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2016 (5) TMI 202 - ITAT AHMEDABAD

2016 (5) TMI 202 - ITAT AHMEDABAD - TMI - Reopening of assessment - correctness of the computation of section 80IB deduction - Both the lower authorities hold that the assessee has not provided for interest on partners capital as well as their remuneration despite specific clauses in its partnership - Held that:- Taking into the account the fact that assessee-firm interest on partnersí capital and remuneration clauses comprise of mutual agreement provisions as well as the fact that it has not pa .....

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we have decided this first fundamental issue of partnership deedís interpretation against the Revenue, other arguments narrated in preceding paragraphs are rendered academic. - Decided in favour of assessee - ITA No. 198 /Ahd/2016 - Dated:- 3-5-2016 - Shri S. S. Godara, Judicial Member And Shri Manish Borad, Accountant Member For the Petitioner : Shri Narendra Singh, Sr. D.R. For the Respondent : Shri Mehul Shah, A.R. ORDER Per : S. S. Godara, Judicial Member This assessee s appeal for A.Y. 201 .....

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g the Assessing Officer s action in disallowing section 80IB deduction of ₹ 2,95,49,204/- thereby restricting its original claim of ₹ 6,48,19,921/- to ₹ 3,52,70,717/-. 3. We come to relevant facts first. This assessee/a firm manufactures textile machinery, their parts and also carries out labour jobs. Its manufacturing unit is located at Dadra and Nagar Haweli covered under 8th schedule of the Act. The assessee commenced its manufacturing activities in financial year 2003-04. T .....

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uction @ 25% of ₹ 25,76,02,0414/- (eligible profits) coming to ₹ 6,44,00,504/-. He would add depreciation as per books, donation and share trading expenses further reduced some other heads of interest income, depreciation, duty drawback etc. The assessee filed appeal against the above stated two disallowances. The CIT(A) in his order dated 02-02-2015 accepted both of its contentions. The Revenue challenged the said in tribunal in ITA 834/Ahd/2015. A co-ordinate bench in its order dat .....

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(5) and subsection (7) to (12) of section 80-1 A shall, so far as may be, apply to the eligible business under this section. Section 80IA(10) of the Income Tax Act, 1961 says "Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the .....

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declaring income of ₹ 250656697/- after claiming deduction of ₹ 64819921/- u/s 80IB for the AY 2010-11. The income was assessed to ₹ 251076114/- u/s 143(3) on 29/011/2013. As per the copy of partnership deed dated 13/2/2003 the assessee is a partnership firm consisting of four partners, viz. Shri Chandrkaht C. Gondalia , Shri Prashant H. Gondalia, Shri Suresh S. Gondalia and Sudhaben A. Gondalia with profit/loss sharing ratio of 25% each. As per the convents of the partnership .....

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tion. Thus, by not providing for the interest and / remuneration to the partners, the assessee firm had made more profits than reasonable profits which would have accrued to the firm and consequently into higher claim of deduction u/s 80IB of the Act. This attracts the provisions section 8OIB(13) r.w.s. 80IA of the Act. The details of amount of deduction claimed u/s 80IB, balance of capital account and interest not claimed during the period 2009-10 i.e. A. Y. 2010-11 is below: Assessment Year Ba .....

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more profits than reasonable profits which would have accrued resulting into higher claim of deduction u/s 80IB. As can be seen from the above table, the assessee has benefited by not providing for the interest to the partners to the extent of ₹ 19327230/- during AY 2010-11. In view of the provisions of 80IA(7) to (12) r.w.s. 80IB of the Act, this amount were to be required to be disallowed from the business income eligible for deduction u/s 80IB of the Act. This being not done resulted i .....

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84/- (book profit of ₹ 265887804/- less interest of ₹ 19327320/- on partners capital account). However, it was seen that no such remuneration was apportioned amongst the above four working partners. Thus, by not providing for the remuneration of ₹ 98676693/- of the partners, the assessee firm had made more profits than reasonable profits which would have accrued to the firm and consequently into higher claim of deduction u/s 80IB of the Act. This attracts the provisions section .....

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meaning of sec 147 of the Act that income to the extent of Rs ₹ 19327230/- & ₹ 98676693/- has escaped assessment. 6. The Assessing Officer accordingly issued section 148 notice dated 07-10-2013. The assessee sought for copy of the above extracted reasons. The same stood supplied. It thereafter filed objections to the impugned reopening. The Assessing Officer declined assessee s petition on 25-02-2015. He took up reassessment thereafter. 7. Both the ld. representatives inform us .....

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f its partnership deed clauses stipulating interest on capital to partners and remuneration. The assessee had not made any provision qua either of the two payments in its books. The Assessing Officer was of the opinion that this led to enhancement of its eligible profits for the purpose of section 80IB deduction. He came across capital balance eligible for charging interest of ₹ 16,10,61,003/-. Section 40(b)(iv) interest admissible thereupon @ 12% in the relevant previous year came to be & .....

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of its partnership deed meant that the interest payment on partners capital would be as per their mutual agreement which in any case shall not exceed the above stated statutory limit. The Assessing Officer did not agree. He opined that the assessee s partnership deed did not provide for any nonpayment or interest or remuneration. He accordingly concluded in reassessment framed on 31-03-2010 that assessee s nonpayment of interest and partners remuneration of ₹ 1,93,27,230/- and ₹ 9,86 .....

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during the course of scrutiny. The CIT(A) rejects the same by holding that the Assessing Officer did not make any specific inquiry on the issue in question which could lead to the impugned reopening being taken as a mere change of opinion. 11. Next come the lower appellate findings on merits. The CIT(A) holds that assessee s gross income has to be computed as per provisions of the act before allowing the impugned deduction available under chapter VI of the Act. This leaves the assessee aggrieve .....

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ase law of Madhukar Khosla vs. ACIT (2014) 90 CCH 23 (Del). He further contends that the very hon ble high court in Jindal Photo films Ltd. vs. DCIT (1998) 234 ITR 170 reiterates the very view that the reopening to withdraw a deduction already granted without any further tangible material is not valid. 13. Ld. authorized representative thereafter pleads that the assessee has been held entitled for the impugned deduction without any disallowance of partners interest on their capital and remunerat .....

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es us to assessee s partnership deed clauses. His case is that both interest and remuneration stipulation are only enabling provision not mandatory in nature so as to lead to an inference that the assessee had to pay the same mandatorily to its partners. He invites our attention to the crucial expression as may be mutually agreed to submit that its partners never agreed on payment of interest and remuneration in question. A catena of case law is also quoted. The same shall be taken into account .....

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is that the same are to be followed in the instant case. Case law of (20003) 261 ITR 98 (Bom) Indian Rayons case is cited to state that full effect is given to the statutory provisions for the purpose of assessment of taxable income. Section 80IB of the Act is also quoted providing for computation of total income before computing chapter VI deduction. It is contended that the assessee had correctly computed its income/deduction. The Assessing Officer has rightly disallowed both the above said am .....

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tentions. There is no dispute about the assessee firm being already eligible for section 80IB deduction since financial year 2003-04. The issue between the parties is about correctness of its computation rather. Both the lower authorities hold that the assessee has not provided for interest on partners capital as well as their remuneration despite specific clauses in its partnership. They are of the opinion that the same had led to swelling of assessee s profits which have been claimed as sectio .....

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the above two clauses Sl. No. 6 & 15 incorporated in assessees partnership deed dated 13/20-02-2003 as under:- The capital required for the business of the partnership firm shall be contributed by the partners as mutually agreed according to the needs of the business of the firm and according to the convenience of the partners. Interest shall be paid on the partners capital as mutually agreed to between them which shall be credited in their respective accounts at the end of the year. However .....

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business. Such working partners shall be entitled to receive the remuneration as may be mutually agreed upon between the partners. Such remuneration shall be credited at the end of year. However, such remuneration in aggregate shall not exceed the limits as laid down in Section 40(b)(v)(2) of the Income-tax Act, 1961 under the heading Amount not deductible . It is hereby specifically agreed that no such remuneration shall be paid in the absence of profits. 18. We have applied our mind to the abo .....

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lar situation. It would observe that mere incorporation of interest on partners capital and remuneration does not signify that the same are mandatory in nature. Ld. co-ordinate bench is of the view that a partnership firm under the provisions of partnership act is by will of its partners. The accounts drawn up at the end of the year did not indicate any such interest or remuneration payments. It holds that this act by itself is sufficient to conclude that the partners of the firms had agreed not .....

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after appreciation of the evidences and material on record, as also the legal and factual position of the case. Needless to say that the impugned appellate order is well reasoned and based on the cogent and credible material and facts of the case. However, it would pertinent to reproduce the relevant part of the decision of the CIT(A), for the purpose of proper appreciation of the same: "3.4. I have considered the rival submissions carefully. An identical issue has been decided in the case .....

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al submissions carefully. Clause 4 and 5 of the partnership deed providing for interest on capital and salary are as under: "4. The capital of the partners is as per their respective accounts in the books of the partnership. The partners shall be entitled to interest on their capital @ 18% per annum or at such other rate or rates as the partners may at the end of each financial year mutually settled subject to the maximum amount admissible under the Income-tax Act, 1961. 5. Both the partner .....

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both the clauses are "the partners shall be entitled...". This shows that the partners were entitled to get interest on the capital and to draw remuneration for their services without binding them to do so. This, in my opinion, is not a mandatory provision in the partnership deed which would be worded like " the partners shall be provided/given....". Further, it is also mentioned in both these clauses, that the rate or rates of interest and the remuneration would be mutually .....

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their capital or to charge remuneration for their services. In my opinion, the terms of the partnership deed do not signify that interest on capital and remuneration to partners had necessarily to be provided in the account of M/s. Dynamech.. 9.7. The AO has drawn support from the provisions of section 80IA(10). This sub-section provides that where the affairs between the eligible business and any other person is so arranged that more than ordinary profits arise to the assessee, the AO shall, in .....

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ts or the income of the other person referred to in this sub-section. It is a fact that the assessee has not received interest and remuneration from M/s. Dynamech. As noted earlier, the terms of partnership deed are not so worded so as to make payment of interest on capital and remuneration to partners as mandatory. It is also not rebutted by the AO that no interest or remuneration has been received by the appellant in earlier years also. This income has not accrued or arisen to the assessee. I, .....

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