2021 (11) TMI 324 - AT - Income Tax

Deduction 10AA(9) - Interest and remuneration to partners - Claim allowable on net income or gross income - AO while passing the assessment order restricted the deduction under section 10AA by making allowance of remuneration to partners and interest @ 12% on their capital contribution - CIT(A) deleting the disallowance by invoking provisions of Section 80(IA)(10) r.w.s. 10AA(9) in giving deductions of interest on Capital and Remuneration to partners of the assessee firm after finding that the assessee had taken undue benefits of Section 10AA by not claiming interest on Capital and Remuneration to partners which resulted increase in exempted profit of the assessee - HELD THAT - CIT(A) while granting relief to the assessee followed the decision of Alidhra Taxspin Engineers 2017 (5) TMI 1684 - GUJARAT HIGH COURT wherein it was held that mere incorporation of interest on partner s account and remuneration does not signify that same are mandatory in nature CIT(A) also considered the CBDT s Circular No.739 of 1996 dated 25.03.1996 wherein it has been clarified that no deduction under section 40(b)(v) of the Act is admissible under partnership deed either specified the amount of remuneration payable to each individual working partners or laid down the manner quantify of such remuneration. In the present case the clauses of partnership deed specifically restrict not to charge payment of interest to partners on their capital contribution as well as remuneration. We find that ld. CIT(A) has decided the issue after proper appreciation of fact and following the decision of Alidhra Taxspin Engineers (supra). Appeal raised by the revenue are dismissed.

Summary

Issues:
- Disallowance of deductions under Section 10AA for interest on capital and remuneration to partners.
- Interpretation of partnership deed provisions regarding interest and remuneration.
- Application of Section 80IA(10) by the Assessing Officer.
- Justification for restricting deduction under Section 10AA.
- Comparison of decisions by the Assessing Officer and the CIT(A).
- Consideration of CBDT Circular No.739 of 1996.

Detailed Analysis:

Issue 1: Disallowance of deductions under Section 10AA for interest on capital and remuneration to partners
The appeal by the revenue challenged the deletion of disallowance made by the Assessing Officer regarding deductions of interest on capital and remuneration to partners of the assessee firm under Section 10AA. The Assessing Officer noted that the assessee did not claim interest on capital contribution and remuneration to its partners, leading to an increase in exempted profit. The dispute revolved around whether the assessee was justified in not claiming these expenses.

Issue 2: Interpretation of partnership deed provisions regarding interest and remuneration
The partnership deed of the firm did not provide for payment of interest and remuneration to partners. The assessee contended that as per the partnership deed, no interest or remuneration was payable to partners, and this was in line with previous years' treatment. The Assessing Officer invoked Section 80IA(10) to calculate the disallowed amounts, which the assessee disputed.

Issue 3: Application of Section 80IA(10) by the Assessing Officer
The Assessing Officer applied Section 80IA(10) to work out the remuneration and interest on capital contribution of partners, leading to a restriction on the eligible deduction claimed by the assessee. The dispute arose from the Assessing Officer's interpretation of the provisions and the impact on the assessee's claim under Section 10AA.

Issue 4: Justification for restricting deduction under Section 10AA
The Assessing Officer restricted the deduction under Section 10AA based on the disallowance of partners' remuneration and interest on capital contribution. The CIT(A) considered the partnership deed provisions, relevant case laws, and CBDT Circular No.739 of 1996 to support the assessee's position that the restrictions were not justified.

Issue 5: Comparison of decisions by the Assessing Officer and the CIT(A)
The CIT(A) granted relief to the assessee by following the decision of the jurisdictional High Court and considering the partnership deed clauses that restricted interest and remuneration payments to partners. The CIT(A) also referred to relevant case laws to support the assessee's contention against the disallowance made by the Assessing Officer.

Issue 6: Consideration of CBDT Circular No.739 of 1996
The CIT(A) referenced CBDT Circular No.739 of 1996 to highlight the requirements for claiming deductions under Section 40(b)(v) of the Act, emphasizing the necessity for partnership deeds to specify remuneration payable to partners. The partnership deed in this case did not provide for such payments, supporting the assessee's position.

In conclusion, the Tribunal dismissed the appeal by the Revenue, upholding the CIT(A)'s decision to grant relief to the assessee based on the partnership deed provisions and relevant legal interpretations. The judgment emphasized the importance of partnership agreements in determining the eligibility of deductions under the Income Tax Act.