Income Tax Appellate Tribunal - Rajkot
The Dy. Commr. Of Income Tax, Circle-1,, ... vs M/S. Deep Recycling Ind.,, Jamnagar on 8 October, 2018
आयकर अपील य अ
धकरण, राजकोट यायपीठ, राजकोट ।
IN THE INCOME TAX APPELLATE TRIBUNAL
RAJKOT BENCH, RAJKOT
सव ी राजपाल यादव या यक सद य एवं olhe vgen] ys[kk lnL;,
lnL; के सम ।
BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND
SHRI WASEEM AHMED, ACCOUNTANT MEMBER
I.T.A. No.367/Rjt/2013
(Assessment Year : 2010-11)
Assistant Commissioner बनाम/ M/s. Deep Recycling
of Income Tax, Vs. Industries,
Circle - 2, Plot No.773, GIDC-P-
Jamnagar. II, Dared, Jamnagar.
I.T.A. No.324/Rjt/2015
(Assessment Year : 2011-12)
Dy. Commissioner of बनाम/ M/s. Deep Recycling
Income Tax, Vs. Industries.
Circle - 1,
Jamnagar.
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. :AADFD 2991 A
(अपीलाथ'/Appellant) .. (()यथ' / Respondent)
Assessee by : Praveen Verma, Sr. D.R.
Revenue by: Shri Ankit Gokani, A.R.
ु वाई क- तार ख/
सन Date of Heari ng 27/08/2018
घोषणा क- तार ख /Date of Pronounce ment 08/10/2018
आदे श / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The two captioned appeals have been filed at the instance of the Revenue against the separate orders of the Commissioner of Income ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -2- Tax(Appeals)-Jamnagar [CIT(A) in short] dated 24.07.2013 & 07-04- 2015 relevant to Assessment Years (AYs) 2010-11 & 2011-12.
The issue involved in both the appeals filed by the revenue are common. Therefore both the appeals have been clubbed together for the sake of brevity, convenience, and adjudication.
2. First, we take up ITA No. 367/Rjt/2015 pertaining to Assessment Year 2010-11. The Revenue has raised the following grounds of appeal:
"1. That CIT(A) has erred in law and in facts in treating the interest income from GEB as ''Business Income'' instead of Income from other sources as considered by the AO.
2. The CIT(A) erred in law and in facts by working out the eligible deduction u/s.10B after excluding the freight and insurance of Rs.3,63,135/- and Rs.9,610/- respectively from export turnover as well as from the total turnover.
3. The CIT(A) erred in law and in facts by granting the deduction u/s.10B without reducing the interest on capital of Rs.66,27,065/- and remuneration to partners of Rs.1,31,01,213/- in the profit & loss account.
4. That on the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.
5. It is therefore prayed that the order of the Ld.CIT(A) be set aside and that of the Assessing Officer be restored.
6. That the revenue craves leave to add, amend, alter or withdraw any grounds of appeal."
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -3-
3. The first issue raised by the Revenue in ground no.1 is that ld. CIT(A) erred in treating the interest income as income from business and accordingly, allowed the deduction u/s 10B of the Act.
4. Briefly stated facts are that the assessee in the present case is a partnership firm, registered as 100% EOU and engaged in the business of manufacturing of brass electrical wiring accessories, brass Ingots and processing of scrap. The assessee is also claiming deduction u/s 10B of the Act.
4.1 The assessee during the year has earned an interest income of Rs. 70,135/- on the deposits made with Gujarat Electricity Board (GEB). The assessee during the year has taken new high tariff connection from GEB on the deposit made with it for Rs.10,27,209/- only. The new connection was taken on account of expansion of new factory shed and purchase of new machineries. Thus it was claimed that the deposit was made in the course of the business activity. Therefore the interest income earned thereon should be treated as business income of the assessee. The assessee in support of his claim relied on the judgment of Hon'ble Karnataka High Court in the case of CIT vs. Chinna Nachimuthu Constructions reported in 297 ITR 70.
4.2 The assessee also submitted that as per the provision of Section 10B(4) of the Act, the entire profit of the business undertaking registered as 100% EOU is eligible for deduction.
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -4- 4.3 The assessee in support of his claim also relied on the order of Karnataka High Court in the case of ACIT vs. Motarola India Electronics Pvt. Ltd. reported in 114 ITD 387.
However, the AO disregarded the contentions of the assessee and held that the amount of interest income is chargeable to tax under the head income from other sources. Accordingly, the AO denied the exemption u/s 10B of the Act in respect of such interest income.
5. Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld. CIT(A) submitted that the AO has not pointed out any defect in the submission made by it during the assessment proceedings. The AO has just mention in his order that the case law relied by the assessee are not applicable to the facts on hand. As such, the AO has not distinguished the case laws relied by the assessee.
5.1 The amount was deposited during the year under consideration for Rs. 10,27,209/- with GEB in connection with the new high tariff line which was taken for the purpose of the business. Therefore, the amount of interest income should be held as income under the head business and not under the head income from other sources.
The ld CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under:
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -5- "5.2 I have carefully considered the reasons given by the AO as well as the written submission made before me as well as the oral submission made by the AR of the appellant. Deposit to electricity unit was made by the appellant for obtaining the connection of electricity for the purposes of manufacturing activity of eligible unit. Without placing the deposit appellant would not have been able to carry on manufacturing activity, therefore the interest income arising from that is the business income of the appellant as it has direct nexus with the business of the undertaking. Therefore, same is the business income of the appellant. AO is directed to treat the interest income on deposit for Electricity connection as business income. Hence, ground no.1 of the appeal is allowed."
Being aggrieved by the order of ld. CIT(A) Revenue is in appeal before us.
6. The ld DR before us vehemently supported the order of AO.
7. On the other hand, the ld AR before us filed a paper book which is running from pages 1-67 and reiterated the submissions as made before the ld CIT(A).
8. We have heard the rival contentions and perused the materials available on record. In the instant case, the AO treated the interest income earned by the assessee on the deposits made with the GEB as income from other sources. Accordingly, the AO denied the benefit of exemption claimed by the assessee u/s 10B of the Act in respect of such interest income. However, the view of the AO was reversed by the ld CIT(A) by observing that the interest income was earned in the course of the business. Accordingly, it is eligible for deduction u/s 10B of the Act.
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -6- 8.1 In the identical facts and circumstances, we note that the Hon'ble Karnataka High Court in the case of CIT Vs. Motorola India Electronics (P.) Ltd. reported in 46 taxmann.com 167 decided the issue in favour of the assessee. The relevant extract of the order is extracted below:
By Finance Act, 2001, with effect from 1-4-2001, the present sub- section (4) is substituted in the place of old sub-section (4). No doubt sub-section speaks about deduction of such profits and gains as derived from 100 per cent EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But sub-section (4) explains what is the profit derived from export of articles as mentioned in Sub-section (1).
The substituted sub-section (4) says that profits derived from export of articles or things or computer software shall be the account which bares to the profits of the business of the undertaking and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles is different from the income derived from the profits of the business of the undertaking.
The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under section 80HHC. On the contrary, there is specific provisions like section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking. [Para 7] In the instant case, the assessee is a 100 per cent EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -7- entitlement, which is permissible in law.
Now the question is whether the interest received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not partake the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles.
In view of the definition of income from profits and gains incorporated in sub-section (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts. [Para 8] In the result, the revenue's appeal is dismissed.
From the above judgment, we note that the provisions of section 10B(4) of the Act mandates to claim the deduction for the profit of the business of the undertaking registered as 100% EOU. Therefore, the profit earned in the form of interest income by the assessee from such eligible unit in the course of the business is eligible for deduction u/s 10B of the Act. Therefore, we find no infirmity in the order of ld CIT(A). Hence, the ground of appeal of the Revenue is dismissed.
9. The next issue raised by the Revenue is that ld. CIT(A) erred in reducing the amount of freight and insurance of Rs. 3,63,135/- and 9,610/- respectively from the export turnover / total turnover for working out the deduction u/s 10B of the Act.
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -8-
10. The assessee while calculating the amount of exemption u/s 10B of the Act in Form No.56G has reduced the amount of freight and insurance from the export turnover as well as from total turnover. On question by the AO the assessee submitted that there is no definition given u/s 10B of the Act for the total turnover whereas, the export turnover has been defined in Clause (iii) of Explanation 2 of Section 10B of the Act.
10.1 The assessee also submitted that once the amount of freight and insurance has been excluded from the export turnover, the same needs to be excluded from total turnover in order to maintain the parity for calculating the eligible profit for deduction u/s 10B of the act.
10.2 The assessee in support of his claim relied on the following judgments:
i. Hon'ble Bombay High Court in the case of Commissioner of Income-Tax vs. Sudarshan Chemicals Industries reported in 245 ITR 769.
ii. Hon'ble Calcutta High Court in the case of Commissioner Of Income-Tax Vs. Chloride India Ltd reported in 256 ITR 625. iii. The Hon'ble Supreme Court in the case of Commissioner of Income Tax Vs. Lakshmi Machine Works reported in 290 ITR 667. 10.3 The assessee in support of his claim also relied on the Circular No.621 dated 19-12-1991 issued by the CBDT clarifying the definition of total turnover with reference to the deduction u/s 80HHC of the Act.
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12 -9- 10.4 However, the AO disregarded the contentions of the assessee by observing that the Clause (iii) of Explanation 2 of Section 10B of the Act mandates to exclude certain items from the export turnover. There is no definition of the total turnover given in the Section. Therefore, the amount of freight and insurance cannot be excluded from the total turnover of the assessee.
10.5 No reference can be made to the provision of Section 80HHC, 80HHE and 80HHF for working out export turnover and total turnover. It is because the legislature has intentionally given definition under the provisions of relevant section. Thus the provisions of those sections are only applicable for the deduction as specified under the relevant Section. The same cannot be incorporated by implication into Section 10B of the Act. The AO accordingly, excluded the amount of freight and insurance from the export turnover and calculated the deduction available to the assessee u/s 10B of the act.
11. Aggrieved, assessee preferred an appeal to ld CIT(A). The assessee before the ld CIT(A) submitted that there is no definition of total turnover as mentioned under the provision of Section 10B of the Act. Therefore, the meaning of total turnover would be concluded as prevailing in the commercial sense.
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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11.1 The provisions of Section 80HHC are similar to the provision of Section 10B of the Act. Therefore, a reference can certainly be made to the provision of Section 80HHC of the Act.
11.2 The assessee in support of his claim relied on the order of Special Bench of Chennai in the case of Saksoft Ltd reported in 30 SOT 55. The assessee also relied on the order of Hon'ble Karnataka High Court in the case of Tata Elsxi Ltd. rreported in 349 ITR 98. The ld CIT(A) after considering the submission directed the AO to exclude the amount of freight and insurance from the export turnover and total turnover of the assessee for working out the deduction u/s 10B of the Act. The relevant extract of the order is reproduced below:
"6.2 I have carefully considered the rival submission. In my view the issue is squarely covered by the decision of Bombay High court and Calcutta High court where in courts have held that the numerator and denominator both has to be identical parameter for working out deduction. So it is not correct on part of AO to exclude freight etc. in export turnover and not to reduce same from total turnover. Therefore, AO is direct to exclude freight etc. from total turnover also and after that wok out eligible deduction. Therefore ground no.2 of appeal is allowed."
Being aggrieved by the order of ld CIT(A) revenue is in appeal before us.
12. Both the parties relied on the order of authorities below as favorable to them.
13. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the Special Bench in the ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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case of ITO vs. Saksoft Ltd. reported in 30 SOT 55 in the identical facts and circumstances has decided the issue in favour of the assessee. The relevant extract of the order is reproduced as under:
"coming to provisions of section 10B, it is seen that clause (iii ) of Explanation 2 to section 10B defines 'export turnover'. There is no definition of 'total turnover'. If the parity principle is to be applied, it follows that whatever has been excluded from the export turnover by the definition shall stand excluded from the total turnover also. In clause (iii ) of Explanation 2 to section 10B, the freight, telecom charges and insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in providing technical services outside India have been excluded from export turnover. Therefore, the same have to be excluded also from the total turnover though that expression has not been defined in the section. The argument of the department that in the absence of any definition of 'total turnover' for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance, could not be accepted for two reasons. Firstly, there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to the delivery of the goods outside India and expenses incurred in foreign exchange in connection with the providing of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses have an element of turnover. It is only in recognition of this position that in the definition of 'export turnover' in section 10B, the two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent 'consideration' in respect of the export. This can only refer to the price of the computer software exported out of India. Any reimbursement of the two items of expenses mentioned in the definition can under no circumstances be considered to represent 'consideration' for the export of the computer software or articles or things. Thus, there is evidence inherent in the definition of 'export turnover' itself that it should represent 'consideration' for export of the articles or things or computer software. It follows that the expression 'total turnover' which ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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is not defined in section 10B should also be interpreted in the same manner. Thus, the two items of expenses referred to in the definition of 'export turnover' cannot form part of the total turnover since the receipts by way of recovery of such expenses cannot be said to represent consideration for the goods exported. It must be borne in mind that total turnover is nothing but the aggregate of the domestic turnover and the export turnover. The formula prescribed by section 10B(4), differently expressed, will be as follows :
Export profits= profit of the business X export turnover Domestic turnover + export Turnover For the above reasons, it was to be held that for the purpose of applying the formula under section 10B(4), the freight, telecom charges or insurance attributable to delivery of articles or things or computer software outside India or the expenses, if any, incurred in foreign exchange in providing the technical services outside India are to be excluded both from the export turnover and from the total turnover, which are the numerator and the denominator, respectively, in the formula. Therefore, the appeals filed by the department were to be dismissed."
13.1 Similarly, we also find support and guidance from the judgment of Karnataka High Court in the case of CIT vs. Tata Elsxi Ltd reported in 349 ITR 98, wherein it has held as under:
"The word 'export turnover' used in sub-section (4) is defined in Explanation 2(iv) at the end of section 10A. As per this Explanation while computing the consideration received from such export turnover, the expenses incurred towards freight, telecommunication charges, or insurance attributable to the delivery of the articles or things or computer software outside India, or expenses if any incurred in foreign exchange, in providing the technical services outside India should not be included. However, the word 'total turnover' is not defined for the purpose of this section. [Para 8] ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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The expression 'total turnover' has been the subject matter of various decisions as defined under the Act under section 80HHC. However, in the aforesaid provision, the total turnover is defined. In section 10A not only the word 'total turnover' is not defined, there is no clue regarding what is to be excluded while arriving at the total turnover. However, while interpreting the aforesaid provisions of section 80HHC, the Courts have laid down various principles, which are independent of the statutory provisions. [Para 9] The formula for computation of the deduction under section 10A would be as under:
Profits of the business Ã--
export turnover Total turnover From the various judgments, it emerges that there should be uniformity in the ingredients of both the numerator and the denominator of the formula, since otherwise it would produce anomalies or absurd results. Section 10A is a beneficial section. It is intended to provide incentives to promote export. The incentive is to exempt profits relatable to exports. In the case of combined business of an assessee, having export business and domestic business, the legislature intended to have a formula to ascertain the profits from export business by apportioning the total profits of the business on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. In the case of section 80HHC, the export profit is to be derived from the total business income of the assessee, whereas in section 10A, the export profit is to be derived from the total business of the undertaking. Even in the case of business of an undertaking, it may include export business and domestic business, in other words, export turnover and domestic turnover. The export turnover would be a component or part of a denominator, the other component being the domestic turnover. In other words, to the extent of export turnover, there would be a commonality between the numerator and the denominator of the formula. In view of the commonality, the understanding should also be the same. In other words, if the export turnover in the numerator is to be arrived at after excluding certain expenses, the same should also be excluded in computing the export turnover as a component of total turnover in the denominator. The reason being the total turnover includes export turnover. The components of the export turnover in the numerator and the ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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denominator cannot be different. Therefore, though there is no definition of the term 'total turnover' in section 10A, there is nothing in the said section to mandate that what is excluded from the numerator that is export turnover would nevertheless form part of the denominator. Though when a particular word is not defined by the legislature and an ordinary meaning is to be attributed to the same, the said ordinary meaning to be attributed to such word is to be in conformity with the context in which it is used. When the statute prescribes a formula and in the said formula, 'export turnover' is defined, and when the 'total turnover' includes export turnover, the very same meaning given in the export turnover by the legislature is to be adopted while understanding the meaning of the total turnover, when the total turnover includes export turnover. If what is excluded in computing the export turnover is included while arriving at the total turnover, when the export turnover is a component of total turnover, such an interpretation would run counter to the legislative intent and impermissible. If that were the intention of the legislature, they would have expressly stated so. If they have not chosen to expressly define what the total turnover means, then, when the total turnover includes export turnover, the meaning assigned by the legislature to the export turnover is to be respected and given effect to while interpreting the total turnover which is inclusive of the export turnover. Therefore, the formula for computation of the deduction under section 10A, would be as under:
Export turnover
Profit of the
Of the undertaking Ã-- 'Export turnover + domestic business turnover' Total Turn Over [Para 10] In that view of the matter, no error was committed by the Tribunal in following the judgments rendered in the context of section 80HHC in interpreting section 10A when the principle underlying both these provisions is one and the same. Therefore, the Tribunal was correct in holding that while computing relief under section 10A the amount of communication expenses should be excluded from the total turnover if the same are reduced from export turnover."
After having reliance in the above judgments, we hold that the amount of freight and insurance needs to be excluded from the export turnover as well as from the total turnover while calculating the amount eligible for ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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deduction u/s 10B of the Act. Hence, we find no infirmity in the order of ld CIT(A). The ground of appeal of the Revenue is dismissed.
14. The last issue raised by the revenue is that ld CIT(A) erred in directing the AO for calculating the amount eligible for deduction u/s10B of the act without reducing the interest on capital and remuneration to partners for Rs. 66,27,065/- and Rs.1,31,01,213/- respectively.
15. The assessee in the year under consideration has worked out the deduction u/s 10B of the Act without claiming any deduction on account of interest and remuneration to the partners. As per the assessee, the partnership deed was amended w.e.f 01.04.2009 wherein the interest/ remuneration to the partners was denied. The assessee also claimed that once it is not eligible for deduction u/s 40(b) of the Act on account of interest and remuneration to the partners, there is no question of reducing the amount of profit from such amount for the working of the deduction u/s 10B of the Act. However, the AO disregarded the contentions of the Assessee and held that the sole purpose of not claiming the interest and remuneration was to claim the higher amount of deduction u/s 10B of the Act. Accordingly, the AO worked out the amount of exemption u/s10B of the Act after reducing the amount of interest and remuneration payable to the partners for Rs. 66,27,065/- and Rs. 1,31,01,213/- only.
16. Aggrieved, assessee preferred an appeal to ld. CIT(A). The assessee before the ld. CIT(A) submitted that it cannot claim the interest ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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and remuneration as deduction in view of the provision of Section 40(b) of the Act. Therefore, the profit before the interest and remuneration to the partners should be considered for the purpose of exemption u/s 10B of the Act. As such, the deed of partnership was amended w.e.f 01.04.2009 whereby, the amount of interest and remuneration was denied to the partners. The assessee in support of his claim also relied on several orders / judgments.
16.1 The ld CIT(A) after considering the submission of the assessee directed the AO to work out the deduction u/s 10B of the Act without reducing the interest on capital and remuneration to the partners. The relevant extract of the order is reproduced below;
"7.3I have carefully considered the reasons given by AO in the assessment order as well as written submission made by AR of the appellant and oral submission made by him. Appellant is a partnership firm carrying on the business of manufacturing activities which is eligible for deduction u/s10B and it is getting this deduction since beginning. The deduction has also been allowed to the appellant for all those years and is not in dispute.
a) Appellant is a partnership firm which is reconstituted i.e wherefrom Shri Ratilal B. Dobaria retired from the firm and it was reconstituted. In the reconstituted deed there were provisions in the deed to not to pay interest and remuneration to the partner w.e.f.
01.04.2009. The relevant partnership deed is submitted by the appellant at page no 64-67 of the paper book relevant clauses at serial no.12 are as under:-
"[12] that all the parties have decided to not pay any interest on the capital contributed by them.
[13] That all the parties of these presents shall be working partners of the firm respectively and will actively engage themselves in conduct of the business of the partnership firm. The ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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said partners shall be called working Partners of the firm. It is hereby agreed that in consideration of the said parties keeping themselves actively engaged in the business of the partnership firm and working as working partners, they shall not be entitled to payment of any remuneration.'' The Audited accounts of the appellant were also produced at page no.1 to 33 of the paper book in which also it is clear that no interest and remuneration is provided by the appellant in the books of accounts. Computation of total income submitted by the appellant which at page no.34 to 36. Provisions of section 13 of the Indian Partnership Act 1932 is also very heavily relied on by the AR of the appellant which is as under:-
''Section 13: MUTUAL RIGHT AND LIABILITIES Subject to contract between the partners:
a) A partner is not entitled to receive remuneration for taking part in the conduct of the business;
b) The partner are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm;
c) Where a partner is entitled to interest on the capital subscribed by him, such interest shall be payable only out of profits;
d) A partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six percent per annum''.
As there is no authorization for payments of interest and remuneration to the partners in the partnership deed there is no reason that amount of eligible profit requires to be reduced by the amount of hypothetical amount of interest and remuneration to the partners.
b) The provision of section 10B of the act provides for 100% deduction to the eligible industrial undertaking of profit derived from its business in the proportion of export turnover to total turnover. This deduction is available to the assessee for a consecutive period of 10 years and during this period it bars certain adjustment u/s32 etc. As the deduction is profit based tow safeguards have also been incorporated in the act itself by applying the provision of section 80IA(8) and 80 IA (10) of the act that if there is flow of goods or supply between the eligible undertaking and non-eligible undertaking of the same assessee than such transaction ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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should be recorded at arm's length and second if there is more than ordinary profit shown by any undertaking of the assessee compared to other undertaking of the assessee or other assessee than AO is empowered to adjust the profits of the undertaking which is claiming deduction u/s10B. In the present appeal it is not the case of the AO that appellant has shown more than ordinary profits compared to its own working for previous years or any other undertaking of the appellant or any other comparable undertaking of the other assessee. The section also speaks about the eligible profit which refers to the ''undertaking'' and it is correct that profits of the undertaking cannot change with the change in the status of the appellant such as partnership firm where interest and remuneration can be paid to the partners, proprietary concerns and in case of companies where this payments cannot go to reduce the profit of the undertaking. Therefore, it is rightly stated that the other things being same the profits eligible for the firm, who has paid interest and remuneration to the partners and the proprietary concern and company the eligible of profit would be different, this situation is not permitted under section 80 IA(10) of the act which provides for adjustments to the eligible profit u/s108 of the act. Therefore looking at the provisions of section 10B of the act the reduction of eligible profit by hypothetical sum of interest and remuneration to the partners cannot be permitted.
C) The Hon ITAT in case of Divine Impex has held that interest and remuneration should be reduced from the eligible profit of the industrial undertaking where there is a provision in the deed of partnership for the payments of interest. In para no.9 and 10 of the order honourable ITAT has held that deed of partnership athorizes the payment of interest and remuneration to the partners. In para no.11 also the ITAT has held that by that method profits of the assessee are suppressed as the expenditure is not debited in the books. The facts of the case of the appellant is different, in this case there is no provision for payments of interest and remuneration to the partners as per clause no.12 and 13 of the partnership deed submitted therefore there are no expenditure which are required to be debited as the interest and remuneration is not authorized by the deed. Therefore, the ration laid down in that case does not apply to the case of this appellant. Further the adjustment made by the AO cannot be equated with the adjustment of depreciation allowances to the eligible profit.
d) Naturally as the payments of interest and remuneration is not provided in the deed, there is no claim of such expenditure u/s 40b of the ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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act. Therefore, the applicability of decision of Hon Supreme court in Goetz India does not apply to the facts of the case as appellant has not asked for any fresh claim not has filed any revised return of income.
7.4 In view of above facts and reasoning given I am of the view that profit of undertaking u/s 10B cannot be reduced by the hypothetical amount worked out AO of interest and remuneration to the partners of the appellant in spite of absence of any such provision in the partnership deed prohibition contained in section 13 of the partnership act, the absence of provisions u/s 10B of the Act vis-à-vis section 80IA(8) and (10) of the Income Tax act. Therefore AO is directed to grant deduction u/s.10B of the Act to the appellant without reducing debiting interest on capital and remuneration to partners n P & L A/c of Rs.66,u/s.271(1)(c) of the Act,065/- and Rs.1,31,01,213/- respectively. Ground no.3 of the appeal is allowed."
Being aggrieved by the order of ld CIT(A) revenue is in appeal before us.
17. Both the parties before us relied on the order of authorities below as favorable to them.
18. The issue in the instant case relates whether the assessee is eligible for deduction u/s 10B of the Act without reducing the interest on capital and remuneration to the partners. The AO was of the view that the assessee has not claimed the deduction on account of interest on capital and remuneration to the partners with a view to claim higher amount of deduction u/s 10B of the Act.
However, we note that in the identical facts and circumstances the Hon'ble Gujarat High Court in the case of CIT vs. Mundra Packaging Industries in Tax Appeal No. 615 of 2006 to Tax appeal no.617 of 2006 ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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vide order dated 11.10.2006 decided the issue in favour of the assessee by observing as under:
"The following common questions of law are proposed for the admission of this Appeal.
"[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 I.T. Act, 1961 has to be computed as per the provisions of section 29 of 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 Me Dowel & Co.Ltd. V/s. Commercial Tax Officer (1985) 154 ITR 48 (SC)?
[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 I. T. Act, 1961 particularly in background of the fact that the assessee had claimed deduction u/s.80IB of the I.T. Act?"
The learned Counsel for the revenue fairly admits that similar issue was raised in case of Commissioner of Income Tax v/s. Industrial Workwear being Tax Appeal No. 1177 of 2005 and the said Appeal was not admitted.
Following the view taken in above Tax Appeal No.1177 of 2005, no case is made out for admission of these Appeals. The Appeals stand dismissed."
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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19. We also find important to reproduce the relevant extract of the Hon'ble ITAT, Ahmedabad Alidhara Taxspin Engineers vs. ACIT in ITA No.198/Ahd/2016 relevant extract are reproduced below:
"17. We have given thought consideration to rival contentions. There is no dispute about the assessee firm being already eligible for section 80IB deduction since financial year 2003-04. The issue between the parties is about correctness of its computation rather. Both the lower authorities hold that the assessee has not provided for interest on partners capital as well as their remuneration despite specific clauses in its partnership. They are of the opinion that the same had led to swelling of assessee's profits which have been claimed as section 80IB deduction. They seek to trim the deduction claim as indicated hereinabove in other words. The assessee's stand on the other hand is that these two clauses of interest on partners capital and remuneration are not mandatory. They depend on mutual agreement between the partners for the purpose of crediting the same in respective capital accounts at the end of the year subject to the maximum statutory limits. The question arises for the our adjudication therefore depends on interpretation of the above two clauses Sl. No. 6 & 15 incorporated in assessees partnership deed dated 13/20-02-2003 as under:-
"The capital required for the business of the partnership firm shall be contributed by the partners as mutually agreed according to the needs of the business of the firm and according to the convenience of the partners. Interest shall be paid on the partners' capital as mutually agreed to between them which shall be credited in their respective accounts at the end of the year. However, the rate of interest per annum on such capitals shall not exceed the limits as laid down in Section 40(b)(iv) of the Income-tax Act, 1961 under the heading "Amounts not deductible".
This is followed by partners remuneration clause as follows:-
"All the major partners of this deed shall be working partners within the meaning of "working partner" as mentioned in explantion-4 to section 40(b) of the Income Tax Act, 1961 and shall work actively, honestly and conscientiously for the common good of the business. Such working partners shall be entitled to receive the remuneration as may be ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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mutually agreed upon between the partners. Such remuneration shall be credited at the end of year. However, such remuneration in aggregate shall not exceed the limits as laid down in Section 40(b)(v)(2) of the Income-tax Act, 1961 under the heading "Amount not deductible". It is hereby specifically agreed that no such remuneration shall be paid in the absence of profits."
18. We have applied our mind to the above extracted clauses. Our view tends to differ with that of the lower authorities. It emerges that although the above two clauses provide for interest on partners capital and remuneration, the same is subject to their mutual agreement since the crucial expression 'as may be mutually agreed' is duly incorporated therein subject however to the maximum statutory limit. We find that a co-ordinate bench of the tribunal in ITA 319/Asr/2010 ITO vs. Smt. Mala Tandon decided on 14-06-2011 dealt with a similar situation. It would observe that mere incorporation of interest on partners' capital and remuneration does not signify that the same are mandatory in nature. Ld. co-ordinate bench is of the view that a partnership firm under the provisions of partnership act is by will of its partners. The accounts drawn up at the end of the year did not indicate any such interest or remuneration payments. It holds that this act by itself is sufficient to conclude that the partners of the firms had agreed not to provide for the two payments in question. We deem it appropriate to reproduce operative portion as under:-
"6. We have heard both the parties and given our thoughtful consideration to the rival submissions, examined the facts of the case, evidence and material placed on record and also gone through the orders of the authorities below. A careful perusal of the impugned appellate order clearly reveals that the Ld. CIT(A), has considered and adjudicated the issue, in question, in greater detail, after appreciation of the evidences and material on record, as also the legal and factual position of the case. Needless to say that the impugned appellate order is well reasoned and based on the cogent and credible material and facts of the case. However, it would pertinent to reproduce the relevant part of the decision of the CIT(A), for the purpose of proper appreciation of the same:
"3.4. I have considered the rival submissions carefully. An identical issue has been decided in the case of Rohit Tandon, husband of the ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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appellant, the other partner in M/s. Dynamech holding 50% share in the partnership firm for the assessment year 2006-07. In that case also, the AO had added the interest payable on the capital of Sh. Rohit Tandon and remuneration payable to Sh. Rohit Tandon to the total income of the assessee, I have adjudicated that appeal vide order dated 14.7.2009 in appeal No.591/08-09/CIT(A)/Jal and have deleted similar additions as under:
"9.5 I have considered the rival submissions carefully. Clause 4 and 5 of the partnership deed providing for interest on capital and salary are as under:
"4. The capital of the partners is as per their respective accounts in the books of the partnership. The partners shall be entitled to interest on their capital @ 18% per annum or at such other rate or rates as the partners may at the end of each financial year mutually settled subject to the maximum amount admissible under the Income-tax Act, 1961.
5. Both the partners shall diligently attend to the business of the partnership and carry on the same for their greatest common advantage. Both the working partners shall be entitled to a remuneration of Rs.48,000/- per annum each or at such other rate or rates as the partners may at the end of each financial year, mutually settle subject to the maximum amount admissible under the Income-tax Act, 1961."
9.6. The aforesaid clauses of the partnership deed are clearly enabling clauses since the word used in both the clauses are "the partners shall be entitled...". This shows that the partners were entitled to get interest on the capital and to draw remuneration for their services without binding them to do so. This, in my opinion, is not a mandatory provision in the partnership deed which would be worded like " the partners shall be provided/given....". Further, it is also mentioned in both these clauses, that the rate or rates of interest and the remuneration would be mutually settled by the partners at the end of each financial year. Now, a partnership, by its very name and as per the provisions of Partnership Act is by will of the partners. There are only two partners in this firm, both having equal shares. The accounts drawn up at the end of the year reveal that no interest on the capital or remuneration to the partners has been provided in the accounts of the firm M/s.Dynamech. This act by itself signifies that the partners have agreed not to provide interest on their capital or to charge remuneration for their services. In my ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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opinion, the terms of the partnership deed do not signify that interest on capital and remuneration to partners had necessarily to be provided in the account of M/s. Dynamech..
9.7. The AO has drawn support from the provisions of section 80IA(10). This sub-section provides that where the affairs between the eligible business and any other person is so arranged that more than ordinary profits arise to the assessee, the AO shall, in computing the profit and gains of such an eligible profits for the purposes of deduction under this section, take the amount of profits as may be reasonably taken to have been derived therefrom. Thus sub-section has been made applicable to section 80IB by virtue of sub-section (13) of section 80IB. However, this sub-section only enables, the AO to effect the profit of the undertaking claiming deduction u/s 80IB, which is M/s. Dynamech in this case. This does not enable the AO to alter the profits or the income of the other person referred to in this sub-section. It is a fact that the assessee has not received interest and remuneration from M/s. Dynamech. As noted earlier, the terms of partnership deed are not so worded so as to make payment of interest on capital and remuneration to partners as mandatory. It is also not rebutted by the AO that no interest or remuneration has been received by the appellant in earlier years also. This income has not accrued or arisen to the assessee. I, therefore, hold that the AO was not justified in making the addition on account of interest on capital in M/s. Dynamech and remuneration receivable from M/s. Dynamech. This ground of appeal is allowed."
3.5. Following the decision in the case of Sh. Rohit Tandon (supra), ground No.3 of appeal is allowed."
6.1. In view of the above, we do not find any infirmity in the findings of the CIT(A), as the same are based on proper appreciation of the legal and factual position of the case. Accordingly, this appeal of the revenue is dismissed."
We draw support therefrom the above decision of the tribunal and also take into the account the fact that assessee-firm interest on partners' capital and remuneration clauses comprise of mutual agreement provisions as well as the fact that it has not paid or provided for any amount in the books to conclude that the assessee's partners had decided not to charge any interest or remuneration since the relevant ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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clauses hereinabove are not of mandatory nature. We accept assessee's arguments. The Revenue's submissions justifying action of the lower authorities on this fundamental construction of assessee's partnership deed clauses stand rejected. We delete the impugned disallowance of interest on partners' capital and remuneration in question. Since we have decided this first fundamental issue of partnership deed's interpretation against the Revenue, other arguments narrated in preceding paragraphs are rendered academic. The assessee succeeds in its ground no. 2."
In view of above, we hold that the assessee was very much eligible to work out the quantum of deduction u/s 10B of the Act without reducing the amount of interest on capital and remuneration to the partners. Hence, we do not find any infirmity in the order of ld CIT(A). Thus, the ground of appeal of the Revenue is dismissed.
20. The issue raised by the Revenue in ground no.4, 5 & 6 are general in nature. Therefore the same does not require any separate adjudication. Accordingly, we dismiss the same.
21. Now we take up grounds of appeal in ITA No.324/Rjt/2015 pertaining to the A.Y. 2011-12:
1. "The learned CIT(A) erred in law and facts in treating interest income on deposit of electricity connection as business income.
2. The learned CIT(A) erred in law and facts in excluding freight and insurance from the total turnover for calculating deduction u/s.10B.
3. The learned CIT(A) erred in law and facts in including remuneration and interest to the partners for calculating eligible profit u/s.10B
4. On the basis of the facts and circumstances of the case, the learned CIT(A) ought to have upheld the order of the Assessing Officer.
5. That the revenue craves leaves to add, amend, alter or withdraw any ground of appeal."
ITA Nos.367 & 324/Rjt/2015 Deep Recycling Industries A.Ys. 2010-11 & 2011-12
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22. At the outset we note that the issues raised by the Revenue in ITA No. 324/Rjt/2015 are exactly identical to the issues raised in ITA No. 367/Rjt/2013 which have already decided in the aforesaid Paragraphs. Both the ld. DR & AR agreed before us that whatever will be taken in ITA 367/Rjt/2013 will be applied for the appeal on hand. Accordingly we dismiss all the grounds of appeal of the Revenue in view of the dismissal of appeal of the Revenue in ITA No. 367/Rjt/2013. Thus all the grounds of appeal of the Revenue are dismissed.
23. In the result, both the appeals filed by the Revenue are dismissed.
This Order pronounced in Open Court on 08/10/2018
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(RAJPAL YADAV) (WASEEM AHMED)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 08/10/2018
Priti Yadav, Sr.PS
आदे श क
त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ' / The Appellant
2. ()यथ' / The Respondent.
3. संबं
धत आयकर आयु3त / Concerned CIT
4. आयकर आयु3त(अपील) / The CIT(A)- Jamnagar.
5. 4वभागीय ( त न
ध, आयकर अपील य अ
धकरण,राजोकट/DR,ITAT, Rajkot
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER,
स)या4पत ( त //True Copy//
उप/सहायक पंजीकार (Dy./Asstt.Registrar)
आयकर अपील!य अ"धकरण, राजोकट / ITAT, Rajkot