THE D.C.I.T PATAN Circle, Patan V. M/S. SIDHPUR ISABGOL PROCESSING CO., Sidhpur

ITA 2540/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6583 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 03-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 04-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 80HHC

Judgement Text

FIT FOR PUBLICATION IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER DATE OF HEARING : 03/05/11 DRAFTED ON: 03/05/ 11 ITA NO.2540/AHD/2009 ASSESSMENT YEAR : 2006-07 DCIT PATAN CIRCLE PATAN (N.G.) VS.1 M/S.SIDHPUR ISABGOL PROCESSING CO., KHALI, TAL: SIDHPUR PAN/GIR NO. : AAGFS 5738 M (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI G.M. CHAUHAN, SR. D.R. RESPONDENT BY: SHRI MUKESH M. PATEL O R D E R PER SHRI MUKUL KR. SHRAWAT, JUDICIAL MEMBER : THIS IS AN APPEAL AT THE BEHEST OF THE REVENUE WH ICH HAS EMANATED FROM THE ORDER OF LEARNED CIT(APPEALS)-GAN DHINAGAR DATED 29/06/2009 PASSED FOR ASSESSMENT YEAR 2006-07. 2. THE SUBSTANTIVE GROUND IS GROUND NO.1 IS REPROD UCED BELOW: 1. THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING TH E ADDITION ON ACCOUNT OF EXPORT PROFIT RESERVE CREDITED TO PARTNERS CAPITAL OF RS.4,70,000/-. ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 2 - 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S.143(3) OF THE ACT DATED 18.12.200 8 WERE THAT THE ASSESSEE-FIRM IS IN THE BUSINESS OF MANUFACTURING A ND EXPORT OF SAT ISABGUL IT WAS NOTICED BY THE AO THAT A SUM OF RS.41,70,000/- WAS CREDITED IN THE PARTNERS CAPITAL ACCOUNT. THE ASSESSEE HAS CREATED A RESERVE AS PRESCRIBED U/S.80HHC OF THE I.T. ACT. THE SAID RESERVE WAS REFLECTED IN THE BOOKS OF AC COUNTS AS EXPORT PROFIT RESERVE ACCOUNT. IT WAS CREATED FOR THE ASSESSMENT YEARS 1986-87, 1987-88 AND 1988-89 RESPE CTIVELY FOR RS.10,50,000/-, RS.11,55,000/- AND RS.19,60,000/- A S PER THE TERMS OF THE PROVISIONS OF SECTION 80HHC(1) OF THE ACT. IT WAS INFORMED THAT NO EAR-MARKED INVESTMENT WAS PRESCRIBED IN THE STATUTE AND IT WAS TO BE UTILIZED FOR THE PURPOSE OF THE BUSINESS OF T HE ASSESSEE. IT HAS ALSO BEEN INFORMED THAT CBDT HAS ISSUED A CI RCULAR NO.463 DATED 11.07.1986 AND ISSUED THE INSTRUCTION THAT TH E RESERVE SO CREATED COULD BE UTILIZED FOR THE PURPOSES OF DISTR IBUTION OF DIVIDEND AND THERE WOULD BE NO INFRINGEMENT IF DIVIDEND IS D ISTRIBUTED OUT OF SUCH RESERVE. IT HAS ALSO BEEN INFORMED THAT TH ERE WAS A CHANGE IN THE PARTNERSHIP, HENCE IT WAS DECIDED TO DISTRIB UTE THE SAID RESERVE AMONGST EX-PARTNERS IN THEIR PROFIT SHARI NG RATIO. HOWEVER, THE AO WAS NOT CONVINCED AND COMMENTED THA T A NEW PARTNER, VIZ. MONICA NIRAJ WADHWA HAVING 10% SHARE ADMITTED TO THE PARTNERSHIP-FIRM AND THE RESERVE WAS DISTRIBU TED TO ALL PARTNERS, HENCE THAT DISTRIBUTION WAS NOT A USE FOR THE BENEF IT OF THE BUSINESS OF THE ASSESSEE. DUE TO CHANGE IN THE PARTNERSHIP , THE RESERVE ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 3 - WHICH WAS CREATED IN 1985-86, COULD NOT BE SAID TO BE USED FOR THE BENEFIT OF THE FIRM WHICH WAS CONSTITUTED IN THE YE AR UNDER CONSIDERATION 2006-07, HELD BY THE AO. AS PER AO , THE RESERVE WAS DISTRIBUTED FOR THE PERSONAL USE OF THE PARTNER . THE AO HAS CONCLUDED THAT THE SAID ACTION OF THE ASSESSEE OF D ISTRIBUTION OF RESERVE IN THE ACCOUNTS OF THE OLD PARTNERS WAS N OT JUSTIFIED, HENCE TREATED THE SAME AS INCOME OF THE ASSESSEE. ACCORD INGLY AN ADDITION OF RS.41,70,000/- WAS MADE WHICH WAS CHALLENGED BEF ORE THE FIRST APPELLATE AUTHORITY. 3. THE LD.CIT(A) HAS EXAMINED THE FACTS OF THE CASE IN THE LIGHT OF THE BOARDS CIRCULAR AND COMMENTED THAT AS PER T HE PROVISIONS OF SECTION 80HHC, PREVAILING AT THAT TIME, IN ACCORDAN CE WITH FINANCE ACT, 1985, WITH EFFECT FROM 01/04/1986, THERE WAS NO SPECIFIC PROVISION TO SPECIFY ABOUT ITS USAGE, AS ALSO THE P ERIOD, FOR KEEPING ASIDE THE RESERVE AND THERE WAS NO SPECIFIC GUIDELI NES AS TO FOR HOW LONG THE MONEY SO RESERVED WAS NOT TO BE TOUCHED. LATER ON, THERE WAS A CHANGE IN THE PROVISIONS OF SECTION 80HHC VID E FINANCE ACT, 1988 OPERATIVE WITH EFFECT FROM 01/04/1989 BUT AS P ER THE CHANGED PROVISION, EVEN THEN THERE WAS NO STATUTORY MANDATE AS TO HOW THE RESERVE CREATED FOR THE PAST YEARS, I.E. FOR AYS 19 86-87 TO 1988-89 (UPTO OCTOBER 1989) HAS TO BE DEALT WITH. THE LD. CIT(A) HAS ALSO COMPARED THE SAID RESERVECREATED WITH AN ANOTHER TYPE OF RESERVE CREATED U/S.32A AS INVESTMENT ALLOWANCE RESERVE I N RESPECT OF WHICH THE MANDATE WAS CLEAR ABOUT ITS UTILIZATION. THE LD.CIT(A) ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 4 - HAS ALSO MENTIONED THAT THE DISTRIBUTION AMONGST PA RTNERS WAS LIKE IN THE NATURE OF DISTRIBUTION OF DIVIDEND AMONGST SHAR EHOLDERS. RELEVANT PORTION FOR READY REFERENCE IS REPRODUCED BELOW:- 2.3.2. HOWEVER, AS ALREADY STATED, WE HAVE NO MAND ATE AS TO HOW LONG THE RESERVE IS TO BE MAINTAINED AND WHAT ARE CONSEQUENCES. IF ONE LOOKS AT THE CIRCULAR DATED 1 1/07/1986 QUOTED BY THE AUTHORISED REPRESENTATIVE, IT HAS BEE N SATED THAT IT HAS BEEN DECIDED THAT THE PROVISIONS OF TH E ABOVE PROVISO WILL NOT BE INFRINGED IF DIVIDENDS ARE DIST RIBUTED BY THE ASSESSEE OUT OF SUCH RESERVE. THEREFORE, IF, IN CASE OF A COMPANY, THE DIVIDEND CAN BE DISTRIBUTED OUT OF THI S TYPE OF RESERVE, IN A PARTNERSHIP CONCERN, SUCH RESERVES CA N BE DISTRIBUTED AMONG PARTNERS. DIVIDEND IS ALSO DISTR IBUTION OF PROFITS AMONG SHAREHOLDERS. CONSEQUENTLY DISTRIBUT ION OF RESERVES TO PARTNERS, WHICH IN ANY CASE WAS A PROFI T, ALREADY CONSIDERED FOR ASSESSMENT, WOULD ALSO BE TREATED AS UTILIZATION OF RESERVE FOR THE BUSINESS OF THE ASSESSEE. ON TH E OTHER HAND, THE RATIO OF THE SUPREME COURTS JUDGMENT IN THE CA SE OF AJAX PRODUCTS LTD. (SUPRA), AS QUOTED BY THE AUTHORISED REPRESENTATIVE, IS AS MUCH APPLICABLE. TO TAX AN I TEM, THERE SHOULD BE A STATUTORY MANDATE TO DO SO; MORE SO WHE N IT HAD ALREADY BEEN PART OF THE COMPUTATION OF THE ASSESSE D INCOME IN EARLIER YEARS. THERE IS NO SOUND LOGIC IN TAXIN G THE REDISTRIBUTION OF SURPLUS LYING IN FORM OF RESERVE AS INCOME OF YEAR IN THE HANDS OF THE FIRM. 2.3.3. THEREFORE, CONSIDERING ALL ASPECTS OF T HE CASE IN MY VIEW, THERE WAS NO JUSTIFICATION OF TAXING THE AMOU NT OF RS.41,70,000/-. HENCE THE SAME IS DELETED. THE AS SESSING OFFICER MAY, HOWEVER, LOOK INTO ITS CONSEQUENCES IN INDIVIDUAL PARTNERS HANDS. 3.1. THE REVENUE HAS CHALLENGED THE VERDICT OF THE LD.CIT(A). ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 5 - 4. FROM THE SIDE OF THE REVENUE MR.G.M.CHAUHAN, SR .D.R. AND FROM THE SIDE OF THE ASSESSEE MR. MUKESH M.PATE L APPEARED AND RESPECTIVELY PLACED RELIANCE ON THE ORDERS OF T HE AO AND CIT(APPEALS). 5. TO DECIDE THIS LEGAL ISSUE WE HAVE EXAMINED THE OLD PROVISIONS OF SECTION 80HHC AS THEY STOOD VIDE FINA NCE ACT, 1985. WITH A VIEW TO PROVIDE EXPORTERS SUFFICIENT RESOU RCES, UPGRADATION AND PRODUCT DEVELOPMENT, THE FINANCE AC T, 1985 HAS PROVIDED THAT A PERSON/AN INDIAN COMPANY, WHO EXPOR TS OUT OF INDIA ANY GOODS AND MERCHANDISE WOULD BE ALLOWED DEDUCTIO N OF AN AMOUNT OF 50% OF THE PROFITS DERIVED BY THE ASSESSE E FROM THE EXPORT OF SUCH GOODS. THE PROVISIONS OF SECTION 8 0HHC(1) HAS ALSO PRESCRIBED THAT AN AMOUNT EQUAL TO THE AMOUNT OF DEDUCTION CLAIMED SHOULD BE DEBITED TO THE PROFIT & LOSS ACCO UNT OF THE PREVIOUS YEAR IN RESPECT OF WHICH THE REDUCTION IS TO BE ALLOWED. THAT AMOUNT WAS REQUIRED TO BE CREDITED TO A RESER VE ACCOUNT TO BE UTILIZED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. THEREFORE, FOR AVAILING THE DEDUCTION U/S.80HHC FOR THE ASSESSMENT YEARS 1986-87 TO 1988-89, IT WAS ESSENTIAL THAT AN AMOUNT EQUAL TO THE AMOUNT OF DEDUCTION CLAIMED UNDER THAT SECTION WAS TO BE FIRST DEBITED TO THE PROFIT & LOSS ACCOUNT OF THE PREVIOU S YEAR IN RESPECT OF WHICH THE REDUCTION WAS TO BE ALLOWED AND, THERE AFTER TO BE CREDITED TO A RESERVE ACCOUNT TO BE UTILIZED FOR THE PURPOSES OF THE BUSINESS OF THE ELIGIBLE ASSESSEE. ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 6 - 6. THERE WAS A SEA-CHANGE IN THE OLD PROVISIONS OF THE SAID DEDUCTION. CONSIDERING THE LOW PROFITABILITY OF I NDIAN EXPORTERS, IT WAS SUGGESTED THAT A SHIFT BE MADE IN RESPECT OF TH E QUANTUM OF DEDUCTION AND SEVERAL EXPORTERS ORGANIZATIONS HAVE SUGGESTED THAT THE DEDUCTION SHOULD BE TURNOVER BASED, INSTEAD PROFIT BASED . A TURNOVER BASED INCENTIVE THUS TOOK CARE OF THE NE ED OF THOSE EXPORTERS WHO DID NOT EARN ENOUGH PROFIT BUT, HOWEV ER, IT WAS FOUND THAT THOSE EXPORTERS HAVE EQUALLY CONTRIBUTED SIGNI FICANTLY THE EARNING OF THE FOREIGN EXCHANGE ON ACCOUNT OF THEIR LARGE TURNOVER. WITH EFFECT FROM 1987, CERTAIN CHANGES WERE MADE AN D VIDE CBDT CIRCULAR NO.469 DATED 23/09/1986 CERTAIN CLARIFICAT IONS WERE ISSUED. HOWEVER, IT IS ALSO WORTH TO MENTION THAT THE REQUI REMENT AS TO THE CREATION OF THE SAID RESERVE WAS NO MORE APPLICAB LE FOR AND FROM THE AY 1989-90. 6.1. WITH THIS LEGAL BACKGROUND, TWO CONTENTIONS HA VE BEEN RAISED BEFORE US. FIRST PLANK OF THE CONTENTION WAS THAT AS PER THE THEN OLD PROVISIONS THERE WAS ONLY MANDATE ABOUT THE CRE ATION OF THE RESERVE BUT THERE WAS NO MANDATE ABOUT ITS UTILIZ ATION . THERE WAS ALSO NO MANDATE ABOUT THE PERIOD FOR WHICH THE RES ERVE WAS REQUIRED TO REMAIN EXISTED AS SUCH IN THE BOOKS OF ACCOUNTS WITHOUT ANY UTILIZATION. THE SECOND PLANK OF ARGUMENT WAS THAT IN THE ABSENCE OF ANY SPECIFIC PROVISION OR MANDATE ABOUT ITS UTILIZATION IN THE STATUTE, THE UTILIZATION OF THE CREATED RESERV E COULD BE ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 7 - GOVERNED BY A CIRCULAR OF CBDT BEARING NO.463 DATED 11/07/1986. AS FAR AS THE FIRST PLANK OF ARGUMENT WAS CONCERNED , IT IS CORRECT THAT THE STATUTE WAS SILENT ABOUT ITS UTILIZATION. THE STATUTE WAS ALSO SILENT ABOUT THE PERIOD FOR WHICH IT WAS REQUIRED T O REMAIN UNTOUCHED IN THE BOOKS OF ACCOUNT. THE STATUTE HAS SIMPLY PRESCRIBED THAT THE RESERVE SO CREATED WAS TO BE UTILIZED FOR THE BUSINESS OF THE ASSESSEE. ANALYZING THE SAID SITUA TION, THE CBDT HAS ISSUED A CIRCULAR NO.463(SUPRA), WHICH COVERS T HE SECOND PLANK OF ARGUMENT. THE RELEVANT PORTION OF THE CIRCULAR IS REPRODUCED FOR READY REFERENCE:- CIRCULAR NO.463 PROVISIONS OF S.80HHC OF THE IT ACT, 1961 CLARIFI CATION REGARDING 11/07/1986 DEDUCTIONS SECTIONS 80HHC SEC. 80HHC, AS AMENDED BY THE FINANCE ACT, 1985, PR OVIDES THAT AN ASSESSEE, BEING AN INDIAN COMPANY OR A PERS ON (OTHER THAN A COMPANY), WHO IS RESIDENT IN INDIA, EXPORTS OUT OF INDIA DURING THE PREVIOUS YEAR, ANY GOODS OR MERCHA NDISE TO WHICH THIS SECTION APPLIES, WILL BE ALLOWED DEDUCTI ON OF AN AMOUNT, NOT EXCEEDING 50 PER CENT OF THE PROFITS DE RIVED BY THE ASSESSEE FROM THE EXPORT OF SUCH GOODS OR MERCHANDI SE. THE PROVISO TO THIS SECTION LAYS DOWN THAT AN AMOUNT EQ UAL TO THE AMOUNT OF THE DEDUCTION CLAIMED SHOULD BE DEBITED T O THE PROFITS AND LOSS ACCOUNT OF THE PREVIOUS YEAR IN RE SPECT OF WHICH THE DEDUCTION IS TO BE ALLOWED AND CREDITED T O A RESERVE ACCOUNT TO BE UTILIZED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. 2. THE QUESTION WHETHER DISTRIBUTION OF DIVIDENDS OUT OF SUCH RESERVE IS UTILIZATION OF THE RESERVE FOR THE PURPO SES OF THE ASSESSEES BUSINESS HAS BEEN CONSIDERED BY THE BOAR D. IT HAS ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 8 - BEEN DECIDED THAT THE PROVISIONS OF THE ABOVE PROVISO WILL NOT BE INFRINGED IF DIVIDENDS ARE DISTRIBUTED BY THE AS SESSEE OUT OF SUCH RESERVE. SOURCE ; [REPORTED IN (1986) 58 CTR (ST) 38: (1986) 160 ITR (ST) 60] 6.2. THIS CIRCULAR HAS, THUS, SUGGESTED THAT IF OUT OF THE RESERVE DIVIDENDS ARE DISTRIBUTED, THEN THERE WOULD BE NO I NFRINGEMENT OF ANY OF THE PROVISIONS OF THE SAID SECTION. IN THE PRESENT APPEAL, THIS CIRCULAR WAS CITED BEFORE THE AO BUT HE HAS BRUSHED ASIDE THE CONTENTIONS ON THE GROUND THAT THE CIRCULAR WAS IN RESPECT OF THE COMPANY BECAUSE THE CIRCULAR HAS AUTHORISED THE DIS TRIBUTION OF DIVIDEND, AS AGAINST THAT, THE ASSESSEE HAS DISTRIB UTED THE RESERVE IN THE HANDS OF THE PARTNERS BY CREDITING THEIR RES PECTIVE CAPITAL ACCOUNT MAINTAINED IN THE BOOKS OF ACCOUNT OF ASSES SEES FIRM. WE ARE NOT GOING TO APPROVE THE SAID LOGIC OF THE AO. THE BOARD HAS DECIDED TO ALLOW THE DISTRIBUTION OF DIVIDEND BUT T HEY HAVE NOT SPECIFICALLY MENTIONED THAT THE SAID CIRCULAR SHOUL D REMAIN CONFINED TO THE INDIAN COMPANIES. RATHER WE HAVE TO GO BEHI ND THE INTENTION OF THE SAID CIRCULAR THAT THE DIVIDEND WHICH WAS WI THHELD BY AN ASSESSEE IN THE SHAPE OF UNDISTRIBUTED RESERVE WA S THUS ALLOWED TO BE DISTRIBUTED. APPRECIATING THE SAID INTENTION, WE THEREFORE HOLD THAT IN A SITUATION WHERE THE ASSESSEES FIRM HAD U NDERGONE A CHANGE IN ITS CONSTITUTION AND A NEW PARTNER WAS IN TRODUCED, THEN IT WAS NOT ONLY LOGICAL BUT ALSO A BUSINESS-MA N APPROACH TO DISTRIBUTE AN OLD RESERVE AMONGST THE OLD PARTNER S. ASSIGNING THESE REASONS WE HEREBY NEGATE THE FINDIN G OF THE AO IN THIS REGARD AND AFFIRM THAT OF CIT(A). ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 9 - 6.3. AS FAR AS THE PURPOSE OF CREATION OF EXPORT R ESERVE WAS CONCERNED, THE REQUIREMENT WAS TO UTILIZE FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. UNDISPUTEDLY, THE RESERVE WAS CREATED WAY BACK IN THE YEARS 1986-87, 1987-88 AND 1988-89 AND IT WAS DISTRIBUTED AMONGST PARTNERS IN THE ASSESSMENT YEAR 2006-07, THE YEAR UNDER APPEAL. WHICH MEANS THAT THE SAID RESERVE REMAINED WITH THE FIRM APPROXIMATELY FOR 18 TO 20 YEARS, HENCE, IT WAS IN FACT REMAINED UNDER UTILIZATION FOR THE P URPOSES OF THE BUSINESS OF THE ASSESSEE FOR A SUBSTANTIAL LONG PER IOD. DUE TO THIS REASON ALSO, THE CONDITION AS PRESCRIBED BY THE SAI D STATUTE WAS ACCOMPLISHED BY THIS ASSESSEE. 6.4. THE LD. COUNSEL MR. MUKESH M. PATEL HAS CITED A DECISION OF HONBLE SUPREME COURT PRONOUNCED IN THE CASE OF CIT VS. AJAX PRODUCTS LTD. REPORTED AT [1965]55 ITR 741 (SC) FO R THE LEGAL PROPOSITION THAT THERE MUST BE STRICT INTERPRETATIO N OF THE CHARGING PROVISIONS AND AN AMOUNT SHOULD NOT BE TAXED UNLESS THE CHARGING PROVISION CLEARLY IMPOSES THE OBLIGATION. THERE IS NO TWO OPINION IF THE WORDS OF A STATUTE ARE PRECISE AND UNAMBIGUO US, THEY MUST BE ACCEPTED AS IT EXISTED IF DECLARING THE EXPRESS INT ENTION OF THE LEGISLATURE. WE HAVE TO GIVE A SIMPLE AND A NATURAL MEANING OF THE OLD PROVISIONS OF THE STATUTE THAT I) A RESERVE W AS REQUIRED TO BE CREATED AND THAT II) THE RESERVE WAS REQUIRED TO BE USED FOR THE BUSINESS OF THE ASSESSEE. THE SAID TWIN CONDITIONS WERE FULFILLED BY ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 10 - THE ASSESSEE, HENCE THERE WAS NO INFRINGEMENT OF TH E RULES. FURTHER, THERE WAS NO GUIDELINES IN THE SAID SECTION ABOUT I TS DISTRIBUTION, THEREFORE, THERE IS NO HARM IN TAKING THE SHELTER O F THE CIRCULAR NO.463 (SUPRA) TO ARRIVE AT A LOGICAL AND A RIGHTEO US CONCLUSION. 6.5. THE SAID OLD PROVISION AS IT STOOD AT THAT REL EVANT TIME HAS NOT PRESCRIBED AND DID NOT MANDATE THAT THE SAID STATUT ORY RESERVE TO BE MAINTAINED PERMANENTLY IN THE BOOKS OF ACCOUNT F OREVER. IT IS NOTED HEREINABOVE THAT THE SAID REQUIREMENT OF CREA TION OF EXPORT RESERVE WAS ALSO DISPENSED WITH FROM 01/04/1989. THE PROVISIONS OF SECTION 80HHC WERE SILENT AND NOTHING WAS INDICA TED THAT IT WAS INTENDED TO MAINTAIN THE RESERVE PERMANENTLY. WE, THEREFORE, CONCLUDE THAT IF THE CBDT HAD CLARIFIED THOSE PROVI SIONS BY THE SAID CIRCULAR AND APPROVED THAT THE DISTRIBUTION OF DIVI DEND CONSTITUTED THE UTILIZATION OF THE RESERVE AS PRESCRIBED, THE N THE SAME ANALOGY HAS TO BE APPLIED IN THE PRESENT CASE, I.E. IN THE CASE OF THE FIRM WHERE THE SAID RESERVE IS TRANSFERRED TO THE CAPI TAL ACCOUNT OF THE PARTNERS. WE, THEREFORE, HOLD THAT THERE WAS NO VIO LATION OR INFRINGEMENT OF THOSE PROVISIONS OF SECTION 80HHC. FOR THIS LEGAL PROPOSITION AND TO BUTTRESS OUR VIEW, WE PLACE RELI ANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT PRONOUNCED IN THE CASE OF CIT VS. PRAVIN M.MEHTA REPORTED AT [2000]246 ITR 445 (MUM. ). THIS GROUND OF THE REVENUE IS, THEREFORE, DISMISSED . 7. GROUND NO.2 READS AS UNDER: ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 11 - 2. THE LD. LEARNED CIT(APPEALS) WAS NOT JUSTIFIED IN DELETING THE ADDITION ON ACCOUNT OF INTEREST CLAIME D ON PARTNERS CAPITAL ACCOUNT OF RS.5,00,400/-. 7.1. SINCE THE AO HAS HELD THAT THE DISTRIBUTION OF RESERVE IN THE CAPITAL ACCOUNT OF THE PARTNER WAS NOT JUSTIFIED, T HEN HE HAS ALSO HELD THAT INTEREST GRANTED ON THE SAID CAPITAL WAS ALSO UNJUSTIFIED. ACCORDINGLY, HE HAS DISALLOWED THE INTEREST BY APPL YING THE RATE OF 12% AND AN ADDITION OF RS.5,00,400/- WAS MADE. T HE ISSUE WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY WHO HA S HELD THAT ONCE THE CREDIT OF RESERVE IN THE CAPITAL ACCOUNT WAS HELD AS LAWFUL AND THAT THE PARTNERSHIP DEED AUTHORIZES PAYMENT OF INTEREST OBVIOUSLY THE INTEREST TO PARTNERS SHOULD NOT BE DISALLOWED. W E FIND NO FALLACY IN THE SAID VIEW OF THE LD.CIT(A) BECAUSE ONCE THE CRE DIT OF RESERVE IN THE RESPECTIVE CAPITAL ACCOUNT OF THE PARTNERS H AVE BEEN APPROVED IN ABOVE PARAS, IN CONSEQUENCE THEREOF, THE PARTNER S ARE ENTITLED FOR INTEREST ON THE CREDIT BALANCE OF THEIR CAPITAL ACC OUNTS, UNDISPUTEDLY AS PROVIDED IN THE PARTNERSHIP DEED. WE HEREBY UPH OLD THE FINDINGS OF THE LD.CIT(A) AND THIS GROUND OF THE REVENUE IS DISMISSED. 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 20/ 05 /2011. SD/- SD/- ( G.D. AGARWAL ) ( MUKUL KR. SHRAWAT ) VICE PRESIDENT (AZ) JUDICIAL ME MBER ITA NO. 2 540/AHD/2009 DCIT VS. M/S.SIDHPUR ISABGOL PROCESSING CO. ASST.YEAR - 2006-07 - 12 - COPY OF THE ORDER FORWARDED TO : 1. THE ASSESSEE. 2. THE DEPARTMENT. 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-GANDHINAGAR 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD 1. DATE OF DICTATION..03/05/2011 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 04/05/2011 OTHER MEMBER 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S.. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S20/5/2011 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 20/5/2011 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 9. DATE OF DESPATCH OF THE ORDER