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Kaizen Switchgear Products Versus ACIT

2015 (4) TMI 46 - ITAT AHMEDABAD

Revision u/s 263 - not provided for the interest and remuneration to the partners though authorized in the partnership deed thus had earned more profits than the reasonable profit and this attracts provisions of section 80IA(10) r.w.s. 10B(7) - whether the issue sought to be raised in order passed u/s 263 of the Act was not on the basis of material thrown up by search u/s 132 of the Act and cannot be subject matter of addition while framing assessment u/s.153A ? - Held that:- Commissioner has no .....

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ble in the eyes of law. We have already held that the impugned orders of the AO were not an erroneous order because ultimately the calculation of the claim of deduction u/s.10B should be made on the basis of the case laws as discussed in the case, therefore, there was no ultimate gain to the Revenue Department. Such an order of the AO cannot be termed as prejudicial to the interest of the Revenue. While granting the deduction u/s.10B it was not a situation that an incorrect application of law wa .....

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olidated order of learned Commissioner Central-II, Ahmedabad dated 27.03.2014 pertaining to the Assessment Years 2004-05 to 2008-09. The Appellant has raised the main ground as under: 1. In law and in the facts and circumstances of the appellant's case, the impugned order passed u/s. 263 of the Income-tax Act, 1961 is void and deserves to be cancelled for the reason that it has been passed without jurisdiction inasmuch as the assessment order passed u/s.153A sought to be revised by him was n .....

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is that for all the Assessment Years the Assessment was completed u/s.153A r.w.s. 143(3) of IT Act. The impugned Assessment Orders for A.Y. 2004-05 to 2008-09 were all dated 30th of December, 2011. A search u/s.132 was carried out in the group of cases of Baroda bushing and insulator including the Assessee on 10th of September, 2009. Consequent upon the search the proceedings u/s.153A were initiated. Facts as per the lead Year 2004-05 were that the income disclosed as per the return filed in co .....

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ssment order the AO has reproduced the submission of the Assessee wherein it was explained that the provisions of Section 10B(1) grants deduction of the profits and gains derived by 100% EOU from the export of articles or things. The deduction u/s.10B was stated to be allowed for a period of 10 consecutive years. The AO has also narrated the essential conditions required to be satisfied for the purpose of claiming of deduction u/s10B of IT Act. The AO has discussed at length the provisions of Se .....

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rmining the total income as under, appear to be erroneous in so far as it is prejudicial to the interest of the Revenue for the reasons mentioned in the subsequent paragraphs:- A.Y. Assessed income 2004-05 ₹ 12,69,102 2005-06 ₹ 24,91,033 2006-07 ₹ 53,54,839 , 2007-08 ₹ 95,24,372 2008-09 Rs.2,34,84,433 While computing the total income for the above A.Ys., you have not provided for the interest and remuneration to the partners though authorized in the partnership deed. By n .....

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to be disallowed u/s.10B(7) of IT Act r.w.s. 80IA(10). According to him, the exemption u/s.10B was claimed in excess by not charging the interest and remuneration which resulted in excessive claim of deduction. The assessee s explanation was as under, only relevant portion reproduced: 3.2 We shall proceed now to elaborate on each one of the above contentions. PARTERSHIP DEED DID NOT PROVIDE FOR ANY PAYMENT OF INTEREST AND REMUNERATION 4.1 This partnership firm came into existence with effect fr .....

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ra -7 and 8 of the Partnership deed executed on 8th April, 1995 the following modifications shall be made and it shall be read now as under: (A) CAPITAL AND INTEREST (PARA-7):: It is mutually agreed between the partners that with effect from 01-04-1995 i.e., since inception, interest on capital balance of the Partners would not be paid/charged from the said Partnership firm. However, the Partners may paid/charged interest on capital at the rate prescribed u/s. 40(b)(iv) in future as per the Inco .....

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t this firm has NEVER in the past paid any interest or remuneration to its partners in any of the assessment years since its inception with effect from 1.4.1995 till assessment year 2008-09. Your Honour must kindly therefore, appreciate that the impugned Notice seeks to raise an issue which has absolutely no foundation oh facts. Be that as it may considering the fact that this firm did not pay any interest or remuneration to its partners in any of the five assessment year in question just as it .....

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3.1 The Assessee has also contested that there was no jurisdiction for the proposed addition because the provisions of Section 153A were applicable in this case as well. The Assessee has furnished the following case laws. (1) ITAT Calcutta decision in LMJ International Ltd. v. DCIT [(2008) 119 TTJ (Kol) 214] (2) ITAT Delhi decision in Archit Agarwal v. ACIT Central Circle 12, New Delhi [(2009) 34 SOT 348 (Delhi)] (3) ITAT Ahmedabad decision in Meghmani Organics Ltd. v. DCIT[(2010) 6 ITR (Trib) .....

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siness income eligible for deduction u/s.10B of IT Act in the following manner: 5. The arguments of the assessee have been carefully considered. The fact remains that in this case the partners were entitled for interest and remuneration as per the original partnership deed dated 08/04/1995. However, subsequently a supplementary deed was executed on 24/04/1995 mentioning that no interest and remuneration will be payable to the partners. It is further observed that vide partnership deed dated 01/0 .....

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ion 80IA (10) r.w.s. 10B(7) of the I.T. Act, the Assessing Officer was required to disallow interest and remuneration which was not done by him. 6. I therefore hold that the assessment orders passed by the Assessing Officer u/s. 153A r.w.s. 143(3) of the I.T. Act of A.Y. 2004-05 to 2008-09 dated 30/12/2011 are erroneous and prejudicial to the interest of revenue. The Assessing Officer is therefore, directed to complete the assessments after making disallowance of interest and remuneration in eac .....

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ction u/s.10B for the years under consideration. The calculation of deduction was duly checked and rechecked by the Chartered Accountant and after examining the facts of this case the claim was made. He has mentioned that a partnership deed was executed on 8th of April, 1995 and just 16 days after a supplementary deed was executed on 24th of April, 1995. Relevant Deeds are placed before us according to which vide clause-A it was mutually agreed that interest on capital balance of the partners wo .....

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lause of the partnership deed was revoked or cancelled. In support of the contention that the remuneration or interest could not be enthrusted upon the Assessee he has placed reliance on several case laws listed as under: 1. ITO Vs. M/s. Thermal System & Engineers, Silvassa in ITA No.2947/Ahd/2004 order dated 17.12.2004. (Tribunal Ahd) 2. M/s. Indstrial Workwear Vapi Vs. ITO Vapi, in ITA No.785/Ahd/2004 order dated 3.2.2005 (Gujarat High Court) 3. CIT Vs. Industrial Workwear in Tax Appeal No .....

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10 order dated 21.11.2014 (Tribunal Ahd) 8. Cadila Healthcare Ltd. Vs. CIT Ahmedabad-I, in ITA Nos.1096/Ahd/2013 & 910/Ahd/2014 order dated 17.10.2014 (Tribunal Ahd) 6. On the other hand, From the side of the Revenue-Department, learned CIT-D.R., Mr. O.P. Vaishnav appeared and raised an objection that the original partnership deed was not properly examined by the Revenue Authorities and the AO has also not seen the reason for emanating the clauses of the said partnership deed, therefore, the .....

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deduction u/s.10B had expired. Therefore, as per learned D.R., it was a colourable device to claim a higher rebate u/s.10B. It was also a devise to save the tax in the hands of the partners. Since, the AO has not examined basic facts about the clauses of the partnership hence it was rightly considered as an erroneous order, moreover the Assessee has evaded the tax hence in the interest of the Revenue Department was prejudiced. He has pleaded to affirm the action taken u/s.263 of IT Act. 7. We h .....

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it within the meaning of Section 10B of IT Act. The impugned orders of the AO were not cryptic in nature because the detailed discussion was made about the manufacturing activity of the Assessee as well as the articles manufactured. Thereafter the claim of deduction u/s.10B was also modified by the AO. 7.1 There was no denial of this fact that the issue of non-payment interest and remuneration to partners was not discussed in the body of assessment order. As far as the facts as stated before us .....

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the Assessee. We have examined the provisions of Section 40(b)(iii)&(iv) of IT Act, according to which in the case of any firm any payment of interest or remuneration to any partner should be authorized by the terms of the partnership deed. Meaning thereby a firm is entitled for the claim of remuneration and interest paid to partners only if the same is authorized in the partnership deed. If a partnership deed is silent about the payment of interest and remuneration to partners then naturall .....

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partners then the Learned Commissioner is not justified to force the Assessee to make such payments to the partners. In the absence of any compulsion in the language of the statute, we hereby hold that learned Commissioner was not justified in directing the AO to compute the deduction u/s.10B after deducting the interest and remuneration from the business profit. 7.2 We have also examined the provisions of Section 263 of IT Act according to which the learned Commissioner is enshrined with the po .....

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at order was otherwise a correct order in the eyes of law; then even if one of the inquiry has not been made then such an order especially when there is no loss of tax to the Revenue Department cannot be held as an erroneous order. We have given this opinion on the basis of few case laws as cited supra wherein the Hon ble Courts have held that the remuneration or interest etc. cannot be forced upon the registered firm. 7.3 In the case of M/s. Thermal Systems and Engineers (supra) a view was expr .....

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ucing the net profit of Industrial Undertaking which was entitled for deduction u/s.80IB by the amount of interest and remuneration to the partners. Following few decisions of the Tribunal it was held that the interest and remuneration must not be compulsorily foisted upon the Assessee. In the case of CIT Vs. Industrial Work Wear (Tax Appeal No.177/2005 vide order dated 20th of March, 2006 the view taken by the Tribunal was confirmed. Further in the case of M/s. Mundra Packaging Industries and M .....

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