BOMBAY CYCLE IMPORTING CO. vs NINTH INCOME TAX OFFICER.

ITA No. 3100/Mds/88 is by the assessee for the assessment year 1983-84 and ITA. No. 3769/Mds/88 is by the Revenue for the assessment

year 1984-85. In the assessee firm there were two partners Shri V. M. Ajmeera and Shri P. V. Ajmeera, who represented their respective H. U.

F. Yet another partner was Smt. U. M. Ajmeera. Interest was paid on individual funds contributed by S/Sri V. M. Ajmeera and P. Y. Ajmeera.

Such payment of interest amounted to Rs. 24,501 to Sri V. M. Ajmeera and Rs. 39,103 to Shri P. V. Ajmeera in the assessment year 1983-84.

The I. T. O. added back these amounts by applying the provisions of section 40(b) and the C. I. T. (A) upheld the inclusion of the same.

Before us, the assessee submitted that following the decision of the Andhra Pradesh High Court in N.T.R. Estate Vs. Commissioner of Income

Tax, as also the decision of the Full Bench of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Narbharam Popatbhai and

Sons, , and the Punjab & Haryana High Court in the case of Hindustan Steel Forgings v. CIT 1989 Tax LR 996, this disallowance was not

warranted. The learned departmental representative, on the other hand, urged that following the decision of the Madras High Court in Dwarkadas

Rameshwar Goenka Vs. Commissioner of Income Tax, Madras, and in the case of Venkatesh Emporium Vs. Commissioner of Income Tax, Tamil

Nadu, the amounts had to be added back. Such, he submitted, was the decision of the Full Bench decision of the Allahabad High Court in the case

of COMMISSIONER OF Income Tax Vs. NITRO PHOSPHETIC FERTILIZER., .

We have considered the rival submissions A similar issue had come up before the Tribunal in the case of Asera Finance Corpn. v. ITO [1987]

63 CTR (Mad.) 66. There the decision of the Madras High Court referred were considered by the Tribunal in the light of the Explanation

introduced by the Taxation Laws (Amendment) Act, 1984, which came into force on 1-4-1985. The Tribunal observed that in the case of N. T.

R. Estate (supra), the Andhra Pradesh High Court had held that the explanation was introduced to avoid inconvenience to taxpayers and reduce

litigations and it was clarificatory in nature and the present type of case was one of the specific cases where according to the explanation interest

paid was not to be added back. Since the amendment was clarificatory in nature, the Tribunal held that the interest disallowance could not be

made even in the assessment year prior to the introduction of the explanation. That the explanation is clarificatory in nature is the view taken by the

Full Bench decision of the Madhya Pradesh High Court as also by the dissenting Judge in the Full Bench decisions of the Allahabad High Court.

The Punjab & Haryana High Court in the case of Hindustan Steel Forgings (supra) has further relied on the Circular printed at page Commissioner

of Income Tax, Tamil Nadu-V Vs. K.S.M. Guruswamy Nadar and Sons, under the heading ""Reducing Litigation"". The relevant portion of the

Circular read as under :-

A number of amendments have been made to bring out the legislative intention more clearly so that further controversy and litigation regarding

the true intent and purport of these provisions is avoided. To illustrate :-

** ** **

(b) It has also been clarified that where a person is a partner in his representative capacity, interest paid to him in his individual capacity will not be

disallowed under the abovementioned provisions and vice versa.

The Punjab & Haryana High Court apart from taking the view that the explanation was clarificatory in nature, held that in view of the Circular of

the Board it was settled law having regard to the decision of the Supreme Court that such Circulars were binding on the department. In view of the

aforesaid discussion and the decisions of the various High Courts referred to, I am unable to agree with the learned departmental representative

that the decision of the Tribunal in the case of Asera Finance Corpn. (supra) requires reconsideration inasmuch as the provisions of the Explanation

to section 40(b) are only clarificatory. I hold that the disallowance of the interest to the persons concerned was not warranted on the facts of the

case.

For the assessment year 1984-85 again there arises the question of disallowance of interest to the two partners S/Shri V. M. Ajmeera and P. V.

Ajmeera aggregating to Rs. 41,015. The A. A. C. had allowed the deduction. The Revenue contests the same. In view of my decision for the

assessment year 1983-84, I hold that the allowance by the A. A. C. was in order.

There is another common point involving both the appeals. There was a search in the assessees premises and certain discrepancies in stock

were noticed. But the I. T. O. stated that he was not making any addition in respect of stock value difference of Rs. 60,217, but he made an

addition of Rs. 20,000 on ad hoc basis for the assessment year 1983-84 stating that it was in the absence of authentic verification. For the

assessment year 1984-85 the addition made in similar terms was Rs. 10,000. For the assessment year 1983-84 the addition made was sustained

by the C. I. T. (A), but for the assessment year 1984-85 the addition made was deleted by the A. A. C. stating that an ad hoc addition was not

warranted.

Before me the learned counsel submitted that though similar additions were made in the assessment years 1985-86 and 1986-87, they were

deleted in the first appeal and there were no further appeals by the Revenue. It was contended that there was no warrant for making any ad hoc

additions and, therefore, the appeal of the assessee should be allowed for the assessment year 1983-84 and the appeal of the Revenue for the

assessment year 1984-85 should be dismissed.

The learned departmental representative relied on the reasons stated for the assessment year 1983-84 to which I have already adverted.

The I. T. O. desisted from making any adjustment to the stock value as such since if it was disturbed, a similar allowance would have to be

made later. If there was any real discrepancy in the stock valuation, then the same should have been set right and the fact that any adjustment

would have been called for in the next year giving relief would not be a relevant reason for not making the adjustment. In the present case, ad hoc

additions have been made. There is no warrant for making ad hoc additions and, therefore, for the assessment year 1983-84 I direct deletion of

the amount and for the assessment year 1984-85 I uphold the decision of the A. A. C. deleting the addition of Rs. 10,000.

In the result, the appeal for the assessment year 1983-84 is allowed and the appeal for the assessment year 1984-85 is dismissed.