1990 (3) TMI 106 - AT - Income Tax

Summary

Issues:
1. Addition of accrued interest on fixed deposits in the names of partners.
2. Treatment of fixed deposits and interest as revenue receipt in the hands of the assessee-firm.
3. Deletion of addition of accrued interest by CIT(A).
4. Interpretation of Indian Partnership Act, 1932 regarding property of the firm.

Analysis:

1. The appeal was filed by the revenue against the order of the CIT(A) regarding the addition of Rs. 10,903 as accrued interest on fixed deposits standing in the names of the partners on behalf of the firm. The ITO considered these deposits as assets of the firm, and the partners were enjoying the interest on behalf of the firm. The CIT(A) deleted the addition based on the argument that there was insufficient evidence to show that the firm used these fixed deposits in its business operations.

2. The CIT(A) observed that the fixed deposits were not investments made by the firm but were shown in the Balance Sheet to enhance the firm's image. The CIT(A) concluded that since the commercial use of the fixed deposits was not recorded, the addition of accrued interest was unjustified. The revenue contended that the interest should be included in the firm's income as per the mercantile system of accounting. The Tribunal noted that property bought with firm's money is deemed to be bought on account of the firm unless there is a contrary intention.

3. The Tribunal analyzed the Indian Partnership Act, 1932, specifically Section 14, which states that property bought with firm's money is considered firm property unless there is a contrary intention. In the absence of evidence showing an agreement or intention that the fixed deposits were individual properties of the partners, the deposits were deemed to be the property of the firm. Therefore, the interest on these deposits was correctly assessed in the hands of the firm. The Tribunal distinguished previous cases where additions were deleted due to procedural issues, emphasizing that in the current assessment year, the addition was made in the regular assessment under section 143(3).

4. The Tribunal allowed the appeal filed by the revenue, upholding the addition of accrued interest on fixed deposits in the names of the partners as a revenue receipt in the hands of the assessee-firm. The decision was based on the interpretation of the Indian Partnership Act and the absence of evidence indicating a contrary intention regarding the ownership of the fixed deposits.