Judgment:
1. It is an appeal filed by the assessee against the order of the learned CIT(A) dated 26-3-1993 for the assessment year 1990-91. The following grounds have been taken up : 1. The learned CIT (Appeals) has erred in confirming major portion of disallowance of interest out of Rs. 1,58,01,118 paid by the appellant to its depositors/creditors on the borrowings made for the purposes of its business allowable under Section 36(1)(it) of Income-tax Act, 1961.
2. That the learned CIT (Appeals) in any case has erred in confirming that part of disallowance of interest which relates to impugned/assumed debit balances in the accounts of the partners in earlier years when the assessment orders for all the years from assessment years 1984-85 to 1989-90 lay set aside either by CIT (Appeals) or by CIT under Section 263 of Income-tax Act, 1961.
3. Without prejudice to above grounds, the learned CIT (Appeals) erred in holding that the credit entries of goodwill, revaluation of machinery and on account of revaluation of shares in the accounts of the partners of the appellant-firm in their profit sharing ratios represented the notional entries or unrealized gains and, therefore, they were to be ignored while considering the actual credit or debit balances in their accounts as on 1-4-1989, i.e., at the beginning of the previous year relevant to the assessment year under appeal. In coming to the above conclusion, the learned CIT(A) ignored the following facts:- (a) that the appellant came to own 1,37,95,500 shares of the face value of Rs. 10 each in Jaypee Rewa Cement Ltd. (later renamed as Jaiprakash Industries Limited) on 31-3-1987. The cost of these shares to the appellant was only Rs. 91,97,500 while their face value was Rs. 13,79,55,000. The appellant, therefore, brought them to their face value; (b) that the market value of above shares on Kanpur Stock Exchange was also Rs. 10 per share as on 31-3-1987 which was the lowest quotation on different Stock Exchanges on that date; (c) that it was necessary for the appellant to value the above shares at their face value in order to give a fair and correct view of the appellanfs balance sheet as required for the purposes of report under Section 44AB of the Income-tax Act, 1961; (d) that similarly the appellant also revalued its machinery to bring these assets to their correct valuation; (e) that since, the appellant commanded good reputation, it was also thought necessary to create goodwill at a reasonable figure; (f) that, in any case, the entries for revaluation of machinery and goodwill have been reversed by debiting the proportionate amounts to the accounts of the partners of the appellant-firm on 31-3-1990, i.e., at the end of the previous year relevant for the assessment year under appeal itself; 4. That the learned CIT(A) has, therefore, further erred in holding that the accounts of the partners disclosed a total debit balance of Rs. 3,28,93,607. He ought to have held that it was in fact a credit balance of Rs. 9,89,96,467.
5. The learned CIT(A) erred in law and facts in overlooking or by passing the various written submissions made before him during the course of appellant proceedings in the present case.
6. The learned CIT(A) also erred in holding that reasonable rate of interest payable to Depositors/Creditors covered by Section 40A(2)(b) of the Income-tax Act, 1961 could be estimated at 20% per annum ignoring the following facts:- (a) that the other Depositors/Creditors were also paid interest @ 24% per annum which according to learned CIT(A) was reasonable; 7. The learned CIT(A) further erred in holding that the credit entries in the accounts of the partners of the appellant-firm on account of conversion of the appellant's investments in shares into Stock-in-trade on 1-1-1990 were notional entries and were required to be ignored/excluded for working out the balance in their accounts.
8. The finding of learned CIT(A) directing disallowance of interest on borrowings held to be not-genuine in earlier years is incorrect inasmuch as assessment orders of those years lay set aside with the Assessing Officer and no fresh assessments had been framed.
9. The learned CIT(A) was not legally and factually correct in holding that the following facts as contained in para 7 of his order, required to be taken into consideration for disallowing the interest paid by the appellant to its depositors/creditors:- (i) the debit balance of Rs. 3,28,93,607 in the accounts of the partners as on 1-4-1989, inasmuch as this amount has not been correctly worked out for the reasons given in the above grounds; (ii) the exclusion of Rs. 1,27,54,489 being the profit of the year under appeal credited to the accounts of the partner; (iii) the borrowings made in earlier years but held as not genuine, as the assessments of earlier years lay set aside; (iv) the exclusion of Rs. 25,50,000 alleged to be fixed capital to be contributed by the partners, when in fact there was no such stipulation of any fixed capital in the Partnership Deed.
10. The reliance on and interpretation of various decided cases by the learned CIT(A) is incorrect and uncalled for on the facts and circumstances of the appellant's case.
11. The learned CIT(A) has erred in holding that the provisions of Section 145(2) of Income-tax Act, 1961 are applicable to amount of machinery hire charges received by the appellant from M/s Jaiprakash Associates & M/s Friends Construction Corporation.
12. The learned CIT(A) further erred in disallowing the depreciation and repair expenses on 14 Tippers and one recovery van (Total 15 Tippers) on the alleged ground that they were not used for the purpose of business. He erred in ignoring the fact that the above tippers were kept in a ready condition meant for hire as and when required.
13. The learned CIT(A) also erred in holding that the hire charges on 8 tippers used by M/s Jai Prakash Associates at Lakhwar were to be calculated for the entire year @ Rs. 300 per day. That the interpretation put by him on the Agreement dated 20-10-1982 entered into between the appellant and M/s Jai Prakash Associates is illegal, against the facts of the case, the commercial principles and the past practice.
14. The learned CIT(A) also erred in directing the Assessing Officer to estimate the hire charges from M/s Friends Construction Corporation on the basis of volume of work done by the latter at the same site, i.e., Kevadia in the assessment year 1989-90.
15. On the basis of entries appearing in the books of the hirers, the learned CIT(A) ought to have directed the Assessing Officer to accept the hire charges at Rs. 38,92,200 as declared by the appellant in its books of account.
16. The learned CIT(A) further erred in confirming the disallowance of Rs. 28,11,678 incurred by the appellant on repairs and spares on its machinery on the alleged ground among others as mentioned in the assessment order that they were the responsibility of the hirers in terms of two agreements dated 20-10-1982 and 9-10-1987 entered into between the appellant and M/s Jai Prakash Associates and M/s Friends Construction Corporation respectively.
17. The learned CIT(A) ought to have allowed the entire expenses of Rs. 18,11,678 incurred by the appellant as having been laid out or expended wholly and exclusively for the purpose of its business.
2. Ground Nos. 1 to 10 pertain to disallowance of interest out of Rs. 1,58,01,118 paid by the assessee to its depositors/creditors on the borrowings made for the purpose of its business. The brief facts are that the assessee is a firm and is a sub-contractor of the firm M/s Jaiprakash Associates and also has certain dumpers and tippers etc., which it gives on hire to the contractors on daily basis. The firm has been running its business for the last several years. It had 91,970 shares each valuing Rs. 100 of Jaiprakash Associates (P.) Ltd. in the assessment year 1986-87. On 31-12-1985, the company M/s Jaiprakash Associates issued bonus shares @ 1 to 1 and thus the accumulation of the shares with the assessee-firm amounted to 1,83,940. The investment in the original shares of the firm was Rs. 91,97,000. Thereafter, J.P.Associates (for brief JPA) was merged into J.P. Rewa Cement Public Limited Co. (for brief JPR). By the order of the Hon'ble High Court, as per terms of agreement, 1 share of JPA was allotted 75 shares of JPR.In this way, the total shares with the firm, on the basis of its holding of shares of JPA, amounted to 3,97,55,000 in JPR. These shares of JPR were of face value of Rs. 10 each and its market value was also slightly higher than Rs. 10 as is evident from page 62 of the compilation. The firm showed its real value amounting to Rs. 13,97,55,000 in the accounts of the firm and after deducting initial investment of Rs. 91,97,000 from the said value, credited the balance amount of Rs. 12,87,58,000 in the respective shares of the partners in proportion to their shares and the abovesaid value was also adjusted in the accounts and the balance sheet of the firm. During the year the partners withdrew Rs. 2,27,08,772 in total from the respective accounts. The assessee-firm had also paid Rs. 1,58,01,118 as interest during the year to its depositors/creditors. The Assessing Officer disallowed the said interest on the ground that the drawings by the partners were in excess of the deposits and thus the interest paid on the borrowings was not for business purposes. In appeal, the learned CIT(A) also confirmed the said disallowance on the abovesaid plea and also on an additional ground that the interest paid to certain depositors/creditors, who were directly related, or friends of the partners of the assessee-firm, was also in excess of the reasonable interest. The learned CIT(A) held that the reasonable interest was of 20% and 25% to some of the creditors being in excess of that 20%, was also a point for the alleged disallowance. The assessee being aggrieved has come up in second appeal before us.
3. The learned counsel for the assessee has tried to assail the alleged disallowance on various counts. The first and the foremost ground taken up by him is that in fact there was no excess withdrawal during the year. He has pointed out that the total withdrawal by the partners during the year was only Rs. 2,27,08,772 while the dividends received by the partners from different companies was deposited with the firm during the year to the tune of Rs. 1,64,60,041 and the profits, which was allotted to their shares was to the tune of Rs. 1,27,54,480 and in this way the total deposits in the accounts of the partners during the year amounted to Rs. 2,91,61,000 which was far in excess than the withdrawals. He has also pointed out that even the amount of depreciation claimed and allowed amounting to Rs. 1,06,80,000 was also available with the firm in the form of cash which was in excess of the abovesaid deposits. In this way, he has argued out that it was not a case of excess withdrawals during the year. He has pointed out that the revenue authorities have worked out the withdrawals and the deposits on the basis of their mere conjectures and surmises and it is only on that basis that they have recast even the balance sheet of the assessee and on that basis which the debit balance computed is at Rs. 3,28,93,607, which was nowhere reflected from the accounts.
4. The next limb of argument of the learned counsel for the assessee is that the correct valuation of the shares shown by the assessee in his accounts in the assessment year 1986-87 was nothing but a part of the usual accountancy method. It has not been disputed even by the Department that the value of the share was inflated. The face value of the shares was Rs. 10 and its price as a little higher in the market which is proved by the papers filed at page 62 of the compilation. He has further pointed out that since 1986-87, the alleged valuation of the shares was never disputed by the Department and it is only one fine morning, that is, in the assessment year 1990-91, the Department has woke up and challenged the said valuation which is not warranted by law. He has pointed out that this valuation was in accordance with the principle of accountancy. He has stressed about the actual valuation of the shares, which the firm had received under the orders of the High Court while passing the orders for amalgamation of JPA into JPR vide order dated 30-7-1986. Hence, it was not the re-valuation of the shares but it was the actual valuation of the shares allotted in lieu of the old shares after amalgamation and the valuation adopted in the book was nothing but the face value which was positively lower than the market value. In this way, there was no question of any manipulation or any mala fide intention but only showing the correct value of the assets of the firm and to balance the balance sheet, counter-entry had to be made in the accounts of the partners. In this way, he has stressed that after valuation there was a credit entry in the accounts of the partners even before the deposit of the dividend and the profits for the year and it was of more than Rs. 12 crores and the withdrawals of Rs. 2 crores and odd during the year can by no stretch of imagination be said to be excessive withdrawals during the year.
5. The next argument advanced by the learned counsel for the assessee is that the learned CIT(A) has gone wrong in assuming that the partner has no right to withdraw from the amounts standing at rris credit. We "has pointed out that this has been held by the Tribunal and various High Courts that it is perfectly within the rights of the partners to withdraw the amount standing at the credit. For that, he has relied upon the decisions of Ahmedabad Bench of the Tribunal in N. Mansukhram & Co. v. ITO [1984] 17 Taxman 13, CIT v. Mahatta Construction Co.
[1989] 45 Taxman 87 (Gauhati), ITO v. S.V.S. Oil Mills [1982] 14 TTJ (Mad.) 306, CIT v. Alok Paper Industries [1982] 138 ITR 729 (MP) and CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469 (AP).
6. As regards the excess interest alleged to have been paid to the creditors, as alleged by learned CIT(A), the learned counsel for the assessee has pointed out that it was on the basis of an agreement and by no stretch of imagination payment of 24% interest on unsecured loans can be said to be excessive, specially when the Bank charges @ 20% on secured loans and which effectively comes to 22%. He has also pointed out that even the learned CIT(A) himself has upheld the payment of 24% in the case of other creditors, while disallowed the excess interest beyond 20% in the case of relatives and friends, which was not justified.
7. On the other hand, the learned Departmental Representative has vehemently opposed it and stressed that the order of the learned CIT(A) was perfectly correct and justified. He has stressed that this was the modus operandi of the assessee to get loans from the market and advance it to its partners after making a notional entry about the increase in price of the shares and thereby dilute profits of the firm by claiming interest paid to the creditors, which, in fact, was payable by the partners who had withdrawn the amount from their respective shares on the basis of the notional credit entry on re-valuation of the shares.
He has also pointed out that it was not done only this year but it was being done over the years and detected only during this year by the Department and this is why the entire balance sheet was recast by the Assessing Officer and the interest paid on excess withdrawals without taking into consideration the credit entries made on the basis of the re-valuation of the shares was disallowed. He has also pointed out that the interest paid in excess of 20% to relations and friends was also rightly disallowed by the learned CIT(A), as the creditors, who were friends and relations, were more than satisfied about the security of the loans with the assessee-firm and thus the Bank interest of 20% was rightly held to be reasonable.
8. The learned Departmental Representative has also stressed the point taken up by the Assessing Officer and also confirmed by the learned CIT(A) that the partners had no right to withdraw the amount from the partnership firm, which they had contributed at the outset and the alleged amount became the fixed assets of the firm for the purposes of the business of the firm. He has also pointed out that during the years the assessee-firm was not having any business except giving his tippers and other vehicles on hire and for which there was no business necessity of having any loan. He has pointed out that in fact the loans were taken only to accommodate the partners and not for any business necessity. Hence, on that count too the interest was disallowable. He has also pointed out to certain loans which were soon paid to partners, the details of which are given below as extracted from page 16 of the assessment order :Date Deposit amount Withdrawals by partners23-6-1989 5,00,000 2,58,000 9. On the basis of the above facts, he has also stressed that even a nexus of these loans has been established by the Assessing Officer.
10. As regards the deposit of the dividends and the profits of the partners, it has been argued out by the learned Departmental Representative that they were made at the close of the year and thus the withdrawals earlier than the said deposits cannot be said to have been made against the said deposits. He has also pointed out that the profits accrued at the close of the year and not during the year and thus any withdrawals towards the profits cannot be justified to have borrowings from the market to pay the same in advance to its partners.
11. We have heard the parties at length and we are of the opinion that the arguments advanced by the learned counsel for the assessee have force and the Department appears to have gone on wrong premises and based the entire order on mere surmises and conjectures. The very fact that the assessee is not doing any other business except giving its tippers and dumpers on hire is not borne out from the facts.
Admittedly, the assessee-firm is a sub-contractor and it has taken sub-contracts to the extent of crores of rupees and had been doing the said business for years. It may be possible that this year no other sub-contract might have been obtained by the assessee-firm, yet it cannot be said that it has completely ceased to have any such business.
From the details of deposits and withdrawals during the year given out at page 1 of the compilation, it is evident that the total borrowings amounted to Rs. 5,92,46,393 while the total payments to the creditors during the year amounted to Rs. 7,75,53,488. It means that the borrowings during the year were less than the payments made to the creditors. We fail to understand that under these circumstances how it can be said that the withdrawals were from the borrowings. In fact, the contention raised by the learned counsel for the assessee has greater force that these borrowings were to repay the old borrowings. It has been pointed out that there was an advance of Rs. 5.74 crores (interest-free) from M/s Jaiprakash Associates (P.) Ltd. during the assessment year 1986-87 and the said fact stands reflected from the balance sheet of the financial year 1985-86 which is alleged to have been filed in the compilation. It has further been pointed out that out of these advances, the assessee had met the following investments during the assessment year 1986-87 which are reflected in the balance sheet for the said year at Schedule G-Investments attached to the balance sheet for the year ending 31-3-1986 (copy filed in the compilation):-(a) Rs. 75,00,000 In 75,000 Equity Shares of Rs. 100 each in M/s Jaiprakash Associates (P.) Ltd.(b) Rs. 2,00,00,000 In 20,00,000 Equity Shares of Rs. 10 each of M/s J.P. Rewa Cement Ltd.(c) Rs. 2,75,00,000 Representing Share application money invested in M/s J.P. Rewa Cement Ltd.(d) Rs. 22,500 In 2,250 Equity Shares of Rs. 10 each 5,50,22,500 of J.P Associates Construction Ltd. 12. It appears that it is to refund these amounts that fresh deposits bearing interest were accepted during the year 1989-90 to the tune of Rs. 5,83,71,210 and out of the same in the same assessment year, i.e., 1989-90, Rs. 6,50,70,812 was paid back to M/s Jaiprakash Associates from whom the assessee-firm had received excessive advance as reflected at page 31 of the paper book. During the assessment year 1990-91, the deposits, as mentioned above, were less than the amounts paid. With all these details, we fail to understand as to how it can be said that the deposits were not accepted for business purposes. When the assessee-firm had invested the interest-free excessive advances received from Jaiprakash Associates in the assessment year 1986-87 itself, then if required to return the said amount, it had only two alternatives, either to sell its assets in the firm of shares or to borrow money from the market on interest and pay the same. The company in its wisdom thought it proper to borrow the money from market and pay to Jaiprakash Associates instead of selling the shares and the said wisdom proved to be the real wisdom as the very shares increased in value far more than the interest paid by the firm. The very share of Jaiprakash Associates of Rs. 100 was converted into 75 shares of JPR and the equity shares of JPR exceeded far in value in the assessment year 1990-91 as compared to its face value of Rs. 10. Over and above all this, the assessee received dividends during the year to the extent of more than Rs. 3 crores which was, in our opinion, far more than the interest paid by the assessee on its borrowings to which it had to resort for distress sale of its shares to repay the interest-free excessive advances received by the firm from Jaiprakash Associates. It has been more often than not held by the Hon'ble Supreme Court in its various decisions that the action/decision taken by a businessman has to be looked with a view of the businessman1 and not with the view of a bureaucrat/taxing authority sitting in the office. We, therefore, feel that by no stretch of imagination it can be said that the borrowings were not for business purposes and once the borrowings were for business purposes, then the interest on the said borrowings had to be allowed under the law. Now, the only fact to be seen in this case is as to whether the withdrawals by the partners were justified or not.
Whether the decision of the Hon'ble High Court in CIT v. H.R. Sugar Factory (P.) Ltd. [1991] 187 ITR 363 (All.) and subsequently followed in the case of CIT v. Saraya Sugar Mills (P.) Ltd. (1992] 193 ITR 575 (All.), applies to the present case or not. As far as these two decisions of Hon'ble Allahabad High Court are concerned, in our opinion, they do not have any application at all to the present facts of the case. In both those cases, there were excessive loans to the Directors and at the same time borrowings by the company. Consequently, the interest was disallowed to the extent of the loans advanced to the Directors without interest. Here in this case, the partners had not taken any loan from the firm. Firstly, they had withdrawn their amount from the credit entries standing in the name and, secondly, the profits during the year and the deposits made by them (dividend warrants of the partners deposited with the firm) were far in excess than, the withdrawals. The proposition laid down by the learned CIT(A) that the partners had absolutely no right to withdraw from the deposits with the firm has no legs to stand and cannot be accepted to be a correct proposition of law. The Hon'ble Gauhati High Court in the case of Mehatta Construction Co. (supra) had held that the withdrawals by the partners from their credits in the firm to purchase immovable property or to gift away to some of the relations was not improper unless specifically agreed upon in the partnership deed. Here in this case, the partnership deed has been filed in the compilation and there is no stipulation to the effect that the partners will not be permitted to withdraw the initial deposits made by them with the firm.
13. The Hon'ble Andhra Pradesh High Court in the case of Gopikrishna Murlidhar (supra), had held as under : The assessee, a Hindu undivided family, which carried on business on an extensive scale with a capital of about Rs. 20 lakhs, made large borrowals during the relevant year for the purposes of the business and paid interest amounting to Rs. 93,611. In the course of the year monies amounting to Rs. 1,77,984 were withdrawn from time to time for household expenses. The question was whether a part of the interest paid on borrowed capital could be disallowed : Held that, as the amounts were borrowed for the purposes of the business of the family and as no particular sum purporting to be borrowed on behalf of the business was spent for household expenses and the family was entitled to withdraw from the capital supplied by it thereby depleting the capital, the fact that part of the amounts borrowed was later on used for personal expenses did not deprive the assessee of the benefit of deduction of the entire interest paid on borrowed capital under Section 10(2](iii) of the Indian Income-tax Act, 1922 and a part of the interest could not, therefore, be disallowed.
14. Likewise, the Hon'ble Madhya Pradesh High Court in the case of Alok Paper Industries's case (supra) has observed as under : The mere fact that there was no plausible explanation for not charging the interest on the debit balance, when interest had been paid by the assessee on the borrowings by itself would not be enough to infer that the borrowings to the extent of the debit balance in the partner's account had not been utilised for business purposes.
15. Even the Income-tax Appellate Tribunal Benches too have been holding that such withdrawal is permissible. Ahmedabad Bench in the case of N. Mansukhram & Co. (supra) had held that there is no bar against the partners to withdraw their capital as they so chose and as a result of the borrowings or even in order to provide for withdrawals for the partners, if the assessee-firm is required to borrow money on interest, it cannot be said that the borrowings were not for the purposes of business. Therefore, so long as there is no overdrawal of the partners, the withdrawals by the partners to the extent of the capital or credit balance could be permitted.
16. The Ahmedabad Bench had followed the decision of the Hon'ble Bombay High Court in Kishinchand Chellaram v. CIT [1978] 114 ITR 654, in which it has been held that to the extent to which the partners have a credit balance in their accounts, any withdrawal made to the extent of such capital account would not be subjected to disallowance of interest but it is only the overall debit balance or net withdrawals out of the total amount utilised, that is subjected to such disallowance.
17. The Madras Bench of the Tribunal in the case of S.V.S. Oil Mills (supra) had held that if current profits were available and were earned throughout the year, the same has got to be taken into consideration while disallowing the interest of withdrawals of the partners and the technical definition as to when the profits occurred, will be a concern for the said disallowance. Moreover, we see everyday that, in partnership firms partners do withdraw amounts for their personal use during the year, as the profits do arise in the business everyday and the partners have to meet their expenses from the said business.
Hence', if the partners withdrew the amount out of the deposits of the dividend, amount and out of the profits arising during the year, no wrong was committed to that extent and to disallow the interest on the borrowings to the extent of withdrawals was not called for.
18. The learned Departmental Representative had also argued out and that plea had also been taken up by the Assessing Officer and the learned CIT(A) that the alleged valuation of the shares was only notional and no cash flow was there on the basis of that valuation and accordingly the partners should not. have been allowed the withdrawals.
He had also stressed that if at all for the purposes of accountancy the correct valuation of the shares had to be reflected in the accounts, then the balance amount, i.e., "Investment and the actual price" should have been shown as reserved and not credited to the accounts of the partners. In our opinion, that proposition does not appear to be correct. When certain shares had been received in exchange of the old shares after amalgamation of a company into another company and the shares received in exchange were far in excess of the original value of the shares, then the actual cost of the shares allotted in exchange have got to be reflected in the balance sheet for proper valuation of the assets and liabilities of the firm. As regards the contention of the reserve, it is generally done in the case of companies where the said amount cannot be adjusted against the individual shareholders. In the case of the firm, whether you put it as reserve or credits in the accounts of the partners, it means the same as in truth the reserve belongs to none but the proprietors just as in their capital investment by them in the firm. A reference to that effect can be made to page 246 of the Book 'Advance Accounts' by M.C. Shukla and T.S. Grewal, in which the nature of the reserve has been explained as under : Reserves are shown on the liability side of a Balance Sheet. It perplexes many a new student of accountancy. He argues that the business owes this sum to no one. Why should it be a liability? And if a reserve is a liability, what is its use It should be an asset. The truth is that reserves belong to the proprietors just as capital does. This sum is owed by the business to the proprietors.
Hence, it is quite proper to show it as a 'liability'. Looked at in another way, reserves themselves are not assets. Reserves mean that a portion of assets, equalling reserves, is free to be utilised by the business as it likes and assets equalling reserves are not required to pay liabilities. Also, reserves indicate that, taking into account the capital brought in cash into the business by the proprietor and the sums owed to outsiders, there is surplus of assets. The surplus really is measured by the amount of the reserves.
From the above, it is clear that as to whether the alleged valuation is shown as reserve or credited to the accounts of the partners, it means the same, as alleged amount belongs to the partners and can be utilised by them as and when they like. Hence, in this case, in our opinion, even crediting of the said amount to the accounts of the partners in proportion to their share was also justified on the basis of the principle of accountancy.
19. Taking the above circumstances into consideration, we hold that, firstly, there was no excess withdrawal by the partners during the year as the amounts deposited by them during the year (dividends + profits) was far in excess than the withdrawals. Secondly, the shares, which were owned by the firm indirectly belonged to the partners and the amounts credited to their accounts in proportion to the shares was far in excess than the withdrawals. Thirdly, the interest paid on the borrowings was for business interest as the amounts borrowed during the year was far less than the amounts paid towards the old borrowings. On the scope too it cannot be said that the partners were advanced money out of the borrowings. In fact, we feel that this whole controversy has arisen in the minds of the taxing authorities by going through a wrong premise that the assessee had no other business except giving his dumpers and tippers on hire. In fact, the assessee was also a sub-contractor and had also invested money in the shares, which was permissible by the Partnership Act and any amount invested in the shares had paid huge dividends to the assessee which was far in excess than the interest liability of the assessee. In these circumstances, in our opinion, no interest was disallowable and the finding to the contrary by the learned CIT(A) is hereby cancelled and the issue is decided in favour of the assessee.
20. Ground Nos. 11 to 15 are regarding the hire charges and disallowing of the depreciation and repair expenses on 14 tippers and one recovery van on the ground that they are not used during the year for the purposes of business. The brief facts are that the assessee had certain dumpers and tippers and had given the same on hire to M/s Friends Constructions Corporation and M/s Jaiprakash Associates. The total receipts disclosed were at Rs. 37,30,000 for the actual number of working days used. The Assessing Officer, applying the provisions of Section 145(2), estimated the receipts at Rs. 92,98,000 on the basis of the 360 working days as per agreement in which it was mentioned that the hire charges will be received from the date of the actual use.
Besides, the slips prepared daily for the actual use could not be produced by the assessee on the ground that the same had outlined its utility as the same had been entered on a chart and the bills prepared and submitted to the hirers and there being no discrepancy in the bills raised and the amounts received by the assessee-firm. In absence of the primary evidence of those slips, the abovesaid estimate was made by the Assessing Officer. In first appeal, the learned CIT(A) gave some relief and issued certain directions to reduce the number of working days. The assessee being aggrieved has come up in second appeal before us.
21. The learned counsel for the assessee has very vehemently stressed that the estimate made by the Assessing Officer and some relief given by the learned CIT(A) was completely on a wrong interpretation of the terms of the agreement. He has pointed out that, firstly, the very applicability of Section 145(2) was not justified, secondly, the agreement had to be interpreted as understood by the parties to the agreement and not the technical interpretation given by the Assessing Officer. For both the contentions, he has relied upon the various decisions of different Hori'ble High Courts, which are as under : R.B. Jessaram Fatehchand (Sugar Dept.) v. CIT [1970] 75 ITR 33 (Bom.)Orissa v. Maharaja Shri B.P. Singh Deo [1970] 76 ITR 690 (SC) He has also stressed that the depreciation and repair charges on 14 tippers and one recovery van also cannot be disallowed merely on the ground that they were not used for the purpose of business. He has pointed out that all these tippers and vans were kept in ready condition at the site meant for hire as and when required. He has stressed that the law provides that when the vehicles and tippers, etc., are owned by the assessee and ready for use, the depreciation or any repair expenses required to keep them ready for use cannot be disallowed merely on the whims of the Assessing Officer. He has pointed out that the law is very clear on the point that it is the very ownership and its readiness for use which is enough for allowance of depreciation and repair expenses, if any.
22. On the other hand, the learned Departmental Representative has relied upon the order of the learned CIT(A), who has discussed the whole issue from para 8 onwards and stressed that in absence of the primary evidence of the slips, which were prepared on the site, the secondary evidence cannot be accepted and thus the provisions of Section 145(2) were rightly attracted. He has also stressed that the interpretation of the agreement made by the Assessing Officer was also correct that the hire charges were to be paid by the hirer from the date of the actual use and not for the days of actual use. He has pointed out that from the words used in the agreement, it is clearly suggested that it is from the date of actual use that the hire charges are to be paid by the hirer. He has pointed out that in earlier years, hire charges were far in excess than the charges shown by the assessee during the year. He has also pointed out that it was only to indirectly help the sister concerns which were hirers of these tippers and dumpers.
23. We have heard the parties at length. As far as the question of depreciation and the repair charges of 14 tippers and one recovery van is concerned, that was allowable. Law as it stands only requires that they should be kept in readiness for use. There is no dispute in the case that these tippers and vans were not provided at the site. If because of the paucity of work, they could not be utilised by the hirers, then law does not permit the disallowance of the depreciation and the repair charges, if any, to the owner of the tippers. In our opinion, the proposition laid down by the Assessing Officer and taken up by the learned CIT(A) is completely unwarranted by law. We, therefore, disagree with the said observations of the learned CIT(A) and direct the Assessing Officer to allow the depreciation, if any, for those tippers and vans also which were kept in readiness for use by the hirer.
24. Now, the basic question and the point in issue is as to how the agreement, is to be interpreted and whether Section 145(2) was applicable to the facts of the case or not and if yes, then whether the estimate made by the Assessing Officer and part of it confirmed by the learned CIT(A) is correct or not. It is admitted that the Assessing Officer had referred the matter to the hirer and they had reported and confirmed the above payment made to the assessee. There is no conflict or dispute between the assessee-firm and the hirers. The assessee-firm had absolutely no motive or reason to charge less from the said companies who were the hirers of its tippers and dumpers. It may be correct that the said companies might be sister concerns, yet they were public limited companies and the assessee is a partnership firm in which only limited number of partners are there. Any amount coming to the firm is the profit of the partners only while any amount left to the companies will go to the common fund of the company's profits and will be distributed to its shareholders which might come in the shape of dividends to the partners holding the shares to a very little extent. Hence, this contention that the assessee might have tried to help the sister concerns, in our opinion, has no legs to stand.
25. It is correct that the so-called primary evidence, i.e., the slips prepared at the time of the actual use are not there. But law does not require that the assessee should maintain all the details and voluminous slips. In fact, in the present case, those slips were meant only for the satisfaction of the hirers who were required to pay the bills raised by the assessee. When the hirer had accepted the bills raised and paid the amounts accordingly, in our opinion, the evidentiary value of the slips ceased to exist. The Hon'ble Kerala High Court, in the case of M. Durai Raj (supra) had held that when the assessee had admittedly maintained his accounts according to the method regularly employed for him and the profits and gains of the business could be properly completed from his accounts, then there was no necessity of maintaining a laborious process giving out the particulars of the names and addresses of the customers in the case of cash transactions and the absence of such particulars in the said bills would not be a ground for not accepting the books of account of the assessee. The facts of this case were not exactly similar but it is only the principle which has to be looked into and which has been propounded by the Hon'ble Kerala High Court. In fact, what is to be seen in such type of cases is that as to whether the method adopted is the method regularly employed and as to whether the profits can be properly ascertained from it or not. Here in this case, the assessee was maintaining this method regularly over the years and was never objected. No discrepancy was found or detected by the Assessing Officer regarding the payments received by the assessee from the hirers. It is not the case of the Department that these tippers and dumpers were used or hired by somebody else. Once they were used by the hirer company and the hirer company had confirmed payments shown by the assessee-firm, in our opinion, there was no justification to apply Section 142 or reject the account or make an estimate on conjecture.
26. The Hon'ble Supreme Court in the case of Maharaja Shri B.P. Singh Deo (supra) had held that even in the best judgment assessment, the Assessing Officer had no arbitrary powers, he has to base his order on relevant materials. In this case, admittedly, there is no discrepancy in the payment made by the hirer and the amount shown by the assessee as receipts. There is no other circumstances to show that the receipts had been suppressed. The mere fact that the receipts in this year were lower than that of the earlier year is not sufficient to reject the accounts and make an estimate. The assessee has explained that this was because of the work of the hirers being disturbed by so many unavoidable circumstances and thus they could not utilise the dumpers and tippers to its full use. The details of the contracts executed during the year given in the compilation clearly reflect that it had gone down considerably from that of the last year. In fact, this fact was also taken note of by the learned CIT(A), yet he has not given the complete relief but directed the Assessing Officer to give some relief on that score. In our opinion, the facts on record are sufficient to hold that the receipts shown by the assessee were genuine and were not suppressed and thus to apply Section 145(2) was not justified.
27. Taking the above discussion into consideration, we direct that the Assessing Officer should accept the receipts towards hire charges as the correct one and allow depreciation and repair charges, if any, on 14 tippers and one recovery van, which is alleged not to have been used during the year, while they were kept in readiness, for use by the hirer at the site. The issue is decided accordingly.
28. Ground Nos. 16 and 17 pertain to the disallowance of the entire machinery, spares and repair expenses. The assessee had incurred an amount of Rs. 18,11,878 towards the repairs and purchase of spares on its machinery. The said amount was disallowed on the ground that this year, firstly, the receipts were too low and, secondly, the amount of repairs shown was too high in comparison to last year. The Assessing Officer has highlighted the said fact in his assessment order and the learned CIT(A) in first appeal filed by the assessee has also repeated the same arguments and confirmed the same. The assessee being aggrieved has come up in second appeal before us.
29. The learned counsel for the assessee has vehemently argued out that the question of expenditure on repair is not within the powers of the assessee. It depends on various circumstances beyond his control. The expenses on repairs and purchase of spares can never be compared with the amount of receipts towards hire charges from the use of the said tippers and dumpers. It is everyday experience that a vehicle may not need repairs even though for a few hundreds of rupees for a year or two, yet in the third year it might need thousands and it cannot be said that this expenditure of thousands in the third year is disproportionate to the expenditure meted out in the earlier first and second year. He has stressed that there are complete details along with the vouchers of the expenditure on repairs and purchase of spares and not a single voucher has been alleged to be untrue and thus the disallowance of the same merely on the ground that in earlier year the expenses were far less in comparison to this year was not justified in the eyes of law.
30. On the other hand, the learned Departmental Representative has stressed that various expenses were paid to the hirers as the said vehicles were repaired in the workshop of the hirers. He has pointed out that because the very hirers had charged the said expenses, it could be inflated. He has also pointed out that on the basis of the agreement, the maintenance of the said tippers and dumpers was the responsibility of the hirers and thus no expenditure towards the repair and purchase of spares could be allowed. Accordingly, the Assessing Officer was justified in disallowing the same and the learned CIT(A) had rightly confirmed the same.
31. We have heard the parties at length and we are of the opinion that the arguments advanced by the Assessing Officer and accepted by the learned CIT(A) have been on wrong premises. In cases of vehicles itself, it is very difficult for anybody to predict or calculate as to when and how much amount will be required for its repairs. Admittedly the vehicles were being used on Kacha roads and hilly terrain which were the contract site. Under these circumstances, the repair charges and replacing the spares have to be on higher scale. The very fact that last year the expenses were too less in comparison to the receipts suggests that the same needed heavy repairs and replacements of the spares during the year in question. It is a very common experience that vehicles, if any, not given sufficient repairs in a particular year, then they need heavy repairs in the subsequent year. In our opinion, by no stretch of imagination the earnings from hire charges can be compared or co-ordinated the expenditure over repairs and replacing spare parts. The two are completely independent processes. The receipts are received only by the use of the vehicles while repairs and replacement of spares depend on various circumstances beyond the control of the owner of the vehicles. Hence, in our opinion, to disallow the same on that basis was not at all justified.
32. The expenditure could be said to be inflated and on that basis some of the expenditure could be disallowed. But to arrive at that conclusion, some concrete evidence had to be brought on record. In this case, there is not an iota of evidence to suggest that the bills were inflated. The fact that the tippers and dumpers were repaired in the workshop of the hirers suggests that they must have been repaired economically as it is a common day experience that if the vehicles are allowed to go to the garage, then the charges are exorbitant. As the hirers were the companies and the assessee was a partnership firm, the assessee had no reason to pay extra to the hirers for the bill raised by them towards repairs and replacement of spare parts. In fact, the majority of the expenses is towards the replacement of tyres and tubes which the assessee itself had provided from purchasing it from the open market. The names and details of the firms, from whom they were purchased, have been given in the compilation andinone of the bills were either suspected to be false or proved to be fishy or non-genuine.
In absence of any such circumstances, we have no-reason that the entire expenditure meted out by the assessee for the repairs and replacement of spares, details of which have been confirmed by the vouchers,, was genuine and not inflated.
33. Now, the only point to be seen is as to how far the hirers were responsible for maintenance or repairs of the tippers and dumpers. A little careful scrutiny of the very agreement, copy of which is in the compilation, will show that the hirers were only responsible for minor repairs. The expenditure shown by the assessee is not on minor repairs but is of major repairs and on replacement of the spares of the machinery. It is also a hard fact that hirers are never responsible for major repairs unless specifically agreed upon in the agreement deed.
Here, both the companies, M/s Friends Construction Co. and Jaiprakash Associates had only agreed in the agreement deed for minor repairs and not for major repairs. Hence, the natural conclusion is that it has to be borne by the assessee-firm and it was rightly borne by it. We, therefore, direct the Assessing Officer to allow the entire expenditure meted out by the assessee-firm on repairs and spares and its machinery.
The issue is decided accordingly.