M/s. Metapow Industries, Pune V. ITO, Ward 8(3), Pune

CO 38/PUN/2013

• Counselvise Citation: [2013] 122 COUNSELVISE.COM (IT) 9138 (ITAT-PUNE)
• Duration Of Justice: 1 month(s) 13 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 29-10-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: misc
• Appeal Filed On: 16-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S KOTHARI
• Assessee Lawyers: SUNIL KARBHARI
• Keywords: Business income
• Section: 143(3); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B , PUNE BEFORE: SHRI R.S. PADVEKAR, JUDICIAL MEMBER AND SHRI R. K. PANDA, ACCOUNTANT MEMBER ITA NO. 1707 / P N/ 20 1 2 ASSESSMENT YEAR : 200 6 - 07 INCOME TAX OFFICER, WARD - 8(3), P UNE VS. M/S. METAPOW INDUSTRIES, W - 143, MIDC, BHOSARI, PUNE (APPELLANT) (RESPONDENT) PAN NO. AAEFM3720H CO NO. 3 8 /PN/20 1 3 (ARISING OUT OF ITA NO. 1707 /PN/201 2 ) ASSESSMENT YEAR : 200 6 - 07 M/S. METAPOW INDUSTRIES, W - 143, MIDC, BHOSARI, PUNE ( CROSS OBJECTOR ) PAN NO. AAEFM3720H INCOME TAX OFFICER, WARD - 8(3), PUNE ( APPELLANT IN THE APPEAL ) A SSESSEE BY: SHRI SUNIL KARBHARI RE VENUE BY: SHRI D.S. KOTHARI DATE OF HEARING : 07 - 10 - 2013 DATE OF PRONOUNCEMENT : 29 - 10 - 2013 ORDER P ER R.S. PADVEKAR , JM : - THE REVENUE HAS FILED THE APPEAL CHALLENGING THE IMPUGNED ORDER OF THE LD. CIT(A) - V, PUNE DATED 02 - 05 - 2012 FOR THE A.Y. 2006 - 07 . THE ASSESSEE HAS ALSO FILED THE CROSS OBJECTION IN THE REVENUE APPEAL . WE, FIRST DISPOSE OF THE APPEAL FILE D BY THE REVENUE . THE R EVENUE HAS TAKEN THE FOLLOWING GROUNDS IN THE APPEAL: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) WAS JUSTIFIED IN INCLUDING DISALLOWANCE U/S. 40(A)(IA) AMOUNTING TO RS.40,90,265/ - IN THE BOOK PROFIT FOR WORKI NG OUT PARTNER'S REMUNERATION WITHOUT APPRECIATING THE PROVISIONS CONTAINED IN EXPLANATION 3 BELOW SEC. 40(B)(V) AS PER WHICH 'BOOK PROFIT' MEANS THE NET PROFIT AS SHOWN IN THE P&L A/C FOR THE RELEVANT PREVIOUS YEAR, COMPUTED IN THE MANNER LAID DOWN IN 2 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE CHA PTER IV - D AS INCREASED BY THE AGGREGATE AMOUNT OF THE REMUNERATION PAID OR PAYABLE TO ALL PARTNERS OF THE FIRM. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT THE A.O. WAS NOT JUSTIFIED IN REDUCING THE BOOK PROFIT TO THE EXTENT OF DISALLOWANCE U/S. 40(A)(IA) AND RECOMPUTING THE REMUNERATION TO THE PARTNERS, WHEN THE BOOK PROFIT MEANS NET PROFIT AS SHOWN IN PROFIT & LOSS A/C AND THE DISALLOWANCE U/S. 40(A)(IA) NEVER REFLECTS IN THE PROFIT & LOSS ACCOUNT . 3. WH ETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) WAS JUSTIFIED IN ADDING DISALLOWANCE U/S 40(A)(IA) IN THE BOOK PROFIT FOR THE PURPOSE OF COMPUTING PARTNERS REMUNERATION IGNORING THE FACT THAT IT WOULD AMOUNT TO ALLOWING OF DOUBLE DEDUCTION. 2. THE BRIEFLY STATED FACTS ARE AS UNDER. THE ASSESSEE IS A PARTNERSHIP FIRM WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING BOILER A CCESSORIES AND SUGAR MACHINERY. THE ASSESSEES ASSESSMENT HAS BEEN COMPLETED U/S. 143(3) OF THE INCOME - TAX ACT. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE FIRM HAS DEBITED SALARY/REMUNERATION TO THE PARTNERS TO THE EXTENT OF RS.33,50,000/ - IN THE PROFIT AND LOSS ACCOUNT. AS PER THE TERMS OF THE DEED OF THE PARTNERSHIP THE TOTAL SALARY PAYABLE TO THE PARTNER I S TO BE CREDITED TO RESPECTIVE PARTNERS/PARTNERS CURRENT/CAPITAL ACCOUNT IN THE PROFIT SHARING RATIO. THE ASSESSEE FIRM HAS TWO PARTNERS AND EACH PARTNER IS HAVING 50% SHARES IN THE PROFIT AND LOSS OF THE FIRM. THE ASSESSING OFFICER REFERRED TO THE CIRCU LAR NO. 739 OF THE CBDT AND HAS OBSERVED THAT ONE SHOULD QUANTIF Y THE SALARY AND ACCORDINGLY CREDIT TO THE CURRENT/CAPITAL ACCOUNT OF THE PARTNER I N ACCORDANCE WITH THE FINANCIAL RESULT OF PROFIT AND LOSS ACCOUNT AND WHICH CAN BE ALLOWABLE AS A DEDUCTION U NDER THE PROVISIONS OF SEC. 40 (B)(V) OF THE ACT. AS OBSERVED BY THE ASSESSING OFFICER , THE ASSESSEE SHOULD HAVE WORKED OUT THE SALARY IN ACCORDANCE WITH THE PROVISIONS OF DEED OF 3 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE PARTNERSHIP I.E. AS PER THE PERCENTAGE S LAID DOWN IN THE PROVISIONS OF SEC. 40 (B)(V) AND ALLOCATE IT IN ACCORDANCE WITH THE PROVISIONS OF CLAUSE 11 OF THE DEED OF PARTNERSHIP. 3. AS NOTED BY THE ASSESSING OFFICER THE REAL NET PROFIT AS PER THE P & L A/C. OF THE ASSESSEE FIRM IS RS.26,29,290/ - WHICH IS AVAILABLE FOR THE APPROP RIATION BETWEEN THE PARTNERS AS PER THE TERMS OF THE DEED OF THE PARTNERSHIP AND AT THE MOST THE ASSESSEE SHOULD HAVE DEBITED THE SALARY OF RS.11,04,216/ - AS PROVIDED U/S. 40 (B)(V) OF THE ACT AND SHOULD NOT HAVE DEBITED THE SALARY TO THE EXTENT OF RS. 33,5 0,000/ - . IT WAS NOTICED BY THE ASSESSING OFFICER THAT THE AMOUNT DISALLOWED U/S. 40(A)(IA) OF THE ACT WAS ALSO INCLUDED FOR THE PURPOSE OF THE BOOK PROFIT AND ACCORDINGLY THE SALARY/REMUNERATION WAS WORKED OUT. THE ASSESSEE HAS DISALLOWED U/S. 40(A)(IA) OF THE ACT TO THE EXTENT OF RS.48,90,265/ - WHICH WAS CONSIDERED AS A PART OF THE BOOK PROFIT. THE ASSESSING OFFICER RESTRICTED THE ALLOWABLE REMUNERATION TO RS.11,04,216/ - . THE ASSESSEE CHALLENGED THE ACTION OF THE ASSESSING OFFICER BEFORE THE LD. CIT(A) . THE ASSESSEE CONTENDED BEFORE THE ASSESSING OFFICER THAT THE ASSESSING OFFICER HAS ERRED IN LAW IN COMPUTING THE REMUNERATION WITHOUT ADDING BACK THE OTHER ATTEMPTS DEBITED TO P & L A/C. IN TERMS OF SEC.40 (B)(V) R.W. EXPLANATION 3 AS THE BOOK PROFIT IS TO BE COMPUTED IN THE MANNER PROVIDED UNDER CHAPTER IV - D OF THE ACT. AS PER THE ASSESSEE TOTAL ADDITION WAS TO THE EXTENT OF RS. 55,77,476/ - WHICH WAS BY WAY OF DIFFERENT DISALLOWANCE AND SAME SHOULD HAVE BEEN ADDED TO THE NET PROFIT/LOSS IN ADDITION TO T HE REMUNERATION AND INTEREST. AS PER THE ASSESSEE , THE BOOK PROFIT AS COMPUTED U/S. 40 (B)(V) IS WORKED OUT AT RS.82,022,48/ - AND THE ASSESSEE HAS RIGHTLY CALCULATED THE SAME. THE LD. CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE BOOK PROFIT FO R THE PURPOSE OF SEC. 40 (B)(V) IS TO BE WORKED OUT AS PROVIDED IN EXPLANATION 3 CONSIDERING CHAPTER IV - D OF THE ACT. NOW THE REVENUE IS IN APPEAL BEFORE US. 4 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE 4. WE HAVE HEARD THE RIVAL SUBMISSIONS OF THE PARTIES AND PERUSED THE RECORD. AS PER THE GROUNDS TAKEN BY THE REVENUE THE ONLY DISPUTE RAISED BY THE REVENUE IS IN RESPECT OF WHETHER THE EXPENDITURE DISALLOWED U/S. 40(A)(IA) OF THE ACT CAN F ORM PART OF THE BOOK PROFIT WITHIN THE MEANING OF SEC. 40 (B)(V) R.W. EXPLANATION 3 FOR THE PURPOSE OF WORKING O UT THE ALLOWABLE REMUNERATION OF SALARY TO THE WORKING PARTNER. NOWHERE IT IS IN DISPUTE THIS CASE THAT THE REMUNERATION IS PAID TO THE WORKING PARTNER AS AUTHORIZED BY THE DEED OF PARTNERSHIP. THE SHORT ISSUE IN CONTROVERSY R EVOLVE AROUND SEC. 40 (B)(V) OF THE INCOME - TAX ACT R.W. EXPLANATION 3 AND THE SAID PROVISION READS AS UNDER : 40 (B) IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH, - (I).. (II). (III) (IV) (V) ANY PAYMENT OF REMUNERATION TO ANY PARTNER WHO IS A WORKING PARTNER, WH ICH IS AUTHORIZED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR AS THE AMOUNT OF SUCH PAYMENT TO ALL THE PARTNERS DURING THE PREVIOUS YEAR EXCEEDS THE AG GREGATE AMOUNT COMPUTED AS HEREUNDER: - (A) ON THE FIRST RS.3,00,000 RS.1,50000 OR AT THE RATE OF OF THE BOOK - PROFIT OR IN 90 PER CENT OF THE BOOK - PROFIT, CASE OF A LOSS WHICHEVER IS MORE; (B)ON THE BALANCE OF THE AT THE RATE OF 60 PER CENT B OOK - PROFIT PROVIDED THAT IN RELATION TO ANY PAYMENT UNDER THIS CLAUSE TO THE PARTNER DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR COMMENCING ON THE 1 ST DAY OF APRIL, 1993, THE TERMS OF THE PARTNERSHIP DEED MAY, AT ANY TIME DURING THE SAID PREVIOUS YEAR, PROVIDE FOR SUCH PAYMENT. EXPLANATION1 .. (I) .... (II) EXPLANATION 2.. EXPLANATION 3. FOR THE PURPOSE OF THIS CLAUSE, BOOK - PROFIT MEANS THE NET PROFIT, AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR T HE 5 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE RELEVANT PREVIOUS YEAR, COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV - D AS INCREASED BY THE AGGREGATE AMOUNT OF THE REMUNERATION PAID OR PAYABLE TO ALL THE PARTNERS OF THE FIRM IF SUCH AMOUNT HAS BEEN DEDUCTED WHILE COMPUTING THE NET PROFIT . 5. IN T HE GROUNDS, THE REVENUE TAKEN THE AMOUNT DISALLOWED U/S. 40 (A)(IA) AT RS.40,90,265/ - BUT IN THE COMPUTATION THE ASSESSING OFFICER HAS SHOWN THE SAID AMOUNT OF RS.48,90,265/ - ? EVEN AS PER THE ASSESSEE S COMPUTATION THE AMOUNT OF DISALLOWANCE U/S. 40 (A)(I A) OF THE ACT IS SHOWN AS 40,90,265/ - . I T APPEARS THAT THERE IS SOME TYPING MISTAKE. NOW LET US CONSIDER THE CORRECT MEANING OF EXPRESSION BOOK - PROFIT U/S. 40 (B)(V) R.W. EXPLANATION - 3 O F THE ACT. ADMITTEDLY AS PER THE FACTS ON RECORD , IF THE EXPENDIT URE IS DISALLOWED U/S. 40(A)(IA) OF THE ACT THE NET PROFIT IS INCREASED. SEC. 40(B)(V) PROVIDES FOR ALLOWING THE PAYMENT OF THE REMUNERATION TO ANY WORKING PARTNER WHICH SHOULD BE AUTHORIZED BY AND ALSO IN ACCORDANCE WITH THE TERMS OF PARTNERSHIP DEED AND AT THE SAME TIME THE CE ILING IS PRESCRIBED ON THE ALLOWABLE DEDUCTION OF THE REMUNERATION . P RECISELY THE ISSUE IN CONTROVERSY BEFORE US IS IN RESPECT OF THE TERM USED BOOK - PROFIT . N OWHERE , IT IS MENTIONED IN RESPECTIVE PROVISION THAT IT SHOULD BE THE NET PROFIT . EXPLANATION - 3 EXPLAIN THE MEANING OF BOOK - PROFIT MEANS THE NET PROFIT WHICH COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV - D AS SHOWN IN THE PROFIT AND LOSS ACCOUNT AS INCREASED BY THE AGGREGATE AMOUNT OF THE REMUNERATION PAID OR PAYABLE TO AL L THE PARTNERS OF THE FIRM I F THE DEDUCTION IS CLAIMED WHILE WORKING OUT NET PROFIT . T HE TERM BOOK PROFIT IS BROADER THAN THE TERM NET PROFIT . MOREOVER , AS PER THE EXPLANATION - 3 , THE NET PROFIT IS TO BE COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV - D OF THE ACT. CHAPTER IV - D OF THE ACT PROVIDES FOR THE COMPUTATION OF THE PROFIT OF BUSINESS O R PROFESSION WHICH IS ONE OF THE HEAD OF INCOME. 6 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE 6. THERE SHOULD NOT BE QUARREL ON THE LEGAL INTERPRETATION OF SEC. 40(A)(IA) THAT SAID PROVISION IS INCORPORA TED IN CHAPTER IV - D AND IF THE PARLIAMENT WAS DESIRING THAT NET PROFIT WHATSOEVER AS DECLARED IN THE PROFIT AND LOSS A/C BY THE ASSESSEE A S A FINAL RESULT SHOULD BE TREATED AS A BOOK PROFIT THEN THERE WAS NO NECESSITY TO ADD FURTHER THAT NET PROFIT SHOUL D BE COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV - D OF THE ACT. THIS SUGGEST THAT IF THE NET PROFIT AS WORKED OUT IN THE PROFIT AND LOSS ACCOUNT IS NOT IN COMPLIANCE WITH THE MANNER LAID DOWN IN CHAPTER IV - D THAT IS AS PER SEC. 28 TO 43D THEN THE REQUIR ED ADJUSTMENT CAN BE MADE TO WORK OUT THE NET PROFIT AS PER CHAPTER IV - D OF THE ACT. I N THE CASE OF JAS CONSTRUCTION, BARODA IN ITA NO. 1666/AHD/2010 DATED 17 TH SEPTEMBER, 2010 CERTAIN DISALLOWANCE WERE MADE WHILE COMPUTING THE BUSINESS INCOME OF THE AS SESSEE AND ADDITION MADE BY MAKING THE SAID DISALLOWANCE WAS CONSIDERED FOR THE PURPOSE OF COMPUTING THE BOOK PROFIT U/S. 40(B)(V) OF THE ACT. THE TRIBUNAL HAS OBSERVED THAT IF THE PROFIT IS INCREASED IN BY MAKING DISALLOWANCE U/S. 40(A)(IA) OF THE ACT , T HEN CORRESPONDING INCREASE IN REMUNERATION SHOULD ALSO BE ALLOWED. 7. IN THE CASE OF SURESH A. SHROFF & CO. VS. JOINT COMMISSIONER OF INCOME TAX 140 ITD (MUM) THE TRIBUNAL HAS HELD THAT FOR THE PURPOSE OF BOOK PROFIT THE NET PROFIT IS TO BE COMPUTED IN THE MANNER LAID DOWN IN CHAPTER IV - D OF THE I.T. ACT . IN OUR OPINION , AS PER THE LANGUAGE OF EXPLANATION - 3 BELOW SEC. 40(B)(V) , IN THE CASE OF FIRM BOOK PROFIT SHOULD BE COMPUTED AS PER THE MANNER LAID DOWN IN CHAPTER IV - D OF THE ACT WHICH PROVIDES FOR COMPUTING THE INCOME UNDER THE HEAD P ROFIT AND GAINS OF THE BUSINESS PROFESSION. MOREOVER THE TERM BOOK PROFIT IS BROADER THAN THE NET PROFIT AS THE NET PROFIT AS DECLARED THE ASSESSE IN THE PROFIT AND LOSS ACCOUNT CAN BE LESSER AS MANY OF THE DISALLOWABL E EXPENDITURE MAY HAVE BEEN DEBITED TO P & L A/C. HE NCE, THE PARLIAMENT IN ITS WISDOM H AS USED THE TERM BOOK PROFIT IN PLACE OF NET PROFIT WHILE PUT TING THE CEILING OF ALLOWABLE REMUNERATION U/S. 40 (B)(V) OF THE 7 ITA NO. ITA NO. 1707 /PN/201 2 & CO NO. 3 8 /PN/201 3 , M/S. METAPOW INDUSTRIES, PUNE ACT . IN OUR OPINION , THE LD. CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. WE FIND NO REASON TO INTERFERE WITH THE ORDER OF THE LD. CIT(A). WE ACCORDINGLY CONFIRM THE SAME. WE ALSO DIRECT ASSESSING OFFICER THAT IF SAID EXPENDITURE IS CLAIMED BY THE ASSESSEE IN SUBSEQUENT YEAR THEN TO THAT EXTEND NET PROFIT SHOULD BE REDUCED AND THEN ALLOWABLE REMUNERATION IS TO WORK OUT TO AVOID DOUBLE CLAIM. 8. NOW WE TAKE UP THE CROSS OBJECTION FILED BY THE ASSESSEE. THE ASSESSEE HAS TAKEN THE FIVE GROUNDS IN THE CROSS OBJECTION. THE LD. COU NSEL FAIRLY ADMITTED THAT ALL THE GROUNDS ARE SUPPORTING THE ORDER OF THE LD. CIT(A) . IN OUR OPINION , THE CROSS OBJECTION IS FILED BY THE ASSESSEE IS INFRUCTUOUS AS NO SPECIFIC GRIEVANCE IS RAISED IN ANY OF THE GROUNDS AGAINST THE ORDER OF THE LD. CIT(A). ACCORDINGLY, ALL THE GROUNDS IN THE CROSS OBJECTION ARE DISMISSED. 9. IN THE RESULT, THE REVENUES APPEAL AS WELL AS ASSESSEES CROSS OBJECTION ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 29 - 10 - 20 1 3 SD/ - SD/ - ( R.K . PAN DA ) ( R.S. PAD VEKAR ) ACCOUNTANT MEMBER JUDICIAL MEMBER RK /PS PUNE , DATED : 29 TH OCTOBER, 20 1 3 COPY TO 1 DEPARTMENT 2 ASSESSEE 3 THE CIT(A) - V, PUNE 4 THE CIT - V, PUNE 5 THE DR, ITAT, B BENCH, PUNE . 6 GUARD FILE. //TRUE COPY// BY ORDER PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL PUNE