MAHINDRA HOLDINGS & FINANCE LTD ( SINCE MERGED WITH MAHINDRA * MAHINDRA LTD), MUMBAI V. ACIT CIR 6(3), MUMBAI

ITA 4450/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55203 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Assessment Year: 2006-2007
• Appeal Filed On: 31-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GOLI SRINIWAS RAO
• Assessee Lawyers: SANTOSH PARAB
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI VIJAY PAL RAO, JUDICIAL MEMBER. I.T.A. NO. 445 0/MUM/2010. ASSES SMENT YEAR : 2006-07. MAHINDRA HOLDING & FINANCE LIMITED, ASSTT. COMMISSIONER OF (SINCE MERGED WITH MAHINDRA & VS. INCOME TAX, MAHINDRA LIMITED), CIRCLE-6(3), MUMBAI. MAHINDRA TOWERS, P.K. KURNE CHOWK, WORLI, MUMBAI 400 018. PAN AAACM 4489N. APPELLANT. RESPONDENT. APPELLANT BY : SHRI SANTOSH PARAB. RESPONDENT BY : SHRI GOLI SRINIWAS RAO. DATE O F HEARING : 19-07-2011. DATE O F PRONOUNCEMENT : 09-09-2011. O R D E R. PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED CIT(APPEALS)-12, MUMBAI DATED 08-03-2010. 2. THE ISSUE RAISED IN GROUND NO. 1 OF THIS APPEAL RELATES TO THE DISALLOWANCE MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(APP EALS) U/S 14A OF THE ACT READ WITH RULE 8D OF INCOME-TAX RULES, 1962. 3. THE ASSESSEE IN THE PRESENT CASE IS A FINANCE AN D INVESTMENT COMPANY. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION W AS FILED BY IT ON 27-10-2006 2 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. DECLARING TOTAL INCOME OF RS.1,79,70,874/-. IN THE SAID RETURN, DIVIDEND INCOME OF RS.9,43,51,037/- RECEIVED DURING THE YEAR UNDER CON SIDERATION WAS CLAIMED TO BE EXEMPT BY THE ASSESSEE U/S 10(34). NO DISALLOWANCE ON ACCOUNT OF EXPENDITURE INCURRED IN RELATION TO THE EARNING OF THE SAID INC OME, HOWEVER, WAS MADE BY THE ASSESSEE AS REQUIRED BY THE PROVISIONS OF SECTION 1 4A. IN THE ASSESSMENT COMPLETED U/S 143(3), THE AO WORKED OUT SUCH EXPENS ES INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCOME AT RS.1,01,3,225/- BY APPLYING RULE 8D OF INCOME-TAX RULES, 1962 AND DISALLOWANCE TO THAT EXTENT WAS MAD E BY HIM U/S 14A. ON APPEAL, THE LEARNED CIT(APPEALS) UPHELD THE ACTION OF THE A O IN MAKING THE SAID DISALLOWANCE U/S 14A OF THE ACT READ WITH RULE 8D O F INCOME-TAX RULES, 1962 IN PRINCIPLE RELYING ON THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT P. LTD. 117 ITD 169(MUM.)(S.B.). HE, HOWEVER, ACCEPTED THE ALTERNATIVE CONTENTION OF THE ASSESSEE THAT SUCH DI SALLOWANCE COULD NOT EXCEED THE TOTAL EXPENDITURE ACTUALLY CLAIMED BY THE ASSESSEE. SINCE THE TOTAL EXPENDITURE ACTUALLY CLAIMED BY THE ASSESSEE WAS ONLY RS.4.6 LA KHS, THE LEARNED CIT(APPEALS) SUSTAINED THE DISALLOWANCE MADE BY THE AO ON THIS I SSUE TO THE EXTENT OF RS.4.6 LAKHS. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS AGREED BY THE LEARNED REPRES ENTATIVES OF BOTH THE SIDES, THIS ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBL E BOMBAY HIGH COURT IN THE CASE OF DCIT VS. GODREJ AND BOYCE MFG. CO. LTD. 32 8 ITR 81WHEREIN IT WAS HELD THAT RULE 8D IS APPLICABLE ONLY FROM ASSESSMENT YEA R 2007-08 AND PRIOR TO ASSESSMENT YEAR 2007-08, THE QUANTUM OF DISALLOWANC E TO BE MADE U/S 14A HAS TO BE DETERMINED BY ADOPTING SOME REASONABLE METHOD. K EEPING IN VIEW THE SAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT, WE S ET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO 3 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. WITH A DIRECTION TO DETERMINE THE QUANTUM OF DISALL OWANCE OF EXPENSES TO BE MADE U/S 14A BY ADOPTING SOME REASONABLE METHOD. GROUND NO. 1 OF ASSESSEES APPEAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 5. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) CONFIRMING THE ACTION OF THE A O TO BRING TO TAX A SUM OF RS.5,57,18,127/- BEING ALLEGED SHARE OF PROFIT IN T HE PARTNERSHIP FIRM CHASECOM LLP INSTEAD OF ALLOWING DEDUCTION FOR SHARE OF LOSS OF RS.83,19,026/- AS CLAIMED IN THE RETURN. 6. IN THE COMPUTATION OF TOTAL INCOME FILED ALONG W ITH THE RETURN OF INCOME, THE ASSESSEE COMPANY HAD REDUCED AN AMOUNT OF RS.83,19, 026/- BEING SHARE OF LOSS IN THE PARTNERSHIP FIRM OF M/S CHASECOM LLP, A DELAWAR E BASED LIMITED PARTNERSHIP. FROM THE COPY OF AUDITED BALANCE SHEET AND PROFIT & LOSS ACCOUNT OF THE SAID PARTNERSHIP FIRM FILED BY THE ASSESSEE, THE AO NOTI CED THAT THE SAID FIRM HAS ACTUALLY DECLARED A PROFIT OF U.S. $ 2,19,58,731/- WHICH WAS INCLUSIVE OF GAIN FROM THE DEBT RESTRUCTURING OF US $ 2,63,21,330/- FOR TH E YEAR UNDER CONSIDERATION. IN THIS REGARD, IT WAS SUBMITTED ON BEHALF OF THE ASSE SSEE BEFORE THE AO THAT THE GAIN FROM DEBT OF RESTRUCTURING WAS MADE BY CHASECOM LLP ON 10-06-2005 WHEREAS THE ASSESSEE COMPANY WAS ADMITTED AS PARTNER ON PAY MENT OF RS.4,21,41,244/- ONLY ON 15-06-2005. THE AO, HOWEVER, NOTICED FROM THE FI NANCIAL STATEMENTS OF CHASECOM LLP THAT INITIAL INVESTMENT OF US $ 10 LAK HS WAS MADE BY THE ASSESSEE COMPANY ON 10-06-2005 FOR A LIMITED PARTNERSHIP INT EREST. HE, THEREFORE, REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY AN AMOUNT OF RS.5 ,57,18,127/- BEING ITS SHARE OF PROFIT FROM THE SAID PARTNERSHIP FIRM CALCULATED AT 5.439% OF U.S. $ 2,29,58,731/- CONVERTED INTO RUPEES AT THE RATE OF RS.44.62 PER D OLLAR SHOULD NOT BE ADDED TO ITS TOTAL INCOME. IN REPLY, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT IT HAD BECOME 4 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. PARTNER IN THE SAID FIRM AS PER THE PARTNERSHIP DEE D ENTERED ON 10-06-2005 AND SINCE IT WAS ENTITLED TO SHARE OF PROFIT EARNED BY THE SAID FIRM ONLY AFTER 10-06- 2005, IT WAS NOT ENTITLED FOR THE SHARE IN THE GAIN RECEIVED BY THE SAID FIRM FROM DEBT RESTRUCTURING OF US $ 2,68,21,330. 7. THE STAND BY THE ASSESSEE WAS NOT FOUND ACCEPTAB LE BY THE AO FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 4.3 OF THE ASSESSMENT ORDER : I HAVE PERUSED THE ARGUMENTS OF THE ASSESSEE AND AM NOT IN AGREEMENT WITH THE SAME. ASSESSEE COMPANY, AS PER THE TAX AAU DIT REPORT, IS IN THE BUSINESS OF FINANCING AND INVESTING AND FOR THAT PU RPOSE LEND, INVEST MONEY AND NEGOTIATE LOANS, ACCEPT, ENDORSE, DISCOUNT, BUY , SELL AND DEAL IN BILLS OF EXCHANGE, HUNDIES, PROMISSORY NOTES, SECURITIES AND CARRYOUT & UNDERTAKE OPERATIONS AND TRANSACTIONS AS FINANCIERS & INVESTO RS. A PERSON CONDUCTS AS BUSINESS WITH THE SOLE INTENTION OF EARNING PROFITS OUT OF THE BUSINESS. AS PER ITS OWN ADMISSION, WHICH IS CONFIRMED BY THE TAX AU DITOR, THE ASSESSEE IS IN THE BUSINESS OF FINANCING AND INVESTMENTS. THE INVE STMENT MADE BY THE ASSESSEE COMPANY IN CHASECOM LP WILL ALSO HAVE TO B E LOOKED AT THIS ANGLE ONLY. INSTEAD OF INVESTING IN A LOCAL COMPANY , THE ASSESSEE HAS INVESTED IN A LIMITED LIABILITY PARTNERSHIP FIRM BA SED IN THE STATE OF DELAWARE, WHICH IS A TAX HAVEN FOR MANY INDUSTRIAL PURPOSES, WITH THE SOLE INTENTION OF REAPING PROFITS FROM SUCH AN INVESTMENT. HENCE, IT CANNOT BE BELIEVED HAT THE ASSESSEE HAS INVESTED AN AMOUNT OF $ 965,133 TO ACQ UIRE A LOSS OF $ 186,442, AT THE END OF THE YEAR. MOREOVER, ACCORDING TO THE FINANCIAL STATEMENTS OF CHASECOM LP, WHICH WAS FILED BY THE ASSESSEE COMPAN Y THEMSELVES, THE ASSESSEE HAS BEEN INDUCTED AS A PARTNER ON 10.06.20 05. THE INITIAL INVESTMENTS OF $ 1,000,000, WHICH WAS PROMISED BY T HE ASSESSEE FOR 5.439% LIMITED PARTNERSHIP INTEREST IN THE PARTNERSHIP FI RM CHASECOM P AND 15.9% MEMBERSHIP INTEREST IN TC ENTERPRISE LLC, A DELAWAR E LIMSITED LIABILITY CORPORATION, THE SOLE GENERAL PARTNER OF CHASECOM L P, MUST HAVE BEEN REMITTED ON 15.06.2005. HOWEVER, AS PER THE FINANCI AL STATEMENTS OF CHASECOM LP, THE ASSESSEE COMPANY HAS BEEN INDUCTED AS A 5.439% PARTNER ON 10.06.2005. HENCE, THE GAIN FROM THE DEB T RESTRUCTURING EARNED BY 5 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. CHASECOM LP WILL DEFINITELY BE AVAILABLE TO THE ASS ESSEE COMPANY FOR APPORTIONMENT AS THE DEBT RESTRUCTURING AS WELL AS THE INDUCTION INTO PARTNERSHIP HAS HAPPENED ON THE SAME DAY BEING 10.0 6.2005. NO EVIDENCE TO SUPPORT THE CLAIM OF THE ASSESSEE THAT THEY HAVE NO T ENJOYED THE PROPORTIONATE GAIN ON RESTRUCTURING EARNED BY CHASE COM LP HAS BEEN FURNISHED BY THEM. FOR THE REASONS GIVEN ABOVE, THE AO HELD THAT THE S HARE OF PROFIT OF CHASECOM LLP AMOUNTING TO RS.5,57,18,127/- WAS TAXABLE IN TH E HANDS OF THE ASSESSEE COMPANY AND ACCORDINGLY THE SAID AMOUNT WAS ADDED B Y HIM TO THE TOTAL INCOME OF THE ASSESSEE REJECTING ITS CLAIM FOR SHARE OF LOSS OF RS.83,19,026/- AS SHOWN IN THE RETURN OF INCOME. 8. AGAINST THE ORDER PASSED BY THE AO, AN APPEAL WA S PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS). IT WAS SUBMITTED O N BEHALF OF THE ASSESSEE COMPANY BEFORE THE LEARNED CIT(APPEALS) THAT THE SH ARE OF LOSS FROM CHASECOM LLP WAS CLAIMED IN THE RETURN OF INCOME AT RS.83,19 ,026/- ON ESTIMATED BASIS SINCE THE AUDITED ACCOUNTS OF THE SAID FIRM WERE NO T READY AT THE TIME OF FILING THE SAID RETURN. THE ASSESSEE CLAIMED THAT THE AUDITED ACCOUNTS WERE NOW AVAILABLE ACCORDING TO WHICH ITS SHARE OF LOSS IN THE PARTNER SHIP WAS ACTUALLY RS.1,02,8,788/- WHICH SHOULD BE ALLOWED. IT WAS REITERATED THAT THE GAIN OUT OF DEBT RESTRICTING HAD ACCRUED TO THE SAID FIRM PRIOR TO 10-06-2005 WHEN T HE ASSESSEE COMPANY WAS INDUCTED AS A PARTNER AND IT WAS, THEREFORE, NOT EN TITLED TO ANY SHARE IN THE SAID GAIN. THIS SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEP TABLE BY THE LEARNED CIT(APPEALS) AND HE CONFIRMED THE ADDITION MADE BY THE AO ON THIS ISSUE BY BRINGING TO TAX THE SHARE OF PROFIT OF CHASECOM IN THE HANDS OF THE ASSESSEE AT RS.5,57,18,127/- AS AGAINST THE LOSS OF RS.83,19,02 6/- SHOWN BY THE ASSESSEE COMPANY IN ITS RETURN OF INCOME FOR THE FOLLOWING R EASONS GIVEN IN PARAGRAPH NO. 3.4 TO 3.6 OF HIS IMPUGNED ORDER : 6 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. 3.4 I HAVE CONSIDERED THE SUBMISSIONS. ACCORDING T O THE COPY OF THE PARTNERSHIP DEED, THE EFFECTIVE DATE OF THE NEW PAR TNERSHIP DEED IS 10 TH JUNE 2005. THE TERM PROFIT AND LOSS IS DEFINED IN THE PA RTNERSHIP AS PROFITS FOR FISCAL YEAR OR OTHER YEAR IN ACCORDANCE WITH CODE 7 03 WITH CERTAIN ADJUSTMENTS. THE PARTNER IS ENTITLED TO PROFITS AND LOSSES ACCORDING TO HIS SHARE IN THE PARTNERSHIP. PROFITS AND LOSSES CAN BE DETERMINED MONTHLY, YEARLY, DAILY ETC. THE PROFIT AND LOSS STATEMENT AN D THE BALANCE SHEET FILED ARE FOR THE YEAR ENDED DECEMBER 31 ST , 2005. WHEN THE BALANCE SHEET WAS DRAWN UP, THE APPELLANT WAS ALREADY A PARTNER WITH A DEFINITE SHARE IN THE PROFITS AND LOSSES OF THE COMPANY. THE BALANCE SHEE T INDICATES GAIN ON RESTRUCTURING BY WHICH THE COMPANY HAS DECLARED OVE RALL PROFIT. THE PARTNER IS ENTITLED TO ITS SHARE IN THE OVERALL PROFITS OF THE COMPANY UNLESS THERE IS A SPECIFIC CLAUSE OR RULE BARRING THE APPELLANT FROM ITS SHARE IN THE PROFIT. 3.5 THE APPELLANT COULD NOT PRODUCE ANY DOCUMENTARY EVIDENCE TO PROVE THAT IT WAS NOT ENTITLED TO THE GAIN FROM RESTRUCTU RING OF THE DEBTS. THE CONTENTION OF THE APPELLANT, THEREFORE, REMAINS UNS UBSTANTIATED. IN THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT WAS ASKED T O FURNISH A CONFIRMATION, ATLEAST, FROM THE CHASECOM LLP CLARIFYING THAT IT W AS NOT ELIGIBLE TO SHARE IN THE PROFIS OUT OF RESTRUCTURING OF DEBTS AND THAT I TS INCOME FROM PARTNERSHIP WAS A LOSS OF RS.1.02 CRORES. THE APPELLANT HAS NOT BEEN ABLE TO OBTAIN A CONFIRMATION FROM CHASECOM LLP. IN THE ABSENCE OF A NY EVIDENCE, THE CLAIM OF THE APPELLANT CANNOT BE ACCEPTED. 3.6 COMING TO THE PARTNERS DEFICIT STATEMENT, AS TH E NAME SUGGESTS, THIS IS A COPY OF CAPITAL ACCOUNT OF VARIOUS PARTNERS IN TH E PARTNERSHIP. THIS SHOWS THE CAPITAL ACCOUNT BALANCE OF THE APPELLANT AS $73 6,339 AFTER ADJUSTING LOSS OF $228,794 FROM THE CAPITAL CONTRIBUTION OF $965,1 33. FIRSTLY, THIS STATEMENT IS AN UNSIGNED UNAUTHENTICATED DOCUMENT. IT IS ONLY A PHOTOCOPY. MOREOVER, THIS DOCUMENT DOES NOT SHOW AS TO HOW THE LOSS OF $ 228,794 IS DERIVED. THE APPELLANT CLAIMED THAT THIS IS ITS SHARE OF LOSS FR OM THE OPERATING LOSS FOR THE YEAR BEFORE ADJUSTMENT OF GAIN FROM DEBT RESTRUCTUR ING. THE FIGURES, HOWEVER, DO NOT MATCH IN AS MUCH AS THE TOTAL OPERA TING LOSS AS PER THE BALANCE SHEET $34,27,236. 5.4% (APPELLANTS SHARE) OF THIS AMOUNT IS $2,20,262 AND NOT 2,28,794. EVEN IF IT IS A FACT TH AT THE CAPITAL ACCOUNT HAS 7 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. BEEN DEBITED ONLY WITH THE OPERATING PROFIT OR LOSS , IN THE CASE OF THE APPELLANT, THE FACT REMAINS THAT THE GAIN FROM REST RUCTURING ALSO ACCRUES TO THE APPELLANT AS A LIMITED PARTNER. THERE IS NOTHIN G IN THE PARTNERSHIP TO EXCLUDE THE LIMITED PARTNER I.E. THE APPELLANT FROM THIS PROFIT. 3.7 IN VIEW OF THE APPELLANT, THE CLAIM OF THE APPE LLANT IS NOT ACCEPTED AND THE ASSESSMENT OF PROFIT AT RS.5,57,18,127/- AS SHA RE OF PROFIT FROM CHASECOM LLP IS CONFIRMED. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE ASSESSEE IN THE PRESENT CASE IS AN INVESTMENT COMPANY WHICH IS ALSO A FLAGSHIP COMPANY OF MAHINDRA GROUP. HE SUBMITTED THAT INVESTMENT IN THE CAPITAL OF CHASECOM LLP PARTNERSHIP, USA WAS MADE BY THE ASSESSEE COMPANY W HICH WAS DULY REFLECTED IN ITS BALANCE SHEET. HE INVITED OUR ATTENTION TO THE COPY OF RELEVANT BALANCE SHEET OF THE ASSESSEE COMPANY PLACED IN HIS PAPER BOOK AS WE LL AS OTHER DOCUMENTARY EVIDENCE AS A PROOF TO SHOW THE FACTUM AND QUANTUM OF SUCH INVESTMENT. HE ALSO INVITED OUR ATTENTION TO THE COPY OF AGREEMENT OF P ARTNERSHIP PLACED IN HIS PAPER BOOK TO SHOW THAT THE RECONSTITUTED PARTNERSHIP FIR M HAD BECOME EFFECTIVE FROM 10- 06-2005. HE SUBMITTED THAT THE GAIN FROM RESTRUCTUR ING OF DEBTS HAD ACCRUED TO THE PARTNERSHIP FIRM OF CHASECOM BEFORE THE ASSESSEE BE CAME PARTNER IN THE SAID PARTNERSHIP FIRM. ACCORDING TO HIM, THE ASSESSEE CO MPANY THUS HAD NO RIGHT TO SHARE THE SAID GAIN AND THERE IS NO QUESTION OF BRI NGING TO TAX ANY SUCH SHARE IN ITS HANDS IN INDIA. HE CONTENDED THAT THE ASSESSEE COMP ANY ACTUALLY GOT SHARE OF LOSS FROM THE SAID PARTNERSHIP FIRM FOR THE YEAR UNDER C ONSIDERATION WHICH WAS RIGHTLY CLAIMED IN ITS RETURN OF INCOME. HE SUBMITTED THAT THIS POSITION WAS CLEARLY ESTABLISHED FROM THE AUDITED STATEMENT OF ACCOUNTS OF THE ASSESSEES CAPITAL IN THE PARTNERSHIP FIRM. HE THEN INVITED OUR ATTENTION TO THE RELEVANT PORTION OF PARTNERSHIP AGREEMENT AT PAGE NO. 72 OF HIS PAPER BOOK AND POIN TED OUT THAT THE PROFITS AND LOSSES OF THE PARTNERSHIP FIRM ARE TO BE ALLOCATED AMONG THE PARTNERS ON PRORATA 8 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. BASIS. HE CONTENDED THAT THE ADDITION MADE BY THE A O ON THIS ISSUE BY BRINGING TO TAX SHARE OF PROFIT OF THE PARTNERSHIP FIRM WAS BAS ED ON ASSUMPTION AND SURMISES AND THE SAME IS NOT SUSTAINABLE. 10. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THERE WAS NOTHING IN THE PARTNERSHIP AGREEMENT TO SPECIFICALLY PROVIDE FOR T HE ALLOCATION OF PROFITS AND LOSSES OF THE PERIOD PRIOR TO 10-06-2005. HE INVITE D OUR ATTENTION TO PAGE NO.37 OF THE ASSESSEES PAPER BOOK TO SHOW THAT THE OPERATIN G LOSS OF US $ 34,27,236 FOR THE ENTIRE YEAR INCLUDING THE PERIOD PRIOR TO 10-06 -2005 WAS ALLOCATED TO THE ASSESSEE COMPANY IN THE PROFIT SHARING RATIO. HE CO NTENDED THAT WHEN THE LOSS FOR THE PERIOD PRIOR TO 10-06-2005 WAS ALLOCATED TO THE ASSESSEE COMPANY AS A PARTNER, THERE IS NO REASON OR BASIS TO SAY THAT THE ASSESSE E WAS ENTITLED TO SHARE PROFITS AND LOSSES OF THE PARTNERSHIP FIRM FOR THAT PERIOD. HE CONTENDED THAT THE GAIN FROM DEBT RESTRUCTURING THUS WAS RIGHTLY ALLOCATED AND BROUGH T TO TAX BY THE AUTHORITIES BELOW IN THE HANDS OF THE ASSESSEE COMPANY. HE SUBMITTED THAT THERE IS NO OTHER EVIDENCE WHICH HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE TO SUPPORT AND SUBSTANTIATE ITS STAND THAT IT WAS NOT ENTITLED TO ANY SHARE IN THE PROFIT ARISING FROM RESTRUCTURING OF DEBTS OF CHASECOM LLP AND IN THE ABSENCE OF SUCH EV IDENCE, THE STAND OF THE ASSESSEE ON THIS ISSUE CANNOT BE ACCEPTED. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND AL SO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT ALTHOUGH TH E ASSESSEE COMPANY HAD MADE INVESTMENT IN THE CAPITAL ACCOUNT OF CHASECOM LLP I N THE MONTH OF JUNE, 2005 AND THE PARTNERSHIP AGREEMENT ADMITTING THE ASSESSE E AS PARTNER IN THE SAID FIRM WAS MADE EFFECTIVE FROM 10 TH JUNE, 2005, NOTHING HAS BEEN BROUGHT ON RECORD BY THE ASSESSEE COMPANY EITHER BEFORE THE AUTHORITIES BELOW OR EVEN BEFORE US TO SHOW THAT THE PROFIT ARISING AS A RESULT OF RESTRUCTURIN G OF DEBTS HAD BEEN EARNED BY THE 9 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. SAID FIRM PRIOR TO THE ADMISSION OF THE ASSESSEE CO MPANY AS A PARTNER IN THE SAID FIRM AND THAT THE ASSESSEE COMPANY WAS NOT ENTITLED TO ANY SHARE IN THE SAID GAIN. IN THIS REGARD, THE LEARNED COUNSEL FOR THE ASSESSE E HAS SOUGHT TO RELY ON CLAUSE 5.2(A) OF THE PARTNERSHIP AGREEMENT DEALING WITH A LLOCATION OF PROFITS AND LOSSES WHICH READS AS UNDER : ALLOCATIONS OF PROFITS AND LOSSES. (A) PROFITS . EXCEPT AS PROVIDED IN SECTION 5.2(C) , PROFITS FOR ANY FISCAL YEAR WILL BE ALLOCATED IN THE FOLLOWING ORDE R : (1) FIRST, TO THE PARTNERS, PRO RATA, IN PROPORTI ON TO THEIR RESPECTIVE SHARING RATIOS UNTIL THE CUMULATIVE PROF ITS ALLOCATED TO SUCH PARTNER UNDER THIS SECTION 5.2(A)(1) EQUALS THE CUMULATIVE LOSSES ALLOCATED TO SUCH PARTNER UNDER SECTION 5.2(B)(2) FOR ALL PRIOR PERIODS; AND (2) THE BALANCE, IF ANY, TO THE PARTNERS IN PROPO RTION TO THEIR RESPECTIVE SHARING RATIOS, DETERMINED AS OF THE DAT E OF SUCH ALLOCATION. AS IS CLEARLY EVIDENT FROM THE ABOVE CLAUSE OF THE PARTNERSHIP AGREEMENT, THE SAME TALKS ABOUT ALLOCATION OF PROFITS AND LOSSES FOR AN Y FISCAL YEAR AND THERE IS NOTHING EITHER TO INDICATE OR EVEN SUGGEST AS TO HOW THE PR OFITS OR LOSSES ARE TO BE ALLOCATED AMONG THE PARTNERS IN CASE OF RECONSTITUTION OF THE PARTNERSHIP FIRM IN BETWEEN ANY FISCAL YEAR. IT IS ALSO NOT KNOWN AS TO HOW THE PRO FITS OR LOSSES OF THE RELEVANT YEAR ENDED ON 31 ST DECEMBER, 2005 WERE BIFURCATED BETWEEN THE TWO PER IODS I.E. 1 ST JANUARY, 2005 TO 9 TH JUNE, 2005 AND 10 TH JUNE, 2005 TO 31 ST DECEMBER, 2005. AS A MATTER OF FACT, NO SUCH PROFIT & LOSS ACCOUNT SPLIT INTO TWO PERIODS HAS BEEN FURNISHED BEFORE US IN ORDER TO SUPPORT AND SUBSTAN TIATE THE CASE OF THE ASSESSEE COMPANY THAT WHAT IT GOT WAS ONLY THE SHARE IN THE PROFITS OR LOSSES OF THE FIRM FOR THE PERIOD 10 TH JUNE, 2005 TO 31 ST DECEMBER, 2005. 10 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. 12. ON THE OTHER HAND, A STATEMENT OF OPERATION OF CHASECOM LLP HAS BEEN PLACED AT PAGE NO. 37 OF THE ASSESSEES PAPER BOOK WHICH SHOWS THAT THE SAID FIRM HAD SUFFERED OPERATION LOSS OF 34,27,236 US $ FOR THE YEAR ENDED ON 31 ST DECEMBER, 2005 AND AFTER ADJUSTING THE SAID LOSS AG AINST THE GAIN FROM DEBT RESTRUCTURING, A PROFIT OF 2,29,58,731 US $ WAS FIN ALLY EARNED BY THE SAID FIRM. AS RIGHTLY POINTED OUT BY THE LEARNED DR, THE ASSESSEE COMPANY HAD DECLARED A LOSS OF RS.83,19,026/- IN ITS RETURN OF INCOME AS SHARE OF LOSS BEING 5.439% OF US $ 34,27,236/- WHICH WAS ACTUALLY THE LOSS OF CHASECOM LLP FOR THE ENTIRE YEAR ENDED ON 31 ST DECEMBER,2005. THE ASSESSEE COMPANY THUS HAD CLAIM ED ITS SHARE OF LOSS SUFFERED BY THE SAID PARTNERSHIP FIRM FOR THE ENTIRE YEAR ENDED ON 31 ST DECEMBER, 2005 THEREBY ACCEPTING THAT IT WAS ENTITL ED TO SHARE THE PROFITS & LOSSES OF THE SAID PARTNERSHIP FIRM FOR THAT ENTIRE YEAR. AS RIGHTLY CONTENDED BY THE LEARNED DR, WHEN THE ASSESSEE COMPANY BY ITS OWN ADMISSION WAS ENTITLED FOR SHARE OF LOSS OF THE SAID PARTNERSHIP FIRM FOR THE ENTIRE YE AR ENDED ON 31 ST DECEMBER, 2005, IT FOLLOWS THAT IT WAS ALSO ENTITLED TO SHARE THE P ROFIT OF THE SAID PARTNERSHIP FIRM FOR THE ENTIRE YEAR AS THERE CAN BE NO DIFFERENT TREATM ENTS GIVEN TO THE PROFITS AND LOSSES. HAVING REGARD TO ALL THESE FACTS OF THE CAS E, WE ARE OF THE VIEW THAT THE ASSESSEE WAS ENTITLED TO SHARE OF 5.439% OF THE PRO FITS OF CHASECOM LLP FOR THE YEAR ENDED 31 ST DECEMBER, 2005 AMOUNTING TO US $ 2,29,58,731 AND T HE SAID PROFIT EQUIVALENT TO RS.5,57,18,127/- WAS RIGHTLY BROUGHT TO TAX IN ITS HANDS BY THE AO. IN THAT VIEW OF THE MATTER, WE UPHOLD THE IMPUGNED ORD ER OF THE LEARNED CIT(APPEALS) CONFIRMING THE ADDITION MADE BY THE AO ON THIS ISSU E TO THE TOTAL INCOME OF THE ASSESSEE AND DISMISS GROUND NO.2 OF THE ASSESSEES APPEAL. 13. AS REGARDS THE ISSUE RAISED IN GROUND NO. 3 REL ATING TO QUANTIFICATION OF LONG TERM CAPITAL LOSSES TO BE CARRIED FORWARD TO THE SU BSEQUENT YEARS, IT IS OBSERVED THAT THIS ISSUE HAS NOT BEEN ADJUDICATED UPON BY THE LEA RNED CIT(APPEALS) VIDE HIS 11 ITA NO. 4450/MUM/2010 ASSESSMENT YEAR : 2006-07. IMPUGNED ORDER DESPITE THE FACT THAT THE SAME WAS S PECIFICALLY RAISED BY THE ASSESSEE IN GROUND NO. 4 TAKEN IN ITS APPEAL FILED BEFORE THE LEARNED CIT(APPEALS). WE, THEREFORE, FIND IT JUST AND PROPER TO REMIT THI S MATTER TO THE LEARNED CIT(APPEALS) FOR DECIDING THE SAME ON MERIT AFTER G IVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. GROUND NO. 3 OF THE ASS ESSEES APPEAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 9 TH DAY OF SEPT., 2011. SD/- SD/- (VIJAY PAL RAO) (P.M. JAGTAP) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI, DATED: 9 TH SEPT., 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI BENCHES , MUMBAI. WAKODE