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TMI Blog2014 (11) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... r as under: "7(b) That the interest shall be paid to partners on their capital as at the beginning of he year at the rat of 12% per annum or at such rate of interest as may be prescribed u/s 40(b) of the Act or by the Central Govt from time to time which ever is less." 9 The aggregate remuneration payable to the partners shall be calculated for each accounting year in the followi9ng manner: i) In respect of book profit as per Income Tax Act upto Rs. 75,000 at the rate of 90% or Rs. 50,000 whichever is more. ii) In respect of next book profit of Rs. 75,000 at the rate of 60%. iii) In respect of balance of book profit a the rate of 40% Such remuneration shall be distributed between partners as under: a) Party of the first 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as it is necessary for the present case reveals that in order to invoke some essential requirements are: (a) That there must be close connection between the assessee and the other person. (b) That the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits. There are other requirements in the said section with which we do not wish to detail in as much as the same are not relevant to the dispute on hand. Section 80IA(10) is applicable to Sec 80IC also because of provisions of section 80IC also because of provisions of section 80IC(7). As per section 80IA (10) where the Assessing officer finds that owing 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 vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conduct of the partners show that they have not acted upon the clause of the Deed which otherwise authorizes them to take remuneration and interest on their capital contribution. Having factually observe that there was no such payments made and neither was there any liability for such amount, in our view the Assessing officer was not empowered to reduce the profits on this score for the purpose the section 80IA(10) of the Act. In view of the aforesaid discussion, we find that the Assessing officer not only wrongly invoked the provisions of section 80IA(10) but also erred in interpreting the partnership deed so as to hold the assessee liable for reducing its profits on account of remuneration and 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n computing the total income of a member of the association of persons or body of individuals in relation to the share of such member in the income of the association of persons or body of individuals.] [(4) 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, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent 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", ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to such specified business for the same or any other assessment year.]." 80AB - [Deductions to be made with reference to the income included in the gross total income. - Where any deduction is required to be made or allowed under any section [* * *] included in this Chapter under the heading "C.-Deductions in respect of certain incomes" in respect of any income of the nature specified in that section which is included in the gross total income of the assessee, then, notwithstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (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) [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff the carried forward losses of the earlier years in accordance with section 72 of the Act and finding that the said losses exceeded the income, had rightly not allowed any deduction u/s 80P(2)." Above position has been followed later on in various decisions by the Hon'ble Supreme Court like H.H. Sir Rama Verma V CIT, 205 ITR 435 and Motilal Pesticides (I) Pvt Ltd. V CIT, 243 ITR 26 (S.C). 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven hereinabove under the caption "Point at issue". The illustration indicates that the a e has not disclaimed depreciation. The point therefore to be noted is that the assessee has also claimed depreciation, but at a later stage and therefore the judgment of Hon'ble Supreme Court in Mahendra Mills Case, 243 ITR 56 has no application. Accordingly to the assessee the profits derived from the unit was Rs. 100 because u/s 32(2) r.w.s 4 of the IT act, the chargeability was in respect of the total income and, therefore the rate of 20 per cent was applicable to the total income of Rs. 100 without deducting depreciation. Secondly 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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