1994 (4) TMI 121 - AT - Income Tax

Applied To, Assessing Officer, Assessment Proceedings, Assessment Year, Full Bench, Partner In Firm, Reassessment Proceedings

Issues Involved:
1. Jurisdictional issue regarding the reopening of assessment under section 147(b) of the Income-tax Act.
2. Applicability of section 40(b) of the Income-tax Act to disallow interest paid to partners representing their respective Hindu Undivided Families (HUFs).

Detailed Analysis:

Jurisdictional Issue:
The primary jurisdictional issue revolves around whether the Assessing Officer (AO) was justified in reopening the assessment under section 147(b) of the Income-tax Act. Initially, the AO accepted the assessee's contention based on the Gujarat High Court decision in CIT v. Sajjanraj Divanchand [1980] 126 ITR 654, which did not require an add-back under section 40(b) for interest paid to partners. However, the Full Bench of the same High Court later overruled this decision in Chhotalal & Co. v. CIT [1984] 150 ITR 276.

The assessee argued that the AO's reopening of the assessment was based on a mere change of opinion, as the Full Bench decision was available at the time of the original assessment. The assessee relied on CIT v. Gujarat Ginning and Manufacturing Co. Ltd. [1994] 205 ITR 40 to support this contention.

The Tribunal, however, disagreed, citing the Supreme Court's decision in A.L.A. Firm v. CIT [1991] 189 ITR 285, which allows the AO to invoke section 147 if a previously overlooked decision indicates that income has escaped assessment. The Tribunal concluded that the AO validly initiated reassessment proceedings, dismissing the related grounds.

Applicability of Section 40(b):
The second issue concerns the applicability of section 40(b) of the Income-tax Act to disallow interest paid to partners representing their respective HUFs. The assessee-firm, constituted by a Deed of Partnership dated 1-1-1976, had seven partners representing their HUFs and one partner in his individual capacity. The firm paid interest on advances made by the HUFs, which was credited to their respective current accounts.

The Tribunal examined whether the interest paid to the HUFs could be disallowed under section 40(b). Explanation 2 to section 40(b), inserted by the Taxation Law (Amendment) Act, 1984, effective from 1-4-1985, clarifies that interest paid to a partner representing an HUF is disallowable if paid in the same representative capacity.

The Tribunal noted that the Rajasthan High Court in CIT v. Motilal Ramjiwan & Co. [1988] 171 ITR 294 and Gajanand Poonam Chand & Bros. v. CIT [1988] 174 ITR 346 held that Explanation 2 is merely clarificatory or declaratory of existing law. Other High Courts, including Andhra Pradesh, Punjab and Haryana, and Madhya Pradesh, have taken a similar view.

Although the Allahabad High Court in CIT v. U.P. Iron Stores [1989] 180 ITR 296 opined that the Explanation is prospective, the Tribunal chose not to follow this view, citing the Supreme Court's observation in CIT v. P. Doraiswamy Chetty [1990] 183 ITR 559 that even non-retrospective provisions can serve as legislative exposition.

The Tribunal concluded that the interest of Rs. 69,985 was rightly disallowed under section 40(b) as the partners were in a representative capacity, and the interest was credited to the HUFs' current accounts.

Conclusion:
The Tribunal upheld the AO's decision to reopen the assessment under section 147(b) and disallow the interest paid to the partners representing their HUFs under section 40(b). The assessee's appeal was dismissed.

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