT IN VIEW OF THE AGREEMENT THE SHARES ASSI GNED WOULD CEASE TO BE THE INCOME OF THE ASSESSEE. IT FURTHER HELD THAT EV EN IF THERE WAS NO ASSIGNMENT THE AGREEMENT ON THE PART OF THE ASSESS EE TO SHARE THEIR COMMISSION THAT DINSHAW WAS PART OF THE TERMS ON WH ICH THEY MANAGE TO OBTAIN FINANCE AND IN SUCH CIRCUMSTANCES THE PAYME NT TO DINSHAW OF HIS SHARE OF THE COMMISSION WAS AN EXPENDITURE INCURRED BY THE ASSESSEE SOLELY FOR THE PURPOSE OF EARNING PROFIT AND GAINS IN THE CONDUCT OF AGENCY BUSINESS. THE PROPOSITION LAID DOWN IN THIS CASE LA W DO NOT APPLY THE CASE ON HAND FOR THE REASON THAT THERE IS NO BUSINESS CONDU CT BY THE ASSESSEE AND THERE IS NO LOAN TAKEN BUT ONLY CAPITAL CONTRIBUTED ON A MUTUAL UNDERSTANDING BETWEEN THE PARTNERS. NEITHER THERE I S ANY ASSIGNMENT NOR SUN PHARMA EXPORTS ITA NO.5373/M/2009 11 ANY TRANSFER OF INCOME AT SOURCE. ON THESE FACTS AN D CIRCUMSTANCES OF THE CASE WE UPHOLD THE FOLLOWING FINDINGS OF THE COMMI SSIONER (APPEALS):- 3.1 THE PARTNERS OF THE APPELLANT FIRM HAVE ENTERED INTO IN ITS SUPPLEMENTARY PARTNERSHIP DEED DATED 5.1.2001. ACCO RDING TO THIS SUPPLEMENTARY PARTNERSHIP DEED IT IS AGREED THAT T HE ADDITIONAL FUNDS REQUIRED FOR THE PURPOSE OF THE PAYMENT OF INCOME-T AX LIABILITY SHALL BE BROUGHT IN BY THE PARTNERS M/S. SUN PHARMACEUTICAL INDUSTRY LTD. THE INTEREST ON SUCH FUNDS BROUGHT IN SHALL BE PAYABLE ONLY IN THE EVENT OF REFUND BEING GRANTED BY THE I.T. DEPTT. THE INTERES T SHALL BE CALCULATED AT A RATE NOT EXCEEDING THE RATE AS PRESCRIBED IN T HE I.T. ACT 1961. IT IS FURTHER AGREED THAT IF THE DEMAND RAISED BY THE DEPTT. IS NOT REDUCED OR CANCELLED IN THE APPELLATE PROCEEDING THEN THE OTHER PARTNERS SHALL ALSO BE REQUIRED TO BRING THE FUNDS IN THEIR RESPEC TIVE PROFIT SHAREING RATIO AND IN SUCH CASE NO INTEREST SHALL BE PAYABL E BY THE PARTNERSHIP FIRM TO THE PARTNERS. ACCORDING TO THIS PARTNERSHIP THE INTEREST INCOME RECEIVED FROM THE DEPTT. AMOUNTING TO ` 2 71 69 134 HAS BEEN PAID TO M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. AND CLAIMED AS DEDUCTION IN THE HANDS OF THE FIRM. 3.2 AS PER CLAUSE-V OF THE PARTNERSHIP DEED DTD. 30 .8.1994 THE BUSINESS OF THE PARTNERSHIP SHALL BE THAT OF EXPORT ING TRADING MANUFACTURING AND GENERALLY DEALING IN DRUGS PHARM ACEUTICALS CHEMICALS GENERAL HEALTH CARE PRODUCTS AND GENERAL MERCHANDISE GROWTH TO THE BUSINESS CARRIED ON BY THE PARTY OF T HE FIRST PART AS PROPRIETOR OF THE AFORESAID M/S. SUN PHARMA EXPORTS AND SUCH OTHER BUSINESS AS THE PARTIES MAY AGREE FROM TIME TO TIME . BUT THE APPELLANT FIRM HAS ASSIGNED ITS BUSINESS AS GOING CONCERNED T O M/S. SANKALP LABORATORIES WITH EFFECT FROM 12.5.1998 THEREFORE THERE WAS NO BUSINESS CARRIED ON BY THE APPELLANT FIRM AS STIPUL ATED IN THE PARTNERSHIP DEED. THEREFORE THE BUSINESS OF THE FI RM IS DISCONTINUED AFTER ASSIGNMENT OF RUNNING BUSINESS. THEREFORE SU PPLEMENTARY PARTNERSHIP DEED DATED 3.1.2001 HAS BEEN EXECUTED TO BORROWED FUNDS TO PAY INCOME TAX DEMAND. THE LEGISLATURE HAS MADE A SPECIAL PROVISION UNDER SECTION 189(1) THAT WHERE ANY BUSIN ESS OR PROFESSION CARRIED ON BY A FIRM HAS BEEN DISCONTINUED OR WHERE A FIRM IS DISSOLVED THE ASSESSING OFFICER SHALL MAKE AN ASSE SSMENT OF THE TOTAL INCOME OF THE FIRM AS IF NO SUCH DISCONTINUANCE OR DISSOLUTION HAD TAKEN PLACE AND ALL THE PROVISIONS OF THIS ACT IN LCUDING THE PROVISIONS RELATING TO THE LEVY OF PENALTY OR ANY OTHER SUM CH ARGEABLE UNDER ANY PROVISION OF THIS ACT SHALL APPLY SO FAR AS MAY B E TO SUCH ASSESSMENT. THEREFORE ANY SUPPLEMENTARY DEED WHIC H HAS NOT BEEN EVEN FILED WITH THE INCOME TAX DEPTT. BY THE APPELL ANT IS NOTHING BUT AN ARRANGEMENT OF FUNDS FOR PAYMENT OF TAXES. 3.3 ACCORDING TO THE SECTION 188A THE PERSON WHO W AS DURING THE PREVIOUS YEAR A PARTNER OF A FIRM AND THE LEGAL R EPRESENTATIVE OF ANY SUCH PERSON WHO IS DECEASED SHALL BE JOINTLY AND S EVERALLY LIABLE ALONG WITH THE FIRM FOR THE AMOUNT OF TAX PENALTY OR OTH ER SUM PAYABLE BY THE FIRM FOR THE ASSESSMENT YEAR TO WHICH SUCH PREV IOUS YEAR IS RELEVANT AND ALL THE PROVISIONS OF THIS ACT SO FA R AS MAY BE SHALL APPLY TO THE ASSESSMENT OF SUCH TAX OR IMPOSITION O R LEVY OF SUCH SUN PHARMA EXPORTS ITA NO.5373/M/2009 12 PENALTY OR OTHER SUM. THUS IT WAS THE LIABILITY OF THE PARTNER M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. TO PAY THE TAXES AND NO INTEREST CAN BE ALLOWED TO THE PARTNER OF A FIRM IF THE MONEY HAS B EEN INTRODUCED IN THE FIRM TO PAY THE TAXES AND NOT AS A CAPITAL FOR THE PURPOSE OF BUSINESS. THE APPELLANT FIRM HAS NOT MAINTAINED ANY BOOKS OF ACCOUNT AND THE AMOUNT OF MONEY BORROWED FROM M/S. SUN PHAR MACEUTICAL INDUSTRIES LTD. ONE OF THE PARTNER HAS NOT BEEN SH OWN IN THE BOOKS OF ACCOUNT OR IN THE CAPITAL ACCOUNT OF THE PARTNER IN THE RETURNS FILED WITH THE DEPTT. THE APPELLANT FIRM HAS NOT TAKEN ANY LOA N AND ADVANCES ON THE OTHER TWO PARTNERS OR ANY OTHER PERSON AFTER DI SCONTINUATION OF BUSINESS. THEREFORE IT IS ESTABLISHED THAT THE FUN DS BROUGHT BY ONE OF THE PARTNERS M/S. SUN PHARMACEUTICAL INDUSTRIES LT D. ON ACCOUNT OF DISCHARGE OF ITS LIABILITY AS PER PROVISIONS OF SE CTION 188A AND NO INTEREST CAN BE PAID ON THE FUNDS BORROWED FOR THE PURPOSE OF PAYMENT OF TAXES WHICH IS PERSONAL LIABILITY OF THE FIRM AS WELL AS THE PARTNERS. 3.4 THE APPELLANT FIRM HAS NOT SHOWN AMOUNT OF ` 12 47 76 576 AS LOAN IN THE RETURN OF INCOME FILED AND ONLY CAPITAL HAS BEEN SHOWN IN THE NAME OF M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. THE CAPITAL IN THE NAME OF M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. WA S ONLY ` 152 IN ASSESSMENT YEAR 2005-06 AFTER PERUSAL OF PARTNERSH IP DEED IT IS SEEN THERE IS NO PROVISION FOR PAYMENT OF INTEREST TO TH E PARTNERS. THE PAYMENT OF THE PARTNERS HAS TO BE MADE ACCORDING TO SECTION 40(B)(IV) OF THE ACT AND THE SAME HAS TO BE INCORPORATED IN T HE PARTNERSHIP DEED. IF THERE IS NO PROVISION IN THE PARTNERSHIP D EED THEN THE INTEREST CANNOT BE PAID TO THE PARTNERS. THEREFORE THE ASS ESSING OFFICER HAS RIGHTLY DISALLOWED THE CLAIM OF THE ASSESSEE AS PAY MENT OF INTEREST TO PARTNER UNDER SECTION 40(B) OF THE ACT. 3.5 THE APPELLANT HAS FURTHER STATED THAT THE DEMAN D RAISED ON THE ASSESSMENT ON WHICH ASSESSEE IS IN APPEAL CANNOT BE CONSIDERED AS PAYMENT OF TAXES. IT IS A DISPUTED LIABILITY WHICH IS CRYSTALLIZED AND THUS ATTAINS THE NATURE OF TAX ONLY WHEN THE SAME C ASES TO BE DISPUTED BEFORE THE APPELLATE AUTHORITIES OR COURTS. DISPUTE D DEMAND CANNOT BE EQUATED WITH TAX. THIS CONTENTION OF THE APPELLANT IS NOT CORRECT AS THE DEMAND RAISED UNDER THE ACT AND DEMAND NOTICE SERVE D AS PER PROVISIONS OF SECTION 156 IS A TAX AND NO INTEREST ON FUND BORROWED FOR THE PAYMENT OF TAXES IS NOT ALLOWABLE AS BUSINESS E XPENDITURE. SINCE THE BUSINESS OF THE APPELLANT FIRM WAS DISCONTINUED THEREFORE ANY CAPITAL INTRODUCED BY THE PARTNER SUBSEQUENTLY FOR THE PURPOSE OF PAYMENT OF TAX NO INTEREST CAN BE ALLOWED AS BUSIN ESS EXPENDITURE AGAINST PAYMENT OF TAXES. HON'BLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICALS WORK LTD. V/S CIT 224 ITR 62 7 HAVE HELD THAT NO INTEREST IS ALLOWABLE AS EXPENDITURE IF THE FUND S HAVE BEEN BORROWED FOR THE PAYMENT OF TAXES. SIMILAR DECISION HAS BEEN GIVEN BY HONBLE MADRAS HIGH COURT IN THE CASE OF ROOPCHAND CHHABIDAS & SONS V/S CIT 63 ITR 166 AND HONBLE CALCUTTA HIGH COUR T IN THE CASE OF CIT V/S BIRLA COTTON MILLS LTD. 82 ITR 166. THUS THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE INTEREST PAYMENT OF ` 2 71 69 134 FOLLOWING THE DECISION OF HON'BLE SUPREME COURT. 3.6 THE APPELLANT HAS FURTHER STATED THAT THE APPEL LANT FIRM HAS RECEIVED INTEREST INCOME FROM THE I.T. DEPTT. AS IN COME FROM OTHER SUN PHARMA EXPORTS ITA NO.5373/M/2009 13 SOURCES AND ANY EXPENDITURE INCURRED TO EARN INTERE ST INCOME IS AN ALLOWABLE DEDUCTION UNDER SECTION 57(III) OF THE AC T. THIS CONTENTION OF THE APPELLANT IS NOT ACCEPTABLE AS THE FUND HAS NO T BEEN BORROWED FOR THE PURPOSE OF BUSINESS OR INVESTMENT TO EARN INTER EST INCOME BUT TO DISCHARGE THE INCOME TAX LIABILITY. THEREFORE NO E XPENDITURE INCURRED ON BORROWED FUNDS TO PAY THE TAXES CANNOT BE ALLOWE D AS DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. RELIANCE HAS B EEN PLACED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF EA ST INDIA PHARMACEUTICALS WORK LTD. V/S CIT 224 ITR 627 (SUP RA). 3.7 THE APPELLANT HAS FURTHER STATED THAT IN THE PR ESENT CASE THE INTEREST THOUGH RECEIVED BY THE APPELLANT DO NOT BE LONG TO THE APPELLANT ITSELF SINCE IT WAS CLEARLY PROVIDED THAT IN THE CASE OF ANY INTEREST INCOME IS RECEIVED BY THE APPELLANT THE S AME WOULD BE PAID TO SPIL. THEREFORE THE INTEREST RECEIVED FROM THE I.T. DEPTT. AS DIVERSION OF INCOME BY OVERRIDING TITLE. THE APPELL ANT HAS MADE REFERENCE TO THE SUPPLEMENTARY PARTNERSHIP DEED FIL ED IN THIS REGARD. AS DISCUSSED IN EARLIER PARAGRAPH THE PAYMENT OF T AXES IS A JOINT AND SEVERAL LIABILITY OF THE PARTNERS AND IT CANNOT BE SHIFTED BY ANY AGREEMENT TO ANYONE ELSE EXCEPT THE PERSON CONCERNE D. THEREFORE THE PAYMENT OF TAXES WAS ALSO THE LIABILITY OF THE PART NER M/S. SUN PHARMACEUTICAL INDUSTRIES LTD. HAVING 80% SHARE IN THE PARTNERSHIP FIRM AND THE PARTNER HAS DISCHARGED THIS LIABILITY THEREFORE AND THERE IS NO DIVERSION OF INCOME BY OVERRIDING TITLE. SINC E THE PAYMENT OF TAXES WERE MADE BY THE FIRM THEREFORE INTEREST INC OME BELONGS TO THE FIRM AND ENTIRE REFUND AS WELL AS INTEREST HAS BEEN RECEIVED BY THE APPELLANT FIRM FROM I.T. DEPTT. AND IT CANNOT BE DI VERTED AS THERE IS NO EXPRESS PROVISION EITHER IN THE PARTNERSHIP ACT O R UNDER I.T. ACT FOR DIVERSION OF TAX LIABILITY. THEREFORE THIS CLAIM O F THE APPELLANT THAT INCOME OF INTEREST IS A DIVERSION OF INCOME BY OVER RIDING TITLE IS REJECTED. THE CASE LAW RELIED UPON BY THE APPELLANT ARE DISTINGUISHABLE OF FACT AND NO HELP TO THE APPELLANT. IN VIEW OF TH IS FACT THE DISALLOWANCE OF INTEREST PAYMENT OF ` 2 71 69 134 MADE BY THE ASSESSING OFFICER IS CONFIRMED. THE GROUND OF APPEA L NO.1 AND 2 IS DECIDED AGAINST THE APPELLANT. 14. IN VIEW OF THE ABOVE WE DISMISS THE GROUND RAISED BY THE ASSESSEE. 15. IN THE RESULT ASSESSEES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.7.2011 SD/- D.K. AGARWAL JUDICIAL MEMBER SD/- J. SUDHAKAR REDDY ACCOUNTANT MEMBER MUMBAI DATED: 29.7.2011 SUN PHARMA EXPORTS ITA NO.5373/M/2009 14 COPY TO : (1) THE ASSESSEE; (2) THE RESPONDENT; (3) THE CIT(A) MUMBAI CONCERNED; (4) THE CIT MUMBAI CITY CONCERNED; (5) THE DR E BENCH ITAT MUMBAI. TRUE COPY BY ORDER PRADEEP J. CHOWDHURY ASSISTANT REGISTRAR SR. PRIVATE SECRETARY ITAT MUMBAI BENCHES MUMBAI DATE INITIAL 1. DRAFT DICTATED ON 15.7.2011 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 18.7.2011 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 20.7.2011 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 20.7.2011 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 220.7.2011 SR.PS/PS 6. DATE OF PRONOUNCEMENT 29.7.2011 SR.PS 7. FILE SENT TO THE BENCH CLERK 29.7.2011 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER