The ACIT, Circle-2, Surat V. M/s. Shiv Shakti Corporation, Surat

ITA 562/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6296 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 23-06-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 20-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Keywords: Business income; Income from undisclosed sources
• Section: 143(3); 133A

Judgement Text

- 1 - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE S/SHRI M. K. SHRAWAT, JM AND D.C.AGRAWAL, AM ASSTT. CIT, CIRCLE-2, SURAT. VS. M/S SHIV SHAKTI CORPORATION, NEW TEX TILE MARKET, B/H TEXTILE TOWER (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI B. L. YADAV, DR RESPONDENT BY:- NONE O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER . THIS IS AN APPEAL FILED BY THE REVENUE RAISING FOL LOWING GROUND:- (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION MADE B Y THE AO OF RS.8,62,746/- ON THE GROUND THAT THE PAYMENT OF INT EREST ON CAPITAL BALANCE OF THE PARTNERS OF THE FIRM IS AN ALLOWABLE DEDUCTION UNDER SECTION 40(B)(IV) OF THE ACT IGNORING THE MATERIAL FACT THAT AS PER THE RATIO LAID DOWN BY THE HON. ITAT AHMEDABAD D BENCH IN THE CASE OF WHITELINE CHEMICALS VS. ITO, WD 291), SURAT IN ITA NO.3509/AHD/2004 DATED 30.08.2005, THE ASSESSEE-FIR M SHOULD HAVE FILED THE RETURN OF INCOME WHEREIN TOTAL INCOM E SHOULD BE MADE IN RESPECT OF NORMAL CURRENT YEAR PROFIT PLU S ADMISSION OF UNACCOUNTED/UNDISCLOSED INCOME OF RS.1.41 CRORES. ITA NO.562/AHD/2009 ASST. YEAR 2005-06 ITA NO.562/AHD/2009 ASST. YEAR 2005-06 2 2. THE LD. DR DURING THE COURSE OF HEARING CLARIFIE D THAT THIS GROUND IS BROKEN INTO TWO PARTS WHICH HAVE BEEN STATED IN THE STATEMENT OF FACTS ATTACHED WITH THE APPEAL. THESE TWO PARTS ARE READ AS UNDER :- (I) THE LD. CIT(A) HAS NOT APPRECIATED THAT AS PER THE RATIO LAID DOWN BY THE HON. ITAT, AHMEDABAD D BENCH IN THE CASE O F WHITELINE CHEMICALS VS. ITO, WD 2(1), SURAT IN IN ITA NO.3509 /AHD/2004 DATED 30.08.2005, THE ASSESSEE FIRM SHOULD HAVE FIL ED THE RETURN OF INCOME WHEREIN TOTAL INCOME SHOULD BE MADE IN RESPE CT OF NORMAL CURRENT YEAR PROFIT PLUS ADMISSION OF UNACCOUNTED /UNDISCLOSED INCOME OF RS.1.41 CRORES. (II) THE LD. CIT(A) HAS NOT APPRECIATED THAT THE DE DUCTION ON ACCOUNT OF INTEREST PAID PARTNERS WAS NOT ALLOWABLE DEDUCTI ON IN THE CASE OF THE ASSESSEE AS HAS BEEN OPINED BY HIMSELF IN HIS A PPELLATE ORDER THAT THE ASSESSEE HAD DELIBERATELY PAID INTEREST TO THE PARTNERS SO AS TO REDUCE THE INCIDENTS OF TAX ON THE ADDITIONAL IN COME DISCLOSED DURING THE COURSE OF SURVEY FOR THE FIRST TIME FOR THE YEAR UNDER CONSIDERATION WHICH WERE NOT CLAIMED IN THE EARLIER YEAR OF ASSESSMENT. 3. THE FACTS RELATING TO THE ISSUE ARE THAT ASSESSE E FILED RETURN OF INCOME ON 28.10.2005 DECLARING TOTAL INCOME AT RS.1 ,33,75,902/- BUT THE ASSESSMENT WAS FINALIZED U/S 143(3) ON 17.12.2008 D ETERMINING TOTAL INCOME AT RS.1,42,38,650/- MAKING THEREIN AN ADDITI ON OF RS.8,62,746/- BEING DISALLOWANCE OF INTEREST PAID TO PARTNERS U/S 40(B) OF THE ACT. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SERVICE OF P ROJECT DEVELOPMENT MANAGEMENT. A SURVEY WAS UNDERTAKEN U/S 133A OF THE ACT ON 9.3.2005 WHICH HAS RESULTED IN ADMISSION OF UNACCOUNTED INCO ME OF RS.1.41 CRORES. HOWEVER, WHILE FILING RETURN OF INCOME ASSE SSEE HAS CLAIMED THEREFROM A SUM OF RS.8,62,746/-. THE AO HAD DISALL OWED THE CLAIM OF ITA NO.562/AHD/2009 ASST. YEAR 2005-06 3 INTEREST U/S 40(B) OF THE ACT ON THE GROUND THAT AS SESSEE HAS DEBITED THIS INTEREST AGAINST UNDISCLOSED INCOME AND THEREBY RED UCED THE UNDISCLOSED INCOME BY RS.8,62,746/-. THE UNDISCLOSED INCOME, AC CORDING TO THE AO ADMITTED DURING THE COURSE OF SURVEY WAS UNACCOUNTE D INCOME AND COULD NOT BE PRESUMED TO BE A PROFIT AS PER REGULAR BOOK S OF ACCOUNT AND, THEREFORE, THE INTEREST/REMUNERATION/SALARY PAYABLE TO PARTNERS COULD NOT BE ADJUSTED AGAINST THE UNDISCLOSED INCOME. 4. THE LD. CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY HOLDING THAT RESTRICTION PRESCRIBED U/S 40(B) FOR CALCULATION OF ALLOWABLE DEDUCTION ON THE BASIS OF BOOK PROFIT IS APPLICABLE ONLY TO REMU NERATION PAYABLE TO PARTNERS AND NOT TO THE INTEREST ON THE CAPITAL OF THE PARTNERS AND FURTHER THAT INTEREST ON CAPITAL BALANCE OF THE PARTNERS BY THE FIRM IS AN ALLOWABLE DEDUCTION U/S 40(B)(IV) OF THE ACT @ 12% PER ANNUM. 5. AGAINST THIS, THE LD. DR SUBMITTED THAT LD. CIT( A) HAS NOT APPRECIATED THAT THE ASSESSEE FIRM SHOULD HAVE FILE D THE RETURN OF INCOME WHEREIN THE TOTAL INCOME SHOULD BE MADE IN RESPECT OF NORMAL CURRENT YEARS PROFIT PLUS ADMISSION OF UNACCOUNTED/UNDISCL OSED INCOME OF RS.1.41 CRORES. HE ALSO SUBMITTED THAT LD. CIT(A) H AS NOT APPRECIATED THAT THE DEDUCTION ON ACCOUNT OF INTEREST PAID TO PARTNE RS WAS NOT AN ALLOWABLE DEDUCTION. HE HAS ALSO MENTIONED IN THE APPELLATE O RDER THAT ASSESSEE HAS DELIBERATELY PAID INTEREST TO THE PARTNERS SO AS TO REDUCE THE INCIDENTS OF ITA NO.562/AHD/2009 ASST. YEAR 2005-06 4 TAX ON ADDITIONAL INCOME DISCLOSED DURING THE COURS E OF SURVEY. SUCH INTEREST TO PARTNERS WAS NOT CLAIMED IN ANY EARLIER YEAR. 6. NONE APPEARED ON BEHALF OF THE ASSESSEE. 7. WE HAVE HEARD THE LD. DR AND PERUSED THE MATERIA L ON RECORD. IN OUR CONSIDERED VIEW THERE IS NO CASE FOR INTERFEREN CE IN THE ORDER OF LD. CIT(A). FOR THE SAKE OF CONVENIENCE WE REPRODUCE SE CTION 40(B) AS UNDER:- 40. AMOUNTS NOT DEDUCTIBLE.--NOTWITHSTANDING ANYTHI NG TO THE CONTRARY IN SECTIONS 30 TO 38, THE FOLLOWING AMOUNTS SHALL N OT BE DEDUCTED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PRO FITS AND GAINS OF BUSINESS OR PROFESSION',-- (B) IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH,-- (I) ANY PAYMENT OF SALARY, BONUS, COMMISSION OR RE MUNERATION, BY WHATEVER NAME CALLED (HEREINAFTER REFERRED TO AS RE MUNERATION) TO ANY PARTNER WHO IS NOT A WORKING PARTNER; OR (II) ANY PAYMENT OF REMUNERATION TO ANY PARTNER WH O IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER, WHICH, IN E ITHER CASE, IS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, THE TE RMS OF THE PARTNERSHIP DEED; OR (III) ANY PAYMENT OF REMUNERATION TO ANY PARTNER W HO IS A WORKING PARTNER, OR OF INTEREST TO ANY PARTNER, WHICH, IN E ITHER CASE, IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED, BUT WHICH RELATES TO ANY PERIOD ( FALLING PRIOR TO THE DATE OF SUCH PARTNERSHIP DEED) FOR WHICH SUCH P AYMENT WAS NOT AUTHORISED BY, OR IS NOT IN ACCORDANCE WITH, ANY EA RLIER PARTNERSHIP DEED, SO, HOWEVER, THAT THE PERIOD OF AUTHORISATION FOR SUCH PAYMENT BY ANY EARLIER PARTNERSHIP DEED DOES NOT CO VER ANY PERIOD PRIOR TO THE DATE OF SUCH EARLIER PARTNERSHIP DEED; OR ITA NO.562/AHD/2009 ASST. YEAR 2005-06 5 (IV) ANY PAYMENT OF INTEREST TO ANY PARTNER WHICH IS AUTHORISED BY, AND IS IN ACCORDANCE WITH, THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALLING AFTER THE DATE OF SUCH PARTNE RSHIP DEED IN SO FAR AS SUCH AMOUNT EXCEEDS THE AMOUNT CALCULATED AT THE RATE OF *TWELVE PER CENT. SIMPLE INTEREST PER ANNUM; OR (V) ANY PAYMENT OF REMUNERATION TO ANY PARTNER WHO IS A WORKING PARTNER, WHICH IS AUTHORISED BY, AND IS IN ACCORDAN CE WITH, THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PE RIOD FALLING AFTER THE DATE OF SUCH PARTNERSHIP DEED IN SO FAR AS THE AMOUNT OF SUCH PAYMENT TO ALL THE PARTNERS DURING THE PREVIOUS YEA R EXCEEDS THE AGGREGATE AMOUNT COMPUTED AS HEREUNDER:-- (1) IN THE CASE OF A FIRM CARRYING ON A PROFESSIO N REFERRED TO IN SECTION 44AA OR WHICH IS NOTIFIED FOR THE PURPOSE O F THAT SECTION-- (A) ON THE FIRST RS.1,00,000 OF THE BOOK-PROFIT OR IN CASE OF A LOSS RS.50,000 OR AT THE RATE OF 90 PER CENT. OF THE BOO K-PROFIT, WHICHEVER IS MORE; (B) ON THE NEXT RS.1,00,000 OF THE BOOK-PROFIT AT THE RATE OF 60 PER CENT.; (C) ON THE BALANCE OF THE BOOK-PROFIT AT THE RATE O F 40 PER CENT.; (2) IN THE CASE OF ANY OTHER FIRM-- (A) ON THE FIRST RS.75,000 OF THE BOOK-PROFIT OR I N CASE OF A LOSS RS. 50,000 OR AT THE RATE OF 90 PER CENT. OF THE BOOK-P ROFIT, WHICHEVER IS MORE; (B) ON THE NEXT RS.75,000 OF THE BOOK-PROFIT AT TH E RATE OF 60 PER CENT.; (C) ON THE BALANCE OF THE BOOK-PROFIT AT THE RATE OF 40 PER CENT.; 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 1ST DAY OF APRIL, 1993, THE TERMS OF THE PARTNE RSHIP DEED MAY, AT ANY TIME DURING THE SAID PREVIOUS YEAR, PROVIDE FOR SUC H PAYMENT. EXPLANATION 1.--WHERE AN INDIVIDUAL IS A PARTNER IN A FIRM ON BEHALF, OR FOR THE BENEFIT, OF ANY OTHER PERSON (SUCH PARTNER AND THE OTHER PERSON ITA NO.562/AHD/2009 ASST. YEAR 2005-06 6 BEING HEREINAFTER REFERRED TO AS 'PARTNER IN A REPR ESENTATIVE CAPACITY' AND 'PERSON SO REPRESENTED', RESPECTIVELY),-- (I) INTEREST PAID BY THE FIRM TO SUCH INDIVIDUAL O THERWISE THAN AS PARTNER IN A REPRESENTATIVE CAPACITY, SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE; (II) INTEREST PAID BY THE FIRM TO SUCH INDIVIDUAL AS PARTNER IN A REPRESENTATIVE CAPACITY AND INTEREST PAID BY THE FI RM TO THE PERSON SO REPRESENTED SHALL BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE. EXPLANATION 2.--WHERE AN INDIVIDUAL IS A PARTNER IN A FIRM OTHERWISE THAN AS PARTNER IN A REPRESENTATIVE CAPACITY, INTEREST P AID BY THE FIRM TO SUCH INDIVIDUAL SHALL NOT BE TAKEN INTO ACCOUNT FOR THE PURPOSES OF THIS CLAUSE, IF SUCH INTEREST IS RECEIVED BY HIM ON BEHALF, OR F OR THE BENEFIT, OF ANY OTHER PERSON. EXPLANATION 3.--FOR THE PURPOSES OF THIS CLAUSE, 'B OOK-PROFIT' MEANS THE NET PROFIT, AS SHOWN IN THE PROFIT AND LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR COMPUTED IN THE MANNER LAID DOWN IN C HAPTER IV-D AS INCREASED BY THE AGGREGATE AMOUNT OF THE REMUNERATI ON PAID OR PAYABLE TO ALL THE PARTNERS OF THE FIRM IF SUCH AMOUNT HAS BEEN DEDUCTED WHILE COMPUTING THE NET PROFIT. EXPLANATION 4.-FOR THE PURPOSES OF THIS CLAUSE, 'WO RKING PARTNER' MEANS AN INDIVIDUAL WHO IS ACTIVELY ENGAGED IN CONDUCTING THE AFFAIRS OF THE BUSINESS OR PROFESSION OF THE FIRM OF WHICH HE IS A PARTNER. 8. FROM THE READING OF ABOVE SECTION AND CLAUSE (B) THEREOF, WE FIND THAT THE SECTION STARTS WITH NON-OBSTAINE CLAUSE N OTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIONS 30-38... IN OTHER WORDS EVEN IF SALARY, BONUS, REMUNERATION OR INTEREST IS ALLOWED AS DEDUCTION IN ANY OTHER PROVISION BETWEEN SECTIONS 30-38 STILL THEN D ISALLOWANCE TO THE EXTENT MENTIONED IN SECTION 40(B) WILL HAVE TO BE M ADE. IN OTHER WORDS THE AO HAS TO FIRST DETERMINE WHETHER ANY AMOUNT OF SALARY BONUS, ITA NO.562/AHD/2009 ASST. YEAR 2005-06 7 COMMISSION, REMUNERATION OR INTEREST IS ALLOWABLE A S DEDUCTION IN ANY OTHER SECTION IN 30 TO 38. IF IT IS SO ALLOWABLE, T HEN DISALLOWANCE AS CONTAINED IN SECTION 40(B) WILL HAVE TO BE CARRIED OUT BUT WHERE A SUM IS ALREADY HELD NOT ALLOWABLE UNDER SECTIONS 30 TO 38 THEN QUESTION OF FURTHER DISALLOWANCE U/S 40(B) WILL NOT BE PERMISSI BLE. SIMILAR VIEW WAS HELD BY ITAT, MUMBAI B BENCH IN ITO VS. M.M. TEXT ILE IN ITA NO.2547, 7418/MUM/2007 & CO. 48/MUM/2008 PRONOUNCED ON APRIL 16, 2009. FOR THE SAKE OF CONVENIENCE WE REPRODUCE THE OPERATIVE PART IN THIS CONTEXT FROM THAT JUDGMENT AS UNDER :- THERE WAS BASIC FALLACY IN THE OPINION OF THE COMMI SSIONER (APPEALS) FOR THE REASON THAT AFTER THE FINANCE ACT, 1992 INTEREST PAID TO T HE PARTNERS HAS BEEN MADE AS DEDUCTIBLE SUBJECT TO THE LIMITATIONS CONTAINED UND ER SECTION 40( B )( IV ). WITH THE INSERTION OF NON OBSTANTE CLAUSE IN THE BEGINNING OF SECTION 40 WHICH READS NOTWITHSTANDING ANYTHING TO THE CONTRARY IN SECTIO NS 30 TO 38 IT HAS BECOME CLEAR THAT EVEN IF THE EXPENSE IS ALLOWABLE UNDER ANY OF THE SECTIONS 30 TO 38, IT WILL NOT BE ALLOWED AS DEDUCTION IF THE CONDITIONS CONTAINED IN SECTION 40 ARE NOT FULFILLED. [PARA 16] FURTHER, FROM THE ENUNCIATION OF LAW ON THE SIMILAR ISSUE BY THE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPN. V. CIT [2008] 298 ITR 298/168 TAXMAN 43, THERE REMAINED NO DOUBT THAT THE DEDUCTIBILITY OF INTERES T TO PARTNERS IS PRIMARILY TO BE CONSIDERED UNDER SECTION 36(1)( III ) AND IF SUCH INTEREST IS ALLOWABLE THEN IT HAS TO BE SEEN WHETHER THERE IS ANY DISENTITLEMENT UNDER SECT ION 40( B ). THE COMMISSIONER (APPEALS) HAD MISDIRECTED HIMSELF IN HOLDING THAT S ECTION 40( B ) IS A STAND-ALONE PROVISION AND IF THE INTEREST TO PARTNERS IS DEDUCT IBLE AS PER THE PARAMETERS LAID DOWN IN CLAUSE ( IV ) OF SECTION 40( B ), THEN THE SAME HAS TO BE ALLOWED AS DEDUCTION WIT HOUT CONSIDERING THE PROVISIONS OF SECTION 36(1)( III ). THE VIEW TAKEN BY THE COMMISSIONER (APPEALS) ON THIS ISSUE COULD NOT BE APPROVED. [PAR A 17] 9. THE LD. AO CONSIDERED THAT CONCEPT OF BOOK PROFI T SHOULD HAVE BEEN IMPORTED WHILE DECIDING THE PAYMENT OF INTERES T TO PARTNERS BY THE FIRM. IT WAS EXPLAINED BY THE LD. DR THAT WHATEVER PROFIT IN THE BOOKS OF ACCOUNT HAVE BEEN DECLARED BY THE ASSESSEE THAT ALO NE WILL BE SUBJECT TO ITA NO.562/AHD/2009 ASST. YEAR 2005-06 8 DEDUCTION OF INTEREST BY THE FIRM AND ANY OTHER PRO FIT BEING UNDISCLOSED INCOME OR UNACCOUNTED INCOME CANNOT BE SUBJECT TO S UCH DEDUCTION. SINCE ASSESSEE HAS NOT DECLARED ANY INCOME AS PER B OOKS OF ACCOUNT BUT ONLY DECLARED HIS UNACCOUNTED INCOME, THEN SUCH UNA CCOUNTED INCOME CANNOT BE CALLED AS BOOK PROFIT AND, THEREFORE, NO DEDUCTION OF INTEREST PAID TO PARTNERS CAN BE ALLOWED. THIS ARGUMENT AS H ELD BY LD. CIT(A) IF FALLACIOUS BECAUSE FIRSTLY UNACCOUNTED INCOME DECLA RED BY THE FIRM IS ALSO ASSESSED UNDER THE HEAD PROFIT AND GAINS OF BUSINE SS THEREFORE, IT PARTAKES THE SAME CHARACTER AS DECLARED INCOME AS P ER BOOKS OF ACCOUNT. IF IN THE OPINION OF THE AO ASSESSEE OUGHT TO HAVE ALSO DECLARED INCOME AS PER BOOKS OF ACCOUNT THEN HE SHOULD HAVE TAKEN N ECESSARY ACTION IN INVESTIGATING AS TO WHAT WAS THE INCOME AS PER BOOK S AND IF NECESSARY, HE SHOULD HAVE MADE ADDITION ACCORDINGLY. THE FACT THA T HE HAS NOT CHOSEN TO DO SO, ONE CAN INFER THAT THERE WAS NO SUCH DECLARE D INCOME AND WHATEVER ASSESSEE HAD DECLARED IN THE RETURN BEING THE DISCL OSURE MADE DURING THE COURSE OF SURVEY WAS ONLY BUSINESS INCOME ASSESSEE HAD. ONCE THERE IS NO DECLARED INCOME AS PER BOOKS, THE DEDUCTION U/S 40( B) HAS TO BE CONSIDERED ONLY OUT OF BUSINESS INCOME DECLARED BY THE ASSESSEE, MAY BE IT WAS NOT DISCLOSED IN THE BOOKS OF ACCOUNT BUT WA S SURRENDERED DURING THE COURSE OF SURVEY. THIS DISCLOSURE DURING THE CO URSE OF SURVEY DOES NOT TAKE AWAY THE CHARACTERISTICS OF THAT INCOME THAT I T WAS ASSESSEES BUSINESS INCOME. THE AO HAS ALSO ASSESSED THE SAME UNDER THIS HEAD. THE ITA NO.562/AHD/2009 ASST. YEAR 2005-06 9 SECOND LINE OF ARGUMENT ADOPTED BY THE AO AND THE L D. DR WAS THAT INTEREST PAYABLE TO PARTNERS CAN BE DEDUCTED ONLY O UT OF BOOK PROFIT. THE LD. CIT(A) WAS RIGHT IN HOLDING THAT CONCEPT OF BOO K PROFIT IS CONTAINED IN CLAUSE (V) OF SECTION 40(B) WHICH RELATES TO REMUNE RATION TO A WORKING PARTNER. THIS CONCEPT OF BOOK PROFIT IS NOT BROUGHT INTO CLAUSE (IV) WHICH RELATES TO PAYMENT OF INTEREST TO A PARTNER. THEREF ORE, PAYMENT OF INTEREST TO PARTNERS CANNOT BE DISALLOWED ONLY ON THE GROUND THAT SUM OF RS.1.41 CRORES DECLARED BY THE ASSESSEE DURING THE COURSE O F SURVEY WAS NOT PART OF BOOK PROFIT. THE ONLY CONDITION REQUIRED TO BE S EEN FOR APPLYING CLAUSE (IV) OF SECTION 40(B) IS THAT PAYMENT OF INTEREST S HOULD BE AUTHORISED AND SHOULD BE IN ACCORDANCE WITH TERMS OF PARTNERSHIP D EED. SINCE AO HAS NOT COMMENTED ANYTHING WITH RESPECT TO THIS POINT AND T HE REVENUE HAS ALSO NOT BROUGHT ANY MATERIAL TO SHOW THAT PAYMENT OF IN TEREST IS NOT IN ACCORDANCE WITH THE PARTNERSHIP DEED THEN THIS ISSU E, THEREFORE, DOES NOT SURVIVE. THEREFORE, THE ARGUMENT OF LD. AO AND THE LD. DR THAT PAYMENT OF INTEREST TO PARTNERS OUT OF DECLARED UNACCOUNTED INCOME CANNOT BE ALLOWED, IS REJECTED. 10. EVEN THOUGH ASSESSEE MIGHT HAVE DEBITED THE INT EREST TO THE PARTNERS ON THEIR CAPITAL BALANCES, FOR REDUCING IT S TAX LIABILITY BUT IF SUCH REDUCTION OF TAX LIABILITY IS IN ACCORDANCE WITH TH E PROVISIONS OF THE ACT THEN BONA FIDE OF THE CLAIM CANNOT BE DOUBTED. TAX AVOIDANCE DONE ITA NO.562/AHD/2009 ASST. YEAR 2005-06 10 WITHIN THE FOUR CORNERS OF LAW IS PERMISSIBLE UNLES S IT IS SHOWN THAT IT IS NOT GENUINE OR MALA FIDE. HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003) 263 ITR 706 (SC) HELD THAT IF AN ACTION OTHERWISE VALID IN LAW CANNOT BE TREATED AS NON-EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIVES. HONBLE SUPREME C OURT IN THAT CASE HELD AS UNDER :- IF THE COURT FINDS THAT NOTWITHSTANDING A SERIES O F LEGAL STEPS TAKEN BY AN ASSESSEE, THE INTENDED LEGAL RESULT HAS NOT BEEN ACHIEVED, TH E COURT MIGHT BE JUSTIFIED IN OVERLOOKING THE INTERMEDIATE STEPS, BUT IT IS NOT P ERMISSIBLE FOR THE COURT TO TREAT THE INTERVENING LEGAL STEP AS NON EST BASED UPON SOME H YPOTHETICAL ASSESSMENT OF THE REAL MOTIVE OF THE ASSESSEE. AN ACT WHICH IS OTHERW ISE VALID IN LAW CANNOT BE TREATED AS NON EST MERELY ON THE BASIS OF SOME UNDERLYING M OTIVE SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONA L INTERESTS. IN THE SAME CASE HON. SUPREME COURT ALSO HELD IN TH IS CONTEXT AS UNDER :- SUPREME COURT IN THE AZADI BACHAO ANDOLAN CASE [200 3] 263 ITR 706 FOUND NO LEGAL TABOO AGAINST 'TREATY SHOPPING'. TREATY SHOPPING AN D THE UNDERLYING OBJECTIVE OF TAX AVOIDANCE/MITIGATION WAS APPARENTLY NOT EQUATED TO A COLOURABLE DEVICE. IF A RESIDENT OF A THIRD COUNTRY, WERE TO TAKE ADVANTAGE OF THE T AX RELIEFS AND ECONOMIC BENEFITS ARISING FROM THE OPERATION OF A TREATY BETWEEN OTHE R COUNTRIES THROUGH A CONDUIT ENTITY SET UP BY IT, THE LEGAL TRANSACTIONS ENTERED INTO BY THAT CONDUIT ENTITY COULD NOT BE DECLARED INVALID. THE MOTIVE BEHIND SETTING UP S UCH CONDUIT COMPANIES AND DOING BUSINESS THROUGH THEM IN A COUNTRY HAVING BENEFICIA L TAX TREATY PROVISIONS WAS NOT MATERIAL TO JUDGE THE LEGALITY OR VALIDITY OF THE T RANSACTIONS. BUT THE DEVICE COULD NOT BE USED IN A SINISTER SENSE AND THE DESIGN OF TAX A VOIDANCE BY ITSELF WAS NOT OBJECTIONABLE IF IT WAS WITHIN THE FRAMEWORK OF THE LAW AND NOT PROHIBITED BY THE LAW. 11. IN VIEW OF ABOVE, MERELY DUE TO SOME HYPOTHETIC AL MOTIVE PERCEIVED BY THE AO IN REDUCING TAX LIABILITY BY TH E ASSESSEE, THOUGH THE CLAIM IS WITHIN FOUR CORNERS OF LAW, THE SAME CANNO T BE DISALLOWED. 12. FURTHER WE NOTICE THAT LD. CIT(A) IN THIS CASE HAD GIVEN FOLLOWING DIRECTIONS :- ITA NO.562/AHD/2009 ASST. YEAR 2005-06 11 6. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. IT IS ABSOLUTELY CLEAR FROM THE FACTS OF THE CASE THAT, INTEREST WAS DELIB ERATELY PAID TO THE PARTNERS THIS YEAR SO AS TO REDUCE THE INCIDENCE OF TAX ON THE ADDITIONAL INCOME DISCLOSED DURING THE SURVEY. HOWEVER, THE PA YMENT OF INTEREST ON THE CAPITAL BALANCE OF THE PARTNERS BY A FIRM IS AL LOWABLE U/S 40(B)(IV) IF THE SAME IS LIMITED TO 12% PER ANNUM. IN THE CASE O F THE ASSESSEE THE INTEREST PAID TO THE PARTNERS WAS RS.8,62,746/-. TH E AO IS DIRECTED TO VERIFY AS TO WHETHER THIS SUM WAS PAID IN ACCORDANC E WITH THE PROVISIONS OF SEC.40(B)(IV). IF IT IS FOUND TO BE SO, THE INTE REST WOULD HAVE TO BE ALLOWED AND THE ADDITION DELETED. HOWEVER, WHATEVER IS IN EXCESS OF 12% WILL STAND DISALLOWED/CONFIRMED. 13. THE LD. DR COULD NOT POINT OUT AS TO WHAT IS TH E ERROR IN THIS DIRECTION. THE LD. CIT(A) HAS ALLOWED @ 12% AND DIR ECTED THE AO TO DISALLOW THE BALANCE IS IN OUR OPINION IS CORRECT A ND REQUIRES TO BE UPHELD. AS A RESULT, WE FIND THAT THERE IS NO INFIRMITY IN THE ORDER OF THE LD. CIT(A). IT IS ACCORDINGLY UPHELD. 14. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER WAS PRONOUNCED IN OPEN COURT ON 30/6/11. SD/- SD/- (M.K. SHRAWAT) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTANT MEMB ER AHMEDABAD, DATED : 30/6/11. MAHATA/- ITA NO.562/AHD/2009 ASST. YEAR 2005-06 12 COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD 1.DATE OF DICTATION 23/6/11. 2.DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE TH E DICTATING MEMBER 27/6/11. /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 DICTATING MEMBER FOR PRONOUNCEMENT.. 5.DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR .P.S./P.S 6.DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 7.DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 8.THE DATE ON WHICH THE FILE GOES TO THE ASSTT. REG ISTRAR FOR SIGNATURE ON THE ORDER 9.DATE OF DESPATCH OF THE ORDER..