The ITO, Ward-2(1), JAMNAGAR V. M/s. Amardeep Export, JAMNAGAR

ITA 587/RJT/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 72623 (ITAT-RAJKOT)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 21-10-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 31-10-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: SUBHASH BORDIA
• Keywords: Capital expenditure
• Section: 143(3); 10B; 37; 263; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBULAL: RAJKOT BENCH: RAJKOT BEFORE SHRI T K SHARMA, JM AND SHRI D K SRIVASTAVA, AM ITA NO. 587/RJT/2012 ASSESSMENT YEAR: 2006-07 ITO, WARD-2(1), JAMNAGAR V. M/S AMARDEEP EXPORT, PLOT NO.414, GIDC, PHASE-II JAMNAGAR PAN: AALFA 3896 K DATE OF HEARING : 21.10.2013 DATE OF PRONOUNCEMENT : 25.10.2013 REVENUE BY : SHRI ALOK KUMAR, DR ASSESSEE BY : SHRI SUBHASH BORDIA, CA ORDER D. K. SRIVASTAVA: THE APPEAL FILED BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A), JAMNAGAR ON 27.08.2012, ON THE FOLLOWING GROUNDS:- 1. THE CIT(A) ERRED IN LAW AND ON FACTS IN DELETI NG THE ADDITION OF RS.12,51,762/- MADE BY THE AO ON ACCOUNT OF EXCESS ALLOWANCE OF EXEMPTION U/S 10B OF THE ACT. 2. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN HOLD ING THAT THE CLAUSE IN THE PARTNERSHIP DEED AUTHORIZING PAYMENT OF INTERES T AND REMUNERATION TO PARTNERS WAS NOT MANDATORY AND WAS DISCRETIONARY AN D THEREFORE, THE AO COULD NOT HAVE COMPELLED THE ASSESSEE FIRM TO CHARG E SUCH INTEREST OR REMUNERATION BY INVOKING PROVISIONS OF SECTION 40(B ) OF THE ACT. 3. THE CIT(A) ERRED IN LAW AND ON FACTS IN RELYING UPON THE DECISION OF THE JODHPUR TRIBUNAL IN THE CASE OF TULSA RAM KANHI YALAL & SONS VS. ITO (2008) 118 ITJ 536 AS THE SAME IS NOT APPLICABLE IN THE FACTS OF THE CASE AND IS DISTINGUISHABLE IN AS MUCH AS IN THE CASE OF THE ASSESSEE CLAUSE 18 OF THE PARTNERSHIP DEED CLEARLY PROVIDES THAT ANY ADDITION , ALTERATION, DELETION, SUBSTITUTION ETC. IN THE PARTNERSHIP DEED SHALL BE DONE BY WAY OF A SUPPLEMENTARY DEED OF PARTNERSHIP. 4. THE LD. CIT(A) ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAS RESORTED TO DUBIOUS AND COLOU RFUL METHODS IN GUISE OF TAX PLANNING WHICH IS NOT ALLOWABLE IN VIEW OF THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF MCDOWELL & CO. VS. CIT RE PORTED IN 154 ITR 148. 2 587-RJT-2012 - AMARDEEP EXPORT 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFF ICER. 6. IT IS THEREFORE PRAYED THAT THE ORDER OF THE CIT (A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 7. THAT THE REVENUE CRAVES LEAVE TO ADD, AMEND, ALT ER OR WITHDRAW ANY GROUNDS OF APPEAL. 2. THE ASSESSEE IS A PARTNERSHIP FIRM. IT IS ENGAGE D IN THE BUSINESS OF MANUFACTURE AND EXPORT OF BRASS PARTS AND COMPONENT S. IT FILED ITS RETURN OF INCOME ON 31.12.2006 RETURNING TOTAL INCOME AT RS.18,800/- AFTER CLAIMING EXEMPTION OF RS.20,92,167/- U/S 10B OF THE INCOME-TAX ACT. ASSES SMENT U/S 143(3) WAS ORIGINALLY COMPLETED BY THE ASSESSING OFFICER ON 18.12.2008 AT RS. 43,800/- AFTER MAKING ADDITION OF RS.25,000/- ON ACCOUNT OF UNEXPLAINED C REDITS. IN OTHER WORDS, THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF RS.20,92,167/- U/S 10B WAS ACCEPTED BY THE ASSESSING OFFICER IN THE ORIGINAL ORDER OF ASSESSME NT PASSED U/S 143(3) ON 18.12.2008. IN EXERCISE OF HIS POWERS U/S 263, THE COMMISSIONER OF INCOME-TAX CALLED FOR THE RECORDS AND EXAMINED THEM. HE NOTICE D THAT INTEREST AND REMUNERATION PAYABLE TO PARTNERS IN TERMS OF PARTNE RSHIP DEED WERE NOT EXCLUDED WHILE COMPUTING THE RELIEF U/S 10B IN THE ORIGINAL ORDER OF ASSESSMENT. HE THEREFORE SET ASIDE THE ORIGINAL ORDER OF ASSESSMENT AND DIRE CTED THE ASSESSING OFFICER TO PASS A FRESH ASSESSMENT ORDER. 3. IN PURSUANCE OF THE AFORESAID DIRECTIONS GIVEN B Y THE COMMISSIONER OF INCOME-TAX U/S 263 OF THE INCOME-TAX ACT, THE ASSES SING OFFICER HAS PASSED A FRESH ORDER OF ASSESSMENT U/S 143(3) R.W.S. 263 OF THE IN COME-TAX ACT ON 17.11.2011. HE HAS EXCLUDED INTEREST AND REMUNERATION PAYABLE TO P ARTNERS AS PER PARTNERSHIP DEED WHILE COMPUTING THE RELIEF U/S 10B OF THE INCO ME-TAX ACT, WITH THE FOLLOWING OBSERVATIONS:- THE FIRM HAS MADE PROVISION IN THE PARTNERSHIP DEE D. THE PARTNERSHIP DEED IS LEGAL INSTRUMENT BY VIRTUE OF THIS ASSESSEE CARR YING ON THE BUSINESS AND ALSO THE STATUS OF THE ASSESSEE DECIDED ON THE BASI S OF THE PARTNERSHIP. THEREFORE THE ASSESSEES ARGUMENT REGARDING THE PAY MENT OF REMUNERATION 3 587-RJT-2012 - AMARDEEP EXPORT AND INTEREST IS MUTUAL AND NON COMPULSORY IS NOT AC CEPTED. FURTHER THE HON SUPREME IN THE CASE OF MC DOWELL & COMPANY VS. CIT [154 ITR 148] HELD THAT TAX PLANNING SHOULD BE LEGITIMATE AND WITHIN T HE FRAME WORK OF LAW . COLOURFUL DEVICES CANNOT BE PART OF TAX PLANNING AN D IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS NO HORABLE TO AV OID THE PAYMENT OF TAX BY RESORTING THE DUBIOUS METHOD. THE ASSESSEE FIRM HAS MADE THE COLOURFUL PLANNING TO AVOID THE TAX BY NON PAYING / CREDITING THE INTEREST AND REMUNERATION TO ITS PARTNER WHICH IS PROVIDING IN T HE PARTNERSHIP DEED. THEREFORE THE ASSESSEES ARGUMENT IS NOT ACCEPTED. SUBJECT TO THE ABOVE DISCUSSION AND DATA MADE AVAIL ABLE ON RECORDS, INTERST AND REMUNERATION PAYABLE TO PARTNERS OF THE FIRM FO R THE YEAR UNDER CONSIDERATION IS COMPUTED AS UNDER. COMPUTATION OF REMUNERATION TO THE PARTNERS: AND EL IGIBLE DEDUCTION U/S 10B NET PROFIT/TOTAL INCOME BEFORE ALLOWING INTEREST AN D REMUNERATION TO THE PARTNERS AS COMPUTED IN STATEMENT OF INCOME RS.21,10,962 ADD; REMUNERATION ALLOWED NIL LESS : INTEREST ALLOWABLE TO THE PARTNERS RS . 6,09,494 BOOK PROFIT FOR THE PURPOSE OF REMUNERATION U/S40(B )(V) OF THE I.T. ACT. RS.15,01,467 ALLOWABLE REMUNERATION TO THE PARTNER U/S 40(B) RS. 6,53,087 COMPUTATION OF PROFIT FOR DEDUCTION U/S 10B PROFIT COMPUTED AS PER STATEMENT OF INCOME BEFORE INTEREST AND REMUNERATION TO PARTNER R S.21,10,962 LESS: REMUNERATION ALLOWABLE RS.6,53,087 INTEREST PAYABLE TO PARTNERS RS.6,09,495 RS.12,62,582 PROFIT OF THE BUSINESS RS. 8,45,380 COMPUTATION OF ALLOWABLE DEDUCTION U/S 10B 848380 X 10070802/10161273 RS. 8,40,405 DEDUCTION ALLOWED U/S 10B AS PER ORDER DATED 18.12. 08 RS.20,92,167 ACTUAL DEDUCTION ALLOWABLE AS PER ORDER RS. 8,40,405 EXCESS DEDUCTION ALLOWED U/S 10B RS.12,51,76 2 SUBJECT TO THE ABOVE WORKING AND WORKING OF DEDUCTI ON 10BTHE TOTAL INCOME OF THE FIRM IS REVISED AS UNDER: TOTAL INCOME AS PER ORDER DATED 18.12.2008 RS. 42,800 ADD; EXCESS DEDUCTION U/S 10B AS DISCUSSED ABOVE RS.12,51,762 TOTAL TAXABLE INCOME RS.12,95,562 I.E. RS.12,95,560 4. AGGRIEVED BY THE ORDER PASSED BY THE ASSESSING O FFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD CIT(A). THE LD CIT(A) HAS DIRECTED THE 4 587-RJT-2012 - AMARDEEP EXPORT ASSESSING OFFICER NOT TO EXCLUDE THE INTEREST AND R EMUNERATION PAYABLE TO PARTNERS IN TERMS OF PARTNERSHIP DEED WHILE COMPUTING THE RE LIEF U/S 10B OF THE INCOME-TAX ACT, WITH THE FOLLOWING OBSERVATIONS:- 6. I HAVE CAREFULLY CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND THE DISCUSSION MADE BY THE AO IN THE ASSESSMENT ORD ER. THE BASIC ARGUMENT OF THE APPELLANT IS THAT IT IS NOT MANDATORY TO ALL OCATE INTEREST ON PARTNERS CAPITAL AND REMUNERATION TO PARTNER U/S 40(B) MEREL Y ON THE FACT THAT THE PARTNERSHIP DEED CONTAINED PROVISIONS OF INTEREST A ND REMUNERATION. THE PAYMENT OF INTEREST AND REMUNERATION TO THE PARTNER S IS GOVERNED BY MUTUAL CONSENT OF THE PARTNERS. IF PARTNERS MUTUALLY DECID E NOT TO PAY INTEREST AND REMUNERATION, IN SPITE OF HAVING CLAUSE OF THE SAME IN PARTNERSHIP DEED, ASSESSING AUTHORITY IS NOT JUSTIFIED IN ENFORCING D EDUCTION OF INTEREST ON CAPITAL AND REMUNERATION TO THE PARTNERS. 6.1 IN THE INSTANT CASE, IT IS CORRECT THAT THE TER MS OF PARTNERSHIP PROVIDED PAYMENT OF INTEREST @ 12% ON CAPITAL OF PARTNERS AS WELL AS REMUNERATION TO THE WORKING PARTNERS. HOWEVER, THE APPELLANT DID NO T MAKE PAYMENT THEREOF TO THE PARTNERS NOT MADE ANY PROVISION OF LIABILITY IN THE BOOKS OF ACCOUNT. ON PERUSAL OF DEED OF PARTNERSHIP REVEALS THAT THERE W AS NO ANY COMPULSION OF THE PAYMENT OF INTEREST OR REMUNERATION TO THE PART NERS. THE RELEVANT CLAUSE IN THE DEED INDICATE THE FLEXIBILITY BY USING WORDS : THAT THE PARTIES HAVE DECIDED THAT SIMPLE INTEREST AT THE RATE AS MAY BE MUTUALLY AGREED BY THE PARTNERS FROM TIME TO TIME OR PRESCRIBED UNDER SECT ION 40(B) OF THE INCOME- TAX ACT, MAY BE PAID TO THE PARTNER ON THEIR CAPITA L INVESTED, CURRENT, LOAN ACCOUNTS AND SUCH INTEREST MAY BE PAID EVEN IF IN A NY PARTICULAR YEAR THE PARTNERSHIP FIRM MAY HAVE INCURRED LOSSES. FROM TH E CLAUSE, IT IS EVIDENT THAT PARTNERSHIP DEED WITH AUTHORIZED THE PARTNERS TO CHARGE INTEREST ON THEIR CAPITALS AND REMUNERATION TO THE WORKING PARTNERS C OULD BE VARIED OR AMENDED EITHER VERBALLY OR EVEN BY CONDUCT. IT WAS NOT NECESSARY FOR THE PARTIES TO HAVE REDUCED SUCH TERMS IN WRITING IN CA SE THEY DESIRED NOT TO CHARGE ANY INTEREST OR REMUNERATION AS SUCH. THIS V IEW ALSO FOUNDS FURTHER SUPPORTED BY THE DECISION OF JODHPUR BENCH OF TRIBU NAL IN CASE OF TULSA RAM 5 587-RJT-2012 - AMARDEEP EXPORT KANHIYALAL & SONS VS. ITO (2008) 118 TTJ 536. IN VI EW OF THE ABOVE, I OPINE THAT THE AO COULD NOT HAVE COMPELLED THE APPELLANT TO CHARGE SUCH INTEREST OR REMUNERATION BY INVOKING SECTION 40(B) OF THE AC T MORE PARTICULARLY WHEN IT IS NOT MANDATORY BUT DISCRETIONARY FOR THE ASSESSEE TO HAVE MADE SUCH A CLAIM. I THEREFORE, HOLD THAT IN THE CASE OF APPELL ANT, 100% OF THE PROFIT IS ELIGIBLE FOR THE EXEMPTION U/S 10B. 5. AGGRIEVED BY THE ORDER PASSED BY THE LD. CIT(A), THE REVENUE IS NOW IN APPEAL BEFORE THIS TRIBUNAL. IN SUPPORT OF APPEAL, THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ASSESSMENT ORDER PAS SED BY THE ASSESSING OFFICER. 6. IN REPLY, THE LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE RELIED UPON THE APPELLATE ORDER PASSED BY THE LD. CIT(A). HE HAS AL SO FILED WRITTEN SUBMISSIONS IN THIS BEHALF. ACCORDING TO HIM, THE ASSESSEE-FIRM IS A 100% EXPORT ORIENTED UNIT AND THEREFORE ELIGIBLE FOR RELIEF U/S 10B. AS REGARDS T HE ISSUE OF EXCLUSION OF INTEREST AND REMUNERATION PAYABLE TO PARTNERS FOR WORKING OUT RE LIEF U/S 10B, HE SUBMITTED THAT PARTNERS HAD ORALLY DECIDED NOT TO PAY INTEREST AND REMUNERATION TO PARTNERS AND THEREFORE THEY WERE NOT PAID TO THE PARTNERS NOTWIT HSTANDING THE FACT THAT THE PARTNERSHIP DEED AUTHORIZED SUCH PAYMENT TO THE PAR TNERS. BASED ON THE AFORESAID, HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER OUG HT NOT TO HAVE EXCLUDED THEM WHILE COMPUTING RELIEF U/S 10B OF THE INCOME-TAX AC T. 7. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY CON SIDERED THEIR SUBMISSIONS. SECTION 10B EXEMPTS FROM TAX ANY PROFIT AND GAIN DE RIVED BY A 100% EXPORT- ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE SUBJECT TO THE FULFILLMENT OF CONDITIONS LAID DOWN IN SECTION 10B OF THE INCOME-TAX ACT. THE PROFITS AND GAINS ELIGIBLE FOR EXEMPTION U /S 10B CAN NEITHER BE ARTIFICIAL NOR INFLATED PROFITS AND GAINS BUT ACTUAL PROFITS AND G AINS. IN OTHER WORDS, ALL OUTGOINGS INCLUDING EXPENSES ELIGIBLE FOR DEDUCTION NEED TO B E EXCLUDED WHILE COMPUTING THE PROFITS AND GAINS OF THE BUSINESS FOR RELIEF U/S 10 B. 8. PAYMENT OF INTEREST ON CAPITAL AND REMUNERATION TO PARTNERS IS ELIGIBLE FOR DEDUCTION U/S 37 OF THE INCOME-TAX ACT SUBJECT TO F ULFILLMENT OF CONDITIONS LAID DOWN IN SECTION 40(B) OF THE INCOME-TAX ACT. ACCORDING T O SECTION 37, ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIO NS 30 TO 36 AND NOT BEING IN THE 6 587-RJT-2012 - AMARDEEP EXPORT NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. SECTION 40(B) HOW EVER PLACES CERTAIN RESTRICTIONS ON THE DEDUCTIBILITY OF AMOUNT OF INTEREST AND REMU NERATION PAYABLE TO PARTNERS. THE RELEVANT CLAUSES IN THE PARTNERSHIP DEED, COPY OF W HICH HAS BEEN FILED BEFORE THIS TRIBUNAL, DO NOT VIOLATE THE PRESCRIPTION OF SECTIO N 40(B) OF THE INCOME-TAX ACT. SECTION 40(B) ALLOWS DEDUCTION IN RESPECT OF INTERE ST AND REMUNERATION PAYABLE TO PARTNERS IF THEY ARE SO AUTHORIZED BY THE PARTNERSH IP DEED. IN THE PRESENT CASE, PAYMENT OF INTEREST AND REMUNERATION PAYABLE TO PAR TNERS IS DULY AUTHORIZED BY THE PARTNERSHIP DEED. THE MERE FACT THAT THE PARTNERS H AVE ORALLY DECIDED NOT TO PAY INTEREST AND REMUNERATION PAYABLE TO PARTNERS DOES NOT MEAN THAT SUCH PAYMENTS ARE NOT AUTHORIZED BY THE PARTNERSHIP DEED. 9. ON CAREFUL PERUSAL OF THE RELEVANT PARTNERSHIP D EED, IT IS CLEAR THAT PAYMENT OF INTEREST ON CAPITAL AND REMUNERATION TO PARTNERS IS NOT HIT BY SECTION 40(B) OF THE INCOME-TAX ACT. THE FACT THAT THE PARTNERS HAVE CHO SEN TO FOREGO INTEREST ON CAPITAL AND REMUNERATION PAYABLE TO THEM NOTWITHSTANDING TH E FACT THAT SUCH PAYMENT IS DULY AUTHORIZED BY THE PARTNERSHIP DEED MAKES IT AP PARENT THAT SUCH COURSE WAS ADOPTED TO INFLATE THE PROFITS ELIGIBLE FOR EXEMPTI ON U/S 10B. THE ASSESSING OFFICER HAS CORRECTLY WORKED OUT INTEREST ON CAPITAL AND RE MUNERATION PAYABLE TO PARTNERS AND EXCLUDED THEM FROM THE OVERALL PROFITS OF BUSIN ESS FOR WORKING OUT THE PROFITS ELIGIBLE FOR EXEMPTION U/S 10B OF THE INCOME-TAX AC T. THE ORDER OF THE LD. CIT(A) IN THIS BEHALF IS THEREFORE REVERSED AND THAT OF THE A SSESSING OFFICER RESTORED. THE APPEAL FILED BY THE REVENUE IS ALLOWED. ORDER PRONOUNCED ON 25.10.2013 SD/- SD/- (T. K. SHARMA) ( D. K. SRIVASTAVA) JUDICIAL MEMBER ACCOUNTANT MEMBER RAJKOT: 25.10.2013 BT 7 587-RJT-2012 - AMARDEEP EXPORT COPY OF ORDER FORWARDED TO:- 1. APPELLANT ITO, WARD-2(1), JAMNAGAR 2. RESPONDENT- M/S AMARDEEP EXPORT, PLOT NO.414, GIDC, PHASE-II, JAMNAGAR 3. CONCERNED CIT, JAMNAGAR 4. CIT(A), JAMNAGAR 5. DR, ITAT, RAJKOT 6. GUARD FILE. BY ORDER TRUE COPY PRIVATE SECRETARY, ITAT, RAJKOT