2010 (1) TMI 951 - AT - Income Tax

Business disallowance - Interest, salary, etc., paid by firm to partner, Revision - Of orders prejudicial to interest of revenue

Summary

Issues Involved:
1. Interest allowed to partners on capital in respect of credit entries for transfer of shares.
2. Dividend income from shares transferred and its distribution among partners.
3. Applicability of Section 14A regarding expenses against exempt income.
4. Assessment status of the firm as AOP or partnership.

Issue-wise Detailed Analysis:

1. Interest Allowed to Partners on Capital in Respect of Credit Entries for Transfer of Shares:
The CIT (Admn.) issued a notice under Section 263, questioning the admissibility of interest allowed to partners on capital credited by transfer of shares, as per Section 36(1)(iii). The CIT inferred that the interest allowed is not deductible since the shares were not transferred in the firm's name but were merely book entries. The assessee argued that the partnership deed was followed, and the interest was paid per Section 40(b). The Tribunal found that the CIT's basis for invoking Section 263 was different from the grounds stated in the notice, making the revisional order invalid.

2. Dividend Income from Shares Transferred and Its Distribution Among Partners:
The CIT contended that the dividend income from shares was not recorded in the firm's books and was enjoyed by partners, violating the partnership deed. This led to the suggestion that the firm should be assessed as an AOP. The assessee maintained that the firm met all conditions under Section 184 and should be assessed as a partnership firm. The Tribunal noted no evidence that dividends were actually received and distributed among partners otherwise than per the partnership deed. The Tribunal concluded that the CIT's concerns were based on presumptions without concrete evidence.

3. Applicability of Section 14A Regarding Expenses Against Exempt Income:
The CIT argued that the interest against dividend income was not allowable and the Assessing Officer failed to consider this aspect. The Tribunal highlighted that the CIT himself admitted that Section 14A was not invoked. According to the Tribunal, if Section 14A is not applicable, the interest on borrowed capital for shares is allowable even if no dividend is received, referencing the Supreme Court's decisions in CIT v. Raghunandan Prasad Moody and CIT v. Indian Bank Ltd.

4. Assessment Status of the Firm as AOP or Partnership:
The CIT suggested that the firm should be assessed as an AOP due to non-compliance with the partnership deed in distributing profits. The assessee countered that the firm had been assessed as a partnership since 1998, fulfilling all conditions under Section 184. The Tribunal agreed, stating that the firm should continue to be assessed as a partnership if there is no change in its constitution or partners' shares. The Tribunal found no valid ground for the CIT's direction to reassess the firm as an AOP.

Conclusion:
The Tribunal concluded that the CIT did not provide sufficient grounds for revising the assessment order. The assessment order was restored, and the appeal of the assessee was allowed. The dissenting opinion by the Accountant Member emphasized the lack of inquiry by the Assessing Officer, supporting the CIT's invocation of Section 263. However, the majority opinion favored the assessee, stating that the CIT's grounds were not substantiated by evidence and were different from those in the notice.