2008 (6) TMI 543 - AT - Income Tax

Summary

Issues Involved:
1. Assessment of Rs. 1,98,57,604 in the hands of the appellant.
2. Right to receive interest at 18% per annum on the capital contributed.
3. Applicability of section 28(v) read with section 5(1)(c) of the Income-tax Act.
4. Validity of the amendment to the partnership deed through exchange of letters.
5. Valuation of leasehold land and its impact on income.

Detailed Analysis:

1. Assessment of Rs. 1,98,57,604 in the Hands of the Appellant:
The assessee contested the assessment of Rs. 1,98,57,604, arguing that no business was conducted during the relevant period, and hence, no income was earned. The Commissioner of Income-tax (Appeals) upheld the assessment, indicating that the interest on capital contributed by the assessee to the partnership firms accrued and should be reflected in the returns. The Tribunal found that the firms did not earn any profit and the business had not commenced due to prolonged litigation, thus invalidating the assessment.

2. Right to Receive Interest at 18% Per Annum on the Capital Contributed:
The partnership deed initially stipulated an 18% interest on capital. However, the assessee argued that an amendment postponed the interest charge until the project commenced. The Tribunal noted that the amendment was not formalized through a deed but through letters, which lacked legal authenticity. Nevertheless, the Tribunal found that under section 13(c) of the Indian Partnership Act, 1932, interest on capital is payable only out of profits, which were absent in this case.

3. Applicability of Section 28(v) Read with Section 5(1)(c) of the Income-tax Act:
The assessee argued that since no business was carried out, section 28(v) concerning "Profits from business" was not applicable. The Tribunal agreed, noting that the business had not commenced and no profits were generated, thus nullifying the application of section 28(v).

4. Validity of the Amendment to the Partnership Deed Through Exchange of Letters:
The assessee claimed that the terms of the partnership deed were amended through letters exchanged between partners, postponing the interest charge. The Revenue authorities and the Tribunal found these letters to be self-serving and not legally binding as they were not executed on stamp paper or formalized through a deed. Therefore, the original terms of the partnership deed remained unchanged.

5. Valuation of Leasehold Land and Its Impact on Income:
The Commissioner of Income-tax (Appeals) suggested that the increase in the value of leasehold land should be considered as income. The Tribunal refuted this, stating that the accepted principle of valuation is to consider the lower of market price or cost. The firms valued the land at cost, which is an accepted method, and thus, no income arose from the revaluation of land.

Conclusion:
The Tribunal concluded that no interest was payable by the partnership firms to their partners due to the absence of profits, as per section 13(c) of the Indian Partnership Act, 1932. Consequently, no right to receive interest accrued to the assessee-company, making the notional addition of Rs. 1,98,57,604 unsustainable. The appeal of the assessee was allowed, and the addition was deleted.

Order pronounced on June 12, 2008.