Gujarat High Court
Principal Commissioner Of Income Tax, ... vs M/S Ruta Jewels on 24 June, 2019
Author: J. B. Pardiwala
Bench: J.B.Pardiwala, A.C. Rao
C/TAXAP/165/2019 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 165 of 2019
With
R/TAX APPEAL NO. 168 of 2019
FORAPPROVALANDSIGNATURE:
HONOURABLEMR.JUSTICEJ.B.PARDIWALA Sd/-
and
HONOURABLEMR.JUSTICEA.C. RAO Sd/-
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1 Whether Reporters of Local Papers may be allowed NO
to see the judgment ?
2 To be referred to the Reporter or not ? NO
3 Whether their Lordships wish to see the fair copy NO
of the judgment ?
4 Whether this case involves a substantial question NO
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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PRINCIPAL COMMISSIONER OF INCOME TAX, SURAT - 1
Versus
M/S RUTA JEWELS
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Appearance:
MRS KALPANA K RAVAL 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 A.C. RAO
Date: 24/06/2019
COMMON ORAL JUDGMENT
(PER: HONOURABLE MR.JUSTICE J.B.PARDIWALA) Page 1 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT
1. Since the issues raised in both the captioned Tax Appeals are the same and the assessees are also the selfsame, the Appeals were heard analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the Tax Appeal No.165 of 2019 is taken up as the lead matter. This Tax Appeal is at the instance of the Revenue and is directed against the order passed by the Appellate Tribunal, Surat Bench at Surat, in the ITA No.205/SRT/2018 dated 26th October 2018 for the Assessment Year 2014-15.
3. In the case on hand, the assessment was finalized under Section 143(3) of the Act on 22nd December 2016 determining the total income at Rs.2,95,33,190=00 after making addition on account of disallowance of the deduction claimed under Section 10AA of the Act amounting to Rs.2,95,33,190=00 on the premise that the assessee firm had taken undue benefit of Section 10AA of the Act by not claiming interest on the capital and remuneration to partners which resulted into increase in the exempt profit.
4. Being aggrieved and dissatisfied with the order passed by the Assessing Officer, the assessee preferred an appeal before the CIT(A), Surat. The assessee raised the following grounds before the CIT(A) while questioning the legality and validity of the order passed under Section 143(3) of the Act :
"(i) On the facts and in the circumstances of the case and in law, the ld. AO has erred passing the order by holding Page 2 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT that the interest and remuneration to partners are allowable though not provided in the partnership deed of the appellant firm for the purpose of computing the income from eligible business which is exempt u/s 10AA of the IT Act. Therefore, the order so passed by the AO being bad in law may kindly be quashed.
(ii) On the facts and in the circumstances of the case and in law, the ld. AO has erred in working interest to partner Rs.1,10,77,894=00 and remuneration to partner Rs.1,84,55,296=00 and thereby reducing the income computed from eligible business to Rs.1,21,53,533=00 as against income computed at Rs.4,16,86,723=00 by the appellant (which is exept u/s 10AA). Therefore, the interest and remuneration enforced by the AO may kindly be deleted for working the profit of eligible business u/s 10AA.
(iii) Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has erred in working out remuneration to partner Smt.Savitaben D.Kakadiya at Rs.92,27,648=00 not considering the fact that she is not a working partner. Therefore, the remuneration so provided for in the account of partner Smt.Savitaben D.Kakadiya at Rs.92,27,648=00 may kindly be deleted.
(iv) Without prejudice to the above, on the facts and in the circumstances of the case and in law, the ld. AO has erred in working out the interest without taking into consideration the withdrawals made by the partners during the year under consideration. Therefore, the interest if at all is Page 3 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT provided for the same should be worked out after considering the withdrawals made by the partners during the year under consideration."
5. The CIT(A), having regard to the grounds raised by the assessee and also having regard to the stance of the Revenue, held as under :
"I have considered the assessment order as well as the submissions of the appellant. The Grounds of appeal Ground No. 1 to 4 pertains to passing the order by holding that the interest and remuneration to partners are allowable though not provided in the partnership deed of the appellant firm for the purpose of computing the income from eligible business which is exempt u/s 10AA of the IT Act. Therefore, the order so passed by the AO being bad in law may kindly be quashed and working interest to partner Rs.1,10,77,894/- and remuneration to partner Rs.1,84,55,296/- and thereby reducing the income computed from eligible business to Rs.1,21,53,533/- as against income computed at Rs.4,16,86,723/- by the appellant (which is exempt u/s 10AA). The appellant derived income from manufacturing activity and claimed deduction u/s 10AA of Rs.4,16,86,723/-. The AO found that the appellant has not claimed interest and remuneration to the partners from the business income and the partnership deed constituted on 15.12.2011 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 Page 4 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT 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.2,95,33,190/- was excluded from the deduction u/s 10AA of the Act. The AO had restricted the claim of deduction u/s 10AA to the tune of Rs.1,21,53,533/- as against the total claim of deduction of Rs.4,16,86,723/- on account of interest to partners and partners remuneration. The appellant submitted that the AO's finding is incorrect as it was clearly mentions in the partnership deal that no partner is eligible for interest on capital as well as remuneration.
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 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 Page 5 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT 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 H of the Partnership Deed specifically restricts payment of Interest to Partners on their Capital as well as Remuneration to Partners. This is the main reason why the appellant has not claimed both the expenses against the Business Income shown in Income Tax Return.
The AO has mainly relied in the case of Meridian Impex (supra) to disallow the 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 of 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 and 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 to the partners.
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-
Page 6 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019C/TAXAP/165/2019 JUDGMENT 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, Ward-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.
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 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. The Revenue, being dissatisfied with the order passed by the CIT(A), preferred appeal before the Appellate Tribunal, Surat Bench at Surat.
7. The Revenue raised the following grounds before the Appellate Tribunal while questioning the legality and validity of the order passed by the CIT(A), Surat Bench at Surat :
"1. Whether on the fact and circumstances of the case and in law, the Ld.CIT(A) was justified in deleting the Page 7 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT disallowance made by the Assessing Officer by invoking provisions of Section 80(IA) r.w.s. 10AA(9) in giving deductions of interest on Capital and Remuneration to partners of the assessee firm after finding that the assessee had taken undue benefits of Section 10AA by not claiming Interest on Capital and Remuneration to partners which resulted increase in exempted profit of the assessee?
2. Whether on the fact and circumstance of the case and in law, the Ld.CIT(A) was justified in not appreciating the fact that by not providing interest and remuneration to the partners, the firm has claimed higher profits leading to higher claim of deduction u/s 10AA of the Act and thus, devoiding the revenue from due amount of tax?
3. On the facts and circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the assessing officer.
4. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of assessing officer may be restored to the above extent."
8. Ultimately, the Tribunal, while concurring with the findings recorded by the CIT(A), held as under :
"6. On careful consideration of above rival submissions, from the relevant operative part of first appellate order, especially paras 6.1.3 & 6.1.4, we observe that the AO has relied on the order of ITAT, Rajkot Bench in the case of Meridian Impex 37 taxmann.com 22 (2013) but the facts of that case are different from the facts and circumstances of Page 8 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT the present case as in that case there was a specific loss in the partnership deed regarding payment of interest on capital and partner's remuneration in the original partnership deed submitted during scrutiny proceedings. Subsequently, a supplementary/addenda to said partnership deed was made amending the said clause providing the clause of non-payment of interest on capital and remuneration to the partners, which was not submitted before AO during assessment proceedings but in the present case undisputedly in the partnership deed there is no clause providing payment of interest on capital and remuneration to the partners therefore, the ld. CIT(A) was right in denying application of order of ITAT, Rajkot in favour of the Revenue in the present case having distinct and dissimilar facts and circumstances.
7. Further, from the binding decision of the Hon'ble High court of Gujarat in the case of Alidhara Taxspin Engineers (supra), wherein their lordship speaking for the Jurisdictional High Court clearly held that mere incorporation of interest on partners capital account and remuneration does not signify that the same are mandatory in nature. As we have noted above, in the present case the appellant has not charged any interest and remuneration asper partnership deed therefore, the appellant firm cannot be compelled to charge interest or remuneration. Therefore, we are inclined to hold the ld. CIT(A) was right in observing that the disallowance made by the AO on account of non provision of interest and remuneration of s.10AA of the Act deduction is erroneous and incorrect and law and facts as in the peculiar facts of the present case the partnership Page 9 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT deed clearly lays down that no interest and remuneration is payable and hence, the first appellate authority right in deleting the disallowance made by the AO on account of non provision of interest and remuneration from amount of deduction u/s. 10AA of the Act. We are unable to see any valid reason to interfere with the same and thus, we confirm the same. Accordingly, grounds of Revenue are dismissed."
9. Thus, it appears that the Appellate Tribunal, while dismissing the appeal preferred by the Revenue, placed strong reliance on a decision of this Court in the case of Principal Commissioner of Income Tax v. Alidhra Taxspin Engineers and another rendered in the Tax Appeal No.265 of 2017 dated 2nd May 2017. We may quote para-4 of the decision of this Court referred to above thus :
"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 Page 10 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019 C/TAXAP/165/2019 JUDGMENT Appeal. The present Tax Appeal deserves to be dismissed and is accordingly dismissed. "
10. Having heard the learned counsel appearing for the Revenue and having gone through the materials on record, we are of the view that the issue is squarely covered by the aforesaid decision of this Court.
11. In our opinion, no error, not to speak of any error of law, could be said to have been committed by the Appellate Tribunal in dismissing the appeal preferred by the Revenue and thereby affirming the order passed by the CIT(A), Surat Bench at Surat.
12. None of the two questions formulated in the memorandum of the Tax Appeal could be termed as the substantial questions of law.
13. In the result, this Tax Appeal fails and is hereby dismissed. Consequently, the connected Tax Appeal for the Assessment Year 2013-14 also stands dismissed.
(J. B. PARDIWALA,J.) (A. C. RAO,J.) /MOINUDDIN Page 11 of 11 Downloaded on : Wed Jun 26 01:01:36 IST 2019