G. Ramchand v. Commissioner of Income Tax — 1990 DIGILAW 237 (MAD)

Judgment :- V. RATNAM. J. The assessee is a firm of two partners and was constituted under deed dated April 14, 1968, with effect from April 1, 1968. Each of the partners contributed Rs. 50, 000 towards capital. The business of the firm was money-lending and acting as brokers for arranging financial transactions. During the course of the accounting year relevant to the assessment year 1977-78, a sum of Rs. 2, 00, 000 was withdrawn from the firm and the amount was deposited with the Indian Overseas Bank as fixed deposits repayable after the expiry of 63 months. Out of the amount so withdrawn, a sum of Rs. 1, 00, 000 each was deposited in the names of the two partners and the amount payable on maturity in respect of each of the deposits was Rs. 1, 67, 333. On July 21, 1977, the assessee filed a return disclosing an income of Rs. 14, 818 without including Rs. 14, 620 being the interest that had accrued on the fixed deposits in the names of the partners. Along with the return, the assessee filed a balance-sheet in which Rs. 2, 14, 620 was shown as the amount lying in fixed deposits with the Indian Overseas Bank as one of the items of assets of the firm. On the liabilities side, Rs. 1, 00, 000 under capital account and credit balance of Rs. 23, 363.63 and Rs. 20, 468.36 in the accounts of the two partners were shown. The Income-tax Officer took the view that the sum of Rs. 14, 620, being the accrued interest on the fixed deposits, was the income of the assessee-firm and subjected it to tax treatment. However, on appeal, the Appellate Assistant Commissioner accepted the contention of the assessee that the amount withdrawn by the partners did not belong to the firm as such, but belonged to them in their individual capacities and hence the interest that had accrued thereon was not liable to be included as the income of the assessee-firm. Accordingly, he directed the deletion of Rs. 14, 620. On further appeal to the Tribunal, it was found that no contemporaneous entries on the date of the withdrawal of the amount had been made to substantiate the stand of the assessee that there is no debit either in the current account or capital account of the partners in respect of a sum of Rs. 14, 620. On further appeal to the Tribunal, it was found that no contemporaneous entries on the date of the withdrawal of the amount had been made to substantiate the stand of the assessee that there is no debit either in the current account or capital account of the partners in respect of a sum of Rs. 1, 00, 000 each and that a new account was opened styled as asset account and that was debited with Rs. 2, 00, 000 representing the amounts invested in fixed deposits with the Indian Overseas Bank. According to the Tribunal, the intention reflected by the balance-sheet filed along with the return was that the assessee-firm had treated the investment in fixed deposits as its own assets and, therefore, the interest of Rs. 14, 620 was rightly assessed to tax. In that view, allowing the appeal, the Tribunal restored the order of the Income-tax Officer. That is how the following question of law under section 256(1) of the Income-tax Act, 1961, has been referred for the opinion of this court, at the instance of the assessee "Whether, on the facts and circumstances of the case, the Tribunal was right in assessing as income of the firm a sum of Rs. 14, 620 being the accrued interest on the fixed deposits in the names of the partners ?" * The assessee appeared in person and argued his case. According to him, amounts had been withdrawn from the capital account of the individual partners of the firm and that thereafter such amounts belong to the partners in their individual capacities and the interest earned on the investment of the amounts was not liable to be included as the income of the assessee-firm. On the other hand, learned counsel for the Revenue submitted that as per section 14 of the Indian Partnership Act as well as the balance-sheet filed by the assessee, the investment should be properly regarded only as that of the firm and that the Tribunal was right in its conclusion that the interest income from the amounts invested as fixed deposits was assessable in the hands of the assessee-firm. Reference in this connection was also made to the decision reported in Sudarsanam Maistri v. Narasimhulu Maistri 1901 (25) ILR(Mad) 149, at pages 165 and 166. Reference in this connection was also made to the decision reported in Sudarsanam Maistri v. Narasimhulu Maistri 1901 (25) ILR(Mad) 149, at pages 165 and 166. The question whether the investments in fixed deposits belong to the assessee-firm or the partners in their individual capacities has to be considered and decided only in the light of the manner in which those amounts had been treated in the books of account of the firm as well as the partners individually. Before the Tribunal, as could be gathered from paragraph 6 of its order, it was accepted that no entries were made debiting either the current account or the capital account of the partners with Rs. 1, 00, 000 each. There is no dispute that the assessee-firm, along with the return filed on July 21, 1977, enclosed a balance-sheet. From that, it is seen that a new account styled as asset account was opened and that was debited with Rs. 2, 00, 000 referable to the amount invested in fixed deposits with the Indian Overseas Bank. Thus, even according to the balance-sheet submitted by the assessee-firm, it had treated the investment in fixed deposits as its own assets. However, it has to be noticed that in a revised balance-sheet filed on September 9, 1977, subsequent to the filing of the return, it is mentioned as if each of the two partners had withdrawn Rs. 1, 00, 000 on a particular date. But the entries in the revised balance-sheet will not be of any avail. We may also point out that as per the entries in the balance-sheet dated June 18, 1977, the investment is shown to have been made with money belonging to the firm and under section 14 of the Indian Partnership Act, the investment should be deemed to be for and on behalf of the firm. We may also refer in this connection to the observations in Sudarsanam Maistri v. Narasimhulu Maistri 1901 (25) ILR(Mad) 149 to the effect that lands and houses bought in the name of one partner and paid for by the firm or from the profits of the partnership business are prima facie partnership property and the ordinary rule is that unless a contrary intention appears either expressly or by the nature of the transaction, property bought with money belonging to the firm, is deemed to have been bought on the account of the firm. We have earlier referred to the entries in the balance-sheet and those entries also clearly establish that the moneys of the firm have been invested as fixed deposits and it is not, therefore, open to the assessee-firm now to claim that the investments should be treated as having been made in the individual capacities of the two partners and that the interest thereon was not liable to be subjected to assessment in the hands of the assessee-firm. We, therefore, answer the question referred to us in the affirmative and against the assessee. The Revenue will be entitled to the costs of this reference. Counsel's fee Rs. 500.