2014 (3) TMI 182 - HC - Income Tax

Excess drawings effected by the partners - Addition made u/s 68 of the Act - Amount not disclosed in the Return Deletion made u/s 40A(3) and 40(a)(ia) of the Act Held that - The first appellate authority as well as the assessing officer did not have the benefit of checking any of the records which were produced before the Tribunal as a paper book - Some of the documents which were part of the paper book produced before the Tribunal are placed as additional documents by filing an Interlocutory Application. The entire system of accounting maintained by the respondent/assessee is by way of cash -similar accounting system is maintained so far as the sister firms and also the accounts of the partners including Mr.George Jacob - The stand of the respondent/assessee before both the appellate authorities was, the funds coming to the respondent/assessee was belonging to one of the partners, i.e. Shri.George Jacob and the funds reached him through other sister firms, therefore, there is proper explanation so far as ₹ 12.18 Crores - So far as non-payment of interest on excess amounts drawn by the partners of the firm they claim that certain capital amounts were available with the firm in respect of each of the four partners who had drawn excess amount, and as no interest was paid in the previous financial year, they did not charge any interest for the assessment year in question. The Tribunal placing reliance on paper book filed by the respondent/assessee in question which never was the subject matter of consideration before the assessing officer and the first appellate authority - the controversial issues raised before cannot be analyzed with reference to the factual situation - Even otherwise, the Court need not go into the veracity and genuineness of the facts placed on record now - In the absence of the additional documents for consideration before the assessing officer and CIT(Appeals), one cannot conclude that the opinion of the assessing officer and CIT (Appeals) were erroneous - Similarly Tribunal refers to several documents which persuaded reversal of the opinion of the assessing officer and CIT(Appeals) thus, the matter is remitted back to the AO for fresh consideration Decided in favour of Revenue.

Issues Involved:
1. Interest chargeable on excess drawings by partners.
2. Disallowance of interest paid to partner Mr. George Jacob.
3. Introduction of Rs. 12.18 Crores by Mr. George Jacob.
4. Disallowance of premium paid towards Keyman Insurance.
5. Burden of proof and consideration of various disallowances and deletions by ITAT.

Detailed Analysis:

Issue 1: Interest Chargeable on Excess Drawings by Partners
The Assessing Officer (AO) found that four partners had excess drawings amounting to Rs. 166.30 Crores and proposed to charge interest at 12% on these drawings, resulting in an addition of Rs. 19,90,753/-. The assessee argued that no interest was charged due to a credit balance in the partners' capital accounts, but the AO rejected this explanation, citing Section 37(1) of the Income Tax Act. The CIT(A) upheld the AO's decision, but the Tribunal reversed it, stating that the cash system of accounting supported the assessee's stand and deleted the addition.

Issue 2: Disallowance of Interest Paid to Partner Mr. George Jacob
The AO disallowed the interest payment of Rs. 3.27 Crores to Mr. George Jacob, noting discrepancies in the credit balance and the non-disclosure of interest in his income return. The CIT(A) affirmed this disallowance, suspecting that the transactions were designed to circumvent provisions like Section 40A(3) and 40(a)(ia). The Tribunal, however, found that the interest had been offered by the partner in his individual return and thus, disallowed the AO's addition.

Issue 3: Introduction of Rs. 12.18 Crores by Mr. George Jacob
The AO questioned the genuineness of the Rs. 12.18 Crores introduced by Mr. George Jacob, citing a lack of proper explanation under Section 68. The CIT(A) supported this view, noting the absence of supporting documents from sister firms. The Tribunal, however, found that the assessee had provided sufficient documentation and explanations, which the AO had failed to verify, and thus deleted the addition.

Issue 4: Disallowance of Premium Paid Towards Keyman Insurance
The AO disallowed the premium of Rs. 61,29,162/- paid towards Keyman Insurance, stating that the policy was not taken in the name of employees or persons connected with the business. The CIT(A) upheld this view, citing a Mumbai Bench judgment. The Tribunal, however, opined that if the policy was taken for the benefit of the firm, it should be allowed as an expenditure.

Issue 5: Burden of Proof and Consideration of Various Disallowances and Deletions by ITAT
The Revenue argued that the Tribunal wrongly shifted the burden of proof and did not properly consider the disallowances and deletions. The Tribunal, however, relied on documents presented in a paper book that were not previously available to the AO or CIT(A).

Conclusion:
The High Court noted the absence of these additional documents in the initial assessments and remanded the case back to the AO. The AO is directed to reassess the issues afresh, considering the documents produced before the Tribunal. This remand aims to ensure a thorough examination of the facts and documents to arrive at a just conclusion.

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