MR.THOMAS DANIEL,PATHANAMTHITTA vs. THE ITO, WARD-4, THIRUVALLA

Per CHANDRA POOJARI, AM:

This appeal filed by the assessee is directed against the order of the CIT(A),

Kottayam dated and pertains to the assessment year 2014-15.

amount of Rs.67,30,90,917/- by invoking the provisions of section 40(a)(ia) of

the Act.

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assessee showed the following as income:

Profit and gains of business or Profession Partnership firm income Popular Finance 4,55,000 Total income from business and profession 4,55,000 Income chargeable under the head “Business and Profession” 4,55,000

Income from other sources Bank Interest 2,18,401

Interest Income Sub Treasury 47,549 Interest on mpl-popular finance 49,96,53,294 Interest on mpl-popular mini finance 10,18,84,076 Interest on mpl-popular finance company 7,15,53,547 67,31,38,466

Deductions Payment of interest on borrowed funds 67,30,90,917 Taxable interest 47,549 Other credits 5,000 Income chargeable under the head “Other Sources” 2,70,950 Gross Total Income 7,25,950

3.1 The assessee is managing partner of all the firms and in the profit and loss

account of the above firms, interest was debited as interest on Managing

Partner’s loan shown as liability but the loan was credited in the capital account

of the firm. The definition of partnership is “relation between persons who have

share the profits of the business carried on by all or any firm acting for all”.

As the partnership is governed by unlimited liability any loan taken by the firm

from its Managing Partner or any amount credited in the capital account of the

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Managing Partner is treated as addition to the capital. Any interest on that

addition given to the Managing Partner is treated as business income of the

partner and the assesses having earned income from partnership firm has to file

his return of income in ITR 3. In the schedule BP of ITR 3, it has been clearly

mentioned that the Computation of Income under the head Profits and Gains

from business or profession (Income by way of Salary, interest etc from firms in

which assesses is a partner). Therefore, the interest received from the

partnership firm is to be treated as business income of the assessee and not as

income from other sources.

3.2 The Assessing Officer observed that according to Sec. 44AB of the I.T. Act,

1961 any person carrying on business where his total sales, turnover or gross

receipts in business for the previous year(s) related to the assessment year

exceed or exceeds Rs. 1 crore, the person is liable to get his account

compulsorily audited by a Chartered Accountant and file the Audit Report on or

before the specified due date. In this case, since it was found that the gross

receipts of the assessee by way of interest on the partnership exceed Rs. 1

crore, the aasessee was liable for compulsory audit. The assesses paid interest

amounting to Rs.67,30,90,917/- on borrowed funds consisting of loan availed

from partnership firms viz. Popular Traders Vakayar, Popular Printers Vakayar

and Popular Dealers Vakayar. The assesses is also the Managing Partner of the

above three firms. In the instant case, it was found that the total gross receipts

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of the assessee exceeded Rs. 1 crore, he is liable to deduct tax at source on

payment of interest by virtue of sec. 194A. It was found that the assessee had

not deducted tax at source on the interest payment during the relevant financial

year. Therefore, according to the Assessing Officer, the assessee had

contravened the provisions of sec. 194A and one of the consequences of non-

compliance of sec. 194A is contained in section n 40 of the I.T. Act. In such

circumstances, interest paid by the partner to the firms was disallowed u/s.

40(a)(ia) of the Act. The Assessing Officer relied on the judgment of the High

Court of Kerala in the case of Thomas George Muthoot vs. CIT in ITA No. 278 of 2014 dated 3rd July, 2015 which is squarely applicable to this case. The

Assessing Officer made the disallowance of interest expenditure amounting to

Rs.67,30,90,917/- u/s. 40(a)(ia) of the Act.

the main issue is the disallowance of Rs 67, 30, 90,917/- u/s 40(a)(ia) being

payment of interest on borrowed funds from firms in which appellant is a partner

without TDS u/s 194A. The Ld. AR submitted that Section I94A does not apply

to individuals unless he is a person liable to tax audit u/s 44AB of the I.T. Act

1961 and in this case, the assessee, being an individual is not within the purview

of the said section. Therefore, it was submitted that the department will have to

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further establish as a condition precedent that section 44AB applies to the

assessee. The Ld. AR submitted that the AO has erred in taking the view that the

assessee is a person covered by section 44AB of the Act and hence fell within

section I94A. According to the Ld. AR, the finding of the AO that the interest

income received from partnership firms in which the assessee is a partner is to

be regarded as his turnover or gross receipts as per the said section and since

the interest exceeded the limit during the previous year 201 3-14, the assessee

is liable to audit u/s 44AB is wrong.

5.1 The Ld. AR referred to the provisions of sections 40(a)(ia), I94A, and

section 44AB of the Act as under:

“Section 40(a)(ia) as it stood on 01-04-2014 reads as follows: Section 40 - Amounts not deductible.

Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",

(a) in the case of any assessee — (ia) "any interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to a resident, or amounts payable to a contractor or sub-contractor, being resident, for carrying out any work (including supply of labour for carrying out any work)"

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid

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the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.” “Section 194A -Interest other than "Interest on securities

194A(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income [by way of interest on securities], shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (6) of section 44AB during the financial year immediately preceding the financial year, which such interest is credited or paid, shall be liable to deduct income-tax under this section.”

“Section 2(28A) - “interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized;

“Section 44AB - Audit of accounts of certain persons carrying on business or profession.

44AB. Every person,—

(a) carrying on business shall, if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds [one crore rupees] in any previous year.....gets his accounts of such previous year audited by an accountant before the specified date and furnish by that date the report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed :

section 40(a)(ia) for disallowing the payment of interest on loans taken during the year to prove that the payer is liable to deduct tax-under section 194A.

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5.2 It was submitted that the liability to deduct tax at source under section

194A arises only when the individual payer is liable to get the books of accounts

audited under section 44AB in the previous year immediately preceding the

previous year in which the interest was paid or credited. It was submitted that

in this case that there was no finding anywhere in the proceedings that the

assessee is liable to audit under section 44AB in the financial year 2013-14 which

is the preceding year for the financial year 2011-12. It was submitted that the

present appeal related to the financial year 2013-14 and the AO clearly took the

gross receipts etc. of the FY 2013-14 (relevant to the Assessment year 2014-15)

and not the gross receipts of the immediately preceding FY. It was submitted

that the AO has not established the fact that the assessee is liable for tax audit

u/s 44AB in the FY 2012-13. It was submitted that if the provisions of section

44AB are found to be applicable in the PY 2012-13 still Assessing Officer is duty

bound to decide the issue whether the said section is applicable to the assessee

in that year after considering the objections raised against the applicability of

44AB to the PY 2013-14. In other words, all the objections raised against the

applicability of section 44AB to PY 2013-14 shall mutatis mutandis apply to PY

2012-13 as well. Therefore, it was submitted that unless the AO is satisfied that

section 44AB is applicable to PY 2012-13 in accordance with law, the AO cannot

apply the provisions of 194A so as to tag the assessee with the liability u/s

40(a)(ia). It was submitted that the AO is not in possession of the necessary

details for the PY 2012-13 since the department issued a notice u/s 133(6) dt.

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8.6.2018 asking for details of interest received and paid during 2012-13. Thus it

is very clear that the Assessing Officer took into consideration the gross receipts

of PY 2013-14 and not that of PY 2012-13.

5.3 The Ld. AR submitted that the provisions of sec. 44AB are not applicable in

the facts and circumstances of the case for the reasons are given below:

“Section 44AB is not attracted because the assessee received the interest from the firms in his capacity as partner and hence not his gross receipts in business did not exceed the limits specified. It is the firm alone is in busines which is carrying on the business and not the partner. Even if he is said to be carrying on business it can only be as an agent of other partners as mutual agency is a well settled legal relation of the partners. Please see definition of partnership u/s 4 of the Partnership Act 1932 which is as follows:

"Partnership" is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. " It is also pertinent to note that a partner cannot carry on business of the firm in his individual capacity and he is duty bound to hand over the profits or benefits if any derived by him.

It may also be noted that section 194A uses the expression gross receipts from business and not the expression "in business" as used in section 44AB. Thus it is clear that section 194A is attracted only if a person gets receipts from business carried on by him whereas section 44AB is attracted when his receipts in business exceeds the limits. Thus it is necessary to establish that the appellant is in business and gross receipts in that business exceeded the limits. Here the AO failed to establish this crucial point.

It is also submitted that the law relating to partnership should also be kept in mind. The appellant is not carrying any business as envisaged in section 44AB. There is no business as per the common parlance meaning of that term. If the share of profit or renumeration or interest from the firm itself is regarded as the business of the partner then it violates section 16 of the Partnership Act 1932 and any benefit arising from, similar business or competing business is to be handed over to the firm. Thus if the AO regards the interest as his business then as per partnership law the same is required to be made over to the firm and in that case it is

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not his income but income of the firm. There is thus no separate business carried on by the partner. The provisions of section 16 of the 1932 Act is reproduced below for ease of reference.

Section l6 Personal Profits earned by Partners. Subject to the contract between the partners, - (a) if a partner derives any profits for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm- name, he shall account for that profit and pay it to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business

Thus it is clear that the appellant cannot carry on the business of the firm in his individual capacity and hence the interest on capital received by him from the firm can never be regarded as gross receipts of his business. If it is so regarded then he is duty bound to hand over the said receipts to the firm. In other words it belongs to the firm by the application of the doctrine of diversion of income by over riding title.

5.4 The Ld. AR submitted that what is to be considered is the sales turnover or

gross receipt of the business carried on by the assessee. It was submitted that a

firm need not be a separate legal entity, but certainly it is a separate taxable

entity and in case of partnership business, it is the business of a partnership firm

that is to be considered and not the business carried on by a partner. It was

submitted that the interest on remuneration received from the partnership firm

cannot be considered as business receipts or business turnover in the hands of a

partner. According to the Ld. AR the subject matter of audit is the business

turnover or business receipts, which will be received in the course of the

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business carried on by the assessee. It was contended that the receipts by way

of interest or remuneration cannot be treated as turnover or business receipts in

the course of carrying on business by the recipient partner and such receipts are

out of the business carried on by a partnership firm and the partner is not

carrying on, vis-a-vis the business of a partnership firm a separate business of

his own. As such, it was submitted that interest or remuneration received from

partnership firm cannot be considered as gross receipt or turnover from business

carried on by the partner, accordingly, such interest or remuneration normally

has no business character. In any case, such receipts by way of interest or

remuneration cannot be treated as part of the turnover or receipt arising out of

or in the course of carrying on a separate business by such partner, as such,

interest or remuneration received cannot be considered as part of total sales

turnover of business carried on by the partner and the same cannot be clubbed

with other turnover or cross receipt of any business carried on by such partner.

Therefore, it was submitted that as such receipt is not part of business turnover

or gross receipt of the business carried on by the assessee the question of such

interest or remuneration received from the partnership firm constituting part of

the turnover or receipt for the purpose of section 44AB does not arise.

5.5 Thus, according to the Ld. AR, the moot question is whether for the

purpose of applying provisions of section 44AB of the Act, the assessee has to

take into consideration the income by way of interest and remuneration from the

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firm? It is well settled principle of law that statutory provisions must be read in

the context and the purpose for which the said provisions are enacted and

Section 44AB falls within the set of provisions which deal with computation of

business income. The provision contained in part 1VD of the Income Tax Act,

1961 are for the purpose of determining business income which is taxable under

the head "Income from Business or Profession". The provisions are necessary for

the purpose of determining the correct and proper business income which would

be taxable under the Act. Now, the object and the purpose of section 44AB is to

see that the business income has been properly computed as per the provisions

of the Act so that on correctly computed business income, proper tax liability is

determined. As such, the provisions of section 44AB which provide for audit

under certain circumstances are enacted with a view to see that while computing

business income for the purpose of the act the same is correctly and properly

computed as per the various provisions of the act dealing with computation of

business income. Therefore it goes, without saying that the question of finding

out or determining proper tax in compliance with the act concerning business

income arises if and only if there is a question of determining proper taxable

business income.

5.6 The Ld. AR submitted that Section 44AB is not enacted in isolation and the

audit of accounts provided for therein is not just for the purpose of auditing, but

with the aim to see that the business income which is taxable is properly

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computed as per the applicable provisions. According to the Ld. AR, it

necessarily follows that only that source of income or those receipts which play

important part in computing the taxable business income under the provisions of

the Act would be relevant. Accordingly, it was submitted that if, for some reason,

some income or some receipts or some turnover is excluded from the tax net or

the same is not playing any role in determining the proper taxable business

income, then such receipts or such turnover need not be subject matter of the

tax audit because, in the nature of things, the tax audit is for determining the

correct taxable income as per the provisions of act. As such, if such source of

income or such source of turnover is not to be taken into account while

determining taxable business income of an entity, then, in respect of such

turnover arising out of such source of income, the question of applying the

provisions of section44AB just cannot arise. If such turnover or the receipt is not

to be taken into account for determining the taxable business income of that

entity, the question of auditing such turnover and finding out whether the same

is properly computed or returned or not will not arise as, irrespective of the

quantum of such receipt, the same cannot be part of the taxable income of an

assessee, no useful purpose can be served by subjecting such turnover or receipt

for audit under the provisions of section 44AB. If the said turnover or receipt or

whatever income that arises is not taxable in the hands of that person, the

question of proper computation of such income will not arise and it will have no

impact for determining the proper taxable income of an assessee for the purpose

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of determining the proper tax liability. Therefore, it was submitted that if a

particular turnover or receipts is not to be taken into account for determination

of the taxable business income of an assessee, such turnover or receipt may not

be part of the turnover or receipt which will be subject to the audit provisions of

section 44AB.

5.7 It was submitted that if interest on capital as business income u/s 28 is not

included it may be excluded and the assessee is right to a certain extent in

classifying the interest u/s 56 instead of section 28. As far as interest is

concerned, it was submitted that if such interest is deemed to be business

income in the hands of the assessee and will be taxable as such, however, in the

nature of things, such interest or remuneration has no character of business

income. But for the specific provisions of section 28 (v), such interest or

remuneration would not be part of business income.

5.8 It was submitted that simply because interest on capital is to be assessed

as business income shall not automatically lead to the conclusion that the same

should also be treated as "gross receipts or turnover in business carried on".

Section 44AB should be interpreted separately keeping in view the objects and

purposes of that section. The fact that interest on capital is treated as business

income u/s 28 is wholly irrelevant to decide the scope of the expression "gross

receipts or turnover in business carried on" used in section 44AB. It was stated

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that the legislature in its wisdom thought fit to tax interest on capital u/s 28 and

its very specific inclusion itself suggests that otherwise it may not come u/s 28.

In view of the above discussion, it was submitted that as interest or

remuneration are not receipts or turnover in the business carried on by the

assessee the same also do not form part of turnover of the assessee for the

purpose of section 44AB. Though the said remuneration or interest will be

deemed to be business income because of the deeming provisions under section

28(v) of the Act, the same cannot be considered as business income of the

assessee and it is income relating to the business carried on by the partnership

firm, but it is not income arising out of the business carried on by the assessee.

5.8.1 The Ld. AR submitted that the amendment made in section 201(1) of the

Act w.e.f. from 01-04-2013 applied to the assessee as the assessment year in

this appeal is 2014-15. The Ld. AR relied on the provisions of the said section

which reads as follows:

“Where any person, including the principal officer of a company,—

a) who is required to deduct any sum in accordance with the provisions of this Act; or

b) referred to in sub-section (IA) of section 192, being an employer,

does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect ofsuch tax;

[Provided that any person, including the principal officer of a company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this Chapter on the sum paid to a resident or on the sum

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credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident—

(i) has furnished his return of income under section 139;

(ii) has taken into account such sum for computing income in such return of income; and (iii) has paid the tax due on the income declared by him in such return of income, (iv) and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed:]”

Provided further that no penalty shall be charged under section 221 from such person, unless the Assessing Officer is satisfied that such person, without good and sufficient , has failed to deduct and pay such tax.

The Ld. AR referred to proviso to section 40(a)(ia) which reads as under:

“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section (1) of section 201, then, for the purpose of this sub- clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee refared to in the said proviso."

5.8.2 The Ld. AR submitted that the proviso clearly provides that if an assessee

is not deemed to be an assesse in default us 201(1) then the law presumes that

the assessee has deducted the tax and paid such tax on the date of furnishing

income by the resident payee. It was submitted that no attempt was made by

the AO to declare the assessee as an assessee in default u/s 201(1) and hence

he is restrained from applying the provisions of section 40(a)(ia). It was

submitted that the three firms furnished the return of Income and therefore, vide

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the proviso it is to be presumed that the assessee has deducted and paid the tax

on the date of furnishing the return by the respective firms.

5.8.3 It was submitted that on a reading of the proviso to section 40(a)(ia), it

was clear that declaration of an assessee as an assessee-in-default is a condition

precedent. Only and only after a categorical declaration of the assessee as an

assessee-in- default u/s 201(1), resort to section 40(a)(ia) is permissible which is

because the liability to deduct tax at source is a vicarious liability and the primary

liability to discharge the tax is on the payee or recipient of interest. The Ld. AR

relied on the following observation of the Hon Supreme court in Para 34 of the

decision in CIT v Eli Lilly & Co (P) Ltd (2009) 178 Taxman 505 wherein it clearly

spelt out the requirement to declare an assessee as an assessee in default.

"34. A perusal of section 201(1) and section 201(1A) shows that both these provisions are without prejudice to each other. It means that the provisions of both the sub-sections are to be considered independently without affecting the rights mentioned in either of the sub-sections. Further, interest under section 201(IA) is compensatory for withholding the tax which ought to have gone to the exchequer. The levy of interest is mandatory and the absence of liability for tax will not dilute the default. The liability of deducting tax at source is in the nature of a vicarious liability, which pre-supposes the existence of primary liability. The said liability is a vicarious liability and the principal liability is of the person who is taxable. A bare reading of section 201(1) shows that interest under section 201(1A) read with section 201(1) can only be levied when a person is declared as an assessee-in-default. For computation of interest under section 20I(1A), there are three elements. One is the quantum on which interest has to be levied. Second is the rate at which interest has to be charged. Third is the period for which interest has to be charged. The rate of interest is provided in the 1961 Act. The quantum on which interest has to be paid is indicated by section 201(1A) itself. Subsection (1A) specifies "on the amount of such tax" which is mentioned in sub- section(1) wherein, it is the amount of tax in respect of which the

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assessee has been declared in default. The object underlying section 201(1) is to recover the tax. In the case of short deduction, the object is to recover the shortfall. As far as the period of default is concerned, the period starts from the date of deductibility till the date of actual payment of tax. Therefore, the levy of interest has to be restricted for the above stated period only. It may be clarified that the date of payment by the concerned employee can be treated as the date of actual payment.” .

5.9 The Ld. AR relied on the judgment of the Allahabad High Court in the case

of Prakash Jagran (345 ITR 288) where it was held that tax can be demanded

from the deductor only when the same cannot be recovered from the deductee.

Thus, it was submitted that in this case the AO made no attempt to recover the

tax from the deductees, i.e. the 3 firms though all the 3 firms are assesses with

the department. It was submitted that the department did not challenge the

decision before the Supreme Court and hence it became fait accompli and final.

According to the Ld. AR, this decision is binding on the department and the

tribunal in the absence of any other contrary decisions.

5.9.1 The Ld. AR relied on the Instruction No. 20/2015 dt. 29-12-2015 issued

by the CBDT wherein in Para 4 it is very clearly mandated that a show cause

notice is required to be issued before making additions/disallowances along with

reasons forming basis for the disallowances/additions in the assessment so that

the assessee can file his submissions against the proposal. The circular further

directs the AO to consider the submissions before passing final order. It was

submitted that in this case, the AO did not issue any such show cause notice

even though the disallowance is a very huge sum of Rs 67,30,90,917/-. The

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CBDT Circular is binding on the AO and any assessment done in violation of the

Circular cannot be sustained.

5.9.2 It was submitted that the Assessing Officer had relied on the decision of

the Kerala High Court in the case of Thomas George Muthoot vs. CIT in ITA No.

278/2014 dated 3.7.2015. It was submitted that on the following points, the

Muthoot’s case is not applicable to the assessee’s case:

(i) The assessment year in Muthoot's case relates to 2006-07 and 2008-09 whereas in assessee’s case it is 2014-15. A very important amendment by way of insertion of proviso to section 40(a)(ia) was effected w.e.f. 1.4.2013. Thus the scope of the section has undergone a sea change and hence the decision is totally inapplicable.

(ii) In the case of Muthoot, interest was paid on overdrawing whereas in the assessee’s case interest was paid for loan taken from the firms.

(iii). In the case of Muthoot, there is a specific finding by the High Court that the assessee is liable for audit under section 44AB. But in the assessee’s case, there is no finding by any of the authorities. Section 44AB is applicable because the turnover or gross receipts of the preceding previous year had exceeded the limits. Thus, the Muthoot's case does not have any application in the assessee’s case.

5.9.3 It was submitted that the CIT(A) failed to consider the argument put

forward by the assessee in para 3/6 of the ground of appeal filed before the

CIT(A). But he reproduced the same in his order. But these grounds were not

considered.

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5.9.4 It is also submitted that the impugned order is illegal and unsustainable

since there is no show cause notice or proposal by the Assessing Officer in

writing as per Instruction No. 20/2015 dated 29/12/2015 which is binding on the

Assessing Officer. The violation of mandatory circular vitiates the order. The

show cause notice would have given the assessee the chance to realize and

understand the issues and get legal advice from experts in the field rather than

the junior CA who represented the assessee. Thus, it was submitted that the

addition may be deleted.

the assessee for the F.Y. 2012-13 showed the interest on borrowings and the

total of interest earned and expended comes to Rs.42,60,28,469/- which clearly

showed that the gross turnover of the assessee is above one crore for F.Y. 2012-

13, which is the immediately preceding the previous year. As such, it was

submitted that the assessee was liable for tax audit u/s. 44AB.

“Provided that an individual or an Hindu undivided family, whose total sales, gross Receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of Section 44 AB during the financial year in which such interest is credited or paid, shall be liable to deduct income tax under this section.”

6.1 It was submitted that it is clear that an individual whose total sales or gross

receipts or turnover from business exceeds the monetary limit specified, then he

liable for tax audit. Here, according to the ld. DR, the assessee is an individual

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whose gross receipts from business exceeded one crore in the financial year

2012-13, hence, the assessee squarely falls under the application Section 194A

(1). The only question remaining is whether the gross receipts are from

business. Section 28 (v) is clear about this . It reads as under:

“any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by a partner of a firm from such firm shall be chargeable to tax as income from business and profession.”

6.2 The Ld. DR submitted that the assesse's Counsel had tried to distinguish

between "from business" as appearing in 194A and "in business" as used in

Section 44AB. According to the Ld. DR, the assessee being the Managing

Partner of the firm had derived income from the capital and he had invested,

therefore the provisions of section 28 (v) is applicable.

6.3 The Ld. DR submitted that the argument put forth by the assessee that

since the assessee is not “deemed to be an assessee in default" under the first

proviso to sub.section (1) of Section 201, then the mischief of section 40 (a) (ia)

is not applicable to it, is not acceptable. She quoted the amended portion of

section 40 (a) (ia).

"Section 40(a)(ia) : thirty per cent of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub section (1) of 139 of the Act.”

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Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub section (1) of section 201, then, for the purpose of this sub clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. Then for the purpose of this sub section, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”

6.4 Thus it was submitted that the under the said proviso, an assessee can be

treated as not to be defaulter if only the payee has furnished the return of

income. The Ld. DR referred to the proviso to section 201 (1) which specifies

that;

"Provided that any person, including the Principal Officer of a Company, who fails to deduct the whole or any part of the tax in accordance with the provisions of this chapter on the sum paid to a resident or on the sum credited to the account of a resident shall not be deemed to be an assessee in default in respect of such tax if such resident:-

i) has furnished his return of income under section 139. ii) has taken into account such sum for computing income in such return of income and iii) has paid the tax due on the income declared by him in such return of income. iv) and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed. This proviso is applicable from A.Y. 2013-14 onwards”.

6.5 The Ld. DR submitted that the resident payee, M/s Popular Traders and M/s.

Popular Dealers have filed their return of income for the A.Y. 2014-15, but M/s.

Popular Printers had not furnished their return of income for A.Y, 2014-15 and the

return filed by M/s. Popular Traders and Popular Dealers were beyond the time

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limit for filing return u/s 139, (139(4),139(5) and under section 139 (1) the due

date for filing return is 30/09/2014. It was submitted that the return of income in

the case of M/s. Popular Traders was filed on 11/2/2016 in the case of M/s.

Popular Dealers and the return of income was filed on l7/2/2016. Since this is

beyond the time limit stipulated even for filing a revised return, it was submitted

that it cannot be said that payee filed its return of income u/s 139 and included it

as income in the return of income. On perusal of the P & L account of M/s.

Popular Printers & M/s. Popular Dealers, The Ld. DR found that the amount of

Rs. 49,96,53,294/- ( Popular Traders) ,Rs. 7,15,53,547/- (Popular Printers) and

Rs. 10,10,24,076/-( Popular Dealers) were credited. It was submitted that these

P & L Accounts were not audited P & L Accounts. The Ld. DR noticed that as

against the income declared as interest on Managing Partner's loan, debits were

also claimed as interest on loan as under:

Interest on Managing Interest on MPL Net loss as per partners loan debited P&L Account Popular Dealers 10,18,84,076/- 10,32,56,352/- 9,95,793/- Popular Printers 7,15,53,547/- 7,26,77,180/- 3,71,146/- Popular Traders 49,96,53,294/- 50,78,94,486/- 44,57,455/-

6.6 Thus, it was submitted that the assessee was crediting the interest amount

from the Managing Partner and debiting the interest on loan taken by the

Managing Partner and almost similar amounts are credited and debited. It was

submitted that all the firms were reporting net loss. Therefore, it was submitted

that the assessee failed the test of taking into account such sum for computing

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income in such return of income. It was also submitted that none of the firms

had paid tax and all the firms were returning net loss as per the P & L Account.

It was submitted that no certificate was furnished from an accountant.

6.7 The Ld. DR submitted that failure to deduct Tax deducted at source the fact

that the recipient had subsequently paid tax, will not absolve the payee from the

consequences of disallowances". She relied in the case of Shri Thomas George

Muthoot in ITA No 278/2014 dated 3/7/2015 for A.Y. 2005-06 to 2007-08

wherein it was held that the proviso inserted in sec. 40(a) (ia) is from A.Y. 2014-

15 and the second proviso to sec. 40(a)(ia) is prospective in operation.

6.8 The Ld. DR summarized the points raised by the Department as follows:-

1) Even though proviso to Sec, 40(a)(ia) was introduced in the Finance Act w.e.f. 1/4/2013, assessee cannot claim the benefit of that because, it is deemed to be an assessee in default under the 1st proviso to sub section (1) of Section 201. Since the assessee has failed to deduct TDS on interest payments made by him as Managing Partner of the three firms, disallowance is called for u/s 40(a)(ia).

2) Assessee's case is squarely covered by the decision of High Court of Kerala in the case of Shri Thomas George Muthoot in ITA No 278/2014 dated 3/7/2015 wherein it was held that the second proviso inserted by the Finance Act 2012 cannot be treated as retrospective in operation. The fact that payees have already paid tax on the amounts paid does not mean that disallowance for failure to deduct TDS cannot be made. Sec. 40(a)(ia) cannot be interpreted to mean that it applies only to amounts "paid" and not to those "payable",

3) The second proviso to sec. 40(a) (ia) though beneficial to the tax payers, can be claimed only if the condition under proviso to sec. 201(1) is not met. Since the asessee falls this test, this benefit to the tax payer cannot be availed by the assessee.

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6.9 The Ld. DR relied on the judgment of the Delhi High Court in ITA Nos.

160&161/2015 dated 26/08/2015 wherein it was held that the above reasoning

of the Agra Bench of the ITAT as regards the rationale behind the insertion of the 2nd proviso to sec. 40(a)(ia) of the Act and its conclusion that the said proviso is declaratory and curative and has retrospective effect from 1st April,

2005, merits acceptance. She also relied on the decision of the Kerala High Court

in the case of Thomas George Muthoot (287 CTR 101).

occasion, a similar issue came up for consideration before this Tribunal in the

case of Thomas George Muthoot vs. ACIT (57 SOT 270) (Cochin); 41 CCH 633

wherein the Tribunal held as under:

“4. We have considered the rival submissions on either side and also perused the material available on record. Admittedly all the assessees are assessed as individuals in their individual capacity. All the assessees are partners in the respective firms. All the assessees paid interest to the respective partnership firms on the loans borrowed. The question arises for consideration is when the individual partners paid interest to the partnership firms whether they are liable to deduct tax u/s 194A of the Act. For the purpose of convenience we are reproducing section 194A of the Act below:

“194A. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force:

Provided that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him

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exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income-tax under this section.

Explanation.- For the purposes of this section, where any income by way of interest as aforesaid is credited to any account, whether called “interest payable account” or “Suspense account” or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.“

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“Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub-section(1) of section 201, then, for the purpose of this sub-clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”

“5. Reading of Section 40a(ia) along with 2nd proviso and Section 201(1) along with proviso, it would mean that the mandate or requirement on the part of the payer to deduct tax at source is not so strict if they are able to show that the payee or the recipient of the amounts has paid tax in accordance with the provisions of Section 201(1) and the proviso.

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assessment year in question is 2007-08 and the amendment giving breathing space to payer of amounts is with effect from 01/04/2013. Therefore, the said benefit is not applicable to the assessee. Even otherwise, on factual situation, the very fact that these amounts were claimed as loan initially, till the scrutiny came up for consideration before assessing authority would only indicate the real intention of the assessee firm i.e not to disclose this amount as freight charges but something else as repayment of loan.”

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832 of 2012, 857 of 2012, 894 of 2012, 928 of 2012, 12 of 2013, 51 of 2013, 58 of 2013 and 218 of 2013 judgment dated 02-05-2013 considered the decision of the Special Bench of this Tribunal in Merilyn Shipping & Transports (supra) and specifically disagreed with the principles laid down by the Special of this Tribunal in Merilyn Shipping & Transports (supra). The Calcutta High Court also in the case of Crescent Exports Syndicate & Another in ITAT 20 of 2013 and GA 190 of 2013 judgment dated 03-04-2013 considered elaborately the judgment of the Special Bench of this Tribunal in Merilyn Shipping & Transports (supra) and found that the decision rendered by the Special Bench of this Tribunal is not the correct law. It is well settled principles of law that when different High Courts expressed different opinions on a point of law, then, normally, the benefit of doubt under the taxation law would go to the assessee. It is also equally settled principles of law that the judgment which discusses the point in issue elaborately and gives an elaborate reasoning has to be preferred when compared to the judgment which has no reasoning and discussion. Admittedly, the Calcutta High Court and Gujarat High Court have discussed the issue elaborately and the specific reasoning has also been recorded as to why the Special Bench is not correct. Therefore, this Tribunal is of the considered opinion that the judgments of the Calcutta High Court Crescent Exports Syndicate & Another (supra) and Gujarat High Court in Sikandarkhan N Tunvar (supra) have to be preferred when compared to the Allahabad High Court in M/s Vector Shipping Services (P) Ltd (supra).

“ Before dealing with the submissions of the learned Counsel appearing for the assessees in both the appeals we have to examine the correctness of the majority views in the case of Merilyn Shipping. We already have quoted extensively both the majority and the minority views expressed in the aforesaid case. The main thrust of the majority view is based on the fact “that the Legislature has replaced the expression “amounts credited or paid” with the expression ‘payable’ in the final enactment. Comparison between the pre-amendment and post amendment law is permissible for the purpose of ascertaining the mischief sought to be remedied or the object sought to be achieved by an amendment. This is precisely what was done by the Apex Court in the case of CIT Vs. Kelvinator reported in 2010(2) SCC 723. But the same comparison between the draft and the enacted law is not permissible. Nor can the draft or the bill be used for the purpose of regulating the meaning and purport of the enacted law. It is the finally enacted law which is the will of the legislature. The Learned Tribunal fell into an error in not realizing this aspect of the matter. The Learned

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Tribunal held “that where language is clear the intention of the legislature is to be gathered from the language used”. Having held so, it was not open to seek to interpret the section on the basis of any comparison between the draft and the section actually enacted nor was it open to speculate as to the effect of the so-called representations made by the professional bodies. The Learned Tribunal held that “Section 40(a)(ia) of the Act creates a legal fiction by virtue of which even the genuine and admissible expenses claimed by an assessee under the head “income from business and profession”: if the assessee does not deduct TDS on such expenses are disallowed”. Having held so was it open to the Tribunal to seek to justify that “this fiction cannot be extended any further and, therefore, cannot be invoked by Assessing Officer to disallow the genuine and reasonable expenditure on the amounts of expenditure already paid”? Does this not amount to deliberately reading something in the law which is not there? We, as such, have no doubt in our mind that the Learned Tribunal realized the meaning and purport of Section 40(a)(ia) correctly when it held that in case of omission to deduct tax even the genuine and admissible expenses are to be disallowed. But they sought to remove the rigour of the law by holding that the disallowance shall be restricted to the money which is yet to be paid. What the Tribunal by majority did was to supply the casus omissus which was not permissible and could only have been done by the Supreme Court in an appropriate case. Reference in this regard may be made to the judgment in the case of Bhuwalka Steel Industries vs. Bombay Iron & Steel Labour Board reported in 2010(2) SCC 273. ‘

Unprotected worker’ was finally defined in Section 2(11) of the Mathadi Act as follows:-

”unprotected worker’ means a manual worker who is engaged or to be engaged in any scheduled employment.”

The contention raised with reference to what was there in the bill was rejected by the Supreme Court by holding as follows:

“It must, at this juncture, be noted that in spite of Section 2(11), which included the words “but for the provisions of this Act is not adequately protected by legislation for welfare and benefits of the labour force in the State”, these precise words were removed by the legislature and the definition was made limited as it has been finally legislated upon. It is to be noted that when the Bill came to be passed and received the assent of the Vice-President on 05-06-1969 and was first published in the Maharashtra Government Gazette Extraordinary, Part IV on 13-06-1969, the aforementioned words were omitted.

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Therefore, this would be a clear pointer to the legislative intent that the legislature being conscious of the fact and being armed with all the Committee reports and also being armed with the factual data, deliberately avoided those words. What the appellants are asking was to read in that definition, these precise words, which were consciously and deliberately omitted from the definition. That would amount to supplying the casus omissus and we do not think that it is possible, particularly, in this case. The law of supplying the casus omissus by the courts is extremely clear and settled that though this Court may supply the casus omissus, it would be in the rarest of the rate case and thus supplying of this casus omissus would be extremely necessary due to the inadvertent omission on the part of the legislature. But, that is certainly not the case here.

We shall now endeavour to show that no other interpretation is possible. The key words used in Section 40(a)(ia), according to us, are “on which tax is deductible at source under ChapterXVII-B”. If the question is “which expenses are sought to be disallowed?” The answer is bound to be “those expenses on which tax is deductible at source under Chapter XVII-B. Once this is realized nothing turns on the basis of the fact that the legislature used the word ‘payable’ and not ‘paid or credited’. Unless any amount is payable, it can neither be paid nor credited. If n amount has neither been paid nor credited, there can be no occasion for claiming any deduction. The language used in the draft was unclear and susceptible to giving more than one meaning. By looking at the draft it could be said that the legislature wanted to treat the payments made or credited in favour of a contractor of subcontractor differently than the payments on account of interest, commission or brokerage, fees for professional services or fees for technical services because the words “mounts credited or paid” were used only in relation to a contractor of sub-contractor. This differential treatment was not intended. Therefore, the legislature provided that the amounts, on which tax is deductible at source under XVII-B payable on account of interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services or to a contractor of sub-contractor shall not be deducted in computing the income of an assessee in case he has not deducted, or after deduction has not paid within the specified time. The language used by the legislature in the finally enacted law is clear and unambiguous whereas the language used in the bill was ambiguous. A few words are now necessary to deal with the submission of Mr. Bagchi and Ms. Roychowdhuri. There can be no denial that the provision in question is harsh. But that is no ground to read the same in a manner which was not intended by the legislature. This is our answer to the submission of

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Mr. Bagchi. The submission of Ms. Roychowdhuri that the second proviso sought to become effective from 1st April, 2013 should be held to have already become operative prior to the appointed date cannot also be acceded to for the same reason indicated above. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error.

For the reasons discussed above, we are of the opinion that the majority views expressed in the case of Merilyn Shipping & Transports are not acceptable. The submissions advanced by learned advocates have already been dealt with and rejected.”

Gujarat High Court in Sikandarkhan N Tunvar(supra) “23. Despite this narrow interpretation of section 40(a)(ia),the question still survives if the Tribunal in case of M/s Merilyn Shipping & Transports vs. ACIT (supra) was accurate in its opinion. In this context, we would like to examine two aspects. Firstly, what would be the correct interpretation of the said provision. Secondly, whether our such understanding of the language used by the legislature should waver on the premise that as propounded by the Tribunal, this was a case of conscious omission on the part of the Parliament. Both these aspects we would address one after another. If one looks closely to the provision, in question, adverse consequences of not being able to claim deduction on certain payments irrespective of the provisions contained in Sections 30 to 38 of the Act would flow if the following requirements are satisfied:- (a) There is interest, commission or brokerage, rent, royalty, fees for professional services or fees for technical services payable to resident or amounts payable to a contractor or sub-contractor being resident for carrying out any work.

(b) These amounts are such on which tax is deductible at source under XVIII-B.

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(c) Such tax has not been deducted or after deduction has not been paid on or before due date specified in sub-Section (1) of Section 39. For the purpose of current discussion reference to the proviso is not necessary. 24. What this Sub-Section, therefore, requires is that there should be an amount payable in the nature described above, which is such on which tax is deductible at source under Chapter XVII-B but such tax has not been deducted or if deducted not paid before the due date. This provision nowhere requires that the amount which is payable must remain so payable throughout during the year. To reiterate the provision has certain strict and stringent requirements before the unpleasant consequences envisaged therein can be applied. We are prepared to and we are duty bound to interpret such requirements strictly. Such requirements, however, cannot be enlarged by any addition or subtraction of words not used by the legislature. The term used is interest, commission, brokerage etc. is payable to a resident or amounts payable to a contractor or sub-contractor for carrying out any work. The language used is not that such amount must continue to remain payable till the end of the accounting year. Any such interpretation would require reading words which the legislature has not used. No such interpretation would even otherwise be justified because in our opinion, the legislature could not have intended to bring about any such distinction nor the language used in the section brings about any such meaning. If the interpretation s advanced by the assessees is accepted, it would lead to a situation where the assessee though was required to deduct the tax at source but no such deduction was made or more flagrantly deduction though made is not paid to the Government, would escape the consequence only because the amount was already paid over before the end of the year in contrast to another assessee who would otherwise be in similar situation but in whose case the amount remained payable till the end of the year. We simply do not see any logic why the legislature would have desired to bring about such irreconcilable and diverse consequences. We hasten to add that this is not the prime basis on which we have adopted the interpretation which we have given. If the language used by the Parliament conveyed such a meaning, we would not have hesitated in adopting such an interpretation. We only highlight tht we would not readily accept that the legislature desired to bring about an incongruous and seemingly irreconcilable consequences. The decision of he Supreme Court in the case of Commissioner of Income-Tax, Gujarat vs. Ashokbhai Chimanbhai (supra), would no6t alter this situation. The said decision, of course, recognizes the concept of ascertaining the profit and loss 32

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from the business or profession with reference to a certain period i.e. the accounting year. In this context, last date of such accounting period would assume considerable significance. However, this decision nowhere indicates that the events which take place during the accounting period should be ignored and the ascertainment of fulfilling a certain condition provided under the statute must be judged with reference to last date of the accounting period. Particularly, in the context of requirements of Section 40(a)(ia) of the Act, we see no warrant in the said decision of the Supreme Court to apply the test of payability only as on 31st March of the year under consideration. Merely because, accounts are closed on that date and the computation of profit and loss is to be judged with reference to such date, does not mean that whether an amount is payable or not must be ascertained on the strength of the position emerging on 31st March.

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7.1 Later on, the assessee went in appeal before the Jurisdictional High Court

wherein it confirmed the same by holding that as per the proviso to section

194A(1), an individual or Hindu undivided family whose total sales, gross receipts

or turnover from business or profession carried on by him exceeds the monetary

limits specified under section 44AB (a) or (b) during the financial year

immediately preceding the financial year in which such interest was credited or

paid, shall be liable to deduct income tax u/s. 194A.

7.2 Now the contention of the Ld. AR is that the Jurisdictional High Court came

to this conclusion on the reason that the assessee has not placed any material

whatsoever on record to contradict the factual finding recorded by the Tribunal

with reference to the assessment of the assessee’s income as business income

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which exceeded the limit prescribed u/s. 44AB of the Act. Therefore, that

assessee is liable to deduct TDS u/s. 194A of the Act. However, the Ld. AR

submitted that this ratio cannot be applied to the assessee’s case.

7.3 According to the Ld. AR, in the present case, the assessee is not doing any

business and income is received by the assessee from the partnership firm.

Therefore, the income of the assessee is to be assessed as income from other

sources and not as income from business. As such, he submitted that there is

no question of applicability of section 44AB of the Act so as to audit the same.

For the sake of clarity, it would be relevant to understand the head of income

under which the said interest receipt is to be assessed. Whether interest

income received from partnership firm should be assessed under the head

"Income from Other Sources" or "Income from Profits and Gains of Business or

Profession? The relevant provisions with regard to assessment of interest income

are as under:

" F. -Income from other sources Income from other sources. 56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14. items A to E. (2) In particular, and without prejudice to the generality of the provisions of sub-section (1), the following incomes, shall be chargeable to income-tax under the head "Income from other sources", namely :-

(i) dividends ;

(ia) income referred to in sub-clause (viii) of clause (24) of section 2 ; (ib) income referred to in sub-clause (ix) of clause (24) of section 2 ;

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(ic) income referred to in sub-clause (x) of clause (24) of section 2, if such income is not chargeable to income-tax under the head "Profits and gains of business or profession" (id) income by way of interest on securities, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession";"[Emphasis Supplied]

CHAPTER IV OF TOTAL INCOME

" D.—Profits and gains of business or profession Profits and gains of business or profession. 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",-

(i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year......

(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession ;

(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm :

Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (6) of section 40. The income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted ; " [Emphasis Supplied]

From the above relevant provisions, it is evident that the interest income is

assessable under section 56 of the Act only if such interest is not assessable

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under other heads of income. As per section 28(v) of the Act, the interest

received by partner from partnership firm is assessable under the head "Income

from business or profession". Therefore, as a corollary, interest income received

by "Partner" from the firms can only be assessed under the head "Income from

business or profession".

7.4 In the light of the provisions discussed and legal principles explained above,

it is evident that the action of the assessee in offering the interest received from

the partnership firm under the head “income from other sources” is not in

accordance with the provisions of the Act. Further, the interest income received

from partnership firm is assessable only u/s. 28(v) of the Act, which is only

business income.

7.5 Further, the Ld. AR placed reliance on the judgment of the Allahabad High

Court in the case of Jagran Prakashan Ltd. vs. DCIT(TDS) 21

taxman.com.489(All.) wherein it was held that in a case where assessee has not

been deducted at source, short deducted tax cannot be realized from deductor

and liability to pay such tax shall continue to be with payee/deductee direct,

whose income is to be charged and a person who fails to deduct tax at source,

at best is liable for interest and penalty only. In our opinion, this judgment was

delivered in the context of section 201(1) and 201(1A), the object of which is

consequential in nature and cannot be of assistance to the assessee. This fact

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has been noticed by the Tribunal in the case of Thomas George Muthoot cited

supra which was confirmed by the Jurisdictional High Court. Hence, we do not

find any merit in the argument of the Ld. AR.

7.6 According to the Ld. AR since the assessee was not declared as assessee in

default under section 201(1) and 201(1A) of the Act, no disallowance under

section 40(a)(ia) of the Act is to be made. In our opinion, the amended

provisions of section 40(a)(ia) reads as under:

"Section 40(a)(ia) : thirty per cent of any sum payable to a resident on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction, has not been paid on or before the due date specified in sub section (1) of 139 of the Act.”

Provided further that where an assessee fails to deduct the whole or any part of the tax in accordance with the provisions of Chapter XVII-B on any such sum but is not deemed to be an assessee in default under the first proviso to sub section (1) of section 201, then, for the purpose of this sub clause, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso. Then for the purpose of this sub section, it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing of return of income by the resident payee referred to in the said proviso.”

7.7 In our opinion, provisions of section 40(a)(ia) of the Act cannot be applied

by the Assessing Officer when the following conditions are complied with:

i) has furnished his return of income under section 139. ii) has taken into account such sum for computing income in such return of income and iii) has paid the tax due on the income declared by him in such return of income.

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iv) and the person furnishes a certificate to this effect from an accountant in such form as may be prescribed. This proviso is applicable from A.Y. 2013-14 onwards.

7.8 In the present case, resident payee, M/s Popular Traders and M/s. Popular

Dealers have filed their return of income for the A.Y. 2014-15, but M/s.Popular

Printers had not furnished their return of income for A.Y, 2014-15 and the return

filed by M/s. Popular Traders and Popular Dealers were beyond the time limit for

filing return u/s 139, (139(4),139(5) and under section 139 (1) the due date for

filing return is 30/09/2014. The return of income in the case of M/s. Popular

Traders was filed on 11/2/2016 in the case of M/s. Popular Dealers and the return

of income was filed on 17/2/2016. Since this is beyond the time limit stipulated

even for filing a revised return, it cannot be said that payee filed its return of

income u/s 139 and included it as income in the return of income. It was also

brought to our notice that the P & L accounts of M/s. Popular Printers & M/s.

Popular Dealers, it was found that the amount of Rs. 49,96,53,294/- (Popular

Traders) ,Rs. 7,15,53,547/- (Popular Printers) and Rs. 10,10,24,076/- (Popular

Dealers) were credited. These P & L Accounts were not audited P & L Accounts.

It was noticed that as against the income declared as interest on Managing

Partner's loan, debits were also claimed as interest on loan as under:

Interest on Managing Interest on MPL Net loss as per partners loan debited P&L Account Popular Dealers 10,18,84,076/- 10,32,56,352/- 9,95,793/- Popular Printers 7,15,53,547/- 7,26,77,180/- 3,71,146/- Popular Traders 49,96,53,294/- 50,78,94,486/- 44,57,455/-

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Thus, the assessee was crediting the interest amount from the Managing Partner

and debiting the interest on loan taken by the Managing Partner and almost

similar amounts are credited and debited. All the firms were reporting net loss.

Therefore, the assessee failed the test of taking into account such sum for

computing income in such return of income. None of the firms had paid tax and

all the firms were returning net loss as per the P & L Account and no certificate was furnished from an accountant. Hence, the 2nd proviso to section 40(a)(ia)

cannot be applied to the assessee’s case.

was provided by the lower authorities and also no show cause notice was issued

to the assessee. This argument of the ld. AR is also void of merit. A notice u/s.

143(2) of the Act was issued on 06/07/2016. Notice under section 142(1) asking

for details was issued by the Assessing Officer on 30/11/2016, fixing the hearing

on 07/12/2016 and the assessee appeared before the Assessing Officer on

9/12/2016, 13/12/2016, 20/12/2016 and 29/12/2016. Finally, the assessment

order was passed on 30/12/2016. Before the CIT(A), the assessee filed the

appeal on 31/01/2017 and the appeal was posted for hearing on 03/01/2018.

The assessee filed a letter on 02/01/2018 requesting for adjournment of the

appeal. The appeal was re-posted for hearing on 22.01.2018. The CIT(A)

requested the authorized representative either to attend in person or forward his

submissions to the e-mail id and stated that no further adjournment would be

granted in this case. On the reappointed date i.e. 22.01.2018, the authorized

I.T.A. No.68 /Coch/2018

representative of the assessee, Sri Sivadas Chettoor forwarded his submissions

to the official email id. The contents of the submissions are as under:

"Respected sir, I thought of appearing before your goodself on 22-01-2018 to appraise of the situation regarding the pendency of the matter before the Hon Supreme court but unfortunately I am laid up due to fever and body pain. I may appear if I feel alright and fit to travel in the morning tomorrow. The Hon Supreme court adjourned the hearing to 5-02-2018. Therefore our senior advocate advised us to move an adjournment till then. Please note that we have challenged not only the decision regarding stay of collection of tax but questions of law also. Your attention is invited to Question No(c) raised before the court which is as follows. " Whether the disallowance of interest expenditure is bad in law and contrary to proviso to section 40{a)(ia)?

Your attention is also invited to question No (d) which is also a legal question in this appeal. It is now settled law that under Article 136 of the constitution Hon Supreme court has very wide powers and can even pronounce on merits if the court considers it necessary. Please note our SLP has been admitted and the WHOLE matter is now before the Hon court. Please see decision of the Apex Court in Gangadhara Palo v RDO 21Taxmann.com 220(SC) and UOI v West Coast Paper Mills 2004 AIR SCW 838. In the circumstances it is in fairness of things that the hearing be adjourned. This is the legal advice I received from the lawyers.

I am sending a written submission along with of additional ground. It may be considered on merits. This request is made because it was mentioned in the notice that no adjournment shall be given. We are in a dilemma, I request your goodself to do the needful. The written submission is attached which may kindly be looked into.”

8.1 On the basis of the written submission, the CIT(A) disposed of the appeal

on merit. Since the assessee failed to appear before the CIT(A) on the date of

hearing, the assessee cannot have grievance that he was not given proper

opportunity of being heard. Hence, this ground of appeal of the assessee is also

rejected.

I.T.A. No.68 /Coch/2018

sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Kochi Dated: 12th November, 2018 GJ Copy to: 1. Shri Thomas Daniel, Indicattil House, Vakayar P.O., Pathanmthitta. 2.The Income Tax Officer, Ward-4, Thiruvalla. 3. The Commissioner of Income-tax(Appeals), Kottayam. 4. The Pr. Commissioner of Income-tax, Kottayam. 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin