Kerala H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the disallowance of Rs. 6,72,000 out of the claim of interest on borrowings ?

High Court Of Kerala

CIT vs. Muthoot Finance Corporation

Section 145

Asst. Year 1988-89

S. Sankarasubban & A. Lekshmikutty, JJ.

IT Ref. No. 12 of 1998

25th September, 2000

Counsel Appeared

P.K. Ravindranatha Menon & George K. George, for the Applicant : C. Kochunnu Nair & Dale P. Kurian, for the Respondent

JUDGMENT

S. SANKARASUBBAN, J. :

The questions of law are referred to us at the instance of the Revenue under s. 256(1) of the IT Act. The questions of law referred are as follows:

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in deleting the disallowance of Rs. 6,72,000 out of the claim of interest on borrowings ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in allowing the assessee’s claim of interest, even though the cash system was followed only in respect of that particular item of expenditure ?

The assessee, M/s Muthoot Finance Corporation is a partnership firm dealing in money-lending business. The assessment year in question is 1988-89. The AO found that certain amounts were diverted by the partners and for these amounts the interest were not being paid properly. According to the AO, the company was following the mercantile system of accounting. But when it came to the question of interest for the amount which was given on loan to thepartners, the firm was of the opinion that it was the cash system that was followed. After looking into the returns and the records, the AO took the view that the firm is not in a position to divert funds to its partners without the deposit collected has yielded a total amount of Rs. 7,46,143 by way of interest on borrowed funds. Hence, it disallowed an amount of Rs. 6,72,000 being interest on funds diverted by partners. The appeal filed by the assessee was allowed and against that before the Tribunal, the Asstt. CIT, Ernakulam, took the matter in appeal. The Tribunal took the view that for the earlier asst. yrs. 1987-88 to 1994-95 were verified and that interest was being accounted for on the advances given to the partners only on cash basis. On that basis, it was of the view that it is not necessary to take a different view. We heard the counsel for the Department as well as the counsel for the Revenue. Counsel for the Department submitted that so far the accounting year 1987-88 is concerned, the matter was not proceeded with because the amount in question was below that prescribed under circulars. He cited before us certain decisions namely, CIT vs. A. Krishnaswami Mudaliar (1964) 53 ITR 122 (SC) : TC 1R.131, Sundaram vs. CIT (1959) 36 ITR 162 (Mad) : TC. 1R.249, CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) : TC 2R.113 to bring the point that the AO can under the proviso to s. 145 look into the accounts. The AO can even where the accounts are correct and complete to the satisfaction of the AO but the method employed is such that, in the opinion of the AO, the income cannot properly be deduced therefrom, then he can compute the income on such basis and in such manner as he determines.

During the course of the argument, there was a doubt as to whether the assessee was following the same system of accounting with regard to all the matters. This is because in para 3 of the statement of facts, it is stated as follows: The case made out by the Department is that the claim that the assessee was following the cash system for one item of expenditure alone was not permissible in view of the decision of the Madras High Court G. Padma Natha Chettiar & Sons vs. CIT (1989) 77 CTR (Mad) 107 : (1990) 182 ITR 1 (Mad) : TC 1R.217. But according to learned counsel for the Revenue Sri Mahesh, the firm is having the same system of accounting of all transactions. This matter is not clear from the order of the Tribunal. Further, the counsel for the Revenue on the basis of the decision in (1964) 53 ITR 122 (supra), (1959) 36 ITR 162 (supra) and (1991) 91 CTR (SC) 108 : 188 ITR 44 (SC) (supra) contends that even if in the same system of accounting, the AO can exercise the power under the proviso when he finds that the method of accounting is not proper. We may not be able to answer the question referred to us without a decision on the above aspects. Hence, we set aside the order of the Tribunal and direct the Tribunal to reconsider the matter on the basis of the above directions. ITR is disposed of as above.

[Citation : 248 ITR 704]

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