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TMI Blog2008 (6) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... arried on, the application of section 28(v) does not arise. 5. Both under the Partnership Act and under clauses 7 and 8 of the partnership deed, the interest is a charge in determining the profits of the business. There being no profits, which fact is undisputed, the charge does not legally arise and may therefore be deleted. 6. The finding that the appellant has set up business which has commenced is factually incorrect and is not based on any evidence. Hence the assessment may be annulled. 7. The agreement about charging of interest is contained in clauses 7 and 8 of the partnership deed. These clauses have been modified by agreement among the partners. The proposition enunciated by the learned Commissioner of Income-tax (Appeals) that a change in the terms of the partnership cannot be brought about by exchange of letters in contrary to established case law is therefore not sustainable. 8. Once it is accepted that the agreement to levy interest on capital has been lawfully modified the assessment of interest on such capital is without any foundation and may be deleted. 9. The learned Commissioner of Income-tax (Appeals) has misconceived that income can arise by mere valuatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such capital of the partners was due as per clause 7 of the partnership deed and on the mercantile basis of accounting, the income by way of interest from the partnership firms has accrued to the assessee-company, which ought to have been reflected in the returns of income and offered for taxation by the assessee. The Commissioner of Income-tax (Appeals) has confirmed the order of the Assessing Officer. The Assessing Officer has doubted the authenticity of the agreement dated October 20, 1999 between the partners of the firms amending clause 7 of the original partnership deeds and has held the same as self-serving documents. The Commissioner of Income-tax (Appeals) has upheld the addition on account of accrued interest from the partnership firms by holding that the terms of the partnership deed could not be modified through exchange of letters between the partners of the firm. The Commissioner of Income-tax (Appeals) has observed that leasehold land acquired for development by the partnership firms had increased in value and therefore, such increase should have been taken as income against which the interest should have been charged of as expenditure by the partnership firms. Lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as an expenditure in determining the profits or losses of the partnership firms. She submitted that the amendment to the partnership deed by exchange of the simple letters dated October 20, 1999 between the partners of the firms is merely self-serving documents and these letters have been exchanged by three related parties and is not on stamp paper and has no effect of amending the terms and conditions of the partnership deed executed between the partners. She submitted that whether any interest entry on the capital of the assessee-company by the partnership firms is passed or not, is not relevant since the assessee is a company and the right to receive interest has accrued to the assessee from the partnership firms. She submitted that the partnership firms are very much in business of development of land as they have incurred certain expenses on land development, which were capitalised by them as per their statement of accounts filed with the Department. She contended that the provisions of section 13(c) of the Indian Partnership Act, 1932 does not provide that the partners could not provide the allowance of interest on the amount of capital brought by them and in fact, in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms by merely exchanging letter to this effect between themselves. We find that the plea of the Commissioner of Income-tax (Appeals) for confirming the notional addition of interest is that the leasehold land acquired for development by the partnership firms had increased in value and therefore, such increase should have been taken as income against which the interest should have been charged of as expenditure by the partnership firms, is not sustainable and has no force. It is an accepted principle of valuation of the closing stock that the stock can be valued as per market price or cost, whichever is less. In this case, the partnership firms have valued the leasehold land acquired for development at its cost price, which is an accepted method of valuation, we hold that there is no mistake in valuing the leasehold land by the firms. In this case, the statement of accounts of the assessee-company as well as the partnership firms clearly establishes the fact that the partnership firms have not earned any profits during the relevant period. In these facts, we have given our careful thought to the second proposition canvassed by learned counsel for the assessee that the partners of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. [1992] 40 ITD 456. The hon’ble Madras High Court held (headnote of AIR) : “it is only out of the profits, if any, that the capital contributing partner can be expected to take his stipulated interest under section 13(c). This law may recognise an exception to this rule where the contract expressly provides for payment of interest regardless of profits.” The hon’ble Madras High Court has further held that (page 506 of AIR) : “It is only out of the profits, if any, of the business that the capital contributing partner could be expected to take his stipulated interest. This seems to be the principle adopted by the Indian Legislature in section 13(c) of the Indian Partnership Act and by Parliament in section 24, clause (4) of the English Partnership Act. The law may recognise an exception to this rule where the contract expressly provides for payment of interest regardless of profits . . . “. No contrary decision has been brought to our notice by the parties. In these facts of the case and in the light of the decisions of the hon’ble Madras High Court in the case of T. Pr. Sm. Somasundaram Chettiar v. V. Rm. Sevugan Chettiar, AIR 1940 Mad 505 and the Madras Tribunal First ITO v. ..... 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