Income Tax Appellate Tribunal - Ahmedabad
Sagar Foods, Mahuva vs Income Tax Officer, Bhavnagar on 22 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD '' B " BENCH - AHMEDABAD
Before Shri Rajpal Yadav, JM & Shri Manish Borad, AM.
ITA No. 750/Ahd/2014
Asst. Year: 2010-11
M/s Sagar Foods, Vs. ITO, Wd-2(4), Bhavnagar.
Survey No.155, Nesvad,
Sabarkantha Road,
Bhavnagar Road, Mahuva.
Appellant Respondent
PAN ABIFS 5371B
AND
ITA No. 796/Ahd/2014
Asst. Year: 2010-11
Shreeji Dehydrate Exports, Vs. ITO, Wd-2(4), Bhavnagar.
Junagadh, Survey No.95
Paikee, B/h Silver Ginning,
Bhavnagar Road, Village
Yajpur, Una, Junagadh.
Appellant Respondent
PAN ABMFS 3200P
Appellant by Shri Tushar P. Hemani, AR
Respondent by Shri James Kurien, Sr.DR
Date of hearing: 10/02/2017
Date of pronouncement: 22/02/2017
ORDER
PER Manish Borad, Accountant Member.
ITA No. 750/Ahd/2014 2
Asst. Year 2010-11 These two appeals of separate assessees for Asst. Year 2010- 11 are directed against the orders of ld. CIT(A)-XX, Ahmedabad, dated 17.01.2014 & 24.01.2014 vide appeal No.CIT(A)-XX/187/12-13 and appeal No.CIT(A) -XX/186/12-13 arising out of order u/s 143(3) of the Income Tax Act, 1961 (in short the Act) framed on 22.02.2013 and dated 25.02.2013 by ITO, Wd-2(4), Bhavnagar, respectively. As the issues involved in these appeals are similar, these were heard together and are being disposed of by this common order for the sake of convenience.
Grounds raised in ITA No.750/Ahd/2014 are as under :-
1. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating the income of kasar (discount) amounting to Rs1,13,499/- eligible for deduction u/s 80IB(11A) of the Income Tax Act, 1961 ('the Act') after holding that the same is not derived from the eligible industrial undertaking.
2. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating, interest of Rs.27,940/- received from PGVCL, interest subsidy of Rs.1,96,246/- received from Government of Gujarat through district industrial center and interest from FDR of Rs.
10,619/- eligible for deduction u/s 80IB(llA) of the Act after holding that the same is not derived from the eligible undertaking.
3. The learned CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Id. AO in notionally reducing an amount of Rs. 13,44, 287/- on account of remuneration and interest payable to the partners as per the partnership deed from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
ITA No. 750/Ahd/2014 3Asst. Year 2010-11
4. Both the lower authorities have failed to appreciate that the impugned amount of remuneration and interest was neither debited to Profit & loss account nor paid to the partners, and therefore, the same could not have been reduced notionally from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
5. The learned CIT(A) has erred in law and on the facts of the case in confirming the disallowance made by the learned Assessing Officer on account of late payment of PF of Rs.31,421/- u/s 36(l)(va) of the Act.
6. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in disallowing Rs.1,452/- in respect of interest on TDS.
7. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order.
8. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in charging interest u/s 234A/B/C/D of the Act.
9. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in initiating penalty proceedings u/s 271(l)(c) of the Act.
The appellant craves leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before the hearing of the appeal.
ITA No. 750/Ahd/2014 4Asst. Year 2010-11
2. For the purpose of adjudication we will first take up first ITA No.750/Ahd/2014.
3. Briefly stated facts as culled out from the records are that assessee is a partnership firm engaged in the business of manufacturing of dehydrated onion. E-return of income was filed on 25.09.2010 declaring Nil income after claiming deduction u/s 80IB of the Act of Rs.15,90,488/-. Case was selected manually for compulsory scrutiny and statutory notice u/s 143(2) followed by notice u/s 142(1) of the Act along with detailed questionnaire was issued and duly served upon the assessee. Necessary details as called for were submitted. Gross turnover of the assessee aggregated to Rs.2,43,39,737/-. Deduction u/s 80IB of the Act was claimed at 15,90,488/-. During the course of assessment proceedings while examining the claim of assessee u/s 80IB of the Act ld. Assessing Officer observed that assessee has claimed deduction u/s 80IB of the Act on the interest income received from deposit with PGVCL, FDRs and interest on subsidy at Rs.27,940/-, Rs.10,619/- and Rs.1,96,246/- respectively. It was also observed that claim in respect of deduction u/s 80IB of the Act was also taken on the discount received (kasar- vatav) at Rs.1,13,499/-. Ld. Assessing Officer also observed that PF of Rs.31,421/- was paid after the due date and similarly TDS of Rs.1452/- needed to be disallowed. It was also observed by the Assessing Officer that as per the partnership deed assessee was required to provide interest on capital and remuneration to partners but no such expenditure was claimed in the profit and loss account thereby inflating the profits and claiming excessive deduction u/s 80IB ITA No. 750/Ahd/2014 5 Asst. Year 2010-11 of the Act. As a result of which the income which was required to be shown by the partners as remuneration and interest was not shown in their respective income tax returns thereby claiming tax benefits. Necessary submissions were made by the assessee but they were not enough to convince ld. Assessing Officer and he accordingly assessed the income of Rs.3,81,180/- after disallowing deduction u/s 80IB of the Act on the interest income under various heads at Rs.2,34,805/- and discount of Rs.1,13,499/- disallowing PF being paid after the due date, interest on TDS and also reducing the claim u/s 80IB of the Act by notionally calculating interest and remuneration at Rs.13,44,287/- to be debited in Profit & Loss a/c. Net profit of the computation of income as assessed by ld. Assessing Officer is reproduced below :-
Net profit as per computation of income filed. Rs. 15,90,488/-
Less:- Income is not related with industrial undertaking Worked out separately.
i). Interest from GEB Rs. 27,940/-
II). Kasar Discount Rs.1,13,499/-
III). Interest subsidy Rs. 1,96,246/-
Interest from FDR Rs. 10.619/- Rs. 3,48.304/-
Profit from eligible business u/s 80IB ..... Rs. 12,44,184/-
Less;- Amount of remuneration and interest to partners not debited for the purpose of Enhancement of deduction u/s 80IB as worked out in above para. Rs.13.44,287/-but restricted Rs. 12.44.184/- Profit from industrial undertaking eligible u/s 80IB... Rs. Nil/-
Total income of the business.. Rs. NIL/-
Add;- Disallowances/Additions as discussed above
i) Interest from GEB Rs. 27,940/-
II). Kasar Discount Rs.1,13,499/-
III).Interest subsidy Rs.1,96,246/-
ITA No. 750/Ahd/2014 6
Asst. Year 2010-11
Interest from FDR . Rs. 10,619/~
iv) Late payment of PF Rs. 31421/-
Interest on IDS. Rs. 1452/- Rs.3.81.177/-
Total Taxable income of the assessee ... Rs.3,81,177/--
i.e. Rs.3,81,180/--
The assessee has income of eligible profit of industrial undertaking an amount of Rs.
NIL/-.and amount of Rs. 3,81,180/- is taxable income of the assessee\ and an amount of Rs.12,44,184/-is taxable income in the hands of the Partners.
4. Aggrieved assessee went in appeal before ld. Commissioner of Income Tax(A) but partly succeeded and now on the remaining grounds on which ld. Commissioner of Income Tax(A) confirmed the action of ld. Assessing Officer assessee is in appeal before the Tribunal.
Ground no.1 reads as under :-
1. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating the income of kasar (discount) amounting to Rs1,13,499/- eligible for deduction u/s 80IB(11A) of the Income Tax Act, 1961 ('the Act') after holding that the same is not derived from the eligible industrial undertaking.
5. At the out set ld. Authorised Representative submitted that the issue raised in this ground relating to kasar discount being eligible for deduction u/s 80IB of the Act is squarely covered by the decision of the Co-ordinate Bench in the case of Nrox Specialities vs. ITO in ITA No.855/Ahd/2013 pronounced on 9.6.2016.
6. Ld. Departmental Representative could not controvert the submissions of ld. Authorised Representative.
ITA No. 750/Ahd/2014 7Asst. Year 2010-11
7. We have heard the rival contentions and perused the records placed before us. Through this ground assessee has challenged ld. Commissioner of Income Tax(A)'s order confirming action of ld. Assessing Officer in not treating kasar discount of Rs.1,13,499/- being eligible for deduction u/s 80IB (11A) of the Act. Ld. Authorised Representative has relied on the decision of Co-ordinate Bench in the case of Nrox Specialities vs. ITO (supra) and on perusal of the decision of the Co-ordinate Bench we find that in the said decision issue relating to eligibility of purchase discount for deduction u/s 80IB of the Act has been dealt with and decided in favour of assessee by observing as under :-
4. Facts of the case are in a narrow compass. The assessee firm manufactures specialty chemical. There is no dispute about it being already entitled for section 80IB deduction. We find that the relevant amount involved is wrongly stated as Rs. 3,00,295/- instead of the correct one coming to Rs. 2,99,153/-. The assessee received discounts from its suppliers on purchases of raw materials and consumables. The Assessing Officer in assessment order dated 21-10-2011 held that these discounts did not qualify section 80IB deduction since not derived from the eligible industrial undertaking. He treated the corresponding discount figure as income from other sources.
5. The CIT(A) confirms Assessing Officer's action as follows:-
"7.2 SUBMISSION BY THE APPELLANT:- The appellant submitted before me that the Other Income consists of Discount received of Rs. 2,99,753/- and Exchange Rate Difference of Rs. 1,142/-. The appellant is engaged in manufacturing of specialty chemicals and has received discounts from its suppliers while purchasing raw materials and consumables. Therefore, the said Other Income reduces the purchase cost of raw materials and consumables resulting in increase of manufacturing profits and qualifies for deduction U/s. 80/6 as they are directly derived from the Industrial Undertaking. Copies of Ledger Accounts in regard to discount received from various suppliers of raw materials and consumables used for the manufacturing purpose were submitted to the AO.ITA No. 750/Ahd/2014 8
Asst. Year 2010-11 The appellant submitted before, me a copy of the submission made before the AO along with copy of ledger accounts. It was submitted that the discounts received reduces the manufacturing cost of products sold and hence is directly derived from the industrial undertaking. As regards exclusion of exchange rate difference it was submitted that the issue is squarely covered in favor of the appellant in view of the decision of Gujarat High Court in the case of CIT V/s. Amba Impex reported in 282 ITR 0144. It was requested to direct the AO not to exclude the other income to the tune of Rs. 3,00,295/- while calculating deduction U/s. 80IB.
DECISION:- I have carefully perused the facts of the case and the submission made by the appellant along with the observations made by the AO in the assessment order. The judicial rulings are very clear in what constitutes allowable income. The Hon'ble SC in the case of Liberty India Ltd. has clearly brought out the ratio that the income eligible for deduction u/s. 8OIB must have first degree direct nexus with the manufacturing activities during the relevant year. In the instant case, the appellant has accounted discount received of Rs. 2,99,153/- as other source of Income which means there is no relation to the manufacturing activities therefore, does not qualify as having first degree nexus with the manufacturing activities during this year thereby, in my opinion, not eligible for deduction u/s. 801B of the Act. This part in this ground of appeal is dismissed."
6. Both the parties reiterate their respective pleadings against and in support of their respective cases. There is no quarrel about the fact that the assessee received the impugned purchase discount from raw materials/consumables suppliers to the tune of Rs. 2,99,1537- as utilized in its eligible business of manufacturing of specialty chemicals whose profits are already eligible for section 80IB deduction. Both the Id. lower authorities do not rebut assessee's books specifically stating the crucial live nexus between the discounted raw materials and its manufactured specialty chemicals. Net effect thereof is that assessee's eligible profits derived from its manufacturing activities have seen increased since raw material costs have come down due to the impugned discount forming integral part of the manufacturing process. We conclude in these peculiar facts that the authorities below have wrongly equated these facts with those involved in hon'ble apex court decision in Liberty India vs. CIT (2009) 317 ITR 218 (SC) involving DEPB sales figures. We accept assessee's contentions on merits and reject those raised at Revenue's behest supporting the impugned disallowance.
Respectfully following the decision of Co-ordinate Bench as observed above we find that the issue is squarely covered by this decision and, ITA No. 750/Ahd/2014 9 Asst. Year 2010-11 we therefore, are of the view that assessee is eligible to claim deduction u/s 80IB of the Act on the income from discount (kasar) of Rs.1,13,499/-. In the result, this ground of assessee is allowed.
8. Ground no.2 reads as under :-
2. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating, interest of Rs.27,940/- received from PGVCL, interest subsidy of Rs.1,96,246/- received from Government of Gujarat through district industrial center and interest from FDR of Rs.
10,619/- eligible for deduction u/s 80IB(llA) of the Act after holding that the same is not derived from the eligible undertaking.
9. Brief facts relating to this issue are that ld. Assessing Officer denied deduction u/s 80IB on the following interest income :-
Interest on subsidy received from Govt. of Gujarat Rs.1,96,246/-
Interest receied from PGVCL Rs. 27,940/-
Interest on FDRs Rs. 10,619/-
------------------------
Rs. 2,34,805/-
10. Ld. Authorised Representative submitted that ld. Assessing Officer denied deduction u/s 80IB(11A) on interest income of Rs.2,34,805/- and the said action has been confirmed by ld.CIT(A) as well.ITA No. 750/Ahd/2014 10
Asst. Year 2010-11 As regards "Interest subsidy", deduction us 80IB(11A) is allowable on the same. Reliance is placed on CIT vs Meghalaya Steels - 383 ITR 217 (SC).
As regards "Interest received from PGVCL" and "Interest on FDR", deduction must be denied merely on "Net income". Netting off is well accepted principle in the eye of law and hence, while eliminating any sum from the deduction under section 80IB of the Act, it is the ''net income" and not the gross receipt which should be excluded. This principle has been laid down by the Hon.Supreme Court in case of ACG Associated Capsules Pvt. Ltd. vs. CIT - (2012) 343 ITR 89 (SC) in context of deduction under section 80HHC of the Act. Hon'ble Gujarat High Court in case of CIT vs. Nirma Ltd. - (2014) 367 ITR 12 (Guj.) applied such principle in context of provisions contained in section 801, 80IA, etc.
11. On the other hand, ld. Departmental Representative supported the orders of lower authorities. (383 ITR 217)
12. We have heard the rival contentions and perused the records placed before us. Through this ground assessee is aggrieved with the denial of deduction u/s 80IB of the Act on interest income received from Govt. of Gujarat, deposit with PGVCL and FDRs. We observe that there is no dispute to the fact that assessee is eligible for deduction u/s 80IB of the Act and the only source of income of the assessee firm is from business of manufacturing dehydrate onion and vegetables which are covered under the provisions of section 80IB of ITA No. 750/Ahd/2014 11 Asst. Year 2010-11 the Act. The impugned interest income on which deduction u/s 80IB of the Act has been denied relates to following :-
> Interest subsidy received from Govt. of Gujarat: Rs. 1,96,246/-
> Interest received form PGVCL : Rs. 27,940/- > Interest on FOR : Rs. 10,619/-
As regards interest received from Government of Gujarat at Rs.1,96,246/-, we find that the issue is squarely covered in favour of assessee in the case of Commissioner of Income Tax vs. Meghalaya Steels 383 ITR 247 (SC) wherein Hon. Court held as under :-
"that as all the four subsidies were revenue receipts which were reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there could certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. The subsidies were only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products."
Hon'ble Court decided the above issue with relation to assessee's claim u/s 80IB and 80IC of the Act. Examining the facts of the case in the light of above judgment we are of the considered view that assessee has also received interest subsidy from Govt. of Gujarat of Rs. 1,96,246/- for the project undertaken by the assessee eligible for deduction u/s 80IB(11A) of the Act and, therefore, since subsidy received is also a part of profit and loss account of the industrial undertaking it is eligible for deduction u/s 80IB(11A) of the Act. We, therefore, allow assessee's claim of deduction u/s 80IB of the Act on the interest subsidy received from Government of Gujarat at Rs. 1,96,246/-.
ITA No. 750/Ahd/2014 12Asst. Year 2010-11 12.1 As regards interest received from PGVCL and interest on FDRs at Rs..27,940/- & Rs. 10,619/- certainly this income does not have direct nexus with the profit and loss of the undertaking but it is also a fact that the deposits with PGVCL and deposit with the bank FDRs have been indirectly carried out in the process of business only with regard to statutory deposits to be made or surplus funds deposited with Bank. Ld. Authorised Representative during the course of hearing has requested for netting of the interest income against interest paid by placing reliance on the judgment of Hon. Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. vs. Commissioner of Income Tax (2012) 343 ITR 89 (SC) which has been followed by Hon. Gujarat High Court in the case of Commissioner of Income Tax vs. Nirma Ltd. (2014) 367 ITR 12 (Guj). On perusal of the judgment of Hon. Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. vs. Commissioner of Income Tax (supra) in the context to netting of income while providing deduction u/s 80IB of the Act and the judgment of Hon. Gujarat High Court in the case of Commissioner of Income Tax vs. Nirma Ltd. (supra) adjudicating similar issue of netting income inter alia considering the judgment of Hon. Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) we find substance in the argument of ld. Authorised Representative and are of the view that benefitting of netting of interest should be allowed to the assessee against the interest expenditure claimed by the assessee and resultantly there will be nil effect to the eligible profit for the purpose of claiming deduction u/s 80IB (11A) of the Act and accordingly, this ground of the assessee is allowed.
ITA No. 750/Ahd/2014 13Asst. Year 2010-11
13. Ground no.3 & 4 read as under :-
3. The learned CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Id. AO in notionally reducing an amount of Rs. 13,44, 287 /- on account of remuneration and interest payable to the partners as per the partnership deed from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
4. Both the lower authorities have failed to appreciate that the impugned amount of remuneration and interest was neither debited to Profit & loss account nor paid to the partners, and therefore, the same could not have been reduced notionally from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
14. Ld. AR briefing the facts relating to these grounds submitted that during the course of assessment proceedings Assessing Officer found that assessee has not debited remuneration and interest to partners to Profit & Loss a/c even though there is a provision for the same in the partnership deed. Ld. Assessing Officer took a view that assessee ought to have paid remuneration and interest to partners and by not doing so, assessee has inflated the profit and resultantly claimed higher deduction u/s 80IB(11A) to the extent of Rs.13,44,287/- (i.e. Interest Rs.10,92,653 + Remuneration Rs.2,51,634). Hence, ld. Assessing Officer notionally reduced the said sum from deduction u/s 80IB(11 A) and this action of ld. Assessing Officer has been confirmed by CIT(A) as well.
ITA No. 750/Ahd/2014 14Asst. Year 2010-11 14.1 Ld. Authorised Representative further submitted that Assessing Officer and Commissioner of Income Tax(A) failed to appreciate facts in its entirety. Clause 8(IV) of Partnership deed (Pgs.47-56 @ 50 of P/B) specifically provides that the partners shall be entitled to increase or reduce the remuneration and partners may also agree to pay remuneration to other partners. Thus, though the partnership deed contains a provision for interest and remuneration to partners, it is open for the partners to increase or decrease the same or not to pay the same at all. In the assessee's case, it was decided that no interest and remuneration shall be paid and accordingly, neither the same has been paid, nor the same has been debited to Profit & Loss a/c s.36(l)(iii) and s.37 of the Act provide for deduction in respect of expenditure "paid/incurred" by the assessee. Since the "interest" expenditure has neither been paid, nor incurred by the assessee, the same cannot be foisted upon the assessee. s.40 of the Act prescribes for "disallowance" in respect of "remuneration" to partners beyond specified limits. Since s.40 of the Act doesn't provide for "deduction" of remuneration but provide "disallowance" of excess remuneration, even the claim of "remuneration" cannot be foisted upon the assessee. Further, Partnership deed is a creation of "Contract Law". Contents of the Partnership deed cannot override the provisions of the Income-tax Act, 1961. Hence, just as deduction in respect of interest and remuneration to partners cannot be granted beyond the limits prescribed under the Income-tax Act even though partnership provides for a higher sum, similarly, claim of interest and remuneration to partners cannot be foisted upon the assessee ITA No. 750/Ahd/2014 15 Asst. Year 2010-11 because of the mere fact that partnership deed provides for the same especially when conditions u/s 36(l)(iii), 37 and 40(b) of the Act are not satisfied. In light of the above discussed factual and legal position, it is not open for the Department to artificially/notionally reduce the profits by the amount of remuneration and interest so as to ultimately reduce assessee's claim of deduction u/s 80IB(11A). Reliance is placed on:
Tulsa Ram Kanhiyalal & Sons - (2008) 25 SOT 402 (Jodhpur) (SMC) - Pgs.41-43 of P/B;
CIT vs. Mundra Packaging Industries - Tax Appeal No.615-617 of 2006 (Gujarat);
ITO vs. M/s. Twina Polyplast - ITA No.2776 & 3130/Ahd/2010 In light of the above, action of AO and CIT(A) in artificially reducing assessee1 s profit by the amount of interest and remuneration to partners so as to, in turn, reduce the deduction u/s 80IB(11A) is not tenable in the eye of law.
15. On the other hand, ld. Departmental Representative supported the orders of lower authorities and also submitted that assessee firm had to abide by the clauses of the partnership deed and more so there was no supplementary deed entered into by the partners for not providing interest and remuneration for the year under appeal.
16. We have heard rival contentions and perused the record placed before us. In these two ground nos. 3 & 4 grievance of the assessee against ld. Commissioner of Income Tax(A)'s order for confirming the action of ld. Assessing Officer in notionally reducing the deduction u/s ITA No. 750/Ahd/2014 16 Asst. Year 2010-11 80IB of the Act by Rs.13,44,287/- on account of interest and remuneration payable to partners as per partnership deed. We observe that assessee being a partnership firm is carrying on its business under the partnership deed dated 3.6.2008 placed at pages 57 to 69 of the paper book. In this partnership deed as per the clauses 8 & 9 partners are entitled to remuneration and interest on capital. Assessee firm is also enjoying benefits of deduction u/s 80IB(11A) of the Act. During the year under appeal assessee has not charged any amount on account of remuneration and interest to partners. Ld. Assessing Officer on observing this fact was of the view that assessee firm has to adhere as per the clauses of partnership deed and deviation of any nature needs to have been supported by supplementary deed to this partnership deed which was not done in the case of assessee. As a result, ld. Assessing Officer computed the notional amount of interest on partners' capital at Rs.10,92,653/- and remuneration of Rs.2,51,634/- which total to Rs. 13,44,287/- and thereby reducing deduction u/s 80IB(11A) of the Act by this amount and held it to be taxable in the hands of partners. When the assessee went in appeal before ld. Commissioner of Income Tax(A) it was decided against the assessee.
16.1 We further observe that in the clauses 8 & 9 of the impugned partnership deed under clause 8(iv) states that as under :-
IV) The partners shall be entitled to increase or reduce the remuneration and may agree to pay remuneration to other partner or partners. The parties here to may also agree to revise the mode of calculating the above remuneration and decide to pay salary and ITA No. 750/Ahd/2014 17 Asst. Year 2010-11 grant the benefit of house rent allowance, rent fee quarters, motor car or conveyance allowance, medical expenses accident and / or, gratuity, bonus, commission on sales / gross receipts and / or the benefits to the above and / or the partner or partners either on monthly or yearly basis as they may mutually agreed upon.
16.2 We further observe that in clause 9 which relates to interest of partners' capital not exceeding 12% per annum which ends with the line "the partners shall be liberty to increase or reduce above rate of interest from time to time. It is true that clause 10 refers to the execution of a supplementary deed if the partners want to modify the terms relating to remuneration of interest to partners. But in clauses 8 & 9 option has been provided to the partners to modify the amount of remuneration and interest in capital. We further find substance in the submissions of ld. Authorised Representative that particular expenditure relating to interest and remuneration is not compulsorily to be incurred as section 40 of the Act deals with the amount not deductible more specifically section 40(b) deals with disallowance of remuneration beyond specified limit. Providing of remuneration or interest is an expenditure which in the case of assessee has not been booked in the books of account and, therefore, ld. Assessing Officer cannot foist upon to provide a notional amount of interest and remuneration. This view finds support from the decision of Co- ordinate Bench in the case of Tulsa Ram Kanhiyalal & Sons (2008) SOT 402 (Jodhpur) wherein similar issue came up before the Bench which reads as follows :
ITA No. 750/Ahd/2014 18Asst. Year 2010-11 "whether since partnership deed revealed that the parties on mutual consent could add, amend, vary or alter any of the terms of partnership, Assessing Officer could not have compelled the assessee to charge interest or remuneration by invoking section 40(b) of the Act more particularly when it was not mandatory but discretionary for assessee".
The said issue was decided in favour of assessee by deciding as follows:-
6.1 have heard the parties and carefully perused the material on record. It is correct that the terms of partnership provided payment of interest at the rate of 12 per cent on capital of partners as well as remuneration to the working partners. The assesses, however, did not make payment thereof to the partners nor made any provision of liability in the books of account The perusal of deed of partnership reveals that the parties on mutual consent could add, amend, vary or alter any of the terms of partnership. This is found so spelled out in clause No. 11 of partnership deed dated 4-4-1998 and adopted in the supplementary deed as well. Front this clause it is evident that the various clauses of partnership which authorised the partners to charge interest on their capitals 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 in writing in case they desired not to charge any interest or remuneration as such.
From the conduct of parties it is evident that they have acted in terms of clause No. 11 of the partnership deed. The Assessing Officer, therefore, could not have 'compelled the assessee to charge such interest or remuneration by invoking section 40(b}( v) of the Act more particularly when it is not mandatory but discretionary for the assessee to have made such a claim. Even otherwise, if this was to be taken as a case of contravention of provisions of section 184 or 185 of the Act, then also the amount of interest of salary payable to partners could not have been charged as their income in terms of clause (v) of section 28 of the Act. That being so, the folding reached by Id. CIT(A) that the assessee has circumvented tax liability by not claiming the deduction on account of salary, and interest to partners so as to take benefit of set off of brought forward losses will not result into tax evasion but was merely on legitimate tax planning done by the appellant. Keeping in view the overall conspectus of the case, I find no justification in the action of the Id. CIT(A) in upholding the decision of Id. assessing authority in enforcing deduction of interest on capital and remuneration to working partners of the firm while computing the assessable income for the year under consideration. I, therefore, by allowing the ground in appeal, direct the assessing authority to modify the computation of income accordingly.
ITA No. 750/Ahd/2014 19Asst. Year 2010-11 16.3 We further observe that similar issue also came up before Hon. Jurisdictional High Court in the case of Commissioner of Income Tax vs. Mundra Packaging Industries in Tax Appeal No.615-617 of 2006 wherein following questions of law were proposed :-
"[A] Whether on the facts and in the circumstances of the case the Appellate Tribunal is right in law in allowing the appeal of assessee on the ground that when it is not open to the assessee to disclaim any allowance/expense and profit and gain of an industrial undertaking covered under chapter VI-A of the IT.Act, 1961 has to be computed as per the provisions of section 29 to 43 of the I.T.Act, 1961 which includes section 40 for interest/remuneration to partners as per Partnership Deed ?
[B] Whether on the facts and circumstances of case and in 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 Mc Dowel & Co.Ltd. V/s. Commercial Tax Officer (1985) 154 ITR 48 (SO?
[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 IT.Act, 1961 .particularly in background of the fact that the assessee had claimed deduction u/s.80IB of the I. T. Act?"
We observe that Hon. Jurisdictional High Court relying on the judgment of the Court in the case of Commissioner of Income Tax vs. Industrial Workwear in Tax Appeal No.1177 of 2005 did not admit the appeal of the Revenue which draws an inference that Hon. Jurisdictional High Court upheld the decision of the Appellate Tribunal in accepting assessee's claim of not paying interest to partners even when it was authorized as the partnership deed.
ITA No. 750/Ahd/2014 20Asst. Year 2010-11 16.4 Respectfully following the judgment of Hon. Jurisdictional High Court and the decision of the Co-ordinate Bench and examining the facts of the case in the light of above judgments we are of the view that as the assessee was having discretion of providing interest and remuneration to partners, and in the year under appeal it decided to not to book any such expenditure ld. Assessing Officer's was not justified in notionally calculating the interest and remuneration at Rs.10,92,653/- and Rs.251634/- and reducing deduction u/s 80IB(11A) of the Act by Rs.13,44,287/-. Accordingly, we set aside the order of ld. Commissioner of Income Tax(A) and allow this ground of assessee.
17. Ground No.5 reads as under :-
5. The learned CIT(A) has erred in law and on the facts of the case in confirming the disallowance made by the learned Assessing Officer on account of late payment of PF of Rs.31,421/- u/s 36(l)(va) of the Act.
18. At the outset ld. Authorised Representative conceded that the issue raised in this ground has been decided against the assessee by the Jurisdictional High Court in the case of Commissioner of Income Tax vs. Gujarat State Road Transport Corporation 366 ITR 170 (Guj) and the same was confirmed by ld. Departmental Representative.
19. We have heard the rival contentions and perused the record. During the course of assessment proceedings ld. Assessing Officer disallowed a sum of Rs.31,421/- being employees contribution to PF ITA No. 750/Ahd/2014 21 Asst. Year 2010-11 deposited after the due date as statutorily provided under the Act. Ld. Commissioner of Income Tax(A) confirmed the disallowance. We observe that Hon. Jurisdictional High Court in the case of Commissioner of Income Tax vs. Gujarat State Road Transport Corporation (supra) held that if the employees contribution to PF is deposited beyond the due date as provided in the statute then such expenses cannot be claimed as deduction against the gross revenue. Respectfully following the judgment of Hon. Jurisdictional High Court in the above case, we find no reason to interfere with the order of ld. Commissioner of Income Tax(A) confirming the disallowance with respect to late payment of employees PF. Accordingly, this ground of assessee is dismissed.
20. Ground no.6 has not been pressed by the ld. Authorised Representative because of smallness of the amount. We accordingly, dismiss this ground being not pressed.
21. Ground No.7 is general in nature which needs no adjudication.
22. Ground No.8 is consequential.
23. Ground No.9 is premature.
24. Now we take up assessee's appeal in ITA No.796/Ahd/2014 wherein following grounds have been raised:-
1. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating other income amounting to Rs.1,26,722/- (comprising of Rs.14,998/- kasar(discount), Rs. 15,595 Misc. income, Rs.32,451/- earned from selling raw onions and Rs.63,678/-ITA No. 750/Ahd/2014 22
Asst. Year 2010-11 earned on finished goods) eligible for deduction u/s 80IB(llA) of the Income Tax Act, 1961 ('the Act') after holding that the same are not derived from the eligible industrial undertaking.
2. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating, interest of Rs.4,086/- received from PGVCL eligible for deduction u/s 80IB(11A) of the Act after holding that the same is not derived from the eligible undertaking.
3. The learned CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Id. AO in notionally reducing an amount of Rs.13,08,616/- on account of remuneration and interest payable to the partners as per the partnership deed from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
4. Both the lower authorities have failed to appreciate that the impugned amount of remuneration and interest was neither debited to Profit & loss account nor paid to the partners, and therefore, the same could not have been reduced notionally from the eligible profit to claim deduction u/s 801B(11A) of the Act.
5. Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order.
6. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in charging interest u/s 234A/B/C/D of the Act.
7. The Id. CIT(A) has erred in law and on facts in confirming the action of Id. AO in initiating penalty proceedings u/s 271(l)(c)of the Act.
25. Ground no.1 reads as under :-
ITA No. 750/Ahd/2014 23Asst. Year 2010-11
1. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating other income amounting to Rs.1,26,722/- (comprising of Rs.14,998/- kasar(discount), Rs. 15,595 Misc. income, Rs.32,451/- earned from selling raw onions and Rs.63,678/-
earned on finished goods) eligible for deduction u/s 80IB(llA) of the Income Tax Act, 1961 ('the Act') after holding that the same are not derived from the eligible industrial undertaking.
26. Ld. Authorised Representative submitted that ld. Assessing Officer denied deduction u/s 80IB(11A) of the Act on other income aggregating to Rs. 1,26,722/- as follows and such action was confirmed by CIT(A). The bifurcation of other income of Rs.126722/- is as follows :-
Kasar (Discount) : Rs.14,998/-
Misc. income : Rs.15,595/-
Profit earned from selling raw onions : Rs.32,45I/-
Profit on finished goods : Rs.63.678/-
Total Rs.1,26,722/-
Ld. Authorised Representative submitted that as regards Kasar (Discount) of Rs, 14,988/-, the same is eligible for deduction u/s 80IB(11A). Placed reliance on "Nrox Specialities vs. ITO - ITA No.855/Ahd/2013".
Ld. Authorised Representative submitted that as regards Misc. income of Rs. 15,595/-. the same is on account of sale of waste gunny bags and such income is eligible for deduction u/s 80IB(11A) of the Act. Reliance is placed on "DCIT vs. Harjivundas Juthabhai Zaveri and another - 258 ITR 785 (Guj)".
ITA No. 750/Ahd/2014 24Asst. Year 2010-11 Ld. Authorised Representative fairly conceded that as regards "Profit from selling onions" of Rs.32,451/-, and profit from sale of finished goods of Rs.63678/- the same is earned out of trading activity and hence, is not eligible for deduction u/s 80IB(11A) .
27. On the other hand, ld. Departmental Representative supported the orders of lower authorities.
28. We have heard the rival contentions and perused the record placed before us. Through this ground assessee has challenged ld. Commissioner of Income Tax(A)'s order confirming action of Assessing Officer of not treating following other income aggregating to Rs.1,26,722/- being eligible for deduction u/s 80IB(11A) of the Act:-
Kasar (Discount) : Rs. 14,998/-
Misc. income : Rs. 15,595/-
Profit earned from selling raw onions : Rs. 32,45I/-
Profit on finished goods : Rs. 63.678/-
Total Rs.1,26,722/-
29. During the course of hearing before us when the question was posed about the other income of profits earned on finished goods ld. Authorised Representative could not prove that the amounts of income Rs.32,451/- and Rs.63,678/- relates to manufacturing activities and it was fairly conceded that they relate to trading activities. We are therefore of the view that income of Rs.32,451/ and Rs.63,678/- are not eligible for deduction u/s 80IB(11A) of the Act.
30. As regards kasar (discount) of Rs.14,998/- we observe that we have dealt with this issue in the preceding paragraphs while ITA No. 750/Ahd/2014 25 Asst. Year 2010-11 adjudicating assessee's appeal in ITA No.750/Ahd/2014 wherein we have relied on the decision of Co-ordinate Bench in the case of Nrox Specialistics vs. ITO (supra) and have held that discount income is eligible for deduction u/s 80IB(11A) of the Act. Following the same decision we hereby hold that assessee is entitled to deduction u/s 80IB(11A) on the other income under the head 'kasar'(discount) at Rs.14,998/-.
31. As regards remaining misc. income of Rs.15,595/- we find that the same is on account of sale of waste gunny bags. We are of the view that waste gunny bags normally gets accumulated during the manufacturing process and are part and parcel of regular manufacturing activity and miscellaneous income from sale of waste gunny bags is therefore, eligible for deduction u/s 80IB(11A) of the Act.
31.1 We are, therefore, of the view that out of the total other income of Rs.1,26,722/- assessee is only entitled to claim deduction u/s 80IB(11A) of the Act of Rs.30,593/- (Rs.14,998 + Rs.15,595/-). In the result this ground of the assessee is partly allowed.
32. Ground no.2 reads as under :-
2. The learned CIT(A) has erred in law and on the facts of the case in confirming the action of the learned Assessing Officer in not treating, interest of Rs.4,086/- received from PGVCL eligible for deduction u/s 80IB(11A) of the Act after holding that the same is not derived from the eligible undertaking.ITA No. 750/Ahd/2014 26
Asst. Year 2010-11
33. Ld. Authorised Representative submitted that ld. Assessing Officer denied deduction u/s 80IB(11A) on interest from PGVCL (i.e. GEB), deduction must be denied merely on "Net income". Netting off is well accepted principle in the eye of law and hence, while eliminating any sum from the deduction under section 80IB of the Act. it is the "net income" and not the gross receipt which should be excluded. This principle has been laid down by the Supreme Court in case of ACG Associated Capsules Pvt. Ltd. vs. CIT - (2012) 343 ITR 89 (SC) in context of deduction under section 80HHC of the Act. Hon'ble Gujarat High Court in case of CIT vs. Nirma Ltd. - (2014) 367 ITR 12 (Guj.) applied such principle in context of provisions contained in section 801, 80IA, etc.
34. Ld. Departmental Representative supported the orders of lower authorities.
35. We have heard the rival contentions and perused the material placed before us. We observe that similar issue of not treating interest from PGVCL being eligible for deduction u/s 80IB(11A) of the Act has been dealt by us while adjudicating ground no.2 of ITA No.750/Ahd/2014 wherein following the principles laid down by Hon. Apex Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) and duly following the judgment of Hon. Gujarat High Court in the case of Commissioner of Income Tax vs. Nirma Ltd. (supra) we have held that assessee is to be allowed netting off of interest income from surplus business funds or interest from deposits made in the course ITA No. 750/Ahd/2014 27 Asst. Year 2010-11 of business against interest paid. From perusal of the financial statements we observe that during the year assessee's interest expenditure on ICICI loan is Rs.780068/- whereas interest income from PGVCL is only Rs.4,068/- and therefore, if netting off is done there will be no disallowance of deduction u/s 80IB(11A) of the Act. We accordingly allow this ground of assessee.
36. Ground nos.4 & 5 read as under :-
3. The learned CIT(A) has grossly erred in law and on the facts of the case in confirming the action of Id. AO in notionally reducing an amount of Rs.13,08,616/- on account of remuneration and interest payable to the partners as per the partnership deed from the eligible profit to claim deduction u/s 80IB(11A) of the Act.
4. Both the lower authorities have failed to appreciate that the impugned amount of remuneration and interest was neither debited to Profit & loss account nor paid to the partners, and therefore, the same could not have been reduced notionally from the eligible profit to claim deduction u/s 8018(11 A) of the Act.
37. We observe that similar grounds have been dealt with by us in ITA No.750/Ahd/2014 in its ground nos.3 & 4 wherein ld. Assessing Officer calculated notional amount of interest and remuneration and reduced the deduction u/s 80IB(11A) of the Act by such amount. Similarly in this appeal in ITA No.796/Ahd/2014 in the case of Shreeji Dehydrate Exports we find that ld. Assessing Officer has calculated notional amount of Rs.13,08,616/- on account of remuneration and interest payable to partners as per partnership deed. On perusal of ITA No. 750/Ahd/2014 28 Asst. Year 2010-11 the partnership deed we observe that discretion lies with the partners of booking such expenditure. As the issues are verbatim similar we accordingly follow our decision in ITA No.750/Ahd/2014 and hold that ld. Assessing Officer was not correct in notionally reducing the deduction u/s 80IB(11A) of the Act by Rs.13,08,616/- on account of remuneration and interest payable to partners. Accordingly, we set aside the orders of lower authorities and allow these grounds of assessee.
38. Ground No.5 is general in nature, which needs no adjudication.
39. Ground no.6 is consequential in nature.
40. Ground no.7 is premature.
41. In the result, both the appeals of assessees are partly allowed.
Order pronounced in the open Court on 22nd February, 2017 Sd/- sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 22/02/2017
Mahata/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
ITA No. 750/Ahd/2014 29
Asst. Year 2010-11
1. Date of dictation: 15-17/02/2017
2. Date on which the typed draft is placed before the Dictating Member: 21/02/2017 other Member:
3. Date on which approved draft comes to the Sr. P. S./P.S.:
4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________
5. Date on which the fair order comes back to the Sr. P.S./P.S.:
6. Date on which the file goes to the Bench Clerk: 22/2/17
7. Date on which the file goes to the Head Clerk:
8. The date on which the file goes to the Assistant Registrar for signature on the order:
9. Date of Despatch of the Order: