High Court Of Kerala
Sree Hanuman Trading Co. vs. Income Tax Officer & Anr.
Section 41(1)
Asst. Year 1999-2000, 2000-01
C.N. Ramachandran Nair & V.K. Mohanan, JJ.
IT Appeal Nos. 1073 & 1074 of 2009
15th December, 2009
Counsel Appeared :
P. Balakrishnan, for the Appellant : P.K.R. Menon & Jose Joseph, for the Respondent
JUDGMENT
C.N. Ramachandran Nair, J. :
Heard counsel appearing for the appellant and standing counsel appearing for the Department.
2. The appeals arise from the assessment of the assessee for the asst. yrs. 1999-2000 and 200001. The assessee has been crediting interest and even making cash payment of interests to certain credit entries shown in the names of relatives. Interest credits and payments have been regularly claimed as deduction and the same was being allowed. However, during the asst. yrs. 1999-2000 and 2000-01, the assessee transferred the credit entries to the partners’ capital accounts thereby neutralising the liability towards creditors. The assessee’s explanation is that the creditors, who are relatives, gifted these amounts to the partners. Even though the AO by applying s. 41(1) assessed the interest portion of the credit entry as income, the CIT(A), in the course of hearing the appeal, enhanced the assessment by treating the entire credit entries as income assessable under s. 41(1) of the Act. However, the Tribunal, on second appeal, granted relief to the assessee by limiting the addition under s. 41(1) to the interest credited to the account of the creditors. It is against these orders of the Tribunal, the assessee has filed these appeals.
3. The counsel has relied on a decision of the Supreme Court in CIT vs. Sugauli Sugar Works (P) Ltd. (1999) 152 CTR (SC) 46 : (1999) 236 ITR 518 (SC) and contended that mere unilateral transfer entries in the accounts of the assessee will not entitle the Department to make assessment under s. 41(1) of the Act. We are unable to accept the contention of the counsel that what is done is mere transfer of credits in the accounts made by the assessee in this case, because the creditors ceased to have any claim against the assessee after the credit entries are transferred to the capital accounts of the partners. On such transfer, the assessee has ceased to be liable for the interest liability which was claimed as deduction in the previous years. Therefore, in our view, there is cessation of liability in respect of interest credited to the account of the creditors and so much so, it was rightly found by the Tribunal as income assessable under s. 41(1) of the IT Act.
We, therefore, dismiss the appeals.
[Citation : 328 ITR 662]
