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2002 Supreme(Kar) 793
Karnataka High Court
Judges : G.C.Bharuka,K.Sreedhar Rao
COMMISSIONER OF INCOME TAX - Appellant
Versus
MANGALORE GANESH BEEDI WORKS - Respondent
IT Appeal 70 Of 2001
Decided On : 12/19/2002
Headnote:INCOME TAX ACT, 1961 Section 260A -Business of the assessee transferred to A.O.P. -assessment of AOP -disallowing various deductions -held, the income as well as the capital gains till the transfer took place cannot be attached to AOP -consequently cannot be assessed -legal expenses incurred by AOP -cannot be allowed as revenue expenditure.
[G. C. Bharuka & K. Sreedhar Rao, JJ.] - The Tribunal was justified in holding the income arising of the business of the erstwhile firm for the first part of the period namely for 234 days as well as the capital gains arising out of the sale of the assets of the firm to the present assessee AOP 3 could not have been assessed in the hands of assessee AOP-3. So far as AOP-3 is concerned, the income assessable is the actual profits earned for the year ended 31.3.1995. Question No. (ii) -Whether the Tribunal was right in holding that the assessee was entitled to deduction of Rs.13,96,08,653/- as revenue expenditure being interest and service charges paid to financial institutions? It is not in dispute and is borne from the records that members of assessee AOP-3 had jointly borrowed a sum of Rs.113.75 crores from banks and other financial institutions in their collective names for making payments against the purchase of the assets of the dissolve firm as a going concern. Keeping in view these facts, the CIT (Appeals) found the claim to be admissible as a revenue expenditure. The Tribunal could not find any error on this account. Since the facts are admitted, inference drawn there from on deductions claimed are of revenue in nature, the finding of the Tribunal has to be upheld.
( 1 ) IN the present appeals, the assessee is an association of persons comprised of three members (in short the AOP-3 ). These appeals relate to the asst, yr. 1995-96. These members were the erstwhile partners of the dissolved firm which was carrying on business of manufacturing beedies under the firm name "m/s Mangalore Ganesha Beedi Works". The firm was comprised of 13 partners. It stood dissolved on 6th Dec. , 1987, by efflux of time. Thereafter, the business was carried on behalf of all the erstwhile partners as an AOP till the affairs of the firm was finally wound up. The assets of the firm were ultimately sold to the present assessee under the orders of this Court in a winding up proceedings on 20th Nov. , 1994. On and from 21st Nov. , 1994, the business of the erstwhile dissolved firm became that of the present assessee. Thus during previous year for the asst, yr. 1995-96, from 1st April, 1994 to 20th Nov. , 1994, the business was being carried for and on behalf of all the AOP comprised of erstwhile 13 partners (. e. , for 234 days ). But for the period 21st Nov. , 1994, to 31st March, 1995, the business was carried on by and on behalf of the purchasing AOP. e. , assessee (for 131 days ).
( 2 ) BEFORE entering into the facts in detail, we find it advantageous to clarify a basic fact which has led to certain amount of confusion at all stages of the proceedings. This confusion had arisen primarily because of the name 'mangalore Ganesha Beedi Works' (in short 'mgbw') successively adopted by three different taxable entities, namely, a partnership firm, an AOP consisted of 13 members and another AOP consisting of 3 members. For the sake of convenience, we will be referring to the said taxable entities as 'the firm', 'aop-13' and 'aop-3'. At this very stage, we may state that in the year 1993, the number of members of AOP-13 reduced to twelve because one of its members namely, Sri Vinod Rao, having 7. 5 per cent share, had transferred his interest by a deed of assignment dt. 3rd July, 1993, to 7 out of other members leading to rise in their shares. But, the assignment of interest does not have any material relevance for deciding the legal issues involved herein.
( 3 ) IN the present case, on behalf of the assessee-AOP-3, initially returns was filed showing total income of Rs. 4,95,67,570. But subsequently the same was revised showing loss at Rs. 11,11,77,020. The AO completed the assessment under Section 143 (3) of the IT Act, 1961, determining the income at Rs. 1,16,49,03,204. This determination was made by the AO by including the income of AOP-13, which, was for 234 days as well as the capital gains which was arisen out of the sale of the assets of the firm in the hands of AOP 3. The AO also disallowed various deductions and revenue expenditure which had been claimed by the assessee-AOP. The assessee, therefore, went in appeal before CIT (A) who granted certain reliefs to the assessee.
( 4 ) AGGRIEVED by the order of the appellate authority, both the Department and the assessee preferred appeals to the Tribunal. The Tribunal allowed almost all the claims of the assessee. Therefore, the Department has preferred the present appeals. About the firm
( 5 ) SOME time in 1939, late S. Raghuram Prabhu started the business of manufacturing Beedies, subsequently, his brother-in-law, Sr. Madhav Shenoy also joined him in the business as a partner. Thus, M/s Mangalore Ganesh Beedi Works, the firm, came into existence w. e. f. 28th march, 1940. Thereafter, it was reconstituted from time to time. The last re constitution of the firm is evidenced by a partnership deed dt. 30th June, 1982, According to the averments made in the deed, the last re constitution of the firm became effective from 6th July, 1982. According to the deed of partnership, the firm comprised of the following 13 partners.
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No. 1. B. Raghurama Prabhu 2. M. Janardhana Rao 3. M. Ananda Rao 4. M. Vinoda Rao 5. M. Pushpalatha W/o Subray
