TMI Blog2018 (10) TMI 1105X X X X Extracts X X X X X X X X Extracts X X X X ..... /s 10B of the Act. Hence, we find no infirmity in the order of ld CIT(A). The ground of appeal of the Revenue is dismissed. Calculating the amount eligible for deduction u/s 10B of the act without reducing the interest on capital and remuneration to partners - Held that:- As relying on ALIDHRA TEXSPIN ENGINEERS VERSUS THE ACIT, VAPI CIRCLE, VAPI [2016 (5) TMI 202 - ITAT AHMEDABAD] we hold that the assessee was very much eligible to work out the quantum of deduction u/s 10B of the Act without reducing the amount of interest on capital and remuneration to the partners. Hence, we do not find any infirmity in the order of ld CIT(A). Thus, the ground of appeal of the Revenue is dismissed. - I.T.A. No.367/Rjt/2013 And I.T.A. No.324/Rjt/2015 - - - Dated:- 8-10-2018 - SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER For The Assessee : Praveen Verma, Sr. D.R. For The Revenue : Shri Ankit Gokani, A.R. ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The two captioned appeals have been filed at the instance of the Revenue against the separate orders of the Commissioner of Income Tax(Appeals) Jamnagar [CIT(A) in short] dated 24.07.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me earned thereon should be treated as business income of the assessee. The assessee in support of his claim relied on the judgment of Hon ble Karnataka High Court in the case of CIT vs. Chinna Nachimuthu Constructions reported in 297 ITR 70. 4.2 The assessee also submitted that as per the provision of Section 10B(4) of the Act, the entire profit of the business undertaking registered as 100% EOU is eligible for deduction. 4.3 The assessee in support of his claim also relied on the order of Karnataka High Court in the case of ACIT vs. Motarola India Electronics Pvt. Ltd. reported in 114 ITD 387. However, the AO disregarded the contentions of the assessee and held that the amount of interest income is chargeable to tax under the head income from other sources. Accordingly, the AO denied the exemption u/s 10B of the Act in respect of such interest income. 5. Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld. CIT(A) submitted that the AO has not pointed out any defect in the submission made by it during the assessment proceedings. The AO has just mention in his order that the case law relied by the assessee are not applicable to the facts on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in favour of the assessee. The relevant extract of the order is extracted below: By Finance Act, 2001, with effect from 1-4-2001, the present subsection (4) is substituted in the place of old sub-section (4). No doubt sub-section speaks about deduction of such profits and gains as derived from 100 per cent EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But sub-section (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1). The substituted sub-section (4) says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king out the deduction u/s 10B of the Act. 10. The assessee while calculating the amount of exemption u/s 10B of the Act in Form No.56G has reduced the amount of freight and insurance from the export turnover as well as from total turnover. On question by the AO the assessee submitted that there is no definition given u/s 10B of the Act for the total turnover whereas, the export turnover has been defined in Clause (iii) of Explanation 2 of Section 10B of the Act. 10.1 The assessee also submitted that once the amount of freight and insurance has been excluded from the export turnover, the same needs to be excluded from total turnover in order to maintain the parity for calculating the eligible profit for deduction u/s 10B of the act. 10.2 The assessee in support of his claim relied on the following judgments: i. Hon ble Bombay High Court in the case of Commissioner of Income-Tax vs. Sudarshan Chemicals Industries reported in 245 ITR 769. ii. Hon ble Calcutta High Court in the case of Commissioner Of Income-Tax Vs. Chloride India Ltd reported in 256 ITR 625. iii. The Hon ble Supreme Court in the case of Commissioner of Income Tax Vs. Lakshmi Machine Works reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta High court where in courts have held that the numerator and denominator both has to be identical parameter for working out deduction. So it is not correct on part of AO to exclude freight etc. in export turnover and not to reduce same from total turnover. Therefore, AO is direct to exclude freight etc. from total turnover also and after that wok out eligible deduction. Therefore ground no.2 of appeal is allowed. Being aggrieved by the order of ld CIT(A) revenue is in appeal before us. 12. Both the parties relied on the order of authorities below as favorable to them. 13. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the Special Bench in the case of ITO vs. Saksoft Ltd. reported in 30 SOT 55 in the identical facts and circumstances has decided the issue in favour of the assessee. The relevant extract of the order is reproduced as under: coming to provisions of section 10B, it is seen that clause (iii ) of Explanation 2 to section 10B defines 'export turnover'. There is no definition of 'total turnover'. If the parity principle is to be applied, it follows that whatever has been exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported. It must be borne in mind that total turnover is nothing but the aggregate of the domestic turnover and the export turnover. The formula prescribed by section 10B(4), differently expressed, will be as follows : Export profits= profit of the business X export turnover Domestic turnover + export Turnover For the above reasons, it was to be held that for the purpose of applying the formula under section 10B(4), the freight, telecom charges or insurance attributable to delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. Therefore, the appeals filed by the department were to be dismissed. 13.1 Similarly, we also find support and guidance from the judgment of Karnataka High Court in the case of CIT vs. Tata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without reducing the interest on capital and remuneration to partners for ₹ 66,27,065/- and ₹ 1,31,01,213/- respectively. 15. The assessee in the year under consideration has worked out the deduction u/s 10B of the Act without claiming any deduction on account of interest and remuneration to the partners. As per the assessee, the partnership deed was amended w.e.f 01.04.2009 wherein the interest/ remuneration to the partners was denied. The assessee also claimed that once it is not eligible for deduction u/s 40(b) of the Act on account of interest and remuneration to the partners, there is no question of reducing the amount of profit from such amount for the working of the deduction u/s 10B of the Act. However, the AO disregarded the contentions of the Assessee and held that the sole purpose of not claiming the interest and remuneration was to claim the higher amount of deduction u/s 10B of the Act. Accordingly, the AO worked out the amount of exemption u/s10B of the Act after reducing the amount of interest and remuneration payable to the partners for ₹ 66,27,065/- and ₹ 1,31,01,213/- only. 16. Aggrieved, assessee preferred an appeal to ld. CIT(A). T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and remuneration is provided by the appellant in the books of accounts. Computation of total income submitted by the appellant which at page no.34 to 36. Provisions of section 13 of the Indian Partnership Act 1932 is also very heavily relied on by the AR of the appellant which is as under:- Section 13: MUTUAL RIGHT AND LIABILITIES Subject to contract between the partners: a) A partner is not entitled to receive remuneration for taking part in the conduct of the business; b) The partner are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm; c) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits; d) A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum . As there is no authorization for payments of interest and remuneration to the partners in the partnership deed there is no reason that amount of eligible profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e industrial undertaking where there is a provision in the deed of partnership for the payments of interest. In para no.9 and 10 of the order honourable ITAT has held that deed of partnership athorizes the payment of interest and remuneration to the partners. In para no.11 also the ITAT has held that by that method profits of the assessee are suppressed as the expenditure is not debited in the books. The facts of the case of the appellant is different, in this case there is no provision for payments of interest and remuneration to the partners as per clause no.12 and 13 of the partnership deed submitted therefore there are no expenditure which are required to be debited as the interest and remuneration is not authorized by the deed. Therefore, the ration laid down in that case does not apply to the case of this appellant. Further the adjustment made by the AO cannot be equated with the adjustment of depreciation allowances to the eligible profit. d) Naturally as the payments of interest and remuneration is not provided in the deed, there is no claim of such expenditure u/s 40b of the act. Therefore, the applicability of decision of Hon Supreme court in Goetz India does not ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... law, the Appellate Tribunal is justified in granting relief despite the fact that it amounts to tax evasion in the hands of the partners by passing on interest/remuneration in the guise of share of profits and it is colourable device as held by the Hon'ble Supreme Court in the case of Me Dowel Co.Ltd. V/s. Commercial Tax Officer (1985) 154 ITR 48 (SC)? [ C] Whether on the facts and in the circumstances of the case the 'Appellate Tribunal was right in accepting assessee's deliberate and unjustified claim of not paying interest to partners and ignoring their obligation to pay interest to the partners which was authorized as per the partnership deed and was due within the parameters of the provisions of section 40(b)(iv) of the I. T. Act, 1961 particularly in background of the fact that the assessee had claimed deduction u/s.80IB of the I.T. Act? The learned Counsel for the revenue fairly admits that similar issue was raised in case of Commissioner of Income Tax v/s. Industrial Workwear being Tax Appeal No. 1177 of 2005 and the said Appeal was not admitted. Following the view taken in above Tax Appeal No.1177 of 2005, no case is made out for admissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 above extracted clauses. Our view tends to differ with that of the lower authorities. It emerges that although the above two clauses provide for interest on partners capital and remuneration, the same is subject to their mutual agreement since the crucial expression 'as may be mutually agreed' is duly incorporated therein subject however to the maximum statutory limit. We find that a co-ordinate bench of the tribunal in ITA 319/Asr/2010 ITO vs. Smt. Mala Tandon decided on 14-06-2011 dealt with a similar 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 provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tage. Both the working partners shall be entitled to a remuneration of ₹ 48,000/- per annum each or at such other rate or rates as the partners may at the end of each financial year, mutually settle subject to the maximum amount admissible under the Income-tax Act, 1961. 9.6. The aforesaid clauses of the partnership deed are clearly enabling clauses since the word used in 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 settled by the partners at the end of each financial year. Now, a partnership, by its very name and as per the provisions of Partnership Act is by will of the partners. There are only two partners in this firm, both having equal shares. The accounts drawn up at the end of the year reveal that no interest on the capital or remunera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion clauses comprise of mutual agreement provisions as well as the fact that it has not paid or provided for any amount in the books to conclude that the assessee's partners had decided not to charge any interest or remuneration since the relevant clauses hereinabove are not of mandatory nature. We accept assessee's arguments. The Revenue's submissions justifying action of the lower authorities on this fundamental construction of assessee's partnership deed clauses stand rejected. We delete the impugned disallowance of interest on partners' capital and remuneration in question. Since we have decided this first fundamental issue of partnership deed's interpretation against the Revenue, other arguments narrated in preceding paragraphs are rendered academic. The assessee succeeds in its ground no. 2. In view of above, we hold that the assessee was very much eligible to work out the quantum of deduction u/s 10B of the Act without reducing the amount of interest on capital and remuneration to the partners. Hence, we do not find any infirmity in the order of ld CIT(A). Thus, the ground of appeal of the Revenue is dismissed. 20. The issue raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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