ITO, Nahan V. M/s G.N.G. Enterprises, Sirmour

ITA 606/CHANDI/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80977 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 5 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-11-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 03-11-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 24-05-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: SMEER K OHLI
• Keywords: Depreciation; Transfer pricing
• Section: 80C; 92F; 10AA; 80HHC; 80G; 10B; 32; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 606/CHD/2013 ASSESSMENT YEARS : 2006-07 I.T.O.NAHAN V M/S GNG ENTERPRISES TRILOKPUR ROAD KALA AMB SIRMOUR AAGFG 1962K (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI MANJIT SINGH RESPONDENT BY: SHRI SMEER K OHLI DATE OF HEARING 3.11.2014 DATE OF PRONOUNCEMENT 11.11 .2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER OF LD CIT (A), SHIMLA DATED 14.3.2013. 2. IN THIS APPEAL ONLY DISPUTE RAISED BY THE REVENU E IS THAT THE LD. CIT(A) HAS WRONGLY HELD THAT DEDUCTION U/S 80IC IS ALLOWABLE ON THE TOTAL GROSS PROFIT WITHOUT REDUCI NG THE REMUNERATION AND INTEREST PAYABLE TO THE PARTNERS. 3 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURIN G ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT THE ASSESSEE IS A PARTNERSHIP FIRM AND HAS SET UP A MAN UFACTURING UNIT FOR PRODUCTION OF FAN BLADES AND ACCESSORIES O F CEILING FANS. UNIT WAS SET UP IN FINANCIAL YEAR 2005-06 AN D DEDUCTION U/S 80IC WAS CLAIMED. HOWEVER, ON PERUSAL OF PARTN ERSHIP DEED IT WAS NOTICED THAT THE ASSESSEE WAS REQUIRED TO PAY REMUNERATION AND INTEREST TO THE PARTNERS. RELEVANT CLAUSES HAVE BEEN EXTRACTED BY THE ASSESSING OFFICER AS UND ER: 2 7(B) THAT THE INTEREST SHALL BE PAID TO PARTNERS O N THEIR CAPITAL AS AT THE BEGINNING OF HE YEAR AT THE RAT OF 12% PER A NNUM OR AT SUCH RATE OF INTEREST AS MAY BE PRESCRIBED U/S 40(B) OF THE ACT OR BY THE CENTRAL GOVT FROM TIME TO TIME WHICH EVER IS LESS. 9 THE AGGREGATE REMUNERATION PAYABLE TO THE PARTNER S SHALL BE CALCULATED FOR EACH ACCOUNTING YEAR IN THE FOLLOWI9 NG MANNER: I) IN RESPECT OF BOOK PROFIT AS PER INCOME TAX ACT UPTO RS. 75,000 AT THE RATE OF 90% OR RS. 50,000 WHICHEVER I S MORE. II) IN RESPECT OF NEXT BOOK PROFIT OF RS. 75,000 A T THE RATE OF 60%. III) IN RESPECT OF BALANCE OF BOOK PROFIT A THE RA TE OF 40% SUCH REMUNERATION SHALL BE DISTRIBUTED BETWEEN PARTNERS AS UNDER: A) PARTY OF THE FIRST PART 50% B) PARTY OF SECOND PART 50% A THE ABOVE REMUNERATION SHALL ACCRUE AT THE END OF THE ACCOUNTING YEAR AND WILL HAVE TO BE DISTRIBUTED AMO NGST THE PARTNERS AS ABOVE. B THE ABOVE PARTNERS SHALL NOT BE ENTITLED TO DRAW ANY REMUNERATION IN THE ACCOUNTING YEAR IN WHICH THE PA RTNERSHIP FIRM HAS SUFFERED LOSS. THE ABOVE REMUNERATION PAYABLE TO THE PARTNERS SHALL BE CREDITED TO THEIR RESPECTIVE ACCO UNT AT THE CLOSE OF THE ACCOUNTING YEAR AND THE AMOUNT OF REMUNERATI ON SHALL FALL DUE TO THEM AS DETERMINED IN THE ABOVE MANNER. C THE PARTNERS SHALL BE ENTITLED TO INCREASE OR DEC REASE THE ABOVE REMUNERATION OR MAY AGREE TO PAY REMUNERATION TO OTHER WORKING PARTNERS OR PARTNERS AS THE CASE MAY BE. T HE PARTIES HERETO MAY ALSO AGREE TO REVISE THE MODE OF CALCULA TING THE ABOVE SAID REMUNERATION AS MAY BE MUTUALLY AGREED BETWEEN PARTNERS FROM TIME TO TIME OR DUE TO CHANGE IN LAW. HOWEVER , IT S HALL BE WITHIN THE LIMITS AS MAY BE PRESCRIBED UNDER THE IN COME TAX ACT FROM TIME TO TIME. ON PERUSAL OF PROFIT AND LOSS ACCOUNT IT WAS FURTHE R SEEN THAT NEITHER ANY INTEREST NOR ANY REMUNERATION WAS PAID TO THE PARTNERS. THE ASSESSEE WAS CONFRONTED WITH THIS PO SITION AND IN RESPONSE IT WAS ADMITTED THAT THE INTEREST AND S ALARY HAS NOT BEEN PAID AS PROVIDED IN THE PARTNERSHIP DEED AND I T WAS ONLY A TECHNICAL ERROR AND WOULD NOT MAKE ANY DIFFERENCE A S FAR AS INCOME OF PARTNERSHIP FIRM IS CONCERNED. THE ASSES SING OFFICER DID NOT AGREE WITH THIS POSITION AND INVOKED THE PR OVISIONS OF SECTION 80IA(10) WHICH WAS APPLICABLE TO SEC 80IC A LSO AND RECOMPUTED THE DEDUCTION U/S 80IC AFTER REDUCING TH E INTEREST AND SALARY PAYABLE TO THE PARTNER. 3 4 ON APPEAL VARIOUS SUBMISSIONS WERE MADE AND RELIA NCE WAS PLACED ON THE DECISION OF CHANDIGARH BENCH OF T HE TRIBUNAL IN CASE OF M/S NAVKAR POLYPLAST COMPANY, D ISTT SIRMOUR IN ITA NO. 953.CHD/2009. 5 THE LD. CIT(A) EXTRACTED THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL WHICH IS AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY . WITH REGARD TO THE DISPUTE IN HAND, THE CASE MADE OUT BY THE RE VENUE IS ON THE STRENGTH OF SEC 80IA(10) WHICH WE REPRODUCE HEREIN AFTER: 80IA(10) - WHERE IT APPEARS TO THE ASSESSING OFFICER THAT, OW ING TO THE CLOSE CONNECTION BETWEEN THE ASSESSEE CARRYING ON THE ELI GIBLE BUSINESS TO WHICH THIS SECTION APPLIES AND ANY OTHER PERSON, OR FOR ANY OTHER REAS ON, THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BE TWEEN THEM PRODUCES TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE 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 TH IS SECTION, TAKE THE AMOUNT OF PROFITS AS MAY BE REASONABLY DEEMED TO HAVE BEEN DERIVED TH EREFROM: A PERUSAL OF THE SAID SECTION IN SO FAR AS IT IS NE CESSARY FOR THE PRESENT CASE REVEALS THAT IN ORDER TO INVOKE SOME ESSENTIAL REQUIREMENTS ARE: (A) THAT THERE MUST BE CLOSE CONNECTION BETWEEN THE ASSESSEE AND THE OTHER PERSON. (B) THAT THE COURSE OF BUSINESS BETWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN THEM PRODUCES TO THE ASSESSEE MO RE THAN THE ORDINARY PROFITS. THERE ARE OTHER REQUIREMENTS IN THE SAID SECTION WI TH WHICH WE DO NOT WISH TO DETAIL IN AS MUCH AS THE SAME ARE NOT R ELEVANT TO THE DISPUTE ON HAND. SECTION 80IA(10) IS APPLICABLE TO SEC 80IC ALSO BECAUSE OF PROVISIONS OF SECTION 80IC ALSO BECAUSE OF PROVISIONS OF SECTION 80IC(7). AS PER SECTION 80IA (10) WHER E THE ASSESSING OFFICER FINDS THAT OWING TO A CLOSE CONNECTION BETW EEN THE ASSESSING CARRYING ON ELIGIBLE BUSINESS AND ANY OTH ER PERSON DOING ANY OTHER BUSINESS, THE COURSE OF BUSINESS BE TWEEN THEM IS SO ARRANGED THAT THE BUSINESS TRANSACTED BETWEEN TH EM PRODUCTS TO THE ASSESSEE MORE THAN THE ORDINARY PROFITS WHIC H ARISES IN SUCH BUSINESS, THE ASSESSING OFFICER IS EMPOWERED T O COMPUTE THE PROFITS OF SUCH BUSINESS AS MAY BE REASONABLY DEEME D TO HAVE BEEN DERIVED THEREFROM. THE TWO REQUIREMENTS OF TH E SECTION WHICH IN OUR VIEW ARE OF RELEVANCE IN THIS CASE, HA VE BEEN ENUMERATED EARLIER BY US. THE FIRST IS THAT THERE MUST BE A CLOSE CONNECTION BETWEEN THE ASSESSEE AND SUCH OTHER PERS ON. THE SECOND IS THAT THERE MUST BE AN ARRANGEMENT WHERE B Y THE BUSINESS TRANSACTED BETWEEN THE PRODUCES TO THE A SSESSEE MORE THAN THE ORDINARY PROFITS. IN THE PRESENT CASE, THE CHARGE OF ASSESSING OFFICER IS THAT THE ASSESSEE HAS NOT DEBI TED ANY EXPENDITURE ON REMUNERATION TO ITS PARTNERS AND INT EREST ON PARTNERS CAPITAL CONTRIBUTION AND THEREFORE SUCH ARRANGEMENT BETWEEN THE ASSESSEE AND ITS PARTNERS HAVE RESULTED IN MORE THAN ORDINARY PROFITS TO THE ASSESSEE. IN SO FAR AS THE FIRST CONDITION IS CONCERNED, REGARDING CLOSE CONNECTION OSTENSIBLY, T HE SAME STANDS FULFILLED AS THE ASSESSEE AND ITS PARTNERS CAN BE S AID TO HAVE A CLOSE CONNECTION . THE MOOT QUESTION IS AS TO WHET HER THERE CAN BE SAID TO BE AN ARRANGEMENT OF TRANSACTION OF BUSI NESS BETWEEN THE ASSESSEE AND ITS PARTNERS WHEREBY THE ASSESSEE EARNED MORE THAN THE ORDINARY PROFITS. A RELATED QUESTION IS AS TO WHETHER 4 PAYMENT OF REMUNERATION AND INTEREST ON CAPITAL CON TRIBUTION TO THE PARTNERS CAN BE SAID TO BE AN ACTIVITY FALLING WITH IN THE SCOPE OF THE EXPRESSION BUSINESS TRANSACTED BETWEEN THEM. IN OUR VIEW, THE MEANING OF THE EXPRESSION BUSINESS TRANSACTED BETWEEN THEM APPEARING IN SECTION 80IA(10) ONLY REFERS TO SUCH T RANSACTIONS WHICH RELATE TO THE TRADING ACTIVITY OF THE ASSESSE E. VIEWED IN THIS LIGHT, THE PAYMENT OF REMUNERATION AND INTEREST ON CAPITAL CONTRIBUTION TO PARTNERS CAN NOT BE SAID TO THE FAL LING WITHIN THE SCOPE OF TRADING ACTIVITIES OF THE ASSESSEE SO AS T O FALL WITHIN THE EXPRESSION 80IA(10) OF THE ACT. MOREOVER, IN THE P RESENT CASE, THERE IS NO DISPUTE TO THE FACT POSITION THAT THE A SSESSEE HAS NOT ACTUALLY INCURRED ANY LIABILITY ON PAYMENT OF REMUN ERATION OR INTEREST ON CAPITAL CONTRIBUTION TO THE PARTNERS. THE LD. CIT(A) HAS CULLED OUT THE RELEVANT CLAUSE OF THE PARTNERSH IP DEED WHICH AUTHORIZES THE PARTNERS TO REDUCE OR WAIVE THE PAYM ENT OF REMUNERATION AND INTEREST ON CAPITAL CONTRIBUTION B Y A MUTUAL AGREEMENT WITHOUT EXECUTION OF ANY FRESH DEED. THE FACTUM OF THE PARTNERS HAVING APPENDED THEIR SIGNATURES TO THE PR OFIT AND LOSS ACCOUNT WHEREBY NO CLAIM WAS MADE ON REMUNERATION A ND INTEREST ON PARTNERS CAPITAL CONTRIBUTION, ITSELF SHOW THEI R MUTUAL AGREEMENT NOT TO OBTAIN SUCH PAYMENTS FROM THE FIRM . THUS, THE CONDUCT OF THE PARTNERS SHOW THAT THEY HAVE NOT ACT ED UPON THE CLAUSE OF THE DEED WHICH OTHERWISE AUTHORIZES THEM TO TAKE REMUNERATION AND INTEREST ON THEIR CAPITAL CONTRIBU TION. HAVING FACTUALLY OBSERVE THAT THERE WAS NO SUCH PAYMENTS M ADE AND NEITHER WAS THERE ANY LIABILITY FOR SUCH AMOUNT, IN OUR VIEW THE ASSESSING OFFICER WAS NOT EMPOWERED TO REDUCE THE P ROFITS ON THIS SCORE FOR THE PURPOSE THE SECTION 80IA(10) OF THE A CT. IN VIEW OF THE AFORESAID DISCUSSION, WE FIND THAT T HE ASSESSING OFFICER NOT ONLY WRONGLY INVOKED THE PROVISIONS OF SECTION 80IA(10) BUT ALSO ERRED IN INTERPRETING THE PARTNERSHIP DEED SO AS TO HOLD THE ASSESSEE LIABLE FOR REDUCING ITS PROFITS ON ACC OUNT OF REMUNERATION AND INTEREST TO THE PARTNERS FOR THE P URPOSE OF SECTION 80IC OF THE ACT. THE ORDER OF THE LD. CIT( A) ON THIS GROUND IS HEREBY AFFIRMED. THUS, THE REVENUE FAILS ON GROUND NO. 1 AND 2. ON THE BASIS OF ABOVE SHE OBSERVED INN PARA 5 AS UN DER: 5 THUS IT HAS BEEN LAID DOWN BY THE ITAT THAT IN T HE ABSENCE OF ANY PAYMENTS MADE TO THE PARTNERS ON ACCOUNT OF SALARY AND/OR INTEREST, AND THERE BEING NO LIABILITY FOR SUCH PAY MENT, THE ASSESSING OFFICER WAS NOT EMPOWERED TO REDUCE THE P ROFITS ON THIS SCORE BY INVOKING THE PROVISIONS OF SECTION 80IA(1 0) OF THE ACT. RESPECTFULLY FOLLOWING THE SAID JUDGMENT OF THE JUR ISDICTIONAL ITAT, THE ADDITION MADE BY THE ASSESSING OFFICER TO THE T UNE OF RS. 1091064/- IN THE INSTANT CASE IS DIRECTED TO BE DEL ETED. THE ASSESSING OFFICER IS ALSO DIRECTED TO ALLOW THE DED UCTION U/S 80IC OF THE ACT IN RESPECT OF THE ASSESSEES PROFIT WITH OUT REDUCING THE AMOUNT OF SALARY AND INTEREST PAYABLE TO THE PARTNE RS. 6 BEFORE US. LD. D.R FOR THE REVENUE STRONGLY SUPPO RTED THE ORDER OF THE ASSESSING OFFICER. 7 ON THE OTHER HAND, LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AFTER WRITING THE PARTNERSHIP DEED L ATER ON THROUGH MUTUAL UNDERSTANDING IT WAS AGREED THAT SAL ARY AND INTEREST WOULD NOT BE PAID. HE FURTHER RELIED ON T HE DECISION OF THE TRIBUNAL IN CASE OF M/S NAVKAR POLYPLAST COMPAN Y (SUPRA). 5 ATTENTION OF THE LD. COUNSEL FOR THE ASSESSEE WAS I NVITED TO THE PROVISIONS OF SECTION 80AB AND 80B AND IT WAS SPEC IFICALLY ASKED THAT WHY THE INCOME SHOULD NOT BE COMPUTED AS PROVIDED IN SEC 80B R.W.S 29 AS HAS BEEN HELD BY THE HON'BL E SUPREME COURT IN CASE OF CIT V. KOTAGIRI INDUSTRIAL CO-OPER ATIVE TEA FACTORY LTD., 224 ITR 604 (S.C). IN RESPONSE THE L D. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE MAY BE DE CIDED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT. 8 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULL Y AND FIND THAT BEFORE ALLOWING DEDUCTION UNDER CHAPTER V IA BASIC PROVISIONS HAVE TO BE KEPT IN MIND. PROVISIONS OF SECTION 80A, 80AB AND 80B ARE RELEVANT WHICH HAVE BEEN REPRODUCE D AS UNDER: SECTION - 80A - 80A. (1) IN COMPUTING THE TOTAL INCOME OF AN ASSESSEE, THERE SHALL BE ALLOWED FROM HIS GROSS TOTAL INCOME, IN ACCORDANCE WITH AND SUBJECT TO THE PROVISIONS OF THIS CHAPTER, THE DEDUCTIONS SPECIFIED IN SECTIONS 80C TO [ 80U ]. (2) THE AGGREGATE AMOUNT OF THE DEDUCTIONS UNDER TH IS CHAPTER SHALL NOT, IN ANY CASE, EXCEED THE GROSS TOTAL INCOME OF THE ASSESSEE. [(3) WHERE, IN COMPUTING THE TOTAL INCOME OF AN AS SOCIATION OF PERSONS OR A BODY OF INDIVIDUALS, ANY DEDUCTION IS ADMISSIBLE UNDER SECTION 80G OR SECTION 80GGA [OR SECTION 80GGC ] OR SECTION 80HH OR SECTION 80HHA OR SECTION 80HHB OR SECTION 80HHC OR SECTION 80HHD OR SECTION 80-I OR SECTION 80-IA [OR SECTION 80-IB ] [OR SECTION 80-IC ] [OR SECTION 80-ID OR SECTION 80-IE ] OR SECTION 80J OR SECTION 80JJ , NO DEDUCTION UNDER THE SAME SECTION SHALL BE MADE IN COMPUTING THE TOTAL I NCOME OF A MEMBER OF THE ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS IN RE LATION TO THE SHARE OF SUCH MEMBER IN THE INCOME OF THE ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS.] [(4) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTION 10A OR SECTION 10AA OR SECTION 10B OR SECTION 10BA OR IN ANY PROVISIONS OF THIS CHAPTER UNDER THE HEA DING C DEDUCTIONS IN RESPECT OF CERTAIN INCOMES , WHERE, IN THE CASE OF AN ASSESSEE, ANY AMOUNT OF PROFITS AND GAINS OF AN UNDERTAKING OR UN IT OR ENTERPRISE OR ELIGIBLE BUSINESS IS CLAIMED AND ALLOWED AS A DEDUCTION UNDER ANY OF THO SE PROVISIONS FOR ANY ASSESSMENT YEAR, DEDUCTION IN RESPECT OF, AND TO THE EXTENT OF , SUCH PROFITS AND GAINS SHALL NOT BE ALLOWED UNDER ANY OTHER PROVISIONS OF THIS ACT FOR SUCH ASSESSMENT YEAR AND SHALL IN NO CASE EXCEED THE PROFITS AND GAINS OF SUCH UNDERTAKI NG OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS, AS THE CASE MAY BE. (5) WHERE THE ASSESSEE FAILS TO MAKE A CLAIM IN HIS RETURN OF INCOME FOR ANY DEDUCTION UNDER SECTION 10A OR SECTION 10AA OR SECTION 10B OR SECTION 10BA OR UNDER ANY PROVISION OF THIS CHAPTER UNDER THE HEADING C.DEDUCTIONS IN RESPECT OF CERTAIN INCOMES, NO DEDUCTION SHALL BE ALLOWED TO HIM THEREUNDER.] [(6) NOTWITHSTANDING ANYTHING TO THE CONTRARY CONT AINED IN SECTION 10A OR SECTION 10AA OR SECTION 10B OR SECTION 10BA OR IN ANY PROVISIONS OF THIS CHAPTER UNDER THE HEA DING C DEDUCTIONS IN RESPECT OF CERTAIN INCOMES, WHERE ANY GOODS OR SERVICES HELD FOR THE PURPOSES OF THE UNDERTAKING OR UNIT OR ENTERPRISE O R ELIGIBLE BUSINESS ARE TRANSFERRED TO ANY OTHER BUSINESS CARRIED ON BY THE ASSESSEE OR WH ERE ANY GOODS OR SERVICES HELD FOR 6 THE PURPOSES OF ANY OTHER BUSINESS CARRIED ON BY TH E ASSESSEE ARE TRANSFERRED TO THE UNDERTAKING OR UNIT OR ENTERPRISE OR ELIGIBLE BUSIN ESS AND, THE CONSIDERATION, IF ANY, FOR SUCH TRANSFER AS RECORDED IN THE ACCOUNTS OF THE UN DERTAKING OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS DOES NOT CORRESPOND TO THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THE DATE OF THE TRANSFER, THEN, FOR THE PURPOSES OF ANY DEDUCTION UNDER THIS CHAPTER, THE PROFITS AND GAINS OF SUCH UNDERTAKING OR UNIT O R ENTERPRISE OR ELIGIBLE BUSINESS SHALL BE COMPUTED AS IF THE TRANSFER, IN EITHER CASE, HAD BE EN MADE AT THE MARKET VALUE OF SUCH GOODS OR SERVICES AS ON THAT DATE. EXPLANATION. FOR THE PURPOSES OF THIS SUB-SECTION, THE EXPRESSI ON MARKET VALUE, ( I ) IN RELATION TO ANY GOODS OR SERVICES SOLD OR SUPP LIED, MEANS THE PRICE THAT SUCH GOODS OR SERVICES WOULD FETCH IF THESE WERE SOLD BY THE UNDE RTAKING OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS IN THE OPEN MARKET, SUBJECT TO STATUTORY O R REGULATORY RESTRICTIONS, IF ANY; ( II ) IN RELATION TO ANY GOODS OR SERVICES ACQUIRED, MEANS T HE PRICE THAT SUCH GOODS OR SERVICES WOULD COST IF THESE WERE ACQUIRED BY THE UNDERTAKIN G OR UNIT OR ENTERPRISE OR ELIGIBLE BUSINESS FROM THE OPEN MARKET, SUBJECT TO STATUTORY OR REGULATORY RESTRICTIONS, IF ANY;] [(III) IN RELATION TO ANY GOODS OR SERVICES SOLD, SUPPLIED OR ACQUIRED MEANS THE ARMS LENGTH PRICE AS DEFINED IN CLAUSE (II) OF SECTION 92F OF SUCH GOODS OR SERVICES, IF IT IS A SPECIFIED DOMESTIC TRANSACTION REFERRED TO IN SECTION 92BA .] [(7) WHERE A DEDUCTION UNDER ANY PROVISION OF THIS CHAPTER UNDER THE HEADING C. DEDUCTIONS IN RESPECT OF CERTAIN INCOMES IS CLAIME D AND ALLOWED IN RESPECT OF PROFITS OF ANY OF THE SPECIFIED BUSINESS REFERRED TO IN CLAUSE (C) OF SUB-SECTION (8) OF SECTION 35AD FOR ANY ASSESSMENT YEAR, NO DEDUCTION SHALL BE ALLOWED UNDER THE PROVISIONS OF SECTION 35AD IN RELATION TO SUCH SPECIFIED BUSINESS FOR THE SAME OR ANY OTHER ASSESSMENT YEAR.]. 80AB - [DEDUCTIONS TO BE MADE WITH REFERENCE TO THE INCOM E INCLUDED IN THE GROSS TOTAL INCOME. - WHERE ANY DEDUCTION IS REQUIRED TO BE MADE OR ALLOWED UNDER ANY SECTION [* * *] INCLUDED IN T HIS CHAPTER UNDER THE HEADING C.DEDUCTIONS IN RESPECT OF CERTAIN INCOMES IN RESPECT OF ANY INCOME OF THE NATURE SPECIFIED IN THAT SECTION WHIC H IS INCLUDED IN THE GROSS TOTAL INCOME OF THE ASSESSEE, THEN, NOTWITHST ANDING ANYTHING CONTAINED IN THAT SECTION, FOR THE PURPOSE OF COMPU TING THE DEDUCTION UNDER THAT SECTION, THE AMOUNT OF INCOME OF THAT NA TURE AS COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT (BEFORE MAKING ANY DEDUCTION UNDER THIS CHAPTER) SHALL ALONE BE DEEMED TO BE THE AMOUNT OF INCOME OF THAT NATURE WHICH IS DERIVED OR RECEIVED BY THE ASS ESSEE AND WHICH IS INCLUDED IN HIS GROSS TOTAL INCOME.] 80B 80B. IN THIS CHAPTER ( 1 ) [* * *] ( 2 ) [* * *] ( 3 ) [* * *] ( 4 ) [* * *] ( 5 ) GROSS TOTAL INCOME MEANS THE TOTAL INCOME COMPU TED IN ACCORDANCE WITH THE PROVISIONS OF THIS ACT, BEFORE MAKING ANY DEDUCTION UNDER THIS CHAPTER [* * *] [* * *]; ( 6 ) [* * *] ( 7 ) [* * *] ( 8 ) [* * *] ( 9 ) [* * *].] 9 READING OF ABOVE PROVISIONS CLEARLY SHOWS THAT DE DUCTION UNDER VARIOUS PROVISIONS OF THIS CHAPTER ARE ALLOWA BLE ONLY IF THE INCOME OF THE NATURE ON WHICH DEDUCTION IS CLAI MED HAS BEEN INCLUDED IN THE TOTAL INCOME AND FURTHER DEDUC TION HAS TO BE ALLOWED ON THE BASIS OF ABOVE GROSS TOTAL INCOME . GROSS 7 TOTAL INCOME HAS ITSELF BEEN DEFINED IN SEC 80B WHI CH CLEARLY SHOWS THAT DEDUCTION CAN BE ALLOWED ON THAT INCOME WHICH IS COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE A CT BEFORE ALLOWING DEDUCTION UNDER CHAPTER VIA. UNDER INCOME -TAX ACT THE INCOME HAS TO BE COMPUTED UNDER VARIOUS HEADS A S PER THE PROVISIONS OF A PARTICULAR HEAD. THE INCOME UNDER THE HEAD BUSINESS AND PROFESSION IS TO BE COMPUTED AS PER SEC 29 WHICH READS AS UNDER: SEC 29 - INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFES SION, HOW COMPUTED. THE INCOME REFERRED TO IN SECTION 28 SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISION S CONTAINED IN SECTIONS 30 TO [ 43D ]. ABOVE CLEARLY SHOW THAT BEFORE ALLOWING DEDUCTION U /S 80IC THE INCOME HAS TO BE COMPUTED AS PER THE PROVISIONS OF SECTIONS 32 TO 43 OF THE ACT. 10 THIS POSITION HAS BEEN CONFIRMED BY THE HON'BLE SUPREME COURT IN CASE OF CIT V. KOTAGIRI INDUSTRIAL CO-OPER ATIVE TEA FACTORY LTD. (SUPRA). IN THAT CASE THE ASSESSEE SOC IETY WAS CARRYING ON THE BUSINESS OF MANUFACTURING OF TEA. THE ASSESSEE HAD CLAIMED DEDUCTION U/S 80P(2). THERE W ERE SOME BROUGHT FORWARD LOSSES WHICH WAS SET OFF BY THE ITO BEFORE ALLOWING DEDUCTION. THIS ACTION WAS CHALLENGED BY THE ASSESSEE AND ULTIMATELY THE MATTER TRAVELED TO THE HON'BLE SUPREME COURT. IT WAS OBSERVED AS UNDER: IN VIEW OF THE EXPRESS PROVISION DEFINING THE EXPR ESSION GROSS TOTAL INCOME IN CLAUSE (5) OF SECTION 80B OF THE I T A CT FOR THE PURPOSE OF CHAPTER VIA OF THE ACT, IT IS NECESSARY FOR THE PURPOSE OF MAKING DEDUCTION U/S 80P OF THE ACT TO DETERMINE THE GROSS TOTAL INCOME IN ACCORDANCE WITH THE OTHER PROVISIONS OF THE ACT. THIS MEANS THAT THE GROSS TOTAL INCOME MUST BE DETERMINE D BY SETTING OFF AGAINST HE INCOME THE BUSINESS LOSSES OF THE EA RLIER YEARS AS REQUIRED U/S 72 OF THE ACT, BEFORE ALLOWING DEDUCTI ON U/S 80P. ON THE BASIS OF ABOVE OBSERVATION IT WAS HELD AS UN DER: 8 HELD ACCORDINGLY REVERSING THE DECISION OF THE H ON'BLE HIGH COURT THAT BEFORE CONSIDERING THE MATTER OF DEDUCTI ON U/S 80P(2) THE INCOME TAX OFFICER HAD RIGHTLY SET OFF THE CARR IED FORWARD LOSSES OF THE EARLIER YEARS IN ACCORDANCE WITH SECTION 72 OF THE ACT AND FINDING THAT THE SAID LOSSES EXCEEDED THE INCOME, H AD RIGHTLY NOT ALLOWED ANY DEDUCTION U/S 80P(2). ABOVE POSITION HAS BEEN FOLLOWED LATER ON IN VARIOU S DECISIONS BY THE HON'BLE SUPREME COURT LIKE H.H. SIR RAMA VER MA V CIT, 205 ITR 435 AND MOTILAL PESTICIDES (I) PVT LTD. V C IT, 243 ITR 26 (S.C). THEREFORE IT BECOMES CLEAR THAT DEDUCTION COULD HAVE BEEN ALLOWED ONLY AFTER COMPUTING THE INCOME UNDER A PARTICULAR HEAD. IN THIS CASE THE INCOME IN THE HAN DS OF THE A FIRM WAS COMPUTED IN TERMS OF SEC 28 TO 43D AND SEC 40(B) IN RESPECT OF ALLOWANCE OF INTEREST AND SALARY FALLS BETWEEN THESE TWO PROVISIONS AND THEREFORE FULL EFFECT HAS TO BE GIVEN TO THIS PROVISIONS ALSO. 11 THERE IS ANOTHER CONTENTIONS THAT LATER ON IT WA S DECIDED NOT TO PAY SALARY AND INTEREST TO THE PARTNERS. TH IS DOES NOT SEEMS TO BE CORRECT BECAUSE BEFORE THE ASSESSING OF FICER IT WAS ADMITTED THAT REMUNERATION AND INTEREST HAS NOT BEEN PAID AS PER THE PARTNERSHIP DEED. FURTHER THERE IS NO E VIDENCE FOR THE SAME AND IN ANY CASE THIS WILL NOT MAKE A DIFFE RENCE. THIS TYPE OF SITUATION CAME UP FOR CONSIDERATION OF HON' BLE BOMBAY HIGH COURT IN CASE INDIAN RAYON CORPORATION LTD. V CIT, 261 ITR 98. IN THAT CASE THE DEDUCTION FOR INDUSTRIAL UNDERTAKING WAS CLAIMED U/S 80HH BECAUSE INDUSTRY WAS LOCATED I N A BACKWARD AREA. THE DEDUCTION WAS CLAIMED ON THE PRO FITS WITHOUT CLAIMING DEPRECIATION. THE ASSESSING OFFICE R HELD THAT DEDUCTION WAS ALLOWABLE ONLY AFTER ALLOWING DEPRECI ATION. THIS WAS CHALLENGED BY THE ASSESSEE AND THE MATTER TRAVE LED TO THE HIGH COURT. HON'BLE HIGH COURT MADE FOLLOWING OBSER VATIONS: 9 261 ITR 98 INCOME-TAX IS A CHARGE ON AN ASSESSEE IN RESPECT OF HIS TOTAL INCOME COMPUTED IN ACCORDANCE WITH THE P ROVISIONS OF THE ACT. HOWEVER, IN CASES WHERE THE TOTAL TAXABLE INCOME COMPRISES PROFITS DERIVED FROM A NEWLY ESTABLISHED UNDERTAKING U/S 80HH OF THE IT ACT, 1961, THEN SUCH PROFITS HAVE GO T TO BE COMPUTED SEPARATELY AS LAID DOWN BY THE HON'BLE SUP REME COURT IN THE CASE OF CAMBAY ELECTRIC SUPPLY INDUSTRIAL COMPA NY. LTD V CIT, 113 ITR 84. THERE IS A DISTINCT DICHOTOMY BETWEEN THE CASES OF COMPUTATION OF NORMAL INCOME UNDER THE ACT DE HORS CHAPTER VI-A AND COMPUTATION OF TAXABLE INCOME WHERE THE ASSESSE E CLAIMS THE BENEFIT OF DEDUCTION UNDER CHAPTER VI-A. THE PROFI TS AND GAINS OF A NEWLY ESTABLISHED UNDERTAKING, THEREFORE HAVE GOT TO BE COMPUTED AS PER THE PROVISIONS OF SECTION 29 TO 43 AND IF THE ASSESSEE CLAIMS RELIEF UNDER CHAPTER VI-A OF EH ACT , THEN IT IS NOT OPEN TO THE ASSESSEE TO DISCLAIM DEPRECIATION ALLOW ANCE. THIS IS BECAUSE CHAPTER VI-A IS AN INDEPENDENT CODE BY ITSE LF FOR COMPUTING THESE SPECIAL TYPES OF DEDUCTION. IN OTH ER WORDS, ONE MUST FIRST CALCULATE THE GROSS TOTAL INCOME FROM WH ICH ONE MUST DEDUCT A PERCENTAGE OF INCOME CONTEMPLATED UNDER CH APTER VI-A. THEREFORE ONE CAN NOT EXCLUDE DEPRECIATION ALLOWANC E WHILE COMPUTING PROFITS DERIVED FROM NEWLY ESTABLISHED UN DERTAKING FOR COMPUTING DEDUCTIONS UNDER CHAPTER VI-A. 12 IN THIS CASE A SPECIFIC ARGUMENT WAS TAKEN THAT THE HON'BLE SUPREME COURT HAS CLEARLY HELD IN CASE OF C IT V. MAHENDRA MILLS (SUPRA) THAT IF THE ASSESSEE DOES NO T CLAIM DEPRECIATION THEN SAME CANNOT BE THRUSTED ON THE AS SESSEE BY THE INCOME-TAX AUTHORITIES. THE COURT DEALT WITH T HIS CONTENTIONS IN DETAIL AND OBSERVED AT PLACITUM G TO H THAT THE DECISION OF MAHINDA MILLS (SUPRA) IS NOT DECIDED IN RESPECT OF ALLOWABILITY OF DEDUCTION WHICH READS AS UNDER: THE POINT AT ISSUE IS AMPLY CLEAR FROM THE ILLUSTRA TION GIVEN HEREINABOVE UNDER THE CAPTION POINT AT ISSUE. TH E ILLUSTRATION INDICATES THAT THE A E HAS NOT DISCLAIMED DEPRECIAT ION. THE POINT THEREFORE TO BE NOTED IS THAT THE ASSESSEE HAS ALSO CLAIMED DEPRECIATION, BUT AT A LATER STAGE AND THEREFORE TH E JUDGMENT OF HON'BLE SUPREME COURT IN MAHENDRA MILLS CASE, 243 I TR 56 HAS NO APPLICATION. ACCORDINGLY TO THE ASSESSEE THE PROFI TS DERIVED FROM THE UNIT WAS RS. 100 BECAUSE U/S 32(2) R.W.S 4 OF T HE IT ACT, THE CHARGEABILITY WAS IN RESPECT OF THE TOTAL INCOME A ND, THEREFORE THE RATE OF 20 PER CENT WAS APPLICABLE TO THE TOTAL IN COME OF RS. 100 WITHOUT DEDUCTING DEPRECIATION. SECONDLY IN ANY EV ENT, THE CONTROVERSY IN MAHENDRA MILLS CASE, 243 ITR 56 WAS NOT CONCERNING DEDUCTIONS UNDER CHAPTER VI-A OF THE INC OME TAX ACT. THEREFORE THAT JUDGMENT WOULD NOT APPLY TO THIS CAS E. THE IMPORTANT DISTINCTION WHICH IS REQUIRED TO BE NOTIC ED IN THIS CASE IS THAT WE ARE REQUIRED TO COMPUTE THE TOTAL TAXABLE I NCOME OF THE ASSESSEE WHO HAS CLAIMED SPECIAL DEDUCTION UNDER CH APTER VI-A. FOR THAT PURPOSE, ONE HAS TO KEEP IN MIND THE PROVI SIONS OF SECTION 80B(5) AND 80AB. CONSEQUENTLY SECTION 80HH INTER A LIA, LAYS DOWN THAT IF THE GROSS TOTAL INCOME INCLUDES PROFIT S FROM A NEWLY ESTABLISHED UNDERTAKING THEN 20 PER CENT OF SUCH PR OFITS WOULD BE DEDUCTIBLE FROM THE GROSS TOTAL INCOME IN ORDER TO ARRIVE AT THE TOTAL TAXABLE INCOME. THAT IN SUCH A CASE, PROFITS DERIVED FROM A NEWLY ESTABLISHED UNDERTAKING SHALL BE COMPUTED IN ACCORDANCE WITH THE PROVISIONS OF THE ACT I.E. SECTION 29 TO 43A. THEREFORE NET PROFIT WILL HAVE TO BE COMPUTED IN ACCORDANCE W ITH THE 10 PROVISIONS OF THE ACT. THE ARGUMENT OF THE ASSESSE E IS THAT IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN MA HENDRA MILLS CASE, 243 ITR 56, IT IS OPEN TO THE ASSESSEE NOT TO CLAIM DEPRECIATION ALLOWANCE U/S 32 AND CONSEQUENTLY IT I S ARGUED THAT 20 PER CENT RATE OF DEDUCTION SHOULD BE APPLIED TO RS. 100 IN THE ABOVE ILLUSTRATION, WITHOUT TAKING INTO ACCOUNT THE DEPRECIATION. WE DO NOT FIND ANY MERIT IN THIS ARGUMENT. THE SCH EME OF SECTION 4 AND SECTION 5 OF THE INCOME-TAX ACT DOES INDICATE THAT INCOME TAX IS A TAX IN RESPECT OF INCOME COMPUTED AS PER THE PROVISIONS OF THE ACT. THERE IS A DISTINCT DICHOTOMY BETWEEN CASES OF COMPUTATION OF NORMAL INCOME UNDER THE ACT DE HORS CHAPTER VI-A AND COMPUTATION OF TAXABLE INCOME WHERE THE ASSESSE E CLAIMS THE BENEFIT OF DEDUCTION UNDER CHAPTER VI-A BECAUSE THE LEGISLATURE HAS INTENDED THAT THESE SPECIAL DEDUCTIONS SHOULD B E RESTRICTED TO THE RECEIPT OF FOREIGN EXCHANGE. IF THIS OBJECT IS KEPT IN MIND, THEN IT IS CLEAR THAT THE ANALOGY OF SECTION 32(2) GIVEN BY THE ASSESSEE WILL NOT APPLY IN CASES WHERE AN ASSESSEE CLAIMS SP ECIAL DEDUCTION UNDER CHAPTER VI-A. THE MATTER CAN BE LOOKED AT FR OM ANOTHER ANGLE. WHILE COMPUTING NORMAL INCOME, AN ASSESSEE MAY SET OFF DEPRECIATION AGAINST ITS GROSS INCOME. IN SUCH CAS ES, DEPRECIATION IS LIKE ANY OTHER ORDINARY EXPENSE. HOWEVER, SUCH DEPRECIATION CANNOT BE EQUATED WITH SPECIAL ED UNDER CHAPTER VI- A. IN ANY EVENT, IN THIS CASE ON THE FACTS, THE ASSESSEE CLAI MS DEPRECIATION OF RS. 75 FROM THE BALANCE INCOME OF RS. 80 AND THE REFORE THE JUDGMENT OF THE HON'BLE SUPREME COURT IN MAHENDRA M ILLS CASE, 243 ITR 56 HAS NO APPLICATION. THE ABOVE OBSERVATIONS VERY CLEARLY SHOWS THAT FOR MAKING DEDUCTION UNDER CHAPTER VIA THE PROFITS HAS TO BE C OMPUTED SPECIFICALLY AS PER A PARTICULAR PROVISION OF A PAR TICULAR HEAD OF INCOME BECAUSE OF THE DEFINITION OF GROSS TOTAL INC OME U/S 80B(5). 13 IN VIEW OF THE ABOVE CLEAR POSITION THE DEDUCTIO N U/S 80IC WAS ALLOWABLE ONLY AFTER REDUCING THE INTEREST AND REMUNERATION PAYABLE TO THE PARTNERS. THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SECTION 80IA WHICH ARE NOT RELEVANT A ND THE LD. CIT(A) HAS DECIDED THE ISSUE ONLY ON THIS DECISION WITHOUT LOOKING AT THE SPECIFIC PROVISIONS OF THE ACT AND T HE DECISION OF HON'BLE SUPREME COURT WHICH ARE BINDING ON ALL AUTH ORITIES. THEREFORE WE SET ASIDE THE ORDER OF LD. CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER (THOUGH ON A DIFFEREN T REASONING). 14 IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11.11.2014 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 11.11.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR 11