Alidhara Texspin Engineers, Dadra UT of D & NH V. The ACIT., Vapi Circle, Valsad

ITA 198/AHD/2016

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1640 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-05-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 28-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Keywords: Business income; Depreciation; Tangible material; Difference of opinion; Tax effect; Reason to believe; Change of opinion
• Section: 143(3); 234B; 80IB; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH BEFORE: SHR I S. S. GODARA , JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ALIDHRA TEXSPIN ENGINEERS, BLOCK NO. 122, GROUND FLOOR, VAGHDHARA ROAD, DADRA UT OF D & NH PAN: AAIFA2434N (APPELLANT) VS THE ACIT, VAPI CIRCLE, VAPI (RESPONDENT) REVENUE BY : S H RI NARENDRA SINGH , SR. D . R. ASSESSEE BY: S H RI MEHUL SHAH , A.R. DATE OF HEARING : 22 - 03 - 2 016 DATE OF PRONOUNCEMENT : 03 - 05 - 2 016 / ORDER P ER : S. S. GODARA , JUDICIAL MEMBER : - THIS ASSESSEE S APPEAL FOR A.Y. 2010 - 11 , AR IS ES FROM ORDER OF THE CI T(A), VALSAD DATED 05 - 01 - 2016 IN APPEAL NO. CIT(A)/VLS/274/14 - 15 , IN PROCEEDINGS UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . I T A NO . 198 / A HD/20 16 A SSESSMENT YEAR 2010 - 11 I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 2 2. THE ASSESSEE RAISES TWO SUBSTANTIVE GR OUNDS IN THE INSTANT APPEAL. THE FIRST ONE CHALLENGES LEGALITY OF THE IMPUGNED REOPENING TAKEN RECOURSE TO BY THE ASSESSING OFFICER AND AFFIRMED IN THE LOWER APPE LLATE PROCEEDINGS. LATTER SUBSTANTIVE GROUND PLEADS THAT THE CIT(A) HAS ERRED IN CONFIRMING THE ASSESSING OFFICER S ACTION IN DISALLOWING SECTION 80IB DEDUCTION OF RS. 2,95,49,204/ - THEREBY RESTRICTING ITS ORIGINAL CLAIM OF RS. 6,48,19,921/ - TO RS. 3,52,70,717/ - . 3. WE COME TO RELEV ANT FACTS FIRST. THIS ASSESSEE / A FIRM MANUFACTURES TEXTILE MA CHINERY, THEIR PARTS AND ALSO CARRIES OUT LABOUR JOBS. ITS MANUFACTURING UNIT IS LOCATED AT DADRA AND NAGAR HAWELI COVERED UNDER 8 TH SCHEDULE O F THE ACT. THE ASSESSEE C OMMENCED ITS MANUFACTURING ACTIVITIES IN FINANCIAL YEAR 2003 - 04. THERE IS NO DISPUTE TH AT IT IS ENTITLED FOR 2 5 % DEDUCTION U/S. 80IB OF THE A CT QUA PROFITS DERIVES FROM THIS UNIT/UNDERTAKING. 4. THE ASSESSEE FILED ITS RETURN ON 29 - 09 - 2010 ADMITTING INCOME OF RS. 25,06,56,700/ - . THE SAME WAS SUMMARILY PROCESSED. THE ASSESSING OFFICER THERE AFTER COMPLETED A REGULAR ASSESSMENT ON 29 - 01 - 2013 INTER ALIA DISALLOWING SCRAP SALES AND FOREIGN EXCHANGE RATE DIFFERENCE INCOME OF RS. 10,66,750/ - AND RS. 5,18,026/ - ; RESPECTIVELY. HE RECOMPUTED ITS ELIGIBLE DEDUCTION @ 25% OF RS. 25,76,02,0414/ - (ELIG IBLE PROFITS) COMING TO RS. 6,44,00,504/ - . HE WOULD ADD DEPRECIATION AS PER BOOKS, DONATION AND SHARE TRADING EXPENSES FURTHER REDUCED SOME OTHER HEADS OF INTEREST INCOME, DEPRECIATION, DUTY DRAWBACK ETC. THE ASSESSEE FILED APPEAL AGAINST THE ABOVE I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 3 STATE D TWO DISALLOWANCES. THE CIT(A) IN HIS ORDER DATED 02 - 02 - 2015 ACCEPTED BOTH OF ITS CONTENTIONS. THE REVENUE CHALLENGED THE SAID IN TRIBUNAL IN ITA 834/AHD/2015. A CO - ORDINATE BENCH IN ITS ORDER DATED 16 - 12 - 2005 TOOK COGNIZANCE OF CBIT CIRCULAR NO. 21/20 15 DATED 10 - 12 - 2015 PRESCRIBING MINIMUM THRESHOLD LIMIT OF RS. 10 LACS TAX EFFECT TO REJECT THE ABOVE STATED APPEAL. 5. WE COME TO IMPUGNED REOPENING ISSUE . THE ASSESSING OFFICER FORMED REASONS TO BELIEVE THAT ASSESSEE S TAXABLE INCOME LIABLE TO BE AS SESSED HAD ESCAPED ASSE SSMENT FOR THE FOLLOWING : - THE REASON RECORDED FOR REOPENING OF YOUR CASE FOR A.Y. 2010 - 11 IS AS UNDER: - 'AS PER SECTION 80IB(13) THE PROVISIONS OF SUB - SECTION (5) AND SUB - SECTION (7) TO (12) OF SECTION 80 - 1 A SHALL, SO FAR AS MAY BE, APPLY TO THE ELIGIBLE BUSINESS UNDER THIS SECTION. SECTION 80IA(10) OF THE INCOME TAX ACT, 1961 SAYS 'WHERE IT APPEARS TO THE ASSESSIN G OFFICER THAT, OWING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELIGIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REASON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE, 1 ' IN SUCH ELIGIBLE BUSINESS, THE ASSESSING OFFICER SHALL, IN COMPUTING THE PROFITS AND GAINS OF SUCH ELIGIBLE BUSINESS FOR THE PURPOSES OF THE DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED THEREFROM. ' THE ASSESSEE FIRM WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF TEXTILE MACHINERIES AND THEIR PARTHS AND LABOUR JOB FILED ITS RETURN OF INCOME 29/09/2010 DECLARING INCOME OF RS.250656697/ - AFTER CLAIMING DEDUCTION OF RS.64819921/ - U/S 80IB FOR THE AY 2010 - 11. THE INCOME WAS ASSESSED TO RS.251076114/ - U/S 143(3) ON 29/011/2013. I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 4 AS PER THE COPY OF PARTNERSHIP DEED DATED 13/2/2003 THE ASSESSEE IS A PARTNERSHIP FIRM CONSISTIN G OF FOUR PARTNERS, VIZ. SHRI CHANDRKAHT C. GONDALIA , SHRI PRASHANT H. GONDALIA , SHRI SURESH S. GONDALIA AND SUDHABEN A. GONDALIA WITH PROFIT/LOSS SHARING RATIO OF 25% EACH. AS PER THE CONVENTS OF THE PARTNERSHIP DEED THAT INTEREST SHALL BE PAID ON THE PARTNERS CAPITAL AND SHALL NOT EXCEED THE LIMITS AS LAID DOWN IN SECTION 40(B)(IV ) OF THE INCOME TAX ACT. AS PER TH E CONVENTS OF THE PARTNERSHIP DEED THE PARTNERS WERE ELIGIBLE FOR INTEREST ON THE BALANCE OF 53746775/ - CAPITAL ACCOUNT AT THE MAXIMUM RATES PERMISSIBLE UNDER SECTION 40(B)(IV) OF THE INCOME TAX ACT I.E. @12% PER ANNUM. HOWEVER, IT WAS OBSERVED THAT THE ASSESSES HAD NOT PROVIDED FOR THE INTEREST TO THE PARTNERS DURING THE YE AR UNDER CONSIDERATION. THUS, BY NOT P ROVIDING FOR THE INTEREST AND / REMUNERATION TO THE PARTNERS, THE ASSESSEE FIRM HAD MADE MORE PROFITS THAN RE ASONABLE PROFITS WHICH WOULD HAVE ACCRUED TO THE FIRM AND CONSEQUENTLY INTO HIGHER CLAIM OF DEDUCTION U/S 80IB OF THE ACT. THIS ATTRACTS THE PROVISIONS SECTION 8OIB(13) R.W.S. 80IA OF THE ACT. THE DETAILS OF AMOUNT OF DEDUCTION CLAIMED U/S 80IB, BALANCE OF CAPITAL ACCOUNT AND INTEREST NOT CLAIMED DURING THE PERIOD 2009 - 10 I.E. A. Y. 2010 - 1 1 IS BELOW : ASSESS M ENT YEAR BALANCE IN CAPITAL ACCOUNT AVAILABLE FOR INTEREST (OPENING BALANCE + CAPITAL INTRODUCED LESS WITHDRAWALS) (T) INTEREST NOT CLAIMED AS PER SECTION 40(B)(IV) @12% ON THE CLOSING BALANCE OF CAPITAL ACCOUNT DEDUCTIO N CLAIMED U/S 80 - IB TOTAL AMOUNT TO BE DISALLOWED U/S 80 - IB (7) R.W.S. 80IA (10) BUT RESTRICTED TO CLAIM U /S 80 - IB OF THE ACT (T) I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 5 2010 - 11 161061003 (DETAILS OF CAPITAL INTRODUCED AND WITHDRAWAL BY PARTNERS NOT AVAILABLE ON RECORD) 19327320 6481992 1 19327230 THUS, THE ASSESSEE FIRM HAD MADE MORE PROFITS THAN R EASONABLE PROFITS WHICH WOULD HAVE ACCRUED RESULTING INTO HIGHER CLAIM OF DEDUCTION U/S 80IB. AS CAN BE SEEN FROM THE ABOVE TABLE, THE ASSESSEE HAS BENEFITED BY NOT PROVIDING FOR THE INTEREST TO THE PARTNERS TO THE EXTENT OF RS. 19327230/ - DURING AY 2010 - 1 1. IN VIEW OF THE PROVISIONS OF 80 IA(7) TO (12) R.W.S. 80IB OF TH E ACT , THIS AMOUNT WERE TO BE REQUIRED TO BE DISALLOWED FROM THE BUSINESS INCOME ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT. THIS BEING NOT DONE RESULTED INTO UNDERASSESSMENT OF INCOME OF RS . 1932 7230 / - RESULTED INTO CONSEQUENT SHORT LEVY OF TAX OF RS. 8802896/ - INCLUDING INTEREST OF RS. 32638 9/ - U/S 234B OF THE ACT FOR THE PERIOD APRIL 2009 TO NOVEMBER, 2011. 2. FURTHER, AS PER THE CONVENTS OF PARTNERSHIP DEED REMUNERATION WAS TO BE APPORT IONED FROM BOOK PROFIT AMONG ALL FOUR WORKING PARTNERS EQUALLY. IN VIEW OF THE ABOVE, THE ASSESSEE FIRM WAS REQUIRED TO APP ORTION REMUNERATION OF RS. 106407 621/ - ON THE AMOUNT OF RS.246560484/ - (BOOK PROFIT OF RS.265887804/ - LESS INTEREST OF RS. 19327320/ - ON PARTNERS CAPITAL ACCOUNT). HOWEVER, IT WAS SEEN THAT NO SUCH REMUNERATION WAS APPORTIONED AMONGST THE ABOVE FOUR WORKING PARTNERS. THUS, BY NOT PROVIDING FOR THE REMUNERATION OF RS.98676693/ - O F THE PARTNERS, THE ASSESSEE FIRM HAD MADE MORE PROFITS THAN REASONABLE PROFITS WHICH WOULD HAVE ACCRUED TO THE FIRM AND CONSEQUENTLY INTO HIGHER CLAIM OF DEDUCTION U/S 80IB OF THE ACT. THIS ATTRACTS THE PROVISIONS SECTION 80IB R.W.S. 80IA OF THE ACT. I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 6 IN VIEW OF THE PROVISIONS O F 80IB R.W.S. 80IA OF THE ACT, THIS AMOUNT WERE TO BE REQUIRED T O BE DISALLOWED FROM THE BUSINESS INCOME ELIGIBLE FOR DEDUCTION U/S. 80IB OF THE ACT. THIS BEING NOT DONE RESULTED INTO UNDERASSESSMENT OF INCOME OF RS.98676693/ - RESULTED INTO CONSEQUENT SHORT LEVY OF TAX OF RS. 449438 7 9/ - INCLUDING INTEREST OF RS. 11403671/ - U/S 234 B OF THE ACT FOR THE PERIOD APRIL 2010 TO JANUARY,2013.' I HAVE REASON TO BELIEVE WITHIN THE MEANING OF SEC 147 OF THE ACT THAT INCOME TO THE EXTENT OF RS RS. 19327230/ - & RS.98676693/ - HAS ESCAPED ASSESSMEN T. 6. THE ASSESSING OFFICER ACCORDINGLY ISSUED SECTION 148 NOTICE DATED 07 - 10 - 2013. THE ASSESSEE SOUGHT FOR COPY OF THE ABOVE EXTRACTED REASONS. THE SAME STOOD SUPPLIED. IT THEREAFTER FILED OBJECTIONS TO THE IMPUGNED REOPENING. THE ASSESSING OFFICE R DECLINED ASSESSEE S PETITION ON 25 - 02 - 2015. HE TOOK UP REASSESSMENT THEREAFTER. 7. BOTH THE LD. REPRESENTATIVES INFORM US AT THIS STAGE THAT THE INSTANT LIS DOES NO T RAISE ANY MAT I SSUE FORMING LATTER REASON OF REOPENING EXTRACTED HEREINABOVE. WE ACCORDINGLY ADJUDICATE UPON TH E FORMER ISSUE OF INTEREST ON ASSESSEE S PARTNERS CAPITAL AND REMUNERATION VIS - - VIS IT S DEDUCTION CLAIM U/S. 80IB OF THE ACT. 8. THE ASSESSING OFFICER NOTICED THAT ASSESSEE FIRM HAD FOUR PARTNERS NAMELY; SHRI CHANDRAKANT, SHRI PRASHAND, SRI SURESH AND SMT. SUDHABEN GONDALIA HAVING 25% SHARE EACH IN ITS PROFIT /LOSS. HE TOOK COGNIZANCE OF ITS PARTNERSHIP DEED CLAUSES STIPULATING I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 7 INTEREST ON CAPITAL TO PARTNERS AND REMUNERATION. THE ASSESSEE HAD NOT MADE ANY PROVISION QUA EI THER OF THE TWO PAYMENTS IN ITS BOOKS. THE ASSESSING OFFICER WAS OF THE OPINION THAT THIS LED TO ENHANCEMENT OF ITS ELIGIBLE PROFITS FOR THE PURPOSE OF SECTION 80IB DEDUCTION . HE CAME ACROSS CAPITAL BALANCE ELIGIBLE FOR CHARGING INTEREST OF RS. 16,10,61, 003/ - . SECTION 40(B)(IV) INTEREST ADMISSIBLE THEREUPON @ 12% IN THE RELEVANT PREVIOUS YEAR CAME TO BE RS. 1,93,27,230/ - AS AGAINST ASSESSEE S SECTION 80IB DEDUCTION AMOUNTING TO RS. 64,81,992/ - . THE ASSESSING OFFICER SOUGHT TO DISALLOW THIS NOTIONAL INTE REST IN THE COURSE OF REASSESSMENT. 9. THE ASSESSEE APPEARS TO HAVE FILED ITS REPLY BEFORE THE ASSESSING AUTHORITY. IT PLEADED THAT IT HAD NEITHER CHARGED ANY INTEREST ON PARTNERS CAPITAL NOR FOR THEIR REMUNERATION FOR THE PAST SO MANY YEARS IN PURSUAN CE TO MUTUAL UNDERSTANDING FOR NOT RAISING ANY EXPEND IT URE CLAIM. IT EMPHASIZED CLAUSE 6 OF ITS PARTNERSHIP DEED MEANT THAT THE INTEREST PAYMENT ON PARTNERS CAPITAL WOULD BE AS PER THEIR MUTUAL AGREEMENT WHICH IN ANY CASE SHALL NOT EXCEED THE ABOVE STAT E D STATUTORY LIMIT. THE ASSESSING OFFICER DID NOT AGREE. HE OPINED THAT THE ASSESSEE S PARTNERSHIP DEED DID NOT PROVIDE FOR ANY NON - PAYMENT OR INTEREST OR REMUNERATION. HE ACCORDINGLY CONCLUDED IN REASSESSMENT FRAMED ON 31 - 03 - 2010 THAT ASSESSEE S NONPAYME NT OF INTEREST AND PAR T NERS REMUNERATION OF R S. 1,93,27,230/ - AND RS. 9,86,76,693/ - ; RESPECTIVELY AGGREGATING TO RS . 11,81,03,923/ - HAD TO BE DISALLOWED. HE WOULD REDUCE THIS GROSS SUM FROM AS SESSEE S I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 8 ELIGIBLE PROFITS OF RS . 25,91,86,790/ - TO RS. 14,10,82 ,967/ - BY REDUCING THE ABOVE AGGREGATED AMOUNT. 10. THE ASSESSEE FILED APPEAL. IT RAISED TWO FOLDED GROUNDS. THE FIRST ONE CHALLENGE VALIDITY OF REOPENING BY TERMING IT AS CHANGE OF OP I NION SINCE ALL FACTS TAKEN NOTE BY THE ASSESSING AUTHORITY BEFORE ISSUING SECTION 148 NOTICE ALREADY AVAILABLE AS PRODUCED DURING THE COURSE OF SCR UTINY. THE C IT(A) REJECTS THE SAME BY HOLDING THAT THE ASSESSING OFFICER DID NOT MAKE ANY SPECIFIC INQUIRY ON THE ISSUE IN QUESTION WHICH COULD LEAD TO THE IMPUGNED REOPENING BEING TAKEN AS A MERE CHANGE OF OPINION. 11. NEXT COME THE LOWER APPELLATE FINDINGS ON MERITS. THE CIT(A) HOLDS THAT ASSESSEE S GROSS INCOME HAS TO BE COMPUTED AS PER PROVISIONS OF THE ACT BEFORE ALLOWING THE IMPUGNED DEDUCTION AVAILABLE UNDER CHAPTE R VI OF THE ACT . THIS LEAVES THE ASSESSEE AGGRIEVED. 12. SHRI MEHUL SHAH, LEARNED AUTHORIZED REPRESENTATIVE APPEARS AT ASSESSEE S BEHEST. HIS FIRST SUBMISSION ASSAILS CORRECTNESS OF THE REOPENING IN QUESTION . HE SUBMITS THAT THE ASSESSING OFFICER HAD R ECOMPUTED SECTION 80IB DEDUCTION IN FIRST ROUND OF SCRUTINY ASSESSMENT. THE PARTNERSHIP DEED IN QUESTION WAS ALREADY ON RECORD . NO NEW TANGIBLE MATERIAL CAME INTO LIGHT POST FACTO FRAMING OF REGULAR ASSESSMENT. IT IS STATED THAT SUCH A REOPENING IN THIS FACTUAL BACKDROP IS NOT SUSTAINABLE AS PER C ASE LAW OF MADHUKAR KHOSLA VS. I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 9 A CIT (2014) 90 CCH 23 (DEL). HE FURTHER CONTENDS THAT THE VERY HON BLE HIGH COURT IN JINDAL PHOTO FILMS LTD. VS. DCIT (1998) 234 ITR 170 REITERATES THE VERY VIEW THAT THE REOPENIN G TO WITHDRAW A DEDUCTION ALREADY GRANTED WITHOUT ANY FURTHER TANGIBLE MATERIAL IS NOT VALID. 13. LD. AUTHORIZED R EPRESENTATIVE THEREAF TER PLEADS THAT THE ASSESSEE HA S BEEN HELD ENTITLED FOR THE IMPUGNED DEDUCTION WITHOUT ANY DISALLOWANCE OF PARTNERS INTEREST ON THEIR CAPITAL AND REMUNERATION IN THE EARLIER SEVEN ASSESSMENT YEARS I . E. FROM FIRST YEAR OF DEDUCTION ASSESSMENT YEAR 2004 - 05 . HE PLACED ON RECORD ORDER DATED 23 - 12 - 2011 RELEVANT TO THE PRECEDING ASSESSMENT YEAR 2009 - 10 TO HIGHLIGHT THAT THE SAME F R AME D U/S. 143(3) DOES NOT RAISE ANY SUCH ISSUE. IT IS ARGUED THAT ONCE THE ASSESSEE HAS BEEN HELD ENTITLED FOR THE IMPUGNED DEDUCTION WITHOUT EITHER OF THE TWO DISALLOWANCES, THE REVENUE AUTHORITIES OUGHT TO OBSERVE CONSISTENCY. 14. LD. AUTHORIZED R EPRESE NTATIVE THEREAFTER TAKES US TO ASSESSEE S PARTNERSHIP DEED CLAUSES. HIS CASE IS THAT BOTH INTEREST AND REMUNERATION STIPULATION ARE ONLY ENABLING PROVISION NOT MANDATORY IN NATURE SO AS TO LEAD TO AN INFERENCE THAT THE ASSESSEE HAD TO PAY THE SAME MANDATO RILY TO ITS PARTNERS. HE INVITES OUR ATTENTION TO THE CRUCIAL EXPRESSION AS MAY BE MUTUALLY AGREED TO SUBMIT THAT ITS PARTNERS NEVER AGREED ON PAYMENT OF INTEREST AND REMUNERATION IN QUESTION. A CATENA OF CASE LAW IS ALSO QUOTED . THE SAME SHALL BE I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 10 TAK EN INTO ACCOUNT WHEREVER NECESSARY. THE ASSESSEE ACCORDINGLY PRAYS FOR ACCEPTANCE FOR THE INSTANT APPEAL. 15. WE NOW COME TO REVENUE S ARGUMENTS. LD. DEPARTMENTAL RE PRESENTATIVE QUOTES HON BLE JURISDICTIONAL HIGH COURT DECISION (2013) 353 ITR 131 (GUJ) AQUAGEL CHEMICAL PVT. LTD VS. ACIT UPHOLDING VALIDITY OF REOPENING IN CASE INVOLVING NO EXPRESS OPINION ON THE ISSUE IN QUESTION DURING FRAMING OF REGULAR ASSESSMENT. OUR ATTENTION THEREAFTER IS INVITED TO RELEVANT CLAUSES IN THE PARTNERSHIP DEED. HIS CO NT ENTION IS THAT THE SAME ARE TO BE FOLLOWED IN THE INSTANT CASE. CASE LAW OF (20003) 261 ITR 98 (BOM) INDIAN RAYONS CASE IS CITED TO STATE THAT FULL EFFECT IS GIVEN TO THE STATUTORY PROVISIONS FOR THE PURPOSE OF ASSESSMENT OF TAXABLE INCOME. SECTION 80I B OF THE ACT IS ALSO QUOTED PROVIDING FOR COMPUTATION OF TOTAL INCOME BEFORE COMPUTING CHAPTER VI DEDUCTION . IT IS CONTENDED THAT THE ASSESSEE HAD CORRECTLY COMPUTED ITS INCOME/DEDUCTION. THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED BOTH THE ABOVE SAID AM OUNTS PER LAW. THE REVENUE ACCORDINGLY SEEKS REJECTION OF THE INSTANT APPEAL. 16. WE AFFORDED REBUTTAL OPPORTUNITY TO ASSESSEE S AUTHORIZED REPRESENTATIVE. HE SUBMITS THAT THE ASSESSEE HAS ALREADY PAID TAXES OF RS. 6.97 CRORES. THE IMPUGNED DEDUCTION CLAIM IS NOT A COLORABLE DEVICE TO AVOID PAYMENT OF TAXES. HE CLARI FI ES THAT IT S A CASE OF 25% DEDUCTION. AT THE END, LD. AUTHORIZED REPRESENTATIVE DOES NOT WISH TO PRESS HIS REOPENING ISSUE. I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 11 17 . WE HAVE GIVEN THOUGHT CONSIDERATION TO RIVAL CONTENTIO NS. THERE IS NO DISPUTE ABOUT THE ASSESSEE FIRM BEING ALREADY ELIGIBLE FOR SECTION 80IB DEDUCTION SINCE FINANCIAL YEAR 2003 - 04. THE ISSUE BETWEEN THE PARTIES IS ABOUT CORRECTNESS OF ITS COM PUTATION RATHER. BOTH THE LOWER AUTHORITIES HOLD THAT THE ASSESS EE HAS NOT PROVIDED FOR INTEREST ON PARTNERS CAPITAL AS WELL AS THEIR REMUNERATION DESPITE SPECIFIC CLAUSES IN ITS PARTNERSHIP. THEY ARE OF THE OPINION THAT THE SAME HAD LED TO SWELLING OF ASSESSEE S PROFITS WHICH HAVE BEEN CLAIMED AS SECTION 80IB DEDUCTI ON. THEY SEEK TO TRIM THE DEDUCTION CLAIM AS INDICATED HEREINABOVE IN OTHER WORDS. THE ASSESSEE S STAND ON THE OTHER HAND IS THAT THESE TWO CLAUSES OF INTEREST ON PARTNERS CAPITAL AND REMUNERATION ARE NOT MANDATORY. THEY DEPEND ON MUTUAL AGREEMENT BETWE EN THE PARTNERS FOR THE PURPOSE OF CREDITING THE SAME IN RESPECTIVE CAPI T AL ACCOUNTS AT THE END OF THE YEAR SUBJECT TO THE MAXIMUM STATUTORY LIMITS. THE QUESTION ARISES FOR THE OUR ADJUDICATION THEREFORE DEPENDS ON INTERPRET ATION OF THE ABOVE TWO CLAUSES S L. NO. 6 & 15 INCORPORATED IN ASSESSEES PARTNERSHIP DEED DATED 13/20 - 02 - 2003 AS UNDER: - THE CAPITAL REQUIRED FOR THE BUSINESS OF THE PARTNERSHIP FIRM SHALL BE CONTRIBUTED BY THE PARTNERS AS MUTUALLY AGREED ACCORDING TO THE NEEDS OF THE BUSINESS OF THE FI RM AND ACCORDING TO THE CONVENIENCE OF THE PARTNERS. INTEREST SHALL BE PAID ON THE PARTNERS CAPITAL AS MUTUALLY AGREED TO BETWEEN THEM WHICH SHALL BE CREDITED IN THEIR RESPECTIVE ACCOUNTS AT THE END OF THE YEAR. HOWEVER, THE RATE OF INTEREST PER ANNUM O N SUCH CAPITALS SHALL NOT EXCEED THE LIMITS AS LAID DOWN IN SECTION 40(B)(IV) OF THE INCOME - TAX ACT, 1961 UNDER THE HEADING AMOUNTS NOT DEDUCTIBLE . THIS IS FOLLOWED BY PARTNERS REMUNERATION CLAUSE AS FOLLOWS: - I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 12 ALL THE MAJOR PARTNERS OF THIS DEED SHAL L BE WORKING PARTNERS WITHIN THE MEANING OF WORKING PARTNER AS MENTIONED IN EXPLANTION - 4 TO SECTION 40(B) OF THE INCOME TAX ACT, 1961 AND SHALL WORK ACTIVELY, HONESTLY AND CONSCIENTIOUSLY FOR THE COMMON GOOD OF THE BUSINESS . SUCH WORKING PA RTNERS SHALL BE ENTITLED TO REC EIVE THE REMUNERATION AS MAY BE MUTUALLY AGREED UPON BETWEEN THE PARTNERS . SUCH REMUNERATION SHALL BE CREDITED AT THE END OF YEAR. HOWEVER, SUCH REMUNERATION IN AGGREGATE SHALL NOT EXCEED THE LIMITS A S LAID DOWN IN SECTION 40(B)(V)(2) O F THE INCOME - TAX ACT, 1961 UNDER THE HEADING A MOUNT NOT DEDUCTIBLE . IT IS HEREBY SPECIFICALLY AGREED THAT NO SUCH REMUNERATION SHALL BE PAID IN THE ABSENCE OF PROFITS. 18. WE HAVE APPL IED OUR MIND TO THE ABOVE EXTRACTED CLAUSES . OUR VIEW TENDS TO DIF FER WITH THAT OF THE LOWER AUTHORITIES. IT EMERGES THAT ALTHOUGH THE ABOVE TWO CLAUSES PROVIDE FOR INTEREST ON PARTNERS CAPITAL AND REMUNERATION, THE SAME IS SUBJECT TO THEIR MUTUAL AGREEMENT SINCE THE CRUCIAL EXPRESSION AS MAY BE MUTUALLY AGREED IS DUL Y INCORPORATED THEREIN SUBJECT HOWEVER TO THE MAXIMUM STATUTORY LIMIT. WE FIND THAT A CO - ORDINATE BENCH OF T HE TRIBUNAL IN ITA 319/ASR/2010 ITO VS. SMT. MALA TANDON DECIDED ON 14 - 06 - 2011 DEALT WITH A SIMILAR SITUATION. IT WOULD OBSERVE THAT MERE INCORPORA TION OF INTEREST ON PARTNERS CAPITAL AND REMUNERATION DOES NOT SIGNIFY THAT THE SAME ARE MANDATORY IN NATURE. LD. CO - ORDINATE BENCH IS OF THE VIEW THAT A PARTNERSHIP FIRM UNDER THE PROVISIONS OF PARTNERSHIP ACT IS BY WILL OF ITS PARTNERS. THE ACCOUNTS D RAWN UP AT THE END OF THE YEAR DID NOT INDICATE ANY SUCH INTEREST OR REMUNERATION PAYMENTS. IT HOLD S THAT THIS ACT BY ITSELF IS SUFFICIENT TO CONCLUDE THAT THE PARTNERS OF THE FIRMS HAD AGREED NOT TO PROVIDE FOR THE TWO PAYMENTS IN QUESTION. WE DEEM IT A PPROPRIATE TO REPRODUCE OPERATIVE PORTION AS UNDER: - I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 13 6. WE HAVE HEARD BOTH THE PARTIES AND GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS, EXAMINED THE FACTS OF THE CASE, EVIDENCE AND MATERIAL PLACED ON RECORD AND ALSO GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. A CAREFUL PERUSAL OF THE IMPUGNED APPELLATE ORDER CLEARLY REVEALS THAT THE LD. CIT(A), HAS CONSIDERED AND ADJUDICATED THE ISSUE, IN QUESTION, IN GREATER DETAIL, AFTER APPRECIATION OF THE EVIDENCES AND MATERIAL ON RECORD, AS ALSO THE LEGAL AND FACTUAL POSITION OF THE CASE. NEEDLESS TO SAY THAT THE IMPUGNED APPELLATE ORDER IS WELL REASONED AND BASED ON THE COGENT AND CREDIBLE MATERIAL AND FACTS OF THE CASE. HOWEVER, IT WOULD PERTINENT TO REPRODUCE THE RELEVANT PART OF THE DECISION O F THE CIT(A), FOR THE PURPOSE OF PROPER APPRECIATION OF THE SAME: '3.4. I HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. AN IDENTICAL ISSUE HAS BEEN DECIDED IN THE CASE OF ROHIT TANDON, HUSBAND OF THE APPELLANT, THE OTHER PARTNER IN M/S. DYNAMECH HOLDING 50% SHARE IN THE PARTNERSHIP FIRM FOR THE ASSESSMENT YEAR 2006 - 07. IN THAT CASE ALSO, THE AO HAD ADDED THE INTEREST PAYABLE ON THE CAPITAL OF SH. ROHIT TANDON AND REMUNERATION PAYABLE TO SH. ROHIT TANDON TO THE TOTAL INCOME OF THE ASSESSEE, I HAVE ADJUDIC ATED THAT APPEAL VIDE ORDER DATED 14.7.2009 IN APPEAL NO.591/08 - 09/CIT(A)/JAL AND HAVE DELETED SIMILAR ADDITIONS AS UNDER: '9.5 I HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. CLAUSE 4 AND 5 OF THE PARTNERSHIP DEED PROVIDING FOR INTEREST ON CAPITAL AND SALARY ARE AS UNDER: '4. THE CAPITAL OF THE PARTNERS IS AS PER THEIR RESPECTIVE ACCOUNTS IN THE BOOKS OF THE PARTNERSHIP. THE PARTNERS SHALL BE ENTITLED TO INTEREST ON THEIR CAPITAL @ 18% PER ANNUM OR AT SUCH OTHER RATE OR RATES AS THE PARTNERS MAY AT TH E END OF EACH FINANCIAL YEAR MUTUALLY SETTLED SUBJECT TO THE MAXIMUM AMOUNT ADMISSIBLE UNDER THE INCOME - TAX ACT , 1961. 5. BOTH THE PARTNERS SHALL DILIGENTLY ATTEND TO THE BUSINESS OF THE PARTNERSHIP AND CARRY ON THE SAME FOR THEIR GREATEST COMMON ADVANTAGE. BOTH THE WORKING PARTNERS SHALL BE ENTITLED TO A REMUNERATION OF RS.48,000/ - PER ANNUM EACH OR AT SUCH OTHER RATE OR RATES AS THE PARTNERS MAY AT THE END OF EACH FINANCIAL YEAR, MUTUALLY SETTLE SUBJEC T TO THE I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 14 MAXIMUM AMOUNT ADMISSIBLE UNDER THE INCOME - TAX ACT , 1961.' 9.6. THE AFORESAID CLAUSES OF THE PARTNERSHIP DEED ARE CLEARLY ENABLING CLAUSES SINCE THE WORD USED IN BOTH THE CLAUSES ARE 'THE PARTN ERS SHALL BE ENTITLED...'. THIS SHOWS THAT THE PARTNERS WERE ENTITLED TO GET INTEREST ON THE CAPITAL AND TO DRAW REMUNERATION FOR THEIR SERVICES WITHOUT BINDING THEM TO DO SO. THIS, IN MY OPINION, IS NOT A MANDATORY PROVISION IN THE PARTNERSHIP DEED WHICH WOULD BE WORDED LIKE ' THE PARTNERS SHALL BE PROVIDED/GIVEN....'. FURTHER, IT IS ALSO MENTIONED IN BOTH THESE CLAUSES, THAT THE RATE OR RATES OF INTEREST AND THE REMUNERATION WOULD BE MUTUALLY SETTLED BY THE PARTNERS AT THE END OF EACH FINANCIAL YEAR. NOW, A PARTNERSHIP, BY ITS VERY NAME AND AS PER THE PROVISIONS OF PARTNERSHIP ACT IS BY WILL OF THE PARTNERS. THERE ARE ONLY TWO PARTNERS IN THIS FIRM, BOTH HAVING EQUAL SHARES. THE ACCOUNTS DRAWN UP AT THE END OF THE YEAR REVEAL THAT NO INTEREST ON THE CAPITAL OR REMUNERATION TO THE PARTNERS HAS BEEN PROVIDED IN THE ACCOUNTS OF THE FIRM M/S.DYNAMECH. THIS ACT BY ITSELF SIGNIFIES THAT THE PARTNERS HAVE AGREED NOT TO PROVIDE INTEREST ON THEIR CAPITAL OR TO CHA RGE REMUNERATION FOR THEIR SERVICES. IN MY OPINION, THE TERMS OF THE PARTNERSHIP DEED DO NOT SIGNIFY THAT INTEREST ON CAPITAL AND REMUNERATION TO PARTNERS HAD NECESSARILY TO BE PROVIDED IN THE ACCOUNT OF M/S. DYNAMECH.. 9.7. THE AO HAS DRAWN SUPPORT FROM THE PROVISIONS OF SECTION 80IA(10) . THIS SUB - SECTION PROVIDES THAT WHERE THE AFFAIRS BETWEEN THE ELIGIBLE BUSINESS AND ANY OTHER PERSON IS SO ARRANGED THAT MORE THAN ORDINARY PROFITS ARISE TO THE ASSESSE E, THE AO SHALL, IN COMPUTING THE PROFIT AND GAINS OF SUCH AN ELIGIBLE PROFITS FOR THE PURPOSES OF DEDUCTION UNDER THIS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY TAKEN TO HAVE BEEN DERIVED THEREFROM. THUS SUB - SECTION HAS BEEN MADE APPLICABLE TO SECTION 80IB BY VIRTUE OF SUB - SECTION (13) OF SECTION 80IB . HOWEVER, THIS SUB - SECTION ONLY ENABLES, THE AO TO EFFECT THE PROFIT OF THE UNDERTAKING CLAIMING DEDUCTION U/S 80IB, WHICH IS M/S. DYNAMECH IN THIS CASE. THIS DOES NOT ENABLE THE AO TO ALTER THE PROFITS OR THE INCOME OF THE OTHER PERSON REFERRED TO IN THIS SUB - SECTION. IT IS A FACT THAT THE I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 15 ASSESSEE HAS NOT RECEIVED INTEREST AND REMUNERATION FROM M/S. DYNAMECH. AS NOTED EARLIER, THE TERMS OF PARTNERSHIP DEED ARE NOT SO WORDED SO AS TO MAKE PAYMENT OF INTEREST ON CAPITAL AND REMUNERATION TO PARTNERS AS MANDATORY. IT IS ALSO NOT REBUTTED BY THE AO THAT NO INTEREST OR REMUNERATION HAS BEEN RECEI VED BY THE APPELLANT IN EARLIER YEARS ALSO. THIS INCOME HAS NOT ACCRUED OR ARISEN TO THE ASSESSEE. I, THEREFORE, HOLD THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION ON ACCOUNT OF INTEREST ON CAPITAL IN M/S. DYNAMECH AND REMUNERATION RECEIVABLE FROM M /S. DYNAMECH. THIS GROUND OF APPEAL IS ALLOWED.' 3.5. FOLLOWING THE DECISION IN THE CASE OF SH. ROHIT TANDON (SUPRA), GROUND NO.3 OF APPEAL IS ALLOWED.' 6.1. IN VIEW OF THE ABOVE, WE DO NOT FIND ANY INFIRMITY IN THE FINDINGS OF THE CIT(A), AS THE SAME AR E BASED ON PROPER APPRECIATION OF THE LEGAL AND FACTUAL POSITION OF THE CASE. ACCORDINGLY, THIS APPEAL OF THE REVENUE IS DISMISSED. WE DRAW SUPPORT THERE FROM THE ABOVE DECI SION OF THE TRIBUNAL AND ALSO TAKE INTO THE ACCO UNT THE FACT THAT ASSESSEE - FIRM I NTEREST ON PARTNERS CAPITAL AND REMUNERATION CLAUSES COMPRISE OF MUTUAL AGREEMENT PROVISIONS AS WELL AS THE FACT THAT IT HAS NOT PAID OR PROVIDED FOR ANY AMOUNT IN THE BOOKS TO CONCLUDE THAT THE ASSESSEE S PART NERS HAD DECIDED NOT TO CHARGE ANY INTEREST O R REMUNERATION SINCE THE RELEVANT CLAUSES HEREINABOVE ARE NOT OF MANDATORY NATURE. WE ACCEPT ASSESSEE S ARGUMENTS . THE REVENUE S SUBMISSIONS JUSTIFYING ACTION OF THE LOWER AUTHORITIES ON THIS FUNDAMENTAL CONSTRUCTION OF ASSESSEE S PARTNERSHIP DEED CLAUSE S STAND REJECTED. WE DELETE THE IMPUGNED DISALLOWANCE OF INTEREST ON PARTNERS CAPITAL AND REMUNERATION IN QUESTION. SINCE WE HAVE DECIDED THIS FIRST FUNDAMENTAL ISSUE OF PARTNERSHIP DEED S INTERPRETATION AGAINST THE REVENUE , OTHER ARGUMENTS NARRATED IN PRECEDING PARAGRAPHS ARE I.T.A NO.198 /AHD/20 16 A.Y. 2010 - 11 PAGE NO ALIDHRA TEXSPIN ENGINEERS VS. ACIT 16 RENDERED ACAD EMIC. THE ASSESSEE SUCCEEDS IN ITS GROUND NO. 2. (SUPRA) 19. THIS ASSESSEE S APPEAL IS PARTLY ALLOWED. ORDER PR ONOUNCED IN THE OPEN C OURT ON 03 - 05 - 201 6 SD/ - SD/ - ( MANISH BORAD ) ( S. S. GODARA ) ACCOUNTANT MEMBER JUDICIAL MEMBER AHMEDABAD : DATED 03 /05 /2016 AK / COPY OF ORDER FORWARDED TO: - 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,