Commissioner of Income Tax vs Kodanadu Tea Estate Company

K. Raviraja Pandian, J.—The Revenue is on appeal against the order of the Income Tax Appellate Tribunal, Madras ""D"" Bench, dated

November 20, 2003, in I. T. A. Nos. 1158/Mds/2001. The relevant assessment year is 1988-89.

The facts of this case are as follows: For the assessment year 1988-89, the assessee filed a return of income on April 20, 1988, declaring a loss

of Rs. 4,72,580. The assessment was completed u/s 143(3) and was reopened by issuance of notice u/s 148, dated March 15, 1999. During the

course of the assessment proceedings, it was found that the assessee has claimed interest liabilities to the Canara Bank, Bangalore, and the

Syndicate Bank, Bangalore, as deductions, that these liabilities were not related to the business of the firm and that they were personal liabilities of

the partners. As this was a wrongful claim, the assessment was reopened for disallowance and notice u/s 148 was issued asking the assessee to

substantiate its claim of liability of Rs. 12,40,346 to the Canara Bank, Bangalore, and Rs. 10,81,108 to the Syndicate Bank, Bangalore, as

deduction for the purpose of its business. The Assessing Officer held that as per the dissolution deed dated April 9, 1986, partnership which came

into existence by a deed of partnership dated June 19,1981, was dissolved with effect from April 9, 1986, and the loan was taken from the

Canara Bank and the Syndicate Bank by pledging the shares of Kuchumala Plantations, which were taken over by the W. T. Graig, Johnes group

and, therefore, any funds utilised for the repayment of the said loan were personal not connected with the business and hence the interest liabilities

in relation to the said loan could not be allowed as a deduction in the hands of the firm. Aggrieved by the same, the assessee preferred an appeal to

the Commissioner of Income Tax (Appeals), who held that the liability to the Canara Bank and the Syndicate Bank continued to be the liability of

the firm and not that of the partners and were to be allowed as a deduction. Aggrieved by the decision of the Commissioner of Income Tax

(Appeals), the Department filed an appeal before the Appellate Tribunal, which dismissed the appeal of the Revenue holding that the reconstitution

of the firm was wrongly taken as a dissolution and that the liability of the borrowed bank was always attached to the firm and not to the partners.

Hence, the present appeal is filed by the Revenue questioning the correctness of the order passed by the Tribunal.

The appeal was admitted on the following substantial questions of law :

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that the interest liability of the assessee to the

Canara Bank and Syndicate Bank was allowable for the assessment year 1988-89?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in holding that the claim of interest

payment to the Canara Bank and the Syndicate Bank was allowable especially when the assessee on its own motion had forgo the interest for the

assessment year 1988-89 before the Settlement Commission, which order has been accepted by it?

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal is right in law in not considering the judgment of

the Madras High Court reported in the case of South India Surgical Co. P. Ltd. Vs. Assistant Commissioner of Income Tax, , wherein it has been

held that if any specific ground is raised, non-consideration of the same would amount to a substantial question of law in an appeal u/s 260A of the

Income Tax Act and were entitled to interfere with the finding?

When the matter is taken up for orders, learned Counsel for the respondent/assessee submitted that the tax effect in the present case is Rs.

1,00,212, i.e., Rs. 95,440 + Rs. 4,772. As per the Circular of the Central Board of Direct Taxes in F. No. 279/126/98ITJ, dated March 27,

2000, the monetary limit prescribed for filing an appeal by the Revenue is Rs. 2 lakhs, however, with certain exceptions. The exceptions are not

applicable to the facts of the present case and admittedly, the tax effect in this case is lesser than the monetary limit prescribed in the said Circular.

Hence, it would not be proper on the part of the Revenue to file an appeal, which is against its own circular.

It may be noted that this Court considered a similar issue in the case of Commissioner of Income Tax Vs. Associated Electrical Agencies, ,

wherein this Court held as follows (page 500):

We are of the considered view that none of the exceptions stated in the circular are applicable to the facts of the present case. The circular was

stated to be issued by invoking the statutory power u/s 119 of the Income Tax Act. The appeal is filed u/s 260A of the Income Tax Act. It is well-

settled principle of law that each and every provision of a statute has to be given the same importance. One provision cannot be elevated to a

higher pedestal than the other provision, of course, unless or otherwise specifically stated either in the scheme, the Act or in the provision itself that

a particular provision is subjected to or qualified by any other provision or the provision can be given effect to notwithstanding anything contained

in any other provisions by assigning overriding effect. Hence, the contention that notwithstanding the circular, which was issued u/s 119 of the

Income Tax Act, the appeal could be filed by the Revenue u/s 260A has to be rejected for the reason that if the contention is accepted, one of the

sections would become virtually otiose and that cannot be the intention of the law makers."" Thus, following the long line of case law reported in

Commissioner of Income Tax Vs. Rajasthan Patrika Ltd., , Commissioner of Income Tax Vs. P.S.T.S. Thiruvirathnam and Sons, , to which one of

us is a party (K. Ravi-raja Pandian J.) Commissioner of Income Tax Vs. Digvijay Singh, and Commissioner of Income Tax Vs. Camco Colour

Co., , this Court held that the uniform line of judicial opinion is that if the tax effect is less than what is stated in the circular, the Revenue need not

agitate the issue on appeal and that the circular is binding on the Revenue.

The said judgment of this Court in the case of Commissioner of Income Tax Vs. Associated Electrical Agencies, has been relied on by the

Gujarat High Court in the case of Commissioner of Income Tax Vs. Concord Pharmaceuticals, to reject the appeal of the Revenue where the tax

effect is less than Rs. 2 lakhs. The apex court in the case of State of Kerala and Others Vs. Kurian Abraham Pvt. Ltd. and Another, has laid down

that the circular issued by the Central Board of Direct Taxes is as much binding on the Revenue and that requires no support of judicial precedent.

Learned Counsel for the Revenue fairly admitted that the tax effect is less than Rs. 2 lakhs, the limit prescribed under the abovesaid Circular

dated. March 27, 2000. The appeal is filed on April 15, 2004. Hence, the circular is binding on the Revenue. The appeal is dismissed. No costs.