1993 (1) TMI 107 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of Section 40(b) of the Income-tax Act, 1961.
2. Retrospective application of Explanations inserted by the Taxation Laws (Amendment) Act, 1984.
3. Jurisdiction and validity of the revisional order passed by the Commissioner of Income-tax (CIT).

Issue-wise Detailed Analysis:

1. Applicability of Section 40(b) of the Income-tax Act, 1961:

The primary issue revolves around the disallowance of interest paid to partners under Section 40(b) of the Income-tax Act, 1961. The CIT held that the assessment orders for the years 1983-84 and 1984-85 were erroneous and prejudicial to the interests of revenue because the interest paid to the partners was not disallowed under Section 40(b). The CIT relied on the Karnataka High Court's judgment in the case of CIT v. Khoday Eswarsa & Sons, which held that the prohibition in Section 40(b) is absolute and applies regardless of the capacity in which the partner receives the interest. This judgment was binding on the CIT at the time of the revisional order.

2. Retrospective Application of Explanations Inserted by the Taxation Laws (Amendment) Act, 1984:

The assessee argued that the Explanations inserted by the Taxation Laws (Amendment) Act, 1984, should be applied retrospectively. The Andhra Pradesh High Court in N.T.R. Estate v. CIT held that these Explanations are clarificatory and should govern assessments prior to the assessment year 1985-86. The Karnataka High Court in CIT v. Mangalore Ganesh Beedi Works also opined that Explanation 2 is declaratory of the existing law and intended to remove doubts raised by conflicting High Court decisions. Therefore, the Explanations should be applied to earlier assessment years to avoid unnecessary litigation.

3. Jurisdiction and Validity of the Revisional Order Passed by the Commissioner of Income-tax (CIT):

The CIT invoked his revisional jurisdiction under Section 263 of the Income-tax Act, 1961, to revise the assessment orders. The Tribunal noted that the judgment in Mangalore Ganesh Beedi Works was not available to the CIT at the time of passing the revisional order. Therefore, the CIT was bound by the earlier judgment in Khoday Eswarsa & Sons, which held that the prohibition in Section 40(b) is absolute. The Tribunal upheld the validity of the CIT's assumption of jurisdiction, stating that the orders passed by the ITO were erroneous and prejudicial to the interests of revenue because the interest paid to partners was not disallowed under Section 40(b) prior to the amendment.

Conclusion:

The Tribunal concluded that the revisional order of the CIT was valid and justified based on the binding judgment in Khoday Eswarsa & Sons. However, in light of the later judgment in Mangalore Ganesh Beedi Works, the Tribunal found it necessary to reconsider the matter. The Tribunal restored the matter to the CIT for fresh adjudication, allowing the assessee to present evidence regarding the individual sources of funds or coparcenary sources of funds. The appeals were allowed for statistical purposes, and the revisional order of the CIT was set aside for fresh disposal after considering the evidence adduced by the assessee.