ORDER
N.R.S. Ganesan, Judicial Member
1. This appeal of the assessce relates to assessment year 2000-01 against the order of Administrative Commissioner passed under Section 263 of the Income-tax Act.
2. Mr. V.S. Jayakumar, the learned Counsel for the assessee submitted that the assessee is a partnership firm. As per the partnership deed, the advance made by the partners towards capital contribution and balance in current account are entitled to interest at the rate of 18 per cent per annum or any other rate subject to provisions of Income-tax Act. The learned Counsel for the assessee further submitted that Clause 5 contained in the deed is an enabling provision for charging interest on the advance made to the partners. The learned Counsel further submitted that the partners have decided not to charge interest in the meeting held on 1-4-1998 on the advance made to partners, after considering the business necessity. The Assessing Officer called for the partnership deed and the details of loan and advance by his notice dated 7-2-2002. The learned Counsel further submitted that the assessee has furnished all the details called for by the Assessing Officer with respect to advance made to the partners. The Assessing Officer, according to the learned Counsel, considered the details furnished by the assessee and accepted the explanation of the assessee. According to the learned Counsel, the Assessing Officer has examined the details of advances and loans given by the assessee to the partners and thereafter satisfied that no interest was accrued on such advances.
3. The learned Counsel for the assessce further submitted that the Administrative Commissioner issued a show-cause notice calling for explanation of the assessee as to why interest on loan and advances of Rs. 1,13,02,018 could not be included in the total income of the assessee. According to the learned Counsel, the Commissioner of Income-tax misunderstood the Clause 5 of the deed of partnership while issuing the show-cause notice. The learned Counsel for the assessee further submitted that the assessee-firm has not borrowed any interest bearing funds. The funds advanced to sister concerns and partners are from the own funds of the assessee. Therefore, the question of payment of interest does not arise for consideration. According to the learned Counsel, the assessee has made trade advances from the interest-free funds available with the assessee. Therefore, there is no compulsion on the part of the assessee for charging interest. The learned Counsel for the assessee further submitted that the details were called for by the Assessing Officer and it was examined and thereafter the Assessing Officer found that there was no error in not charging interest on the advances.
4. The learned Counsel for the assessee placed his reliance on the decision of the Kolkata Bench of this Tribunal in the case of Sigma Search Lights Ltd v. ITO [2004] 82 TTJ (Cal.) 956 and submitted that since the Assessing Officer conducted proper enquiries with regard to advance and loan made by the assessee, merely because there was no elaborate discussion in the order of the Assessing Officer, it cannot be considered to be an erroneous order which is prejudicial to the interest of the Revenue. The learned Counsel for the assessee again placed his reliance on the decision of the Kolkata Bench of this Tribunal in the case of Chroma Business Ltd v. Deputy CIT [2004] 82 TTJ (Cal.) 540. The learned Counsel again placed his reliance on the judgment of the Madras High Court in the case of CIT v. Smt. D. Valliammal and submitted that the Administrative Commissioner cannot set aside the assessment order on the ground that verification of accounts was needed. The learned Counsel again placed his reliance on the judgment of the Calcutta High Court in the case of CIT v. Duncan Bros. & Co. Ltd. and submitted that the Commissioner of Income-tax proceeded on the wrong presumption that the Assessing Officer has not examined the chargeability of interest on the advance and loans given by the assessee. In fact, according to the learned Counsel, the Assessing Officer has specifically called for the details regarding loans and advances and examined the details. Merely because an elaborate discussion was not made in the assessment order, it does not mean that the Assessing Officer has committed an error which is prejudicial to the interest of the Revenue. The learned Counsel for the assessee again placed his reliance on the judgment of the Gujarat High Court in the case of Garden Silk Mills Ltd v. CIT and submitted that since the Assessing Officer examined the chargeability of interest on loans and advances, it cannot be said that the decision 1, 74 Taxman 283. taken by the Assessing Officer is prejudicial to the interest of the Revenue. The substance of the submission of the learned Counsel for the assessee is that since the Assessing Officer has examined the entire details with regard to loans and advances and accepted the case of the assessee, the assessment order cannot be termed as erroneous and prejudicial to the interest of the Revenue merely because the Assessing Officer has made a brief assessment order without discussion.
5. On the contrary, Mr. K. Anangapal, the learned Departmental Representative (D.R.) submitted that even though the Assessing Officer called for the details of loans and advances, he has not made any further enquiry with regard to the chargeability of interest on loans and advances. According to the learned D.R., the Assessing Officer is under an obligation to make further enquiry whether the assessee is liable to charge interest as per the partnership deed on the advances and loans. The learned D.R. placed his reliance on the judgment of the Delhi High Court in the case of Gee Vee Enterprises v. Addl CIT and submitted that since the Assessing Officer failed to make further enquiry, the assessment order is erroneous and it is prejudicial to the interest of the Revenue. According to the learned D.R., the scheme of the Income-tax Act requires the Assessing Officer to make further investigation on the facts disclosed by the assessee. Since there was a failure on the part of the Assessing Officer to make further enquiry, the assessment order becomes erroneous and prejudicial to the interest of the Revenue.
6. We have considered the rival submissions on either side, and also perused the material available on record. We have also carefully gone through the partnership deed, a copy of which was produced in the paper-book and also order of the lower authorities. Clause 5 of the partnership deed clearly provides for charging of 18 per cent interest on the advance made by the assessee-firm. The notice issued by the Assessing Officer clearly shows that the details regarding loans and advances were called for. The assessee by his letter dated 16-2-2002 has furnished the details called for by the Assessing Officer which includes the account copies of loans and advances. The Administrative Commissioner found that since interest was not considered to be assessed in the assessment order, it is erroneous and prejudicial to the interest of the Revenue. Therefore, he issued a show-cause notice calling upon the assessee to explain why the interest on advances and loans made by the assessee should not be included in the total income. The assessee has also filed a reply to the show-cause notice explaining that the advances are trade advances and it is not an advance to partners. According to the assessee, the partnership deed does not provide for charging of interest on those trade advances. It was also further explained that the assessee-firm has not borrowed any interest bearing funds. Therefore, there is no claim of interest in the profit & loss account to any person. According to the assessee, no interest bearing funds were diverted towards non-interest bearing advances. After considering this explanation of the assessee, the Administrative Commissioner found that the loans and advances made by the assessee are nothing but made to sister concerns and partners with whom the assessee has no trading activity. Therefore, the Commissioner concluded that this advance could never be termed as trade advances. Accordingly, the Administrative Commissioner set aside the order of the Assessing Officer and directed the Assessing Officer to reconsider the issue afresh.
7. The main contention of the assessee before this Tribunal is that the Assessing Officer called for the details of loans and advances made and had an elaborate discussion with the representative of the assessee. Therefore, the order of the Assessing Officer cannot be termed as erroneous merely because there is no elaborate discussion in the assessment order. We are unable to accept this contention of the assessee. The claim of the assessee before the Commissioner is that the advances are trade advances and there was no provision in the partnership deed for charging interest on trade advance. The Administrative Commissioner found that the parties to whom the advances and loans were made have no trading activity with the assessee. Therefore, it is nothing but advances and loans as enumerated in the Clause 5 of the partnership deed. The Assessing Officer has not examined whether the persons to whom advances were made have any trading relationship or not. If the assessee has no trading activity with the persons to whom the advances were made, then such an advance cannot be termed as trade advance. Therefore, it has to be examined whether the assessee is liable to charge interest on the advances made to sister concerns and partners who have no trading activity with the assessee.
8. We have also carefully gone through the order of Kolkata Bench of this Tribunal in the case of Sigma Search Lights Ltd. (supra). In the case before Kolkata Bench, the assessment order was passed in a brief manner without much discussion on the details of expenses claimed by the assessee for business promotion and marketing. There was no discussion regarding decline in gross profit. However, there is a reference in the assessment order that he discussed the details furnished by the assessee. On those factual circumstances, the Kolkata Bench of this Tribunal found that the Assessing Officer completed the assessment after calling for details and making enquiries with regard to expenses claimed by the assessee but passed a brief assessment order without making any discussion. The Tribunal specifically found that the expenses claimed by the assessee to the same parties in the earlier year and subsequent year was allowed by the Department and no attempt was made to invoke the power of the Commissioner under Section 263 in the earlier year and subsequent year. In view of the above factual situation, the Tribunal held that the order of the Commissioner in setting aside the order of assessment for de novo enquiry is not sustainable.
9. In the case on our hand, the facts are entirely on different footing. The partnership deed specifically provides for charging of interest on the advances and loans given to partners. The assessee explained before the Commissioner that no advances or loans were given to the partners but the advance given is only a trade advance. The Commissioner found that the persons to whom the advances were made have no trading activity with the assessee. In those factual circumstances, it is very difficult to hold that the Assessing Officer has examined the details furnished by the assessee. In fact, the Assessing Officer has not made any enquiry to find out whether the advances are trade advances or not. In the absence of material to establish the trading activity, the advances made to sister concerns and partners cannot be construed as trading advance. Therefore, in our opinion, the decision of the Kolkata Bench of this Tribunal in the case of Sigma Search Lights Ltd. is not applicable to the facts of this case.
10. We have also carefully gone through the decision of the Kolkata Bench of this Tribunal in the case of Chroma Business Ltd. (supra). The facts are almost identical as it was in the case of Sigma Search Lights Ltd. (supra) which was decided by the Kolkata Bench. Therefore, for the reasons discussed at para 9 above, this decision of the Kolkata Bench is also not helpful to the assessee.
11. We have also carefully gone through the judgment of the Gujarat High Court in the case of Garden Silk Mills Ltd. (supra). In the case before the Gujarat High Court, the Assessing Officer allowed the claim of the assessee with regard to depreciation on the basis of the decision of the Tribunal and the High Court. The Commissioner in exercise of his power under Section 263 sought to withdraw the depreciation on the ground that the decision of the Tribunal and the jurisdictional High Court has not attained the finality and it is subject-matter of revision and appeal before the higher forum. In those factual circumstances, the Gujarat High Court held that the law declared by the highest Court on the State is binding on the authorities and the Tribunal. Therefore, it cannot be ignored. Since the Assessing Officer allowed the claim of depreciation on the basis of law laid down by highest Court in the State, it could not be revised by the Commissioner on the ground that the subject-matter was pending in appeal or revision. The Gujarat High Court observed that if such an attitude is permitted, it would introduce nothing but judicial indiscipline which is not called for.
12. In the case on our hand, the issue is no t with regard to revision of assessment order during the pendency of the appeal before the High Court or Supreme Court. In this case, the assessee claimed that the advances and loans were made as trading advance. The Administrative Commissioner found that the parties to whom the advance was made has no trading activity with the assessee. Therefore, the assessee has to explain why interest was not charged when there is enabling provision in the partnership deed for charging interest on the advance made to partners. The assessee appears to have passed a resolution on 1-4-1998 for not charging interest. This resolution was not brought to the notice of the Assessing Officer. Therefore, in all fairness, in our opinion, the Assessing Officer has to re-examine the issue in the light of the material available on record. In view of the above, in our opinion, the judgment of the Gujarat High Court in the case of Garden Silk Mills Ltd. (supra) is not applicable to the facts of the case.
13. We have also carefully gone through the Judgment of the Calcutta High Court in the case of Duncan Brothers and Co. Ltd. (supra). In the case before the Calcutta High Court, the issue is regarding cost of acquisition for the purpose of computation of capital gain. The assessee-company held 5,000 shares of Duncan Brothers (Pakistan) Ltd. As a result of separation of Bangladesh from Pakistan, the company was renamed as Duncan Brothers (Bangladesh) Ltd. After Indo-Pakistan conflict, the company came under the control of Custodian of Enemy Property. The Custodian made a payment of Rs. 2,05,732 to the assessee-company for compensation for 5,000 shares. The cost of acquisition of shares was Rs. 1,00,000. The Income-tax Officer while computing capital gain deducted cost of acquisition of Rs. 1,00,000 from the compensation of Rs. 2,05,732.
Accordingly, the Assessing Officer computed capital gain of Rs. 1,05,732. The Administrative Commissioner by way of wrong presumption proceeded that deduction of Rs. 1,00,000 was granted by way of cost of acquisition on the fair market value as on 1-1-1964. This was factually found to be incorrect by the Tribunal. On those factual circumstances, the Calcutta High Court held that the Tribunal was justified in the quashing order of the Commissioner passed under Section 263.
14. In the case on our hand, the Assessing Officer allowed the claim of the assessee on the presumption that the advances and loans were made to partners as trading advance. But the fact remains that the persons who received the advance have no trading activity with the assessee. Therefore, it may not be construed as trading advance as contended by the assessee before the Commissioner. In those factual circumstances, in our opinion, the judgment of the Calcutta High Court was also not applicable to the facts of the case.
15. We have also carefully gone through the judgment of the Madras High Court in the case of Smt. D. Valliammal (supra). In the case before the Madras High Court, the assessee was carrying on money lending business. The Administrative Commissioner found that Dhandayuthapani Films owed a sum of Rs. 1,00,000 to the assessee as disclosed in the details given by it. But the assessee had not disclosed this amount in the balance sheet. The Commissioner found that the Assessing Officer without verifying this investment, passed the order. Therefore, it is erroneous and prejudicial to the interest of the Revenue. The Commissioner after considering the explanation of the assessee accepted the explanation with regard to investment of Rs. 1,00,000 in the Dhandayuthapani Films. The High Court found that the Commissioner of Income-tax after enquiry has not given any categorical finding that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of the Revenue. Once explanation was accepted and there was no finding with regard to erroneous and prejudicial to the interest of the Revenue, the High Court found that the Commissioner cannot set aside the order of the Assessing Officer on the ground that the verification of account is needed.
16. In the case on our hand, the explanation offered by the assessee was not accepted. In fact, the explanation was found to be false. The explanation of the assessee before the Commissioner is that the advances are trading advances. The Commissioner found that the assessee has no trading activity with the persons to whom the advances were made. Therefore, in our opinion, this judgment of the Madras High Court in the case of Smt. D. Valliammal (supra) is also not applicable to the facts of the case.
17. We find that an identical issue was considered by the Madras High Court in the case of CIT v. South India Shipping Corporation Ltd, . The assessee before the Madras High Court claimed weighted deduction on commission paid to brokers, charterers through whom the contract was finalised. The case of the assessee was that the payment was made to foreign brokers through whom information was obtained in respect of cargo availability and freight rates. The High Court found that the assessee has taken a conflicting standing in the claim made before the Assessing Officer as well as before the Commissioner which necessitated the Commissioner to take a view that the expenses were allowed by the Income-tax Officer without properly verifying the claim. His Lordship Mr. Justice N.V. Balasubramanian, speaking for the Division Bench of the Madras High Court, has observed as follows at page 557 of the ITR.
However, in the instant case, the Commissioner, on examination of records, prima facie came to the conclusion that payments of commission and brokerage did not appear to come under any of Sub-clauses of Section 35B(1)(b) of the Act and he also came to the conclusion that the Income-tax Officer had, in a perfunctory and mechanical manner, allowed the claim of the assessee and that the order was erroneous and prejudicial to the interest of the revenue as the Income-tax Officer allowed the claim without verifying under what sub-clause of Section 35B(1)(b) of the Act, the claim would fall. Therefore, when the Commissioner prima facie came to the conclusion that the order passed by the Income-tax Officer was in accordance with and the assessment records disclose that the Income-tax Officer had not undertaken the enquiry which was expected of him before allowing the claim of the assessee for weighted deduction, we hold that the Tribunal was not justified in holding that the Commissioner lacked the jurisdiction to exercise his power of revision.
18. In the case before us, when the assessee claimed that the advances were trading advances and no material is available on record to suggest any trading activity with the assessee, in our opinion, the Assessing Officer ought to have conducted further enquiry before accepting the claim of the assessee. A similar view was taken by the Delhi High Court in the case of Gee Vee Enterprises (supra). In view of the judgment of the Madras High Court in the case of South India Shipping Corpn. Ltd. (supra) and also the judgment of the Delhi High Court in the case of Gee. Vee Enterprises (supra), we do not find any infirmity in the order of the Administrative Commissioner, Accordingly we have no hesitation to confirm the same.
19. In the result, the appeal filed by the assessee stands dismissed. However, there will be no order as to cost.