1978-VIL-667-ALH-DT

Equivalent Citation: [1981] 129 ITR 475, 8 CTR 170

ALLAHABAD HIGH COURT

Date: 28.07.1978

MAROLIA AND SONS

Vs

COMMISSIONER OF INCOME-TAX

BENCH

Judge(s)  : K. C. AGARWAL., SATISH CHANDRA 

JUDGMENT

The judgment of the court was delivered by

K. C. AGARWAL J.-At the instance of the assessee, the Income-tax Appellate Tribunal referred the following questions of law for our opinion:

" 1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the departmental authorities were entitled to support the disallowance or addition on account of huge debits in the name of Shri Ram Deo Marolia on the ground that interest bearing loans were utilised by the assessee for non-business purposes which included withdrawals by Ram Deo Marolia also ?

2. If the answer to the question is in the affirmative, whether, on the facts and in the circumstances of the case, the Tribunal was justified in sustaining the disallowance of interest of Rs. 12,320, Rs. 12,060, Rs. 9,300, Rs. 8,760 and Rs. 10,560 ? "

The assessee is a firm with three partners. One of the partners of this firm was Ram Deo Marolia. The firm was carrying on business of cotton purchase on commission basis for various cotton mills situated at Kanpur. The partnership was evidenced by a deed of partnership executed on 4th July, 1962. One of the clauses of the said deed, which would be relevant for the purpose of this reference reads as under:

"Interest at the rate of 6% per annum shall be charged on the capital of the partners. "

While dealing with the assessments for the assessment years 1964-65, 1965-66, 1966-67, 1967-68 and 1968-69, the ITO found that huge amounts of money had been withdrawn by Ram Deo Marolia. The firm had, however, charged no interest from him in these years. Being of the view that interest was chargeable on the debit balance, the ITO made additions in the aforesaid five years. Aggrieved by the judgment and orders of the ITO made in respect of these five years, the assessee preferred five appeals before the AAC. The AAC did not accept the assessee's submission that as there was no provision for charging interest on debit balance standing in the account of a partnership, the additions made by the ITO were incorrect. He, therefore, dismissed the assessee's appeals on his ground. The assessee carried the matter before the Tribunal. Before the Tribunal the assessee filed certain fresh evidence. On being satisfied that the question of addition of the amount in the assessment of the assessee required reconsideration, the Tribunal remanded the case to the AAC to find out as to whether or not any add-back could be made in the assessment on the basis of accrual of interest on debit balance in the account of Ram Deo Marolia. The AAC called upon the ITO to submit a report on the aforesaid controversy. The ITO heard the assessee and thereafter submitted a report stating that if the additions made in the debit balances of Ram Deo Marolia were not upheld, the interest on borrowings allowed to the assessee-firm should be proportionately disallowed. The AAC, being of the view that interest was rightly charged on the debit balance appearing in the name of Ram Deo Marolia, dismissed the appeals filed by the assessee-firm.

The assessee again filed appeals before the Tribunal. The Tribunal disagreed with the ITO and the AAC that Ram Deo Marolia was liable to pay interest on the loans taken by him from the firm. It held that as the partners had orally agreed not to charge interest on the debit balances, the AAC was not justified in holding that interest on the balance to the debit of Ram Deo Marolia accrued to the assessee. The revenue, however, pointed out that if the addition of interest not charged to the partner was decided against the revenue, the Tribunal should disallow the interest paid on the borrowings not used for business purposes by the assesseefirm. The Tribunal accepted the argument of the, revenue and holding that since the borrowings obtained by the assessee had not been utilised for the business purposes of the assessee, the deduction of interest on the borrowings was liable to be disallowed. It, however restricted the disallowances to the amounts added on the debit balance standing in the name of Ram Deo Marolia. It was, thereafter, at the instance of the assessee, that the Tribunal referred the two questions mentioned above.

The question referred raised the controversy about the powers of the Tribunal. Before coming to the said question, it appears appropriate to deal briefly with the disallowance of interest, on the borrowings made by the assessee-firm.

Section 36(1)(iii) of the I.T. Act deals with the deduction on the amount of interest paid in respect of capital borrowed for the purposes of business or profession. It would be found from cl. (iii) of sub-s. (1) of s. 36 of the Act that three conditions must be established by an assessee for getting the benefit under the aforesaid clause:

(1) interest should have been payable,

(2) there should be a borrowing, and

(3) capital must have been borrowed or taken for business purposes.

If the capital borrowed is not utilised for the purposes of the business, the assessee will not be entitled to deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partners for their personal use or utilization, the firm would not be entitled to claim deduction on the amount diverted for utilization for other purposes or by other persons. This question has been the subject-matter of decisions by several High Courts. It appears to be settled that an assessee-firm cannot be entitled to claim deduction under cl. (iii) of sub-s. (1) of s. 36 of the Act on the amount which is not used for the purposes of business but is given to the partners for their personal use. Reference may be made to the decisions in Milapchand R. Shah v. CIT [1965] 58 ITR 525 (Mad) and Roopchand Chabildass & Sons v. CIT [1967] 63 ITR 166 (Mad).

In the instant case, it would appear from the statement of the case submitted by the Tribunal that out of the borrowings made by the assesseefirm, a large amount had been given to Ram Deo Marolia for his personal purposes. As the borrowings had not been utilised for the business of the assessee-firm, the Tribunal held that the deduction claimed by the assessee was not admissible. It would be noticed that as the ITO was of the view that Ram Deo Marolia was liable to pay interest on the withdrawals made by him from the firm and added the same in its income, he allowed the interest paid by the assessee on the borrowings as well. This was affirmed by the AAC on appeal. As the addition had been made to the income of the firm by taking into account the amount of interest which ought to have been charged from Ram Deo Marolia, the revenue was not aggrieved by the order of the AAC. The revenue could agitate the question of disallowance of interest on the borrowings only if the ITO had not added back the amount of interest accruing to the assessee on the debit balance standing in the name of Ram Deo Marolia. It could not have two benefits, viz., the addition of income accruing to the firm on the debit balance as well as disallowance of the amount of interest paid on the borrowings obtained by the firm at the same time. In a situation where a firm makes borrowings from an outsider and instead of investing the money in the firm for which it was taken, it gave the same to its partner for his personal use and charged interest on it, the revenue cannot have any possible grievance.

It would be noticed from the report of the ITO as well as that of the judgment of the AAC deciding the appeals, after the remand that an alternative argument of disallowance of interest on the borrowings was advanced on behalf of the revenue. This question, however, more pointedly arose for decision before the Tribunal when it held that the interest having not been actually and really charged from Ram Deo Marolia by the assessee, the addition made to the income of the assessee was unjustified. After this finding had been recorded by the Tribunal, the question arose whether the assessee was entitled to the deduction of the amount of interest paid on borrowings although it was not utilised for business purposes of the firm. The Tribunal rightly went into this question and found that the deduction claimed by the assessee-firm on the amounts given to Ram Deo Marolia out of the borrowings was not admissible. The addition to the income, of the assessee-firm of the amount which ought to have been charged from its partners on the amount given on loan was inseparably connected with the deduction claimed by the assessee-firm as interest paid in respect of capital borrowed. It would not be correct to say that the point relating to the disallowance of interest on the capital borrowed by the assessee-firm given to Ram Deo Marolia for his personal purposes did not fall within the jurisdiction and power of the Tribunal deciding the appeal.

At this place, we are required to consider the scope of the appellate powers of the Tribunal. The relevant portion of sub-s. (1) of s. 254 of the Act reads as under:

" (1) The Appellate Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit."

Placing reliance on the word " thereon ", the learned counsel for the assessee contended that it restricts the jurisdiction of the Tribunal to the subject-matter of the appeal, and the subject-matter of the appeal is to be confined to the grounds of appeal and such additional grounds as may be raised by leave of the Tribunal. He urged that it is not open to a Tribunal to adjudicate or give a finding on the question which is not in dispute and does not form the subject-matter of the appeal. In this connection, it was also emphasised that the Tribunal could not give any finding adverse to the assessee, which does not arise from any question raised in the memorandum of appeal. The learned counsel placed reliance on a number of authorities in support of this contention. We may mention some of them at this place. These are : Assam Co-operative Apex Bank Ltd. v. CIT [1978] 112 ITR 257 (Gauhati), L.K. Shaik Mohammed Brothers v. CIT [1978] 112 ITR 622 (Mad), Motor Union Insurance Co. Ltd. v. CIT [1945] 13 ITR 272 (Bom) and Puranmal Radhakishan and Co. v. CIT [1957] 31 ITR 294 (Bom). In all these cases, the view taken is that the word " thereon " means on the appeal, which must mean on the grounds raised in the appeal. The Tribunal has no jurisdiction to permit the other side, who has not appealed, to raise a ground which would work adverse to the appellant by way of enhancing the tax liability. In fact, there is no dispute with the proposition of law laid down in these cases. It has, therefore, to be taken that the power conferred on the Tribunal under s. 254 does not debar or disentitle a party not filing an appeal to raise a point or a ground on the basis of which he could support the judgment. It may be true that by permitting a party not filing an appeal or cross-objection, the Tribunal cannot enhance the tax. But, where such party wants to take a ground which may be different from the one on which the judgment is given in his favour, there is no restraint on the power of the Tribunal by which it would refuse such a party to raise the ground. In New India Life Assurance Co. Ltd. v. CIT (1957] 31 ITR 844, the Bombay High Court had occasion to deal with the scope of s. 33(4) of the Indian I.T. Act, 1922, which is in pari materia with s. 254 of the, I.T. Act, 1961. Dealing with this, Chagla C.J. observed (p. 855):

" The position with regard to the respondent is different. It is not open to him to urge before the court of appeal and get a relief which would adversely affect the appellant. If the respondent wanted to challenge the decision of the trial court, it was open to him to file a cross appeal or cross-objections. But the very fact that he had not done so shows that he is quite content with the decision given by the trial court. Therefore, under these circumstances, his only right is to support the decision of the trial court. It is true that he may support the decision of the trial court, not only on the grounds contained in the judgment of the trial court but on any other ground. In appreciating the question that arises before us, one must clearly bear in mind the fundamental difference in the positions of the appellant and the respondent. The appellant is the party who is dissatisfied with the judgment; the respondent is the party who is satisfied with the judgment. Now what we have just said is nothing more than really a summary of the provisions with regard to appeals and cross-objections contained in Order XLI of the Civil Procedure Code; and as we shall presently point out, the position of the Appellate Tribunal is the same as a court of appeal under the Civil Procedure Code and the powers of the Tribunal are identical with the powers enjoyed by an appellate court under the Code."

We are in respectful agreement with the view taken by the Bombay High Court in the said case. The only restraint is that it cannot pass an order on a plea raised by the defendant which would adversely affect the appellant by enhancing the tax payable by him. In Hukumchand Mills Ltd. v. CIT[1967] 63 ITR 232 (SC), while interpreting the expression " pass such orders as the Tribunal thinks fit ", which is another phrase required to be interpreted for the purpose of understanding the scope of s. 254, the Supreme Court held that the said expression would include all powers, excepting the power of enhancement, which are conferred on the AAC while dealing with the first appeal.

In the present case, the subject-matter of the appeal before the Tribunal was the question as to whether the adding back of interest on the debit balance of Ram Deo Marolia was justified. It was certainly open to the department, in the appeal, to justify the order on the ground that the deduction permitted on the borrowings was since liable to be refused, the judgment of the AAC could not be interfered with. Sri R. K. Gulati, counsel appearing for the assessee does not appear to be right when he contends that since the firm had borrowed money for the purposes of its business and paid interest on it, whatever might have been done with the sum so borrowed, the interest paid thereon having been allowed as a valid deduction, cannot subsequently be disallowed. To accept this submission of the would mean to confer upon him two benefits to which he was not entitled. According to our opinion, the question of disallowance of interest on the borrowings was not a different question, but another aspect of the same matter. The two matters were inseparably connected. This is the settled position of the law that the power conferred by 0. XLI, r. 33, C.P.C., can be exercised by A court where a portion of the decree appealed against is so inseparably connected with the portion not appealed against that justice cannot be done unless the latter portion is also interfered with. As held by the Supreme Court in Nirmala Bala Ghosh v. Balai Chand Ghosh, AIR 1965 SC 1874, 1884:

"........ Order 41, rule 33, is primarily intended to confer power upon the appellate court to do justice by granting relief to a party who has not appealed, when refusing to do so would result in making inconsistent, contradictory or unworkable order."

In the instant case, the interest of justice as well as the requirement of maintaining the consistency and for avoiding a contradictory judgment it was essential that the Tribunal should have disallowed the deduction claimed by the assessee on the borrowings which had been diverted by Ram Deo Marolia for his personal use.

For the reasons given above, we answer both the questions in the affirmative, in favour of the department and against the assessee. The department will be entitled to costs, which are assessed at Rs. 200.

 

 

 

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