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TMI Blog2006 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... e year of credit to their accounts. The AO found that since the firm is crediting accounts of partners to the extent of amount due which is accumulated over years and again interest is paid on such capital account including interest of earlier years credited, it amounts to payment and hence the partners should have offered the income by way of interest credited to their account. He accordingly issued notice under s. 148 dt. 30th May, 2002 to reassess the income of partners. The assessee objected to proceedings under s. 148. The AO after considering the objection by the assessee held that when the liability to pay tax is evaded by one method or the other, there is escapement of assessment. The term "escaped assessment" includes non-assessment as well as under-assessment. Since the income was not correctly disclosed, it can be said that there was no full and true disclosure and hence reopening of assessment is justified. 3. In the reassessment proceedings, the AO held that the assessee followed mercantile system of accounting upto asst. yr. 1997-98 in respect of such interest income from firm. There are specific provisions for taxation of firm and its partners and there is no relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the firm is not binding on the partners. In a case where a company owned by directors follows mercantile system of accounting and claimed expenditure on such basis but the directors offering such income on cash basis, such method has to be accepted as held in the case of Dr. N.K. Brahmachari vs. CIT (1992) 104 CTR (Cal) 209. The assessee is allowed to choose and follow cash system of accounting and income should be determined on the basis of method regularly followed. The ratio of Hon'ble Supreme Court in McDowell Co. will not apply in view of the subsequent decision of the Supreme Court in the case of Union of India Anr. vs. Azadi Bachao Andolan Anr. (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC). The ground relating to reopening of assessment was not adjudicated as the same was held to be of academic interest. Interest charged under ss. 234A and 234B is held consequential in nature. 5. Whereas the Revenue challenges deletion of addition in respect of interest income, in the cross-objections the assessee challenges reopening of assessment and charging of interest under ss. 234A and 234B of the Act. 6. Learned special counsel for Revenue Shri Jaiswal, narrating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the law giver.' It is a cardinal principle of construction of statute that when language of the statute is plain and unambiguous, then the Court must give effect to the words, used in the statute and it would not be open to the Courts to adopt a hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act. In Kirkness vs. John Hudson Co. Ltd. 1955 (2) All ER 345, Lord Reid pointed out as to what is the meaning of 'ambiguous' and held that 'a provision is not ambiguous merely because it contains a word which in different context is capable of different meanings and it would be hard to find anywhere a sentence of any length which does not contain such a word. A provision is, in my judgment, ambiguous only if it contains a word or phrase which in that particular context is capable of having more than one meaning'. It is no doubt true that if on going through the plain meaning of the language of statute, it leads to anomalies, injustice and absurdities, then the Court may look into the purpose for which the statute has been brought and would try to give a meaning, which would adhere to the purpose of the statut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Referring to the provision of Indian Partnership Act, 1932, Shri Jaiswal submitted that the partnership is the relation between the persons who have agreed to share the profits of the business carried on by all or any of them acting for all. As per s. 2(23) of the IT Act, 'firm', 'partner' and 'partnership' have the meanings respectively assigned to them in the Indian Partnership Act, 1932. The assessees who are partners, are related to each other and have total control over the affairs of the firm. There is no prohibition in the partnership deed for withdrawing any sum standing to the credit of such partner's account. The assessee is merely required to withdraw and such withdrawal cannot be considered as received but the moment the amount is credited to their account, it is as good as receipt by the partner. The assessees have conveniently allowed to swell their accounts from year to year and there is no material to show that such funds are not available to the individual partners. He further submitted that the decision of Hon'ble Supreme Court in CIT vs. A. Gajapathy Naidu (1964) 53 ITR 114 (SC) and CIT vs. Chunilal V. Mehta Sons (P) Ltd. 1973 CTR (SC) 470 : (1971) 82 ITR 54 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. Mercantile system of accountancy, a double entry system, is maintained on the basis of accrual of rights to receive or liability to pay a certain sum of money, unlike in the case of cash system of accountancy which merely takes note of actual receipts or disbursements." As per s. 145 as amended w.e.f. 1st April, 1997 the assessee can follow either the mercantile system or cash system of accounting. The assessee was following mercantile system of accounting till asst. yr. 1997-98. The assessee changed the system of accounting in respect of interest and remuneration from firm by switching over to cash system. Such change is allowable provided the change is bona fide and followed consistently thereafter. As per sub-s. (3) of s. 145 if the AO is not satisfied about the method of accounting followed by the assessee, the AO may make an assessment in the manner provided in s. 144. However, in the present case the assessment is not made under s. 144 but under s. 143(3). This implies that the AO is satisfied with the method of accounting. It is true that the assessees who were equal partners in the firm are exercising total control over the firm. However, the partners cannot withdraw t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1932, the persons constituting the partnership are individually called partners and collectively called firm. Thus though under the IT Act, 1961, the firm and partners are separate assessable entities, the firm is not a separate juristic entity independent of its partners. 8.1 It is now settled law that the mercantile system of accountancy takes note of "payment due" whereas cash system of accounting recognizes only payment received. Under the cash system of accounting, only the actual receipts or disbursement are accounted for. The question, therefore, to be decided is whether the amount credited by the firm to the individual account of the partners in their capital account with firm can be said to have been received by the partners or not. It is agreed fact that in the partnership deed there is no prohibition for the partner withdrawing the sum lying to the credit of his account with the firm. Thus it can be said that the firm has made the amount unconditionally available to the assessee partners. The partners are entitled to withdraw such amount at any point of time just like a deposit in the bank account. The partnership firm credits the interest on the basis of amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble High Court: (1) Whether, in the circumstances of the case, there was a discontinuance of the business or profession carried on by M/s. Motichand Devidas on 8th July, 1940, when Mr. Devidas died, so as to entitle the assessee to the relief provided by sub-s. (3) of s. 25 of the Indian IT Act, 1939? (2) Whether, in the circumstances of the case, the applicants were properly assessed on the "receipts" or "cash" basis? Hon'ble High Court answering the second question held as under: "Dealing with the second question first, it appears to us clear that the ITO was entitled to adopt the method of receipts or cash basis, for assessing the income of the assessee firm. The fact that they had been assessed in the previous years on the footing of their withdrawals in each year, cannot make it "a method of accounting regularly employed by the assessee" as it was not a method of accounting at all. In practice, this should not work any injustice on the assessee because if they have not withdrawn the amounts in one year towards profits, they would withdraw it in another year. On the other hand, it must be conceded that withdrawals are not the test of profits. Under the Act, the que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee during assessment proceedings was discussed and dismissed. Thus the action of the AO has to be upheld. Alternatively it was submitted by both the counsel that if the main issue in appeal by Revenue is held in favour of assessee, this ground need not be adjudicated upon. However, if the same is decided otherwise, since the issue has not been decided by learned CIT(A), the same may be decided by the Tribunal. 11. We have considered the rival submissions. In the present case original assessment was completed under s. 143(1)(a). While computing the income under s. 143(1)(a) the AO has no power to vary the income declared in the return. In fact he formed no opinion on such return. However, when the accounts of the firm and partners were examined subsequently, it came to the knowledge of AO that though the firm is claiming deduction by way of interest payable to the partners, such sum is not offered for taxation by the partners. As per Expln. 1 to s. 147, production before the AO of account books or other evidence from which material evidence could with due diligence have been discovered by the AO will not necessarily amount to discover within the meaning of proviso to s. 147. H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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