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TMI Blog2022 (7) TMI 1266X X X X Extracts X X X X X X X X Extracts X X X X ..... "1. The grounds of appeal mentioned hereunder are without prejudice to one another. 2. The order passed by Pr. Commissioner of Income-tax, Rajkot-1 [hereinafter referred as to the "PCIT"] is bad in law, invalid and requires to be quashed, the same may kindly be quashed. 3. The ld. PCIT erred in law and on facts in arriving at a conclusion to the effect that the assessment order passed by the A.O. was erroneous as well as prejudicial to the interest of the revenue on the ground that such order was passed without verifying mandatory requirement of payment of interest on capital of partner as per clause of partnership deed. Therefore, the order passed by PCIT is required to be quashed and may kindly be quashed. 4. The learned Pr. CIT er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act and claimed deduction amounting to Rs. 35,53,468/-. Therefore, assessee firm is taking advantage of exempt income by not claiming interest on partner's capital as the interest on capital is taxable in the hands of the partners. Therefore, assessee firm has not given any interest on capital as per the terms of partnership deed by claiming higher exempt income. It is further noticed that the assessee firm had not paid interest to the partners in contravention of the express conditions of the partnership deed. Hence, assessee firm had inflated profits eligible for deduction under section 80IB(10) of the Act by not debiting the interest payable to partners as per partnership deed. The eligible interest in the hands of partners on thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conducted any inquiries/verification in of the on the above issue while finalizing the assessment u/s 143(3) of the Act on 29-1-2019. It may be mentioned that two essentials condition for invoking the provisions of section 263 of IT Act are that the order passed by the AO is erroneous and prejudicial to the interest of revenue. xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx 11. As per the Explanation 2, the order passed by the Assessing Officer shall be deemed erroneous in so far as it is prejudicial to the interest of the revenue if the order is passed allowing any relief without inquiring into the claim. However, the AO did not conduct any such inquiri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duly responded by filing submission dated 29-11-2019, which was considered by the AO while passing the assessment order. Further, the counsel for the assessee submitted that Clause-5 of partnership deed specifically provides that the partners shall be entitled to increase or reduce the interest on capital contributed by partners and thus, though the partnership deed contains a provision for interest to partners, it is open for the partners to increase or decrease the same or even not to pay interest at all, as per mutual agreement. In the assessee's case, it was decided that no interest shall be paid and accordingly, neither interest has been paid during the impugned year, nor the same has been debited to the profit loss account. The counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision of such liability in its books of account. A perusal of deed of partnership revealed that the parties on mutual consent could add, amend, vary or alter any of the terms of partnership. This was found to be so spelled out in clause No. 11 of partnership deed dated 4-4-1988 and adopted in the supplementary deed as well. From that clause it was evident that the various clauses of partnership deed which authorized the partners to charge interest on their capital and remuneration to the working partners could be varied or amended either verbally or even by conduct. It was not necessary for the parties to have reduced such terms to writing in case they desired not to charge any interest or remuneration as such. From the conduct of part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to partners. Accordingly, the Gujarat High Court held that the impugned reopening noticed issued against assessee was unjustified and same was to be set aside. While passing the order, the Gujarat High Court observed as under: 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 1-4-2009, interest on capital as well as the remuneration were not to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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