MYHOME DEVELOPERS V. THE ASSISTANT COMMISSIONER OF INCOME TAX

SCA/20821/2018

AI Insights

The case involves My Home Developers, a partnership firm, which challenged the notices issued by the Assistant Commissioner of Income Tax under Section 148 of the Income Tax Act, 1961, seeking to reopen the assessments for the years 2011-12, 2012-13, and 2013-14. The reopening was based on the grounds that the firm had claimed excessive deductions under Section 80 IB(10) of the Act without providing interest on capital and remunerations to the partners, which had allegedly escaped assessment. The court examined the partnership deeds and previous assessments, concluding that the deductions were correctly claimed and that the reopening of the assessments was not justified.

• Counselvise Citation: [2021] 140 COUNSELVISE.COM (IT) 750029 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 09-02-2021
• Assessment Year: misc
• Other Referred Cases: PCIT Vs. Alidhara Taxspin Engineers, Smt. Mala Tandon
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: KALPANA RAVAL
• Assessee Lawyers: VAIBHAVI PARIKH
• Keywords: Excessive deductions; Interest on capital; Partnership deed; Re-opening of assessment; Remunerations to partners
• Section: 148; 143(3); 80-IB(10)

Judgement Text

"C/SCA/20821/2018 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD R/SPECIAL CIVIL APPLICATION NO. 20821 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 20850 of 2018 With R/SPECIAL CIVIL APPLICATION NO. 20853 of 2018 ========================================================== MYHOME DEVELOPERS Versus THE ASSISTANT COMMISSIONER OF INCOME TAX ========================================================== Appearance: MS VAIBHAVI K PARIKH(3238) for the Petitioner(s) No. 1 MRS KALPANAK RAVAL(1046) for the Respondent(s) No. 1 ========================================================== CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE ILESH J. VORA Date : 09/02/2021 COMMON ORAL ORDER (PER : HONOURABLE MR. JUSTICE ILESH J. VORA) 1. As common question of law and fact arises in these captioned writ applications with respect to the same assessee for different assessment years, they were heard together and are hereby disposed of by this common order. 2. By filing these writ applications under Article 226 of the Constitution of India, the writ applicant seeks to challenge the Notices dated 26.03.2018 issued by the respondent under Section 148 of the Income Tax Act, 1961 (for short “The Act, 1961”) seeking to re-open the assessment for the A.Y 2011-12, 2012-13 and 2013-14, on the ground that, the assessee had claimed excessive deductions under Section 80 IB(10) of the Act, without Page 1 of 13 C/SCA/20821/2018 ORDER providing interest on capital and remunerations to the partners for the respective years under consideration, which had escaped assessment. 3. The brief facts giving rise to filing the present writ applications are as follows: 3.1 The writ applicant – My Home Developers is a partnership firm engaged in the activity of developing housing projects. The firm came into existence with effect from 15.06.2007 and partnership deed was executed among the partners on 27.06.2007 which contained a clause as to payment of interest on capital, but no remuneration was payable. Thereafter, due to change in the constitution in the partnership firm, another partnership deed was executed on 01.04.2008, which contained a clause as to payment of interest on capital, but no remuneration was payable at all. The said partnership deed was amended and it was mutually agreed upon that w.e.f 01.04.2009, no interest shall be payable to the partners on capital. 3.2 The case of the writ applicant for the assessment year 2010- 11 was selected for scrutiny assessment and assessment under Section 143 of the Act was framed vide order dated 20.03.2013, whereby, income of Rs.76,25,000/- disclosed by the writ applicant during the course of survey was stated as “income from other source” as against “Business Income” and accordingly, the claim for allowing deduction under Section 80IB (10) of the Act on such Page 2 of 13 C/SCA/20821/2018 ORDER income was denied and the same was challenged in appeal before the Commissioner of Income Tax (Appeals), who vide order dated 28.08.2014 was pleased to dismiss the appeal. The order of CIT was challenged before the Income Tax Appellate Tribunal and the Tribunal vide order dated 07.08.2015 in appeal bearing Income Tax Appeal No.2966/Ahd/2014 hold that, the income of Rs.76,25,000/- disclosed during the survey was income from business and the writ applicant is eligible for deduction under Section 80 IB (10) of the Act on such income. 3.3 Thereafter, the impugned notices having been issued by the respondent on 26.03.2018 under Section 148 of the Act seeking to re-open the case of the writ applicant for the A.Y 2011-12, 2012-13 and 2013-14. 4. In the aforesaid facts, we may summarize the case in details of the respective year as under: 4.1 SCA No. 20821/2018 :- The writ applicant filed its return of income for A.Y. 2011-12 on 30.09.2011 declaring total income of Rs.33,200/- after claiming deduction of Rs.7,60,385/- under Section 80 IB (10 ) of the Act. In response to the notice issued under Section 148 of the Act, the writ applicant filed its return of income for the year under consideration on 14.04.2018 and at the request of the writ applicant, reasons recorded have been furnished to the writ applicant which reads as under: Page 3 of 13 C/SCA/20821/2018 ORDER “3. On further verification of partnership deed executed on 23.01.2008, the clauses 6 & 7 provided payment of interest to partners @ 12% on capital and payment of remuneration to working partners as per eligibility u/s. 40 (b) of the I.T.Act 4. In the case of assessee, the remuneration should be payable for 12 months I..e from 01.04.2012 to 31.03.2013 which works out to Rs.1,05,29,578/- and interest on capital of Rs.12,63,549/- (on Rs.1,05,29,578/-). 5. As the assessee has claimed deduction u/s.80 IB (10) of the I.T.Act of Rs.7,60,385/- without providing interest on capital and remuneration to partners for entire year as per clause 6 & 7 of partnership deed dated 23.01.2008, the assessee has claimed deduction excessively which resulted in under assessment of Rs.7,60,385/- which has escaped assessment on account of failure on the part of the assessee in filing of return of income disclosing fully and truly all necessary material facts.” 4. 2 SCA No. 208 50 /2018 :- The writ applicant filed its return of income for A.Y. 201 2 -1 3 on 29.09.2012 declaring total income of Rs. Nil after claiming deduction of Rs.15,78,260/- under Section 80 IB (10 ) of the Act. In response to the notice issued under Section 148 of the Act, the writ applicant filed its return of income for the year under consideration on 14.04.2018 and at the request of the writ applicant, reasons recorded have been furnished to the writ applicant which reads as under: “3. On further verification of partnership deed executed on 23.01.2008, the clauses 6 & 7 provided payment of interest to partners @ 12% on capital and payment of remuneration to working partners as per eligibility u/s. 40 (b) of the I.T.Act 4. In the case of assessee, the remuneration should be payable for 12 months I..e from 01.04.2012 to 31.03.2013 and interest on capital also payable as per partnership deed but the same was not paid as per partnership deed. 5. As the assessee has claimed deduction u/s.80 IB (10) of the I.T.Act of Rs.15,78,260/- without providing interest on capital and remuneration to partners for entire year as per clause 6 & 7 of partnership deed dated 23.01.2008, the assessee has claimed deduction excessively which resulted in under assessment of Rs.15,78,260/- which has escaped assessment on account of failure on the part of the assessee in filing of Page 4 of 13 C/SCA/20821/2018 ORDER return of income disclosing fully and truly all necessary material facts.” 4. 3 SCA No. 208 53 /2018 :- The writ applicant filed its return of income for A.Y. 201 3 -1 4 on 03.10.2013 declaring total income of Rs. Nil after claiming deduction of Rs.25,98, 219/- under Section 80 IB (10 ) of the Act. In response to the notice issued under Section 148 of the Act, the writ applicant filed its return of income for the year under consideration on 14.04.2018 and at the request of the writ applicant, reasons recorded have been furnished to the writ applicant which reads as under: “3. On further verification of partnership deed executed on 23.01.2008, the clauses 6 & 7 provided payment of interest to partners @ 12% on capital and payment of remuneration to working partners as per eligibility u/s. 40 (b) of the I.T.Act 4.In the case of assessee, the remuneration should be payable for 12 months I..e from 01.04.2012 to 31.03.2013 and interest on capital also payable as per partnership deed but the same was not paid as per partnership deed. 5.As the assessee has claimed deduction u/s.80 IB (10) of the I.T.Act of Rs.25,98,219/- without providing interest on capital and remuneration to partners for entire year as per clause 6 & 7 of partnership deed dated 23.01.2008, the assessee has claimed deduction excessively which resulted in under assessment of Rs.25,98,219/- which has escaped assessment on account of failure on the part of the assessee in filing of return of income disclosing fully and truly all necessary material facts.” 5. The writ applicant has raised the objections and the same came to be rejected by the respondent vide order dated 18.09.2018. 6. Being dissatisfied with the decision to reopen the assessment, the writ applicant is here before this Court with the present writ applications. Page 5 of 13 C/SCA/20821/2018 ORDER 7. We have heard Mr. Tushar Hemani, the learned Senior Counsel assisted by Ms. Vaibhavi K. Parikh, the learned counsel appearing for the writ applicant and Mrs. Kalpana Raval, the learned Standing Counsel appearing for the Revenue. 8. Learned counsel appearing for the writ applicant has submitted the following contentions : (i) It was submitted that, the revenue is not justified in re-opening the assessment proceedings on the grounds as assigned in the reasons. He submitted that, the revenue has failed to appreciate the partnership deeds in correct prospective. Referring to the partnership deeds, he submitted that, the original partnership deed contained a clause for providing interest on capital to partners, whereas, the amended partnership deed contained a clause as to non-payment of interest. In this background facts, it was submitted that, merely a clause for providing for interest and remuneration to the partners in the original partnership deed, it does not signify that, the interest and the remuneration is to be paid to the partners mandatorily. In support of this contention, relying upon the decision of this Court in the case of PCIT Vs. Alidhara Taxspin Engineers [Tax Appeal No.265/2017, decided on 22.05.2017], it was submitted that, in the absence of material on record to indicate that, partners actually received interest on capital or remuneration, merely provision made in the partnership deed does not signify that, it is mandatory in nature. Page 6 of 13 C/SCA/20821/2018 ORDER (ii) It was submitted that, the case of the writ applicant for the assessment year 2010-11 was also selected for scrutiny assessment and in the said assessment year, deduction was claimed without payment of interest on capital and remuneration to the partners and it was not disturbed by the Revenue. Therefore, in view of the principles of consistency, the revenue could not have taken a different stand in the subsequent years and on this ground, the notices deserve to be quashed. (iii) It was further submitted that, the action of re-opening is not justified because the “income” earned by an assessee from the eligible business is exempt under Section 80IB (10) of the Act. Therefore, whether a particular expenditure is claimed as a deduction or not would not alter the character of income eligible for deduction under Section 80 IB (10) of the Act. (iv) It was submitted that, the assessment for the year under consideration was framed under Section 143(3) of the Act and same is sought to be re-opened beyond the period of 4 years and it can be reopened beyond the period of 4 years if an income chargeable to tax has escaped assessment by reason or failure on the part of the writ applicant to disclose fully and truly all material facts necessary for his assessment. In this regard, it was further submitted that, there is no failure on the part of the writ applicant as claim of deduction already mentioned in the return of income as well as tax audit report, wherein, it was mentioned that, no interest and remuneration has been paid to the partners. It was Page 7 of 13 C/SCA/20821/2018 ORDER vehemently argued that, in the year 2012-13, the deduction was not disturbed and for the assessment year 2010-11, the authority while framing the assessment did not make any addition in respect of the interest on capital and remuneration to the partners. Thus, in view of the aforesaid facts, it is evident that, there is no failure on the part of the writ applicant as to full and true disclosure and therefore, the impugned notices deserve to be quashed and set aside. 9. On the other hand, the writ applications have been vehemently opposed by Mrs. Kalpana Raval, the learned Sr. Standing Counsel appearing for the Revenue. Mrs. Raval would submit that, the Assessing Officer is justified in issuing the impugned notices under Section 148 of the Act to re-open the assessment, as in the instant case, no scrutiny assessment was made under Section 143 (3) of the Act. Referring to the clause 6 and 7 of the Partnership Deeds executed on 23.01.2008, it was submitted that, there was a provision for payment of interest to the partners at the rate of 12 % on capital and payment of remuneration to working partners as per Section 40(b) of the Act. In that view of the matter, the Assessing Officer has reason to believe that, the assessee has claimed deduction excessively which has resulted in escape of income chargeable to tax due to failure on the part of the assessee to disclose true particulars of the income. 10. In view of the contentions raised by the Revenue, Mrs. Kalpana Raval, prays that, there being no merits in the writ applications, the Page 8 of 13 C/SCA/20821/2018 ORDER same may be rejected. 11. We have heard the learned counsel appearing for the respective parties and perused the material placed on record. 12. It is settled law that, the Assessing Officer has power to reassess any income with escaped assessment for any assessment year subject to provision of the Act. However, the use of this power is conditional upon the fact that, the assessing officer has some reason to believe that, the income has escaped assessment. Where an assessment under Section 143 or 147 of the Act has been made for the relevant assessment year, no action shall be taken after expiry of 4 years unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under Section 139 or in response to the notice issued under sub-section 1 of Section 142 or Section 148 or to disclose fully and truly all material facts necessary for his assessment. 13. We take the notice of the fact that, the applicant firm My Home Developers is a partnership firm engaged in the construction business and the said firm came into existence w.e.f. 15.06.2007 and partnership deed was executed on 27.06.2007 and thereafter, due to change in the constitution in the partnership firm, another deed replacing the earlier was executed on 01.04.2008 and lastly, partnership deed was amended w.e.f. 01.04.2009. It is not in dispute that, earlier there was a clause in the deed as to payment Page 9 of 13 C/SCA/20821/2018 ORDER of interest on capital, but no remuneration was payable and after amendment in the partnership deed, it was agreed among the partners that, from 01.04.2009, no interest shall be payable to the partners on capital. 14. The applicant has placed on record the copy of the partnership deeds. We deem it appropriate to reproduce the clause 6 and 7 of the partnership deed dated 27.06.2007, which reads thus: “6. CAPITAL : The further fund required for the purpose of the partnership business shall be brought in, --contributed or-arranged-by the-partners in their mutual consents. Interest at the rate of 12% P.A. or such lower rate as may be prescribed under Section 40 (b) (Vi) of the Income Tax Act,1961, or any applicable provision as may be in force for the Income Tax Assessment of the partnership Firm for the relevant accounting period shall be payable by the partnership Firm on the amount standing to the credit of the capital and/or current or loan account or the accounts of the partners. If there is any debit balance in the account of any partner, interest at the above rate shall be payable by him. The partners shall be at liberty to increase or reduce the above rate of interest from time to time. In case of loss, no interest will be payable on Partner's Capital as well as interest will be payable at reduced rate, if after paying interest, Partnership Firm incur Loss. 7. REMUNERATION The parties hereto agreed that, at present no remuneration shall be payable to any partner of the Firm. The partners shall be at liberty to pay remuneration to one or more partners, as may be agreed upon time to time by and between all the parties hereto, under the provisions of Income Tax, as may be in force for the Income Tax Assessment of the partnership Firm for the relevant accounting period. 15. Clause 6 of the amended partnership deed dated 01.04.2009 reads thus: “Clause 6- The parties here to agreed that, at present no interest shall be payable to partners of the firm on the amount standing to the credit of the capital account or current account of the partners.” Page 10 of 13 C/SCA/20821/2018 ORDER 16. At this stage, it is apt to refer to and rely upon the case of Alidhara TaxSpin (supra), wherein identical issue of law was decided. The two questions of law raised by the revenue and the final conclusion arrived at by this Court reads thus : “(A) Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in not appreciating the fact that by not providing interest and remuneration to the partners, the firm has claimed higher profits leading to higher claim of deduction u/s 80IB of the Act and thus, devoiding the revenue from due amount of tax? (B) “Whether on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in not appreciating that the Section 80IB(10) enables AO to re-compute the profit of undertaking claiming deduction u/s 80IB i.e. the partnership firm as in the present case and not the case of partner’s admissibility towards interest/ remuneration as held in the case of Smt. Mala Tandon?” Conclusion:- “On interpretation of the partnership agreement and considering the wish of the partners reflected in the partnership deed, not to pay/charge interest on the partners capital and the remuneration, the learned tribunal has rightly deleted the dis-allowance made by the Assessing Officer with respect to the deduction claimed under Section 80IB of the Income Tax Act. As rightly observed by the learned tribunal, mere incorporation of interest on the partners’ capital and remuneration does not signify that the same are mandatory in nature. We concur with the view taken by the learned tribunal. We see no reason to interfere with the impugned judgment and order passed by the learned tribunal. No substantial questions of law arise in the present Tax Appeal. The present Tax Appeal deserves to be dismissed and is accordingly dismissed.” 17. The record indicates that, the assessee did not have provided any remuneration interest on capital payable to partners. The case of the assessee is that, both the interest and remuneration stipulations were incorporated earlier which contained clause as to payment of interest and remuneration, which was not at all paid to Page 11 of 13 C/SCA/20821/2018 ORDER the partners. The revenue has considered the partnership deed 23.01.2008 and concluded that, interest and remuneration were payable to the partners. 18. We have examined the clauses of the partnership deeds as referred to above. Though the clauses of the partnership deed provided for interest on partner's capital and remuneration, the same is subject to their mutual agreement. In other words, the clauses contained are only enabling provision not mandatory in nature so as to lead to an inference that, the assessee had to pay interest on capital and remuneration to its partners. Even after 01.04.2009, interest on capital as well as the remuneration were not to be paid to the partners. We do not find any material on record to indicate that, the writ applicant has actually received any interest on capital and remuneration from the partnership firm. Record further indicates that, for the assessment year 2010-11, deduction under Section 80 IB(10) was claimed without paying any interest on capital and remuneration to partners and such claim was not disturbed by the assessing officer. In this view of the matter, the conclusion arrived at by the assessing officer that, the assessee has claimed deduction without providing interest on capital and remuneration to partners as per the clause 6 and 7 of the deed, has escaped assessment on account of failure on the part of the assessee in filing of the return of income disclosing fully and truly all material facts are contrary to law and without jurisdiction. Page 12 of 13 C/SCA/20821/2018 ORDER 19. Having regard to the materials on record, we hold that, the contention raised by learned Sr. counsel Mr. Hemani merits consideration that mere incorporation of clauses in the partnership deed for interest on the partner’s capital and remuneration, does not signify that, interest and remuneration is to be paid to the partners mandatorily. 20. The issue involved in the present case is squarely covered by the case of Alidhara Taxspin (P) Ltd. (supra) and applying the principles of law as propounded by this Court, we hold that, re-opening of the assessment is not justified. 21. For the foregoing reasons, all the writ applications succeed and are hereby allowed. The impugned notices dated 23.03.2018 are hereby quashed and set aside. All subsequent proceedings pursuant thereto also stand terminated. (J. B. PARDIWALA, J) (ILESH J. VORA,J) SUCHIT Page 13 of 13 "