9911796707
TMI Blog1987 (5) TMI 41X X X X Extracts X X X X X X X X Extracts X X X X ..... erived from discounting cheques and negotiable instruments. Shri Dilipkumar K. Shah is also carrying on extensive sharafi business in his individual capacity. He has two accounts with the firm viz. Account No. 1, his capital account like the other partners and the Account No. 2, his Sharafi account in respect of the transactions with the assessee in his individual Sharafi business. The assessee had paid interest to him which was credited to these accounts. In its returns of income, the assessee has added back the interest credited to Account No. 1 in view of the provisions of section 40(b) of the Act. However, the assessee had claimed deduction in respect of the interest credited to Account No. 2, as according to it, the same was business expenditure to which the provisions of section 40(b) of the Act were not attracted. 5. On the aforesaid facts in the assessments originally framed u/s. 143(1) of the Act, on 15-3-1975, 10-9-1975 and 14-12-1977, the ITO had accepted the assessee's contention in respect of the assessment years 1974-75, 1975-76 and 1977-78 respectively. Similarly, the ITO had accepted such contentions of the assessee in respect of the assessment year 1976-77 origin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, could not be attracted as dealings with Shri Dilipkumar K. Shah in Account No. 2 was business dealing in the Sharafi business carried on by the assessee as well as Shri Dilipkumar K. Shah. It was also submitted that at the time of original assessment proceedings themselves, the assessee had submitted all the primary facts which clearly show that interest was paid to Shri Dilipkumar K. Shah in his both the accounts with the assessee. Further, the accounts of the assessee in the books of Shri Dilipkumar K. Shah in his individual business was also furnished to the ITO. Based on such particulars the ITO himself had not thought of applying the provisions of section 40(b) of the Act, in respect of the assessment year 1976-77 which was framed u/s. 143(3) of the Act. Relying on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Sajjanraj Divanchand [1980] 126 ITR 654, it was urged that the provisions of section 40(b) of the Act cannot be invoked in case of interest paid to a partner in different capacity. It was, therefore, urged that the penalty proceedings initiated u/s. 274/271(1)(c) of the Act, should be dropped. It may be mentioned that in some other letters writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Rs. 40,000 for all the years under appeal. In other words, it was submitted that for taking an advantage of tax of Rs. 10,000 no body in senses would have invited penalty aggregating to Rs. 1,84,609 imposed by the ITO u/s. 271(1)(c) of the Act. Relying on various reported decisions mentioned in the written submissions, it was urged that since the interest paid to Shri Dilipkumar K. Shah in the two different accounts were in two different capacities, the provisions of section 40(b) of the Act could not have been attracted in respect of the interest paid to him in Account No. 2. It was also pointed out that the amendment in section 40(b) of the Act was made long after the dates on which the assessee had filed its returns of income. It was also urged that since the assessee was under a bona fide belief that the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 was business expenditure, there was no question of invoking the provisions of section 40(b) of the Act, in this respect. It was, therefore, urged that the penalty imposed by the ITO u/s. 271(1)(c) of the Act, in each of the years under appeal, should be cancelled. The AAC in his consolidated order dated 30-9-1985 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department strongly relied on the orders of the ITO and vehemently argued that the orders of the AAC/Commissioner (Appeals) should be set aside and that of the ITO should be restored. Inviting our attention to section 194A(3)(iv) of the Act, he submitted that since the assessee was not required to deduct tax at source on the interest paid to a partner, the fact that it had done so would not absolve it from the purview of the provisions of section 271(1)(c) of the Act. According to him, the assessee ought to have shown the interest paid to Shri Dilipkumar K. Shah in Account No. 2 in Sub-para (B) of Annexure (D) of the return. Since the assessee had failed to do so, the learned representative for the department went on to argue that to that extent the assessee had furnished inaccurate particulars of its income. Inviting our attention to section 40(b) of the Act, he submitted that since the provisions of that section are applicable to all types of interest paid to a partner, it was not clear how the assessee could have bona fide belief that the provisions of that section would not be applicable in a case where interest is paid to a partner not in respect of his capital account with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits to the partners in the guise of payment of interest to them. Thereafter, he invited our attention to the statements of income filed along with the returns of income and highlighted the fact that at no stage, the assessee had tried to hide from the department the fact that Shri Dilipkumar K. Shah had two accounts, viz., Account Nos. 1 2 with the assessee in respect of his capital contribution and Sharafi business respectively. He further submitted that it is no doubt true that the provisions of sec. 194A of the Act, would not be applicable in a case where interest is paid to a partner in respect of his capital account. However, since the assessee was under a bona fide belief that Account No. 2 was having a different character, it had deducted tax at source as contemplated u/s. 194A of the Act, in respect of the interest paid to Shri Dilipkumar K. Shah. In this connection, he invited our attention to the provisions of sections 13 and 48 of the Indian Partnership Act, 1932 with a view to impress upon us that a partner can have dealing with the firm in which he is a partner as a partner as well as an outsider. It is under this impression that the assessee deducted tax at sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not get any support from the decision of the Hon'ble Gujarat High Court in the case of Sajjanraj Divanchand as the same had been overruled by a Full Bench of the same High Court in the case of Chhotalal Co. 14. We have carefully considered the rival submissions of the parties as well as the material to which our attention was drawn during the course of hearing and are of the view that this is not a fit case for imposing the penalty u/s. 271(1)(c) of the Act, and therefore, the AAC/Commissioner (Appeals) were justified in cancelling the penalty so imposed by the ITO. On the appreciation of the facts as stated above, it cannot be denied that the assessee could have bona fide belief that the provisions of section 40(b) of the Act could not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in his Account No. 2 maintained with it. Not only that the assessee had such belief but the ITO himself had accepted the said position in respect of the assessment years 1974-75 to 1977-78. It is no doubt true that except for the assessment year 1976-77, the ITO had framed the assessment u/s. 143(1) of the Act. However, that fact by itself would not justify the ITO to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalty aggregating to Rs. 1.84 lakhs imposable u/s. 271(1)(c) of the Act. In other words, it is difficult to brush aside the assessee's stand that it was under bona fide belief that the provisions of section 40(b) of the Act would not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2 maintained in its books. Again, it is worthwhile to note that the decision in the case of Sajjanraj Divanchand was pronounced on 21-8-1980, while the assessee had filed its returns of income in the year 1981 either u/s. 139(1) or u/s. 148/139(2) of the Act. The ratio laid down in the said decision would have clearly led to believe the assessee that the interest paid to Shri Dilipkumar K. Shah in Account No. 2 would not be hit by the provisions of section 40(b) of the Act. The said decision was overruled by the Hon'ble High Court only on 16-4-1984 in the judgment in Chhotalal Co.'s case. Even on the basis of the latter judgment, the learned counsel for the assessee had tried to make out a case that the provisions of sec. 40(b) of the Act would not be attracted in respect of the interest paid to Shri Dilipkumar K. Shah in Account No. 2. In any event, the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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