COMMISSIONER OF INCOME TAX vs AJANTA TRADING CORPORATION.

N. K. AGRAWAL, J. :

The following two questions of law are sought for reference to this Court under s. 256(2) of the IT Act, 1961 (for short, the Act) :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that recurring deposit accounts in the joint names of each of the four partners and their respective wives were not the assets of the firm as reflected in its books of account and balance sheet and the income earned by way of interest thereon is not its taxable income ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the order dt. 5th August, 1986 passed under s. 263 of the IT Act, 1961 ?"

The assessee-firm derived income from the manufacture and sale of diesel engine parts and tractor and auto parts. Return of income for the asst. yr. 1983-84 was filed, showing income at Rs. 1,27,920. Assessment was, however, made on an income of Rs. 1,46,400 under s. 143(3) of the Act. Certain disallowances of expenditure were made and, consequently, income was enhanced by the AO. There were four partners in the assessee-firm with 25 per cent. share each.

The CIT initiated action under s. 263 of the Act after examining assessment records and noticing that the assessee-firm had earned certain interest income on four recurring deposit accounts. It was seen that there was a Saving Bank Account showing a credit balance of Rs. 1,630 as on 31st March, 1983. Besides, there were four recurring deposit accounts, one each in the joint names of the partner and his wife. The CIT took the view that the recurring deposit accounts belonged to the assessee-firm and, since the accounts had matured on 1st March, 1983, the interest earned on these accounts was treated to be the income of the assessee-firm. The plea of the assessee-firm before the CIT was that each of the four partners had opened a recurring account on 24th January, 1978 in the Central Bank of India with a condition to deposit Rs. 1,000 by way of monthly instalments for a period of 61 months. Monthly instalments were paid to these accounts from the saving bank account of the firm. The recurring deposit accounts matured on 1st March, 1983 with the maturity value of Rs. 79,740 (principal value Rs. 61,000 plus interest Rs. 18,740) in each account. The total amount of interest, which had accrued at the rate of Rs. 18,740 in each account, was claimed by the assessee-firm to be the individual income of the partners. The assessees plea did not find favour with the CIT and he directed the AO to frame the assessment afresh after adding interest income to the income of the firm.

The assessee filed an appeal before the Tribunal on the plea that the partners had declared interest income in their individual returns in the earlier years. There was nothing on record to establish that the recurring deposit accounts belonged to the firm. Some deposits had been made out of the money received from a sister-concern, M/s. Associated Industries, in which the partners of the assessee-firm happened to be the partners. The Tribunal noticed that though contributions to the recurring deposit accounts had been made by the partners through the saving bank accounts of the firm but that will not by itself change the character of the accounts. The partners had, in the earlier years, declared interest income and had been already assessed. Therefore, it amounted to double taxation. Moreover, interest had been declared by individual partners on accrual basis and, therefore, there was no justification to add the entire interest income to the assessee-firms income in the asst. yr. 1983-84. The appeal was allowed by the Tribunal.

Shri R. P. Sawhney, senior counsel for the Department, has pointed out that the questions sought to be referred for opinion, are questions of law inasmuch as the nature of the accounts and the nature of the interest income accruing therefrom are the relevant issues giving rise to questions of law. It is argued by Shri Sawhney that deposits had been made from the funds of the firm in the recurring deposit accounts and, therefore, these accounts belonged to no one else but the firm.

From the facts, it is clear that the nature of the accounts did not leave any room for doubt that these accounts belonged to the partners. Each of the four partners had opened an account in the joint names of himself and his wife. Not only that, each partner had duly declared interest in his individual return in earlier years on mercantile basis. Therefore, these facts found by the Tribunal do not permit any other conclusion except that these accounts belonged to the partners. Certain deposits have been made from the withdrawals made from the sister-concern by the partners. In the absence of any positive evidence showing the entire deposits having been made from the funds of the firm, the accounts cannot be treated to be the accounts opened and run by the firm. On maturity, the principal amount of Rs. 61,000 was shown by the assessee-firm in its books of account by way of an adjustment entered in the recurring deposit accounts of the partners. The amount of interest of Rs. 18,740 was transferred to the capital account of each partner. In the circumstances, the finding of fact, arrived at by the Tribunal does not give rise to the question which are sought to be referred.

There is no force in the application filed under s. 256(2) of the Act and, therefore, it is dismissed.