Income Tax Appellate Tribunal - Cochin
Deputy Commissioner Of Income Tax vs Janatha Steel Mills (P) Ltd. on 25 March, 1999
ORDER
M.M. Cherian, A.M.
1. This is an appeal directed against the order of the CIT(A), Calicut, in the case of the assessee, M/s. Janatha Steel Mills (P) Ltd., Calicut for the asst. yr. 1990-91. The only ground raised by the Revenue in this appeal is that the CIT(A) erred in holding that in computing the deduction allowable under s. 32AB of the IT Act, the share income from the partnership firms was not to be excluded from the profits of the eligible business in the hands of the assessee.
2. The assessee is a private limited company deriving income from a steel mill. The company is also deriving share income from three partnership firms. For the asst. yr. 1990-91 the assessee claimed deduction under s. 32AB of the IT Act, at 20 per cent of the income assessed under the head 'business'. In the assessment order under s. 143(3) of the IT Act, dt. 27th April, 1992, the assessee's claim for deduction under s. 82AB was allowed at 20 per cent of the income from business, including the share income from the partnership firms. The AO later felt that the assessee was not eligible for deduction under s. 32AB on the share income from the partnership firms and so in the assessment there was a mistake in allowing deduction at 20 per cent of the entire income under the head 'business'. Considering this as a mistake apparent on record, the assessing officer passed an order of rectification under s. 154 of the IT Act on 24th February, 1994. In the order of rectification deduction under s. 32AB was allowed at 20 per cent of the profit from own business only, including the share income from three partnership firms. The assessee took up the matter in appeal. The CIT(A) held that the assessee was entitled to deduction under s. 32AB calculated at 20 per cent as profits or the eligible business or profession and that the definition of the term 'eligible business or profession', did not exclude share income from partnership firms. Aggrieved with the order of the CIT(A) allowing deduction under s. 32AB on the entire profits of the business, including share of profit from the partnership firms, the Revenue has filed this appeal before the Tribunal.
3. We have heard the Departmental Representative, Shri C. D. Nair, and the assessee's representative Shri Satyanarayanan, Chartered Accountant. Shri Nair contended before us that the CIT(A) ought to have noticed that the proviso to s. 32AB(1) clarified that deduction under s. 32AB was not admissible in respect of share income from partnership firms and so the finding of the CIT(A) regarding the eligibility of the relief in respect of the share income from the firms was not correct. Shri C. D. Nair also made the submission that the CBDT had issued a clarification in Circular No. 461, dt. 9th July, 1986 to the effect that the deduction under section 32AB is not allowable on the share income from partnership firms.
4. It is not disputed that the assessee is getting shares income from three partnership firms, apart from the income from own business in running the steel mill. There is no dispute that in respect of the profit from own business the assessee is entitled to the deduction under s. 32AB. The dispute is as to whether the deduction could be allowed on the entire income assessed under the head 'business', including the share income from the partnership firms. It is the contention of the Revenue that in view of the proviso to s. 32AB(1) in respect of the income from partnership firm, the firm alone is eligible for the deduction and that no deduction is to be allowed in the hands of the partner in respect of the share income from the firm. The proviso to section 32AB(1), on which the Revenue has relied, reads as under :
"Provided that where such assessee is a firm or any AOP or any BOI, the deduction under this section shall not be allowed in the computation of the income of any person, or as the case may be, any member, of such firm, AOP or BOI."
5. From a reading of the proviso what we understood is that if the assessee, who makes the deposits or utilises the amount for the purchase of new machinery or plant, is a firm or an AOP or a BOI, then the deduction under s. 32AB is allowable only in the assessment of that firm and not in the computation of the income of any partner or member of the AOP or BOI. In the present case, the deduction under s. 32AB is not claimed by any firm, AOP or BOI. The assessee is a company. Though it is getting share income as a partner in three partnership firms, it may be noted that the share of profits from the partnership firms is considered as business income in the hands of the assessee. It is provided in s. 32AB(1)(ii) that the deduction is allowable on a sum equal to 20 per cent of the profits of eligible business or profession as computed in the accounts of the assessee audited in accordance with sub-s. (5). Sub-s. (2)(i) defines eligible business or profession as under :
(i) "eligible business or profession" shall mean business or profession, other than :
(a) the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule carried on by an industrial undertaking, which is not a small-scale industrial undertaking as defined in section 80HHA;
(b) the business of leasing or hiring of machinery or plant to an industrial undertaking, other than a small-scale industrial undertaking as defined in section 80HHA, engaged in the business of construction, manufacture or production of any article or thing specified in the list in the Eleventh Schedule.
6. It has been clarified that the partnership firms in which the assessee-company is a partner are not carrying on any non-eligible business as mentioned in sub-s. (2)(i). The share income from the partnership firms cannot be therefore, excluded from the computation of the deduction under s. 32AB on the reasoning that it represents income which is not derived from eligible business or profession. In the case of CIT vs. Ramniklal Kothari (1969) 74 ITR 57 (SC), the Supreme Court of India held that business carried on by a firm is business carried on by the partners.
7. In that case on p. 59 the Supreme Court observed :
"Where a person carried on business by himself or in partnership with others, profits and gains earned by him are income liable to be taxed under s. 10 of the Indian IT Act, 1922. Share in the profits of a partnership received by a partner is "profits and gains of business" carried on by him and is on that account liable to be computed under s. 10, and it is a matter of no moment that the total profits of the partnership were computed in the manner provided by s. 10 of the IT Act, and allowances admissible to the partnership in the computation of the profits and gains were taken into account. Income of the partnership carrying on business is computed as business income. The share of the partner in the taxable profits of the registered firms liable to be included under s. 23(5)(a)(ii) in his total income is still received as income from business carried on by him."
8. In view of the decision of the Supreme Court it is to be held that the income from the partnership firms was income from the business carried on by the assessee and the same formed part of its business income. We have already seen that the business carried on by the firms were not any of the non-eligible businesses within the meaning of the expression in sub-s. (2)(i). Hence, in computing the deduction allowable under s. 32AB(1), we have to take into account the profits of the businesses of the assessee, including the profits of the business carried on through the partnership firms.
9. The learned Departmental Representative has relied on the Circular No. 461, dt. 9th July, 1986, issued by the CBDT for the contention that a partner is not eligible for the deduction under s. 32AB in respect of the share income from the partnership firm. In the circular it is stated that where an eligible assessee is a firm or any AOP or BOI, any partner or, as the case may be, any member of such firm, AOP or BOI, is not an eligible assessee. It is also made clear in the circular that this provision in a sense places a ban on double deduction. It appears that the double deduction happens when on the basis of the deposit or investment in the new machinery or plant, both the firm and the partner claim the deduction under s. 32AB. We do not think that the circular issued by the CBDT supports the contention that a partner is not eligible for the deduction in respect of the share income from a firm in a case where the partner becomes entitled for the deduction by making deposit in the investment deposit account or by utilising any amount for the purchase of new machinery or plant. The ban is only on the claim of deduction by a partner where the deposit or the investment is made by the firm and the firm is the eligible assessee. That is not the case here. The assessee's claim is on account of the investment made by it in the purchase of new machinery or plant and in computing the deduction under s. 32AB on that basis the computation is to be made on 20 per cent of the profits of the eligible business, which includes the share of profit from the partnership firms also.
10. In this connection, we may also refer to another contention raised by the learned representative of the assessee that the assessing officer was not justified in passing the impugned order under s. 154 of the IT Act for rectification as if there was a mistake apparent on record. In this connection Shri Satyanarayanan submitted before us that the assessee had raised the ground of appeal before the CIT(A) against the validity of the rectification proceedings in view of more than two opinions possible on the issue and that as the CIT(A) had adjudicated the matter in favour of the assessee on merits, it was not found necessary for him to give a separate decision on the other ground on the validity of the order under appeal. We find force in the contention that the assessee could support the order of the first appellate authority on the other ground in regard to the validity of the rectification proceedings. In the case of T. S. Balram vs. Volkart Brothers (1971) 82 ITR 50 (SC), the Supreme Court held that a mistake apparent from the record must be an obvious and patent mistake and not something which could be established by a long drawn process of reasoning on a point on which there could be conceivably two opinions. A decision on a debatable point of law was held to be not a mistake apparent from record. It may be noted that in the regular assessment under s. 143(3) the assessee's claim for deduction under s. 32AB on the entire business income including the share of profits from the partnership firms had been allowed. It was later that the AO passed the order of rectification under s. 154 viewing the deduction allowed originally as a mistake apparent on record. We are of the view that the matter is not free from doubt as to whether the deduction under s. 32AB could be allowed at 20 per cent or the share income from the partnership firm included in the eligible business profit of the assessee. We are inclined to agree with the learned representative of the assessee that the matter is debatable and not free from doubt and so the AO was not correct in revising the assessment through the order of rectification under s. 154. For that reason also we find that the CIT(A) was justified in not upholding the order passed by the AO.
11. In the above circumstances, we uphold the order of the first appellate authority. This appeal by the Revenue is, therefore, dismissed.