Gujarat High Court
Principal Commissioner Of Income Tax, ... vs M/S Kiran Jewellery on 20 January, 2020
Equivalent citations: AIRONLINE 2020 GUJ 49
Author: J. B. Pardiwala
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/818/2019 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 818 of 2019
With
R/TAX APPEAL NO. 819 of 2019
With
R/TAX APPEAL NO. 820 of 2019
With
R/TAX APPEAL NO. 874 of 2019
With
R/TAX APPEAL NO. 875 of 2019
With
R/TAX APPEAL NO. 788 of 2019
With
R/TAX APPEAL NO. 798 of 2019
With
R/TAX APPEAL NO. 805 of 2019
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PRINCIPAL COMMISSIONER OF INCOME TAX, SURAT-1
Versus
M/S KIRAN JEWELLERY
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Appearance:
MRS KALPANAK RAVAL(1046) for the Appellant(s) No. 1
for the Opponent(s) No. 1
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CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 20/01/2020
COMMON ORAL ORDER
(PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA)
1. Since the questions of law as proposed by the Revenue in all the captioned tax appeals are the same, those were heard analogously and are being disposed of by this common order.
2. For the sake of convenience, the Tax Appeal No.818 of 2019 is treated as the lead appeal.
3. This tax appeal under Section 260A of the Income Tax Act, 1961 (for short "the Act, 1961") is at the instance of the Page 1 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER Revenue and is directed against the order passed by the Income Tax Appellate Tribunal, Surat Bench, Surat in the ITA No.193/Srt/2017 for the A.Y.2011-12.
4. The Revenue has proposed the following questions as the substantial questions of law arising in this appeal.
"1(a) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT's order is correct when in fact the exemption u/s. 10AA of the IT Act should be based on total income to be computed as per the provisions of section 29 to 43D of the Act, after allowing all eligible deductions whether or claimed suo-moto by the assessee or not?
1(b) Whether on the facts and circumstances of the case and in law, the Hon'ble ITAT is right in upholding the decision of Ld. CIT(A) in deleting the disallowance made by the Assessing Officer without appreciating that assessee firm had taken undue benefits of section 10AA of the Act by not claiming interest on Capital and Remuneration which resulted into increase in exempt profit of the assessee-firm?
2(a) Whether on the facts and in the circumstances of the case and in law, the decision of the Hon'ble ITAT is perverse in upholding the decision of Ld.CIT(A) in deleting the disallowance made by the Assessing Officer without ascertaining the facts as narrated by the Assessing Officer in as much as there was a partnership deed by which the firm was constituted on 10.07.2007 and the same was modified after receiving LOA from the office of the Development Commissioner, SEZ by their letter dated 30.08.2007 by an amendment in the partnership deed on 01.04.2010 by not providing the payment of interest & remuneration to partners by specially inserting a clause for non-payment?
2(b) Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT's order is perverse in ignoring the important facts which clearly indicate the dubious method adopted by the assessee which cannot be allowed in view of the judgment of Hon'ble Supreme Page 2 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER Court in the case of Mac Dowel! & Company Vs CIT(154 ITR 148) ?"
5. The assessment order under Section 143(3) read with Section 147 of the Act for the A.Y. 2011-12 was passed on 31st March, 2016, determining the total income of the assessee at Rs.95,05,14,050/- after making addition on account of disallowance and the deduction under Section 10AA of the Act. The assessee had claimed deduction under Section 10AA of the Act in each assessment year as under;
For Deduction claimed (in Rs.)
A.Y. 2011-12 Rs.1,37,57,13,846/-
A.Y.2012-13 Rs.1,47,67,42,521/-
A.Y.2013-14 Rs.41,88,69,352/-
A.Y.2014-15 Rs.56,96,25,581/-
6. The Assessee, being dissatisfied with the assessment order passed by the Assessing Officer, preferred an appeal before the CIT (A), Surat. The CIT ((A), Surat allowed the appeal of the assessee and deleted the addition made by the Assessing Officer. The CIT (A), while allowing the appeal preferred by the Assessee, held as under;
"6.1.1. l have considered the assessment order as well as the submissions of the appellant. The Grounds of appeal- Ground No. 2 to 5 pertains to making additions and disallowances on the grounds other than the grounds/reasons on which the reopening was made and since no additions were made based upon the reasons recorded, the entire reassessment proceedings are rendered invalid and needs to be quashed and resorting to provisions of section 80(IA)(10) r.w.s. 10AA(9) and thrusting interest and remuneration payment to partners and consequently reducing the deduction claimed u/s 10AA to the tune of Rs. 89,56,39,225/-. The appellant derived income from manufacturing activity and claimed Page 3 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER deduction u/s 10AA of Rs. 1,37,57,13,846/-. The AO found that the appellant has not claimed interest and remuneration to the partners from the business income and the supplementary partnership deed executed on 10.07.2007 does not provide any provision for payment of interest and remuneration to partners. The AO relying on the judgment in the case of Meridian Impex 37 taxmann.com 22(2013) by ITAT Rajkot Branch, held that interest and remuneration to partners are allowable though it has not been claimed in the partnership deed. The AO held that non charging of the interest on the invested capital and no remunerations for the working partners has been done to enhance the profit of the appellant concern which is exempt from taxation and reduce the taxable income of the individual partners to same extent. The AO held that the partnership deed itself is a vehicle of collusive tax avoiding action and relying on the Meridian Impex (supra) calculated the payment of interest and remuneration to partners and the amount of Rs. 896973755/- was excluded from the deduction u/s 10AA of the Act. The AO had restricted the claim of deduction u/s 801A(10) to the tune of Rs.48,00,74,621/- as against the total claim of deduction of Rs.1,37,57,13,846/- on account of interest to partners and partners remuneration. The appellant submitted that the AO's finding is incorrect as it was clearly mentioned in the supplementary partnership deed that no partner is eligible for interest on capital as well as remuneration.
6.1.2. On the perusal of the details, it is observed that as per the Partnership Deed the appellant has not debited interest and remuneration to the partners as the supplementary partnership deed does not provide any provision for payment of interest and remuneration to the partners. The main contention of the appellant is that the interest and remuneration of the partners are not claimed by the appellant as the same was not authorized by or is not in accordance with the terms of the partnership deed. The appellant has relied on the circular No.739 dated 25.03.1996 wherein the CBDT has clarified that no deduction 40(b)(v) of the Act will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. The clause of the Partnership Deed specifically restricts payment of Interest to Partners on Page 4 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER their Capital as well as Remuneration to Partners. This is the main reason why the appellant has not claimed both expenses against the Business Income shown in Income Tax Return.
6.1.3. The AO has mainly relied in the case of Meridian Impex (supra) to disallow interest on capital partner remuneration but the facts in this case of Meridian Impex (supra) was different as there was the specific clause regarding the payment interest on capital and partners remuneration in the original partnership Deed submitted at the time of scrutiny assessment and the supplementary deed was made amending the clause regarding non-payment of interest on capital an remuneration to partners. This supplementary deed was not submitted before the AO during the assessment proceedings. In the instant case, the Partnership deed itself does not have any clause pertaining to payment of interest and remuneration ton the partners.
6.1.4. This issue came up for consideration before the jurisdictional ITAT Bench, Ahmedabad, in the case of M/s Sagar Foods and Shreeji Dehydrate Export, 2017 (3) TMI 1297. The Hon'ble Bench, in its order dated 22.02.2017, held that the AO could not have compelled the appellant to charge interest or remuneration by invoking section 40(b)(v) of the Act. Similarly in the case of M/s Al Reza Food verses ITO, Ward-2(4), Bhavnagar 2017 (3) TMI 1237 - ITAT Ahmedabad similar view was taken relying on the judgment in the case of M/s Sagar Food and Shreeji Dehydrate Exports verses ITO, Wd-2(4), Bhavnagar. In a recent decision of the Hon, Gujarat High Court in the case of Alidhara Taxspin Engineers, Tax Appeal No. 265 of 2017 dated 02.05.2017 held that mere incorporation of interest on partners capital account and remuneration does not signify that the same are mandatory in nature. These decisions of the jurisdictional high Court and ITAT Bench Ahmedabad are squarely applicable in this case of the appellant The appellant has not charged any interest and remunerations as per the Partnership Deed and therefore, the appellant cannot be compelled to charge interest or remuneration.
6.1.5. In view of the above facts, the disallowance made by the AO on account of non provision of interest and remuneration of 10AA deduction is erroneous and Page 5 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER incorrect in law and facts. The partnership deed clearly lays down that no interest and remuneration is payable and therefore the addition made by the AO is deleted and the grounds of appeal is allowed.
6.2.1. The Grounds of appeal-Ground No. 1 pertains to reopening the assessment proceedings u/s 148 r.w.s 147 where the reason so recorded clearly established that no new information had come in possession of the department and whatever reasons were recorded were merely retaliation of the information already available with the department from day one and the reason were merely a guise to investigate further and clearly against the established judicial principles in this regard and therefore the entire reassessment proceedings needs to be quashed. The case was reopened u/s 147 of the Act and notice u/s 148 was issued on 26.12.2013 which was served on the appellant on 13.1.2014. The appellant filed the return of income on 21.1.2014 in compliance to the notice u/s 148 of the Act. The reasons for reopening was provided to the appellant and the appellant had filed objections of the reopening which was disposed of by the AO vide his letter dated 11.03.2016. Since, the addition made by the AO has already been deleted while adjudicating ground no 2 to 5 above from para 6.1.1 to 6.1.5, therefore this ground become infructuous and is not being adjudicated.
6.3.1. The Grounds of appeal- Ground No. 6 pertains to learned AO is not justified in initiating penalty proceedings u/s 271(1)(c) as no inaccurate particulars of income have been furnished by your appellant. This ground is premature at this stage. "
7. The Revenue, being dissatisfied with the order passed by the CIT (A), went in appeal before the Appellate Tribunal. The Tribunal, while dismissing the appeal preferred by the Revenue, held as under;
''1 Considering the totality of facts and in the light of the above decision of Tribunal in the case of Ruta Jewels (supra). We find that in the present case, the assessee firm has not charged any interest and remuneration as per partnership deed does not prescribed so, therefore, Page 6 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020 C/TAXAP/818/2019 ORDER the assessee firm cannot be compelled to charge interest or remuneration. Therefore, we are inclined to hold the Ld. ClT(A) was right in observing that the disallowance made by the AO on account of non provision of interest and remuneration of cannot be disallowed under section 1OAA(9) of the Act. Hence, disallowances so made by the AO are found to be erroneous arid incorrect in law and facts as in the peculiar facts of the present case the partnership deed clearly lays down that no interest and remuneration is payable and hence, the CIT(A) was right in deleting the disallowance made by the AO on account of non-provision of interest and remuneration from amount of deduction under section 80lA(10) read with section 1OAA(9) of the Act. We further observed that the issue is covered by the decision Co-ordinate Bench of ITAT Surat in favour of the assessee in the case of Ruta Jewels (supra) and no reason to deviate with the finding of Ld. CIT(A), accordingly same is upheld. Thus, the grounds of appeal of the Revenue are dismissed. We are unable to see any valid reason to interfere with the order of learned CIT (A) it and thus, we confirm the same. Accordingly, all grounds of appeal of the Revenue are dismissed."
8. Thus, the Tribunal concurred with the finding recorded by the CIT (A) that the assessee firm had not charged any interest and remuneration in accordance with the partnership deed and, in such circumstances, the assessee firm cannot be compelled to charge interest or remuneration, more particularly, when the partnership deed does not prescribe for the same. The Tribunal concurred with the finding recorded by the CIT (A) that the disallowance made by the AO on account of non provision of interest and remuneration could not have been disallowed under Section 10AA(9) of the Act. The issue stands squarely covered by the decision of this Court in the case of Principal Commissioner of Income Tax vs. Alidhara Taxspin Engineers & Anr. rendered in the Tax Appeal No.265 of 2017 dated 2nd May, 2017. We quote para-4 of the said decision;
Page 7 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020C/TAXAP/818/2019 ORDER "We have heard Shri Sudhir Mehta, learned advocate appearing on behalf of the revenue. On interpretation of the partnership agreement and considering the wish of the partners reflected in the partnership deed, not to pay/charge interest on the partners capital and the remuneration, the learned tribunal has rightly deleted the disallowance made by the Assessing Officer with respect to the deduction claimed under Section 80IB of the Income Tax Act. As rightly observed by the learned tribunal, mere incorporation of interest on the partners' capital and remuneration does not signify that the same are mandatory in nature. We concur with the view taken by the learned tribunal. We see no reason to interfere with the impugned judgment and order passed by the learned tribunal. No substantial questions of law arise in the present Tax Appeal. The present Tax Appeal deserves to be dismissed and is accordingly dismissed. "
9. This Court had the occasion to consider Alidhara Taxspin Engineers (supra) while deciding a batch of appeals being Tax Appeal Nos.165 of 2019 to Tax Appeal Nos. 168 of 2019, decided on 24th June, 2019.
10. Applying the dictum as laid in Alidhara Taxspin Engineers (supra), we are in complete agreement with the findings recorded by the Tribunal in the impugned order. In such circumstances, referred to above, in our opinion, none of the questions, as proposed, could be termed as the substantial questions of law involved in the present tax appeals.
11. In the result, all the tax appeals fail and are hereby dismissed.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 8 of 8 Downloaded on : Wed Jan 22 22:06:39 IST 2020