Sree Hanuman Trading Co. vs ITO and Another

C.N. Ramachandran Nair, J.—Heard counsel appearing for the Appellant and standing counsel appearing for the department.

The appeals arise from the assessment of the Assessee for the assessment years 1999-2000 and 2000-01. The Assessee has been crediting interest and even making cash payment of interests to certain credit entries shown in the names of relatives. Interest credits and payments have been regularly claimed as deduction and the same was being allowed. However, during the assessment years 1999-2000 and 2000-01, the Assessee transferred the credit entries to the partners capital accounts thereby neutralising the liability towards creditors. The Assessees explanation is that the creditors, who are relatives, gifted these amounts to the partners. Even though the assessing officer by applying Section 41(1) assessed the interest portion of the credit entry as income, the Commissioner (Appeals), in the course of hearing the appeal, enhanced the assessment by treating the entire credit entries as income assessable u/s 41(1) of the Act. However, the Tribunal, on second appeal, granted relief to the Assessee by limiting the addition u/s 41(1) to the interest credited to the account of the creditors. It is against these orders of the Tribunal, the Assessee has filed these appeals.

The counsel has relied on a decision of the Supreme Court in Commissioner of Income Tax, Calcutta Vs. Sugauli Sugar Works P. Ltd., and contended that mere unilateral transfer entries in the accounts of the Assessee will not entitle the department to make assessment u/s 41(1) of the Act. We are unable to accept the contention of the counsel that what is done is mere transfer of credits in the accounts made by the Assessee in this case, because the creditors ceased to have any claim against the Assessee after the credit entries are transferred to the capital accounts of the partners. On such transfer, the Assessee has ceased to be liable for the interest liability which was claimed as deduction in the previous years. Therefore, in our view, there is cessation of liability in respect of interest credited to the account of the creditors and so much so, it was rightly found by the Tribunal as income assessable u/s 41(1) of the Income Tax Act.

We, therefore, dismiss the appeals.