M/s Dubeer & Sons, Hubli v. ITO, Hubli

ITA 232/BANG/2009 | 2003-2004
Pronouncement Date: 26-02-2010 | Result: Allowed

Appeal Details

RSA Number 23221114 RSA 2009
Bench Bangalore
Appeal Number ITA 232/BANG/2009
Duration Of Justice 11 month(s) 7 day(s)
Appellant M/s Dubeer & Sons, Hubli
Respondent ITO, Hubli
Appeal Type Income Tax Appeal
Pronouncement Date 26-02-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 26-02-2010
Date Of Final Hearing 23-02-2010
Next Hearing Date 23-02-2010
Assessment Year 2003-2004
Appeal Filed On 19-03-2009
Judgment Text
THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE DR. O.K NARAYANAN VICE PRESIDENT AND SHRI GEORGE GEORGE K JUDICIAL MEMBER ITA NO.232 & 233/BANG/200 9 (ASST. YEAR -2003- 04 & 2004-05) M/S DUBEER & SONS MARATHA GALLI HUBLI. . APPELLANT VS. THE INCOME-TAX OFFICER WARD-3(2) HUBLI. . RESPONDENT APPELLANT BY : SHRI S VENKATESAN CHARTERED ACCOUNTANT RESPONDENT BY : SMT. V.S SREELEKHA ADDL. COMMISS IONER OF INCOME-TAX O R D E R PER DR. O.K NARAYANAN VICE PRESIDENT THESE TWO APPEALS ARE FILED BY THE ASSESSEE. THE R ELEVANT ASSESSMENT YEARS ARE 2003-04 AND 2004-05. THESE AP PEALS ARE DIRECTED AGAINST THE COMMON ORDER PASSED BY THE CIT (A) HUBLI FOR THREE ASSESSMENT YEARS 2003-04 2004-05 AND 2005-0 6. ITA NO.232 & 233/B/09 2 2. THE ASSESSEE HAS NOT FILED ANY APPEAL FOR THE AS SESSMENT YEAR 2005-06. APPEALS ARE FILED ONLY FOR THE TWO ASSESS MENT YEARS 2003-04 AND 2004-05. THE REVENUE HAS ACCEPTED THE ORDERS O F THE CIT(A) FOR THE IMPUGNED ASSESSMENT YEARS 2003-04 AND 2004-05. 3. THESE APPEALS ARISE OUT OF THE ASSESSMENTS COMPL ETED U/S 143(3) READ WITH SEC. 147 OF THE INCOME-TAX ACT 1961. 4. THE FIRST COMMON GROUND RAISED IN BOTH THE APPEA LS IS THAT THE CIT(A) HAS ERRED IN UPHOLDING THE VALIDITY OF THE N OTICES ISSUED BY THE ASSESSING AUTHORITY U/S 148. 5. THE SECOND COMMON GROUND IS THAT THE CIT(A) HAS ERRED IN SUSTAINING THE ADDITION OF RS.2 62 882/- FOR THE AS SESSMENT YEAR 2003- 04 AND RS.2 25 638/- FOR THE ASSESSMENT YEAR 2004-0 5 ON THE GROUND OF DIVERSIFICATION OF INTEREST BEARING BORROWED FUN DS FOR PERSONAL USE OF THE PARTNERS OF THE ASSESSEE FIRM. 6. THE CURRENT ACCOUNT OF ONE OF THE PARTNERS OF TH E ASSESSEE-FIRM SHRI SRINIVAS RAO DUBEER WAS A DEBIT BALANCE. HE H AD WITHDRAWN SUBSTANTIAL AMOUNTS DURING THE PREVIOUS YEAR RELEVA NT TO THE ITA NO.232 & 233/B/09 3 ASSESSMENT YEARS UNDER APPEAL THROUGH HIS CURRENT A CCOUNT. THE PARTNERSHIP DEED CONTAINED CLAUSE WHEREBY THE DEBI T BALANCES STANDING IN THE NAME OF THE PARTNERS WOULD BE LIABL E FOR LEVY OF INTEREST. 7. THE ASSESSING OFFICER FOUND THAT IN SPITE OF HEA VY DRAWINGS MADE BY SHRI SRINIVAS RAO DUBEER THE FIRM HAS NOT LEVIED ANY INTEREST ON THE DEBIT BALANCE. THE ASSESSEE EXPLAI NED BEFORE THE ASSESSING AUTHORITY THAT LEVY OF INTEREST BEING A CONTRACTUAL MATTER NO INTEREST WAS LEVIED ON SHRI SRINIVAS RAO DUBEER AS THE PARTNERS HAVE DECIDED NOT TO LEVY INTEREST ON THE DEBIT BALANCE O F SHRI SRINIVAS RAO DUBEER. THIS EXPLANATION WAS NOT ACCEPTED BY THE A SSESSING OFFICER AND HE MADE ADDITIONS TO THE PROFITS OF THE ASSESSE E FIRM BY WAY OF INTEREST RECEIVABLE BY THE FIRM PROVIDED INTEREST W AS LEVIED ON THE DEBIT ACCOUNT OF SHRI SRINIVAS RAO DUBEER. 8. IN FIRST APPEAL THE CIT(A) TREATED THE CASE AS MATTER OF DIVERSIFICATION OF FUNDS. THE ASSESSEE FIRM HAD AV AILED BORROWED FUNDS INCURRING COST OF INTEREST. THE CIT(A) FOUND THAT THE DIVERSIFICATION OF SUCH INTEREST BEARING FUNDS FOR THE PURPOSE OF OTHER THAN BUSINESS HAS MADE OUT A CASE FOR THE DISALLOWA NCE OF ITA NO.232 & 233/B/09 4 PROPORTIONATE AMOUNT OF INTEREST EXPENDITURE CLAIME D BY THE ASSESSEE. ON THAT GROUND HE MADE AN ADDITION OF RS.2 62 882/ - FOR THE ASSESSMENT YEAR 2003-04 AND AN ADDITION OF RS.2 25 638/- FOR THE ASSESSMENT YEAR 2004-05. 9. WE HEARD SHRI S VENKATESAN THE LEARNED CHARTERE D ACCOUNTANT APPEARING FOR THE ASSESSEE AND SMT. V.S SREELEKHA THE LEARNED ADDL. COMMISSIONER OF INCOME-TAX APPEARING FOR THE REVEN UE. 10. THE LEARNED ADDL. COMMISSIONER HAS FURTHER RELI ED ON THE DECISION OF HYDERABAD ITAT B BENCH RENDERED IN T HE CASE OF ARCHITECHTURAL ASSOCIATES VS. ACIT (92 ITD 479). 11. WE CONSIDERED THE ISSUE. REGARDING OVERDRAWINGS OF FUNDS BY A PARTNER OF THE FIRM AND LEVY OF INTEREST ON THE RES ULTANT DEBIT BALANCE ARE MATTERS OF AGREEMENTS ENTERED INTO BETWEEN THE PARTNERS OF THE FIRM. INSISTENCE OF INTEREST ON THE DEBIT BALANCE OF THE PARTNER OF THE FIRM IS NOT BORNE OUT OF STATUTE. THE LEVY IS BORN E OUT OF CONTRACTUAL OBLIGATION. WHERE THE PARTNERSHIP DECIDED THAT NO I NTEREST IS TO BE LEVIED ON THE EXCESS DRAWINGS MADE BY ONE PARTNER THE MATTER ENDS THERE. THE ASSESSING OFFICER CANNOT GO FURTHER AND PRESUME A CASE OF ITA NO.232 & 233/B/09 5 NOTIONAL INTEREST AGAINST THE FIRM WHICH IS ATTRIBU TABLE TO THE OVER- DRAWN ACCOUNT OF THE PARTNER. AN INCOME BY WAY OF INTEREST IN SUCH CASES COULD BE CONCEIVED IN THE HANDS OF THE FIRM ONLY IF INTEREST HAS BEEN ACCRUED ON THE BASIS OF AN ENFORCEABLE CONTRAC T. IN THE ABSENCE OF ANY SUCH CONTRACTUAL OBLIGATION INTEREST CANNOT BE PRESUMED TO HAVE BEEN EARNED BY THE FIRM. IN VIEW OF THE ABOVE WE HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN COMPUTING I NCOME BY WAY OF INTEREST IN THE HANDS OF THE ASSESSEE FIRM. THE SAI D FINDING HAS RIGHTLY BEEN OVERRULED BY THE CIT(A). 12. NOW COMING TO THE FINDING OF THE CIT(A) THAT TH ERE WAS DIVERSION OF INTEREST BEARING BORROWED FUNDS WE FI ND THAT THE CIT(A) HAS BEEN CARRIED AWAY BY THE ANALYSIS OF BALANCES R EFLECTED IN THE BALANCE SHEET OF THE ASSESSEE FIRM. IN ORDER TO MAK E OUT A CASE OF DIVERSION OF INTEREST BEARING BORROWED FUNDS FOR NO N BUSINESS PURPOSES IT IS NECESSARY TO HAVE AN APPARENT NEXUS BETWEEN THE WITHDRAWAL OF THE FUNDS AND NON-BUSINESS ACTIVITIES INITIATED BY THE WITHDRAWER. A CONTEMPORANEOUS NEXUS IS CALLED FOR IN SUCH CASES. IN THE PRESENT CASE THE PARTNER HAS OVERDRAWN THROUGH HIS ACCOUNT AND HAS KEPT THE MONEY IN FIXED DEPOSITS FOR A WHILE A ND INTEREST WAS EARNED AND THE INTEREST WAS OFFERED BY HIM FOR THE PURPOSE OF TAXATION. ITA NO.232 & 233/B/09 6 ONLY FOR THE REASON THAT THE PARTNER HAD RETAINED T HE FUNDS IN HIS HANDS THROUGH FDS IT IS NOT POSSIBLE TO COME TO A CONCL USION THAT THE PARTNER HAS DIVERTED THE FUNDS FOR NON BUSINESS PUR POSES. WHEN A PARTNER OF A FIRM OVERDRAWS THROUGH HIS ACCOUNT IT IS NECESSARY TO SEE THE CIRCUMSTANCES WHICH MADE HIM TO WITHDRAW MONEY OVER AND ABOVE THE LIMIT. THE WITHDRAWAL COULD BE THE FORER UNNER OF THE RETIREMENT OF PARTNER OR IT MAY BE FOR THE PURPOSE OF APPLICATION OF FUNDS FOR THE BENEFITS OF THE FIRM THROUGH THE MEDI UM OF THE PARTNER OR IT MAY BE A WITHDRAWAL OF FUNDS FROM THE PARTNER FOR HIS PERSONAL PURPOSES. WHEN FACTS RELATING TO THE ABOVE POSSIBL E PROPOSITIONS ARE NOT EXAMINED IT IS NOT POSSIBLE TO SAY THAT THE PA RTNER HAS WITHDRAWN MONEY FOR PURPOSE OTHER THAN BUSINESS. IT IS TO BE REMEMBERED THAT A PARTNER IS AN AGENT OF THE FIRM AND FIRM IS THE AGE NT OF THE PARTNER AND THEREFORE A PARTNER CAN WITHDRAW MONEY FROM THE AC COUNTS OF THE PARTNERSHIP BUSINESS AND UTILIZE THE AMOUNT FOR THE PURPOSE OF THE BUSINESS OF THE FIRM ITSELF. SUCH WITHDRAWAL OF FU NDS NEEDS NOT BE THROUGH THE GENERAL POOL ACCOUNT OF THE FIRM BUT IT COULD BE THROUGH THE PERSONAL ACCOUNTS OF THE PARTNERS AS WELL. A S USTAINABLE CONCLUSION CAN BE ARRIVED AT ONLY AFTER EXAMINING T HESE ASPECTS. ITA NO.232 & 233/B/09 7 13. WE FIND THAT IN THE PRESENT CASE THE CIT(A) HA S TREATED THE EXCESS DRAWINGS OF THE PARTNER AS A DIVERSION OF IN TEREST BEARING BORROWED FUNDS OF THE ASSESSEE FIRM IN A PREMATURE WAY. THEREFORE IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE CIT(A) IS NOT JUSTIFIED IN MAKING ADDITIONS IN THE HANDS OF T HE FIRM BY DISALLOWING A PORTION OF THE INTEREST EXPENDITURE O N THE GROUND THAT FIRM HAS DIVERTED INTEREST BORROWINGS FUNDS. SUCH A CASE OF DIVERSION HAS NOT BEEN ESTABLISHED IN THE PRESENT CASE. THER EFORE THESE TWO ADDITIONS/DISALLOWANCES ARE DELETED. 14. AS THE ISSUES RAISED IN THESE APPEALS HAVE BEEN DECIDED ON THEIR MERITS WE HAVE NOT EXAMINED THE GROUND RAISED BY T HE ASSESSEE RELATING TO THE VALIDITY OF THE REOPENING OF ASSE SSMENTS. 15. IN THE RESULT THESE TWO APPEALS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON FRIDAY THE 26 TH DAY OF FEBRUARY 2010 AT BANGALORE. SD/- SD/- (GEORGE GEORGE K) (DR. O.K NARAYANAN ) JUDICIAL MEMBER V ICE PRESIDENT VMS. ITA NO.232 & 233/B/09 8 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF 7..GF ITAT NEW DELHI. BY ORDER ASST. REGISTRAR ITAT BANGALOR E.