Income Tax Appellate Tribunal - Chandigarh
M/S G.N.G. Enterprises , Nahan vs Department Of Income Tax on 11 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIG ARH BENCH ' A', CHANDIG ARH
BEFORE SHRI BHAVNESH S AINI, JUDICI AL MEMBER AND
SHRI T.R. SOOD, ACCOUNTANT MEMBER
ITA No. 606/Chd/2013
Assessment Years : 2006-07
I.T.O.Nahan V M/s GNG Enterpr ises
Trilokpur Road
Kala Amb
Sirmour
AAGFG 1962K
(Appellant) (Respondent)
Appellant by: Shri Manjit Singh
Respondent by: Shri Smeer Kohli
Date of hearing 3.11.2014
Date of Pronouncement 11.11.2014
O R D E R
PER T.R. SOOD, A.M
This appeal is directed against the order of Ld CIT(A), Shimla dated 14.3.2013.
2. In this appeal only dispute raised by the Revenue is that the Ld. CIT(A) has wrongly held that deduction u/s 80IC is allowable on the total gross profit without reducing the remuneration and interest payable to the partners. 3 After hearing both the parties we find that during assessment proceedings the Assessing officer noticed that the assessee is a partnership firm and has set up a manufacturing unit for production of fan blades and accessories of ceiling fans. Unit was set up in financial year 2005-06 and deduction u/s 80IC was claimed. However, on perusal of partnership deed it was noticed that the assessee was required to pay remuneration and interest to the partners. Relevant clauses have been extracted by the Assessing officer as under: 2
"7(b) That the interest shall be paid to partners on their capital as at the beginning of he year at the rat of 12% per annum or at such rate of interest as may be prescribed u/s 40(b) of the Act or by the Central Govt from time to time which ever is less."
9 The aggregate rem uneration payable to the partners shall be calculated for each accounting year in the f ollowi9ng m anner:
i) In respect of book profit as per Income Tax Act upto Rs.
75,000 at the rate of 90% or Rs. 50,000 whichever is more.
ii) In respect of next book profit of Rs. 75,000 at the rate of 60%.
iii) In respect of balance of book profit a the rate of 40% Such remuneration shall be distributed between partners as under:
a) Party of the first part 50%
b) Party of second part 50%
A The above remuneration shall accrue at the end of the
accounting year and will have to be distributed am ongst the
partners as above.
B The above partners shall NOT be entitled to draw any
rem uneration in the accounting year in which the partnership f irm has suffered loss. T he above remuneration payable to the partners shall be credited to their respective account at the close of the accounting year and the amount of remuneration shall fall due to them as determined in the above manner.
C The partners shall be entitled to increase or decrease the above remuneration or may agree to pay remuneration to other working partners or partners as the case may be. The parties hereto may also agree to revise the mode of calculating the above said remuneration as may be mutually agreed between partners from time to time or due to change in law. However, it s hall be within the limits as may be prescribed under the Income Tax Act from time to time."
On perusal of profit and loss account it was further seen that neither any interest nor any remuneration was paid to the partners. The assessee was confronted with this position and in response it was admitted that the interest and salary has not been paid as provided in the partnership deed and it was only a technical error and would not make any difference as far as income of partnership firm is concerned. The Assessing officer did not agree with this position and invoked the provisions of section 80IA(10) which was applicable to Sec 80IC also and recomputed the deduction u/s 80IC after reducing the interest and salary payable to the partner.
34 On appeal various submissions were made and reliance was placed on the decision of Chandigarh Bench of the Tribunal in case of M/s Navkar Polyplast Company, Distt Sirmour in ITA No. 953.Chd/2009.
5 The Ld. CIT(A) extracted the relevant portion of the order of the Tribunal which is as under:
"W e have c ons idered the rival s ubm iss ions c aref ully. W ith regard to the dispute in hand, the case made out by the revenue is on the strength of Sec 80IA(10) which we reproduce herein after:
" 8 0 I A ( 1 0 ) - Where it appears to the Assessing Officer that, owing to the close connection between the assessee carrying on the eligible business to which this section applies and any other person, or for any other reason, the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits which might be expected to arise in such eligible business, the Assessing Officer shall, in computing the profits and gains of such eligible business for the purposes of the deduction under this section, take the amount of profits as may be reasonably deemed to have been derived therefrom:"
A perusal of the said section in so far as it is necessary for the present case reveals that in order to invoke some essential requirements are:
(a) That there must be close connection between the assessee and the other person.
(b) That the course of business between them is so arranged that the business transacted between them produces to the assessee more than the ordinary profits.
There are other requirements in the said section with which we do not wish to detail in as much as the same are not relevant to the dispute on hand. Section 80IA(10) is applicable to Sec 80IC also because of provisions of section 80IC also because of provisions of section 80IC(7). As per section 80IA (10) where the Assessing officer finds that owing to a close connection between the assessing carrying on eligible business and any other person doing any other business, the course of business between them is so arranged that the business transacted between them products to the assessee more than the ordinary profits which arises in such business, the Assessing officer is empowered to compute the profits of such business as may be reasonably deemed to have been derived therefrom. The two requirements of the section which in our view are of relevance in this case, have been enumerated earlier by us. The first is that there must be a close connection between the assessee and such other person. The second is that there must be an arrangement where by the "business transacted" between the produces to the assessee more than the ordinary profits. In the present case, the charge of Assessing officer is that the assessee has not debited any expenditure on remuneration to its partners and interest on partners' capital contribution and therefore such arrangement between the assessee and its partners have resulted in more than ordinary profits to the assessee. In so far as the first condition is concerned, regarding close connection ostensibly, the sam e stands fulfilled as the assessee and its partners can be said to have a close connection . The moot question is as to whether there can be said to be an arrangement of transaction of business between the assessee and its partners whereby the assessee earned more than the ordinary profits. A related question is as to whether 4 pa ym ent of rem uneration and interest on capital contribution to the partners can be said to be an activity falling within the scope of the expression "business transacted between them". In our view, the meaning of the expression "business transacted between them"
appearing in section 80IA(10) only refers to such transactions which relate to the trading activity of the assessee. Viewed in this l i g h t , t h e pa ym e n t of r em u ne r a t i o n a n d i n t er es t o n c a p i t al contribution to partners can not be said to the falling within the scope of trading activities of the assessee so as to fall within the expression 80IA(10) of the Act. Moreover, in the present case, there is no dispute to the fact position that the assessee has not actually incurred any liability on payment of remuneration or interest on capital contribution to the partners. The Ld. CIT(A) has culled out the relevant clause of the Partnership Deed which authorizes the partners to reduce or waive the pa ym ent of remuneration and interest on capital contribution by a mutual agreement without execution of any fresh deed. The factum of the partners having appended their signatures to the profit and loss account whereby no claim was made on remuneration and interest on partner's capital contribution, itself show their mutual agreem ent not to obtain such paym ents from the f irm . T hus, the conduct of the partners show that they have not acted upon the clause of the Deed which otherwise authorizes them to take remuneration and interest on their capital contribution. Having f actually observe that there was no such paym ents m ade and neither was there any liability for such amount, in our view the Assessing officer was not em powered to reduce the profits on this score for the purpose the section 80IA(10) of the Act.
In view of the aforesaid discussion, we find that the Assessing officer not only wrongly invok ed the provisions of section 80IA(10) but also erred in interpreting the partnership deed so as to hold the assessee liable for reducing its profits on account of remuneration and interest to the partners for the purpose of section 80IC of the Act. The order of the Ld. CIT(A) on this ground is hereby affirmed. Thus, the Revenue fails on ground no. 1 and 2."
On the basis of above she observed inn para 5 as under:
"5 Thus it has been laid down by the ITAT that in the absence of any pa ym ents m ade to the partners on account of salar y and/or i n t e r e s t , a n d t he r e b e i n g n o l i a b i l i t y f or s u c h p a ym e n t, t he Assessing officer was not em powered to reduce the profits on this score by invoking the provisions of section 80IA(10) of the Act. Respectfully following the said judgment of the jurisdictional ITAT, the addition made by the Assessing officer to the tune of Rs. 1091064/- in the instant case is directed to be deleted. The Assessing officer is also directed to allow the deduction u/s 80IC of the Act in respect of the assessee's profit without reducing the am ount of salary and interest payable to the partners."
6 Before us. Ld. D.R for the revenue strongly supported the order of the Assessing Officer.
7 On the other hand, Ld. Counsel for the assessee submitted that after writing the partnership deed later on through mutual understanding it was agreed that salary and interest would not be paid. He further relied on the decision of the Tribunal in case of M/s Navkar Polyplast Company (supra). 5 Attention of the Ld. Counsel for the assessee was invited to the provisions of section 80AB and 80B and it was specifically asked that why the income should not be computed as provided in Sec 80B r.w.s 29 as has been held by the Hon'ble Supreme Court in case of CIT V. Kotagiri Industrial Co-operative Tea Factory Ltd., 224 ITR 604 (S.C). In response the Ld. Counsel for the assessee submitted that the issue may be decided in accordance with the provisions of the Act.
8 W e have considered the rival submissions carefully and find that before allowing deduction under chapter VIA basic provisions have to be kept in mind. Provisions of section 80A, 80AB and 80B are relevant which have been reproduced as under:
" Section - 80A - 80A. (1) In computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of this Chapter, the deductions specified in sections 80C to [80U].
(2) The aggregate amount of the deductions under this Chapter shall not, in any case, exceed the gross total income of the assessee.
[(3) Where, in computing the total income of an association of persons or a body of individuals, any deduction is admissible under section 80G or section 80GGA [or section 80GGC] or section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80-I or section 80-IA [or section 80-IB] [or section 80-IC] [or section 80-ID or section 80-IE] or section 80J or section 80JJ, no deduction under the same section shall be made in computing the total income of a member of the association of persons or body of individuals in relation to the share of such member in the income of the association of persons or body of individuals.] [(4) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-- Deductions in respect of certain incomes", where, in the case of an assessee, any amount of profits and gains of an undertaking or unit or enterprise or eligible business is claimed and allowed as a deduction under any of those provisions for any assessment year, deduction in respect of, and to the extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed the profits and gains of such undertaking or unit or enterprise or eligible business, as the case may be.
(5) Where the assessee fails to make a claim in his return of income for any deduction under section 10A or section 10AA or section 10B or section 10BA or under any provision of this Chapter under the heading "C.--Deductions in respect of certain incomes", no deduction shall be allowed to him thereunder.] [(6) Notwithstanding anything to the contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter under the heading "C-- Deductions in respect of certain incomes", where any goods or services held for the purposes of the undertaking or unit or enterprise or eligible business are transferred to any other business carried on by the assessee or where any goods or services held for 6 the purposes of any other business carried on by the assessee are transferred to the undertaking or unit or enterprise or eligible business and, the consideration, if any, for such transfer as recorded in the accounts of the undertaking or unit or enterprise or eligible business does not correspond to the market value of such goods or services as on the date of the transfer, then, for the purposes of any deduction under this Chapter, the profits and gains of such undertaking or unit or enterprise or eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date.
Explanation.--For the purposes of this sub-section, the expression "market value",--
(i) in relation to any goods or services sold or supplied, means the price that such goods or services would fetch if these were sold by the undertaking or unit or enterprise or eligible business in the open market, subject to statutory or regulatory restrictions, if any; (ii) in relation to any goods or services acquired, means the price that such goods or services would cost if these were acquired by the undertaking or unit or enterprise or eligible business from the open market, subject to statutory or regulatory restrictions, if any;] [(iii) in relation to any goods or services sold, supplied or acquired means the arm's length price as defined in clause (ii) of section 92F of such goods or services, if it is a specified domestic transaction referred to in section 92BA.] [(7) Where a deduction under any provision of this Chapter under the heading "C.-- Deductions in respect of certain incomes" is claimed and allowed in respect of profits of any of the specified business referred to in clause (c) of sub-section (8) of section 35AD for any assessment year, no deduction shall be allowed under the provisions of section 35AD in relation to such specified business for the same or any other assessment year.]." 8 0 A B - [ Deduct ion s t o be m ad e w it h r ef er en ce t o t he i nc om e i ncl ud ed in t h e gr os s t ot al in c ome . - W her e an y d e duc t io n is r e q u ir e d t o be m ad e or a l l o wed un d er a n y s ec t io n [* * * ] i nc l u de d in t h is C h ap ter u nd er t h e he a d in g " C .-- De d uc t i o ns i n r es pec t o f c er t a i n i nc o m es " i n r es pec t of an y i nc om e of th e na tur e s pec if i e d i n t ha t s ec ti o n whic h is i nc l ud e d i n t h e gr os s t ot a l i nc om e of t he as s es s ee , th en , n ot wi t hs t an d i ng an yt h i n g c on t ai n ed in t h at s ec ti o n, f or th e p ur pos e of c om put i n g t h e d ed uc ti o n un d er th a t s ec t i on , t h e am ou nt of i nc om e of t ha t n at ur e as c om pu t ed in ac c or d a nc e wi th th e p r o v is i o ns of t h is Ac t ( bef or e m ak in g a n y d e duc t io n un d er t h is C h ap t er ) s ha l l a lo n e b e de em ed to b e t he am ou nt of i n c om e of th at n at ur e wh ic h is der i v e d or r ec ei v e d b y t h e as s es s ee an d wh ic h is i nc l u de d i n h is gr os s t ot a l i nc om e. ] 8 0 B - 80B. In this Chapter--
(1) [* * *] (2) [* * *] (3) [* * *] (4) [* * *] (5) "gross total income" means the total income computed in accordance with the provisions of this Act, before making any deduction under this Chapter [* * *] [* * *]; (6) [* * *] (7) [* * *] (8) [* * *] (9) [* * *].] 9 Reading of above provisions clearly shows that deduction under various provisions of this Chapter are allowable only if the income of the nature on which deduction is claimed has been included in the total income and further deduction has to be allowed on the basis of above gross total income. Gross 7 total income has itself been defined in Sec 80B which clearly shows that deduction can be allowed on that income which is computed in accordance with the provisions of the Act before allowing deduction under Chapter VIA. Under Income-tax Act the income has to be computed under various heads as per the provisions of a particular head. The income under the head "business and profession" is to be computed as per Sec 29 which reads as under:
" S e c 2 9 - Income from profits and gains of business or profession, how computed.
The income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to [43D]."
Above clearly show that before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act.
10 This position has been confirmed by the Hon'ble Supreme Court in case of CIT V. Kotagiri Industrial Co-operative Tea Factory Ltd. (supra). In that case the assessee society was carrying on the business of manufacturing of tea. The assessee had claimed deduction u/s 80P(2). There were some brought forward losses which was set off by the ITO before allowing deduction. This action was challenged by the assessee and ultimately the matter traveled to the Hon'ble Supreme Court. It was observed as under:
"In view of the express provision defining the expression "gross total income" in clause (5) of section 80B of the IT A ct for the purpose of Chapter VIA of the Act, it is necessary for the purpose of making deduction u/s 80P of the Act to determine the gross total income in accordance with the other provisions of the Act. This means that the gross total income must be determined by setting off against he income the business losses of the earlier years as required u/s 72 of the Act, before allowing deduction u/s 80P."
On the basis of above observation it was held as under: 8
"Held - accordingly reversing the decision of the Hon'ble High Court that before considering the matter of deduction u/s 80P(2) the Income tax officer had rightly set off the carried forward losses of the earlier years in accordance with section 72 of the Act and finding that the said losses exceeded the income, had rightly not allowed any deduction u/s 80P(2)."
Above position has been followed later on in various decisions by the Hon'ble Supreme Court like H.H. Sir Rama Verma V CIT, 205 ITR 435 and Motilal Pesticides (I) Pvt Ltd. V CIT, 243 ITR 26 (S.C). Therefore it becomes clear that deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also.
11 There is another contentions that later on it was decided not to pay salary and interest to the partners. This does not seems to be correct because before the Assessing officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference. This type of situation came up for consideration of Hon'ble Bombay High Court in case Indian Rayon Corporation Ltd. V CIT, 261 ITR 98. In that case the deduction for industrial undertaking was claimed u/s 80HH because industry was located in a backward area. The deduction was claimed on the profits without claiming depreciation. The Assessing officer held that deduction was allowable only after allowing depreciation. This was challenged by the assessee and the matter traveled to the High Court. Hon'ble High Court made following observations: 9
"261 ITR 98 - Income-tax is a charge on an assessee in respect of his total income computed in accordance with the provisions of the Act. However, in cases where the total taxable income comprises profits derived from a newly established undertaking u/s 80HH of the IT Act, 1961, then such profits have got to be computed separately as laid down by the Hon'ble Supreme Court in the case of Cam bay Electric Supply Industrial Com pany. Ltd V CIT, 113 ITR 84. There is a distinct dichotomy between the cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A. The profits and gains of a newly established undertaking, therefore have got to be computed as per the provisions of section 29 to 43 and if the assessee claims relief under Chapter VI-A of eh Act, then it is not open to the assessee to disclaim depreciation allowance. This is because Chapter VI-A is an independent code by itself for com puting these special types of deduction. In other words, one must first calculate the gross total income from which one must deduct a percentage of income contemplated under Chapter VI-A. Therefore one can not exclude depreciation allowance while computing profits derived from newly established undertaking for computing deductions under Chapter VI-A."
12 In this case a specific argument was taken that the Hon'ble Supreme Court has clearly held in case of CIT V. Mahendra Mills (supra) that if the assessee does not claim depreciation then same cannot be thrusted on the assessee by the Income-tax authorities. The Court dealt with this contentions in detail and observed at placitum G to H that the decision of Mahinda Mills (supra) is not decided in respect of allowability of deduction which reads as under:
"T he point at issue is amply clear from the illustration given hereinabove under the caption "Point at issue". The illustration indicates that the a e has not disclaimed depreciation. The point therefore to be noted is that the assessee has also claim ed depreciation, but at a later stage and therefore the judgment of Hon'ble Supreme Court in Mahendra Mills Case, 243 ITR 56 has no application. Accordingly to the assessee the profits derived from the unit was Rs. 100 because u/s 32(2) r.w.s 4 of the IT act, the chargeability was in respect of the total income and, therefore the rate of 20 per cent was applicable to the total income of Rs. 100 without deducting depreciation. Secondly in any event, the controversy in Mahendra Mills case, 243 ITR 56 was not concerning deductions under Chapter VI-A of the Income -tax Act. Therefore that judgment would not apply to this case. The important distinction which is required to be noticed in this case is that we are required to compute the total taxable income of the assessee who has claimed special deduction under Chapter VI-A. For that purpose, one has to keep in mind the provisions of section 80B(5) and 80AB. Consequently section 80HH inter alia, la ys down that if the gross total income includes profits from a newly established undertaking then 20 per cent of such profits would be deductible from the gross total income in order to arrive at the total taxable income. That in such a case, profits derived from a newly established undertaking shall be computed in accordance with the provisions of the Act i.e. section 29 to 43A. Therefore net profit will have to be computed in accordance with the 10 provisions of the Act. The argument of the assessee is that in view of the judgment of Hon'ble Supreme Court in Mahendra Mills' case, 243 ITR 56, it is open to the assessee not to claim depreciation allowance u/s 32 and consequently it is argued that 20 per cent rate of deduction should be applied to Rs. 100 in the above illustration, without taking into account the depreciation. W E do not find any merit in this argument. The scheme of section 4 and section 5 of the Income-tax Act does indicate that income tax is a tax in respect of income computed as per the provisions of the Act. There is a distinct dichotomy between cases of computation of normal income under the Act de hors Chapter VI-A and computation of taxable income where the assessee claims the benefit of deduction under Chapter VI-A because the Legislature has intended that these special deductions should be restricted to the receipt of foreign exchange. If this object is kept in mind, then it is clear that the analogy of section 32(2) given by the assessee will not apply in cases where an assessee claims special deduction under Chapter VI-A. The matter can be looked at from another angle. W hile computing normal income, an assessee may set off depreciation against its gross income. In such cases, depreciation is like any other ordinary expense. However, such depreciation cannot be equated with special ed under Chapter VI-A. In any event, in this case on the facts, the assessee claims depreciation of Rs. 75 from the balance income of Rs. 80 and therefore the judgment of the Hon'ble Supreme Court in Mahendra Mills Case, 243 ITR 56 has no application."
The above observations very clearly shows that for making deduction under chapter VIA the profits has to be computed specifically as per a particular provision of a particular head of income because of the definition of gross total income u/s 80B(5).
13 In view of the above clear position the deduction u/s 80IC was allowable only after reducing the interest and remuneration payable to the partners. The Assessing officer has invoked the provisions of section 80IA which are not relevant and the Ld. CIT(A) has decided the issue only on this decision without looking at the specific provisions of the Act and the decision of Hon'ble Supreme Court which are binding on all authorities. Therefore we set aside the order of Ld. CIT(A) and restore that of the Assessing officer (though on a different reasoning). 14 In the result, appeal of the revenue is allowed.
Order pronounced in the open court on 11.11.2014
Sd/- Sd/-
(BHAVNESH S AI NI) (T.R. SOOD)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated: 11.11.2014
SURESH
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR 11