TMI Blog2014 (11) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... d. [ 1997 (3) TMI 1 - SUPREME COURT ] Above position has been followed later on in various decisions by the Hon'ble Supreme Court like H.H. Sir Rama Verma [ 1993 (11) TMI 2 - SUPREME COURT ] and Motilal Pesticides (I) Pvt Ltd. [ 2000 (2) TMI 9 - SUPREME COURT ] Therefore it becomes clear that deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also. As later on it was decided not to pay salary and interest to the partners - This does not seems to be correct because before the Assessing officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference - As for making deduction under chapter VIA the profits has to be computed specifically as per a particular provision of a particular head of income because of the definition of gross total income u/s 80B(5). In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t part 50% b) Party of second part 50% A The above remuneration shall accrue at the end of the accounting year and will have to be distributed amongst the partners as above. B The above partners shall NOT be entitled to draw any remuneration in the accounting year in which the partnership firm has suffered loss. The above remuneration payable to the partners shall be credited to their respective account at the close of the accounting year and the amount of remuneration shall fall due to them as determined in the above manner. C The partners shall be entitled to increase or decrease the above remuneration or may agree to pay remuneration to other working partners or partners as the case may be. The parties hereto may also agree to revise the mode of calculating the above said remuneration as may be mutually agreed between partners from time to time or due to change in law. However, it s hall be within the limits as may be prescribed under the Income Tax Act from time to time. On perusal of profit and loss account it was further seen that neither any interest nor any remuneration was paid to the partners. The assessee was confronted with this position an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a close connection between the assessing carrying on eligible business and any other person doing any other business, the course of business between them is so arranged that the business transacted between them products to the assessee more than the ordinary profits which arises in such business, the Assessing officer is empowered to compute the profits of such business as may be reasonably deemed to have been derived therefrom. The two requirements of the section which in our view are of relevance in this case, have been enumerated earlier by us. The first is that there must be a close connection between the assessee and such other person. The second is that there must be an arrangement where by the business transacted between the produces to the assessee more than the ordinary profits. In the present case, the charge of Assessing officer is that the assessee has not debited any expenditure on remuneration to its partners and interest on partners capital contribution and therefore such arrangement between the assessee and its partners have resulted in more than ordinary profits to the assessee. In so far as the first condition is concerned, regarding close connection ostens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest to the partners for the purpose of section 80IC of the Act. The order of the Ld. CIT(A) on this ground is hereby affirmed. Thus, the Revenue fails on ground no. 1 and 2. On the basis of above she observed inn para 5 as under: 5 Thus it has been laid down by the ITAT that in the absence of any payments made to the partners on account of salary and/or interest, and there being no liability for such payment, the Assessing officer was not empowered to reduce the profits on this score by invoking the provisions of section 80IA(10) of the Act. Respectfully following the said judgment of the jurisdictional ITAT, the addition made by the Assessing officer to the tune of Rs. 1091064/- in the instant case is directed to be deleted. The Assessing officer is also directed to allow the deduction u/s 80IC of the Act in respect of the assessee s profit without reducing the amount of salary and interest payable to the partners. 6 Before us. Ld. D.R for the revenue strongly supported the order of the Assessing Officer. 7 On the other hand, Ld. Counsel for the assessee submitted that after writing the partnership deed later on through mutual understanding it was agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be. (5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA or section 10B or section 10BA or under any provision of this Chapter under the heading C. Deductions in respect of certain incomes , no deduction shall be allowed to him thereunder.] [(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading C Deductions in respect of certain incomes , where any goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business and, the consideration, if any, for such transfer as reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income.] 80B 80B. In this Chapter (1) [* * *] (2) [* * *] (3) [* * *] (4) [* * *] (5) gross total income means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter [* * *] [* * *]; (6) [* * *] (7) [* * *] (8) [* * *] (9) [* * *].] 9 Reading of above provisions clearly shows that deduction under various provisions of this Chapter are allowable only if the income of the nature on which deduction is claimed has been included in the total income and further deduction has to be allowed on the basis of above gross total income. Gross total income has itself been defined in Sec 80B which clearly shows that deduction can be allowed on that income which is computed in accordance with the provisions of the Act before allowing deduction under Chapter VIA. Under Income-tax Act the income has to be computed under various heads as per the provisions of a particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also. 11 There is another contentions that later on it was decided not to pay salary and interest to the partners. This does not seems to be correct because before the Assessing officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference. This type of situation came up for consideration of Hon'ble Bombay High Court in case Indian Rayon Corporation Ltd. V CIT, 261 ITR 98. In that case the deduction for industrial undertaking was claimed u/s 80HH because industry was located in a backward area. The deduction was claimed on the profits without claiming depreciation. The Assessing officer held that deduction was allowable only after allowing depreciation. This was challenged by the assessee and the matter traveled to the High Court. Hon'ble High Court made following observations: 261 ITR 98 Income-tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... econdly in any event, the controversy in Mahendra Mills case, 243 ITR 56 was not concerning deductions under Chapter VI-A of the Income tax Act. Therefore that judgment would not apply to this case. The important distinction which is required to be noticed in this case is that we are required to compute the total taxable income of the assessee who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of section 80B(5) and 80AB. Consequently section 80HH inter alia, lays down that if the gross total income includes profits from a newly established undertaking then 20 per cent of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act i.e. section 29 to 43A. Therefore net profit will have to be computed in accordance with the provisions of the Act. The argument of the assessee is that in view of the judgment of Hon'ble Supreme Court in Mahendra Mills case, 243 ITR 56, it is open to the assessee not to claim depreciation allowance u/s 32 an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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