Income Tax Appellate Tribunal - Chandigarh
M/S Asa Biotech, Solan vs Ito, Solan on 12 June, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.1169/Chd/2016
(Assessment Year : 2011-12)
M/s ASA Biotech, Vs. The I.T.O.,
Plot No.124, HPSIDC Indl. Area, Ward 1,
Baddi Distt. Solan (HP). Solan.
PAN: AAMFA3779Q
(Appellant) (Respondent)
Appellant by : Shri Ajay Jain
Respondent by : Shri Manjit Singh, DR
Date of hearing : 21.03.2017
Date of Pronouncement : 12.06.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
Th i s a p p e a l ha s b e e n f i l e d by t h e a s s e s s ee a ga i n st t h e o r d er o f CI T( A p p e a l s ) , S h i ml a d a t e d 2 7 . 0 9 .2 0 16 r e l a ti n g t o a s s e s sm e n t yea r 2 0 1 1 - 12 .
2. G r o u n d N o. 1 r a i se d t h e a ss e s s e e re a d s a s un d e r :
"1. That the Id Commissioner of Income Tax (appeal) has wrongly upheld the jurisdiction of ITO Ward-1 Solan & sustained the order of order passed by ITO Ward1 Solan without appreciating the fact that the case has been transferred during the course of assessment proceedings from ITO Ward Baddi to ITO Ward1 Solan without any legal order passed by Commissioner of Income Tax Shimla under section 127 of Income Tax . The Id CIT(A) has failed to appreciate the fact that ITO ward Baddi has the valid and legal jurisdiction over the appellant and the assessing officer i.e. ITO Ward-1, Solan who has framed assessment has no jurisdiction 2 to assessee the case of appellant & order passed by ITO Ward 1 Solan is bad & beyond the jurisdiction and deserves to quashed."
3. Th e s a i d g r o u n d w a s n o t p r e s se d b e f o r e u s a t t he t i m e o f h e a r i ng b y t h e L d . c o un s e l f o r a s s e ss ee a n d t h e s a m e , t h er e f o r e, i s t r e a te d a s di sm i s s e d .
4. Ground No.2 r ai s e d by the assessee reads as under:
2. That the learned Commissioner of Income Tax (Appeals) has erred by not allowing deduction @ 100% of profit derived from manufacturing activities of unit despite of fact that the assessee has undertaken substantial expansion during the year under consideration. Further the Ld assessing officer has wrongly disallowed deduction amounting to Rs.6034922/- u/s 80IC of Income Tax Act.
5. Th e assessee in the a f o r es ai d g r o u nd h as c h a l l e n g ed t h e re s t r i c t i o n o f d e du c t i o n c l ai m e d u/ s 8 0I C @ 1 0 0 % o n a c c o u nt o f s ub s t a n ti a l e x p a n s i o n u n der t a k e n , t o 2 5 % o f t h e e l i gi b l e p r o f i t s, r e su l t i n g i n d i s a l l o w a n c e o f d e d u c t i o n c l a i med t o t h e e x t e n t of R s . 6 0 , 34 , 9 2 2 /-.
6. Brief f ac t s r el ev a n t to the i ssu e are t ha t t he a s s e s s e e h a d c l ai m e d d e d uc t i o n u / s 8 0I C o f t h e In c o m e Ta x A c t , 1 9 6 1 ( i n s h or t ' t h e A c t ' ) at Rs.80,46,562/- i .e. @ 100% of profi t of the current year. The assessee had commenced commerci al producti on on 13.8.2005 and the current assessment year is the 6th year of commencement of producti on. The assessee has been cl ai mi ng deducti on u/s 80I C of the Act s i nce assessment year 2006-07. This i s the 3 6 t h year of prod ucti on of the fi rm. Duri ng the year the assessee mad e i nvestment a nd undertook substanti al e xpansi on by wa y of addi ti on to t he pl ant and mac hiner y. On account of the same the assesse agai n cl ai med deducti on u/s 80I C of the Act @ 100%, rec koni ng the asses sment year 2011-12 as the "i ni ti al assessment year". Duri ng the assessment proc eedi ngs the ass essee was cal l e d upon to sho w cause as to why the cl aim of deducti on u/s 80IC shoul d not be restri cted to 25% si nce i t was the 6 t h year of producti on. The assessee submi tted detai l ed repl y whi ch has been repro duced in the assessment order. The Assessi ng Offi cer re jected the assessee's contentions and hel d that the pr ovi si ons of secti on 80I C of the A ct are ver y cl ear and there e xi sts no ambi g ui t y of any ki nd as regards the quanti t y of d educti on and per i od for whi ch i t i s avai l abl e as per whi ch after a peri od of fi ve years, the assessee i s enti tl ed to deducti on u/s 80I C onl y @ 25%. The Assessi ng Offi cer, therefore, restri cted the deducti on cl ai med by the assessee to 25% of the el i gi bl e profi ts and added back the e xcess deducti on cl ai med, amoun ti ng to Rs.60,34 ,922/-, to the i ncome of the assessee.
7. The matter was carri ed in appeal to the CI T( Appeal s) who uphel d the disal l o wance made fol l owi ng the order of the I. T.A. T. i n the case of I TA No. 798/Chd/2012 i n the case of M/s H ycron El e ctroni cs Vs. I TO and other rel ated cases.
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8. Before us, the L d. counsel for t he assessee fairl y admi tted that the i ssue was covered agai nst i t by vi rtue of the deci si on of the I . T.A. T. in M/s H ycron El ectroni cs ( supra) .
9. The Ld. DR, on the other hand rel i ed upon the order of the CI T( Appeal s) .
10. Havi ng heard the contenti ons of both the parties, we fi nd no reason to i nterfere i n the order of the CI T( A) on thi s i ssue. Undi sputedl y, i denti cal i ssue has been adjudi cated upon by the I . T.A. T. i n the case of M/s H ycron El ectroni cs ( supra) wherei n i t h as been categori call y hel d that the ne w units, whi ch have come i nto e xi stence after the provi si ons of secti on 80I C were brought on Statute, wi l l not be enti tl ed to cl ai m deducti on @ 100% on account of substanti al e xpansi on undertaken by them and in any case there can be onl y one i ni ti al assessment year for the purpose of cl ai mi ng 100% deducti on under the sai d secti on and further that a un i t set up i n Hi ma chal Pradesh i s e nti tl ed to deducti on @ 100% onl y for the peri od of fi rst fi ve years after commencement of producti on and thereafter @ 25% or 30% onl y. Si nce the facts i n the pres ent case demons trate that the el i gi bl e undertaki ng of the assessee came i nto e xi stence after the provi si on of secti on 80I C was brought on the Statute and that the assessee had al ready cl ai med deducti on of 100% of profi t for the fi rst fi ve years si nce commencement of commerci al producti on, the Ld.CI T( Appeal s) , we fi nd, has ri ghtl y restri cted the cl ai m of deducti on u/s 80I C to 25% of 5 i ts profi ts for the i mpugned year, bei ng 6 t h year si nce the commencement o f producti on, as per the rati o l ai d do wn by the I . T.A. T. i n t he case of M/s H ycron El ectroni cs ( supra) . I n vi e w of the a bove, we uphol d the di sal l o wanc e of e xcess deducti on amounti ng to Rs.60,34,922/- u/s 80I C of the Act cl ai med by the assessee and di smi ss the ground of appeal No.2 rai sed by the assessee.
11. Ground of appeal Nos.3, 4 and 5 rai sed by the assessee are i nterl i nked and read as under:
"3. That the learned Commissioner Of Income Tax (appeals) has wrongly upheld provisional addition of Rs. 6358197/- on account of Salary to Partners & Interest on Partners Capital without appreciating the amendment in Partnership deed on 08-02-2010 which deleted the clause no 11& 12 of partnership deed dated 21-12-2009 & amendment deed has been duly submitted/ filed during the course of assessment & appellate proceedings.
4. Without prejudice to ground no 3 the Ld CIT(A) has wrongly interpreted the clause 11 & 12 in partnership deed dated 21-12-2009 with effect from 19-01-2005 & failed to appreciate the fact that clause no 11& 12 of Partnership deed dated 21-12-2009 only authorizes the partners for Interest & salary mutually agree from time to time & no quantum of salary to working partners & interest on partners capital has been specified & also failed to appreciate the fact that the firm has not paid/credited any interest on capital & salary to working partners.
5. Without prejudice to Ground no 3 & 4 That the Ld CIT(A) has failed to appreciate the fact that no addition can be made in the hands of firm on account of Partners salary & Interest on capital. The Id CIT(A) has also wrongly placed reliance on Chandigarh I.T.A.T. Bench decision in case of 6 Shivam Industries ITA No no 510/chd/2012 as the facts of this case are totally different from appellant case."
12. The above grounds chal l enge the chargi ng of i nterest and sal a r y of partners to the profi t and lo ss account of the assessee fi rm, the consequent reducti on i n el i gi bl e profi ts and thus cl ai m of deduction of profi ts u/s 80I C and the chargi ng of such i nterest and remunerati on to ta x i n the hands of the assessee fi rm provi si onal l y.
13. Bri ef facts rel evant to the i ssue are that duri ng the course of assessment, the assessi ng offi cer found that no sal ar y and i nterest pai d to the partners had been debi ted to the profi t and loss account despi te cl ause 11 & 12 of the partnershi p deed dated 21.12.2009 whi ch stated as under:
"Clause No.11 That each party to this deed shall be entitled for interest on their respective capitals at the rate prescribed under the I.T. Act or any other enactment in succession thereof and all the partners will be working partners and they shall perform such duty from time to time as they mutually agree.
Clause No. 12 That the working partner shall be entitled for the remuneration to be mutually agreed by them for each year which shall be subject to the ceiling prescribed under the I.T. Act, 1961 or any other enactment in succession thereof."
14. When confronted wi th the same the assessee submi tted that t he partnershi p deed referred to had been amended by partnershi p deed dated 08.02.2010, where by the aforementi oned enabl i ng cl auses were del eted. Th e Assessi ng Offi cer di d not gi ve credence to thi s amended p artnershi p deed, doubti ng i ts genui neness, and proceeded on the basis of the cl ause No . 11 & 12 of t he partnershi p deed dated 7 21.12.2009 referred above. The Assessi ng Offi cer rejected the e xpl anati on of the assessee by observi ng as under:
"The explanation given by counsel of assessee and copy of addendum to partnership deed has been carefully considered with reference to facts of the case. The partnership deed dated 21.12.2009 is a registered documents with the Sub- Registrar, Baddi on the same day i.e. 21.12.2009. Any amendment to a registered documents i.e. partnership deed, it is mandatory to get the addendum also registered with the competent authority i.e. sub-Registrar. Whereas, the so-called addendum to partnership deed is a not registered documents. Furthermore when a non-judicial paper is purchased from the stamp vender, on the reverse of it the stamp vender mentions the purpose for which non judicial paper is purchased by the vendee. The addendum to partnership deed reduced to writing on non judicial paper in Sr. No. 03AA 327609, the purpose for which it is purchased, is not mentioned. The purpose of purchase of non judicial paper is not clear. It appears that the non judicial paper, in question is sold by stamp vender as an attachment to Sr. No. 25261 dated 08.02.2010. The genuineness of the addendum to partnership deed is doubtful due to the reasons stated above and cannot be accepted. It appears that addendum to partnership deed is an afterthought cover-up, when the assessee is confronted with the fact that salary and interest has not been paid to the working partners, and has no legal justification and therefore cannot be accepted."
15. The Assessi ng Of fi cer further i nvo ked secti on 80I A ( 10) and hel d that the assessee firm by not debi ting i nterest and remunerati on to partners, had managed i ts affairs in such a manner that more ta x free i ncome had accrued to the fi rm, resul tantl y i ncreasi ng the deducti on u/s 80I C and reduci ng the i ncome of the partners. The Assess i ng Offi cer computed the total i nterest and sal ar y, as per provi si on of secti on 40( b) t otal i ng at Rs.63 58197/-. and thereafter proceeded to m ake addi ti on o f the same by hol di ng as under:
"Accordingly a sum of Rs.63,58,197/- is reduced from the eligible net profit and gains entitled for deduction u/s 80IC and brought to tax. The amount of salary and interest is chargeable in the hands of partners. However, it is not 8 ascertainable as to whether partners have filed their returns of income or not, therefore, above disallowance of Rs.63,58,197/- is brought to tax in the hands of the firm (provisionally)."
16. The matter was carri ed in appeal before the Ld.CI T( Appeal s) where the assessee contended that in vi e w of the amended Partnershi p Deed no sal ar y and i nterest was pa yabl e to the partners and, t herefore, the as sessee had ri ghtl y not cl ai med the same as deducti on i n i ts Profi t & Loss Account. The Ld. counsel f or assessee sub mi tted that regi steri ng the Partnershi p Deed is not essenti al and, therefore, the ad dendum to the p artnershi p deed cannot be overl ooked merel y for the reason that the same was not regi stered. I t was al so submi tted that the i ncome of the fi rm had al so to be reduced i f sal ar y and i nterest i s all o wed to the fi rm's partners and further the assessee contended that i n any ci rcumsta nces addi ti on ca nnot be made i n the hands of the fi rm. The Ld.CI T( App eal s) re jected assessee's contenti ons and hel d that the amended partnershi p deed coul d not be rel i ed upon and as per the effecti ve partnershi p deed the assess ee was requi red to debi t remun erati on and sal ar y pai d to partners. The Ld CI T( A) hel d that the profi ts el i gi bl e for deducti on u/s 80 I C were to be cal cul ated as per the provi si ons of l a w, whi ch i n the present case requi red deducti on of re munerati on and sal ar y for arri vi ng at the same. Thus, the Ld.CI T( A) hel d that the profi ts el igi bl e for deducti on u/s 80I C were to be reduced by the amount of remunerati on an d i nterest pa yab l e to partners a nd rel i ed upon the deci si on of the I TAT Ch andi garh Bench i n the case of I TO vs M/s GNG Enterpri ses i n I TA No.606/Chd/2013 9 dated 11.11.2014 i n thi s regard. The rel evant fi nd ings of the Ld.CI T( A) at para 5.3.1 & 5.3.2 are as under:
"5.3.1 ........... The observations of the A.O. are also relevant. The appellant claims to have amended clause 11 & 12 of the partnership deed and has argued that salary and interest eligible for payments to partners till 08.02.2010 was no longer due in the year under consideration. No evidence has been brought on record to show that interest or salary was being paid in view of the partnership deed dated 21.12.2009 which was discontinued after the new partnership deed clauses coming into effect. This leads to the indisputable inference that the findings of the A.O. are correct and the document to substantiate amended partnership deed cannot be relied on.
5.3.2 Thus the partnership deed dated 21.12.2009 was effective during the year under consideration. Accordingly, the partnership firm was required to debit its account with salary and interest paid to the partners. A similar issue was decided by the Jurisdictional ITAT in ITA No. 510/Chd/2012 Assessment Year 2008-09 in the case of M/s. Shivam Industries wherein relying on its own decision in the case of M/s G.N.G. Enterprises, ITAT held as under-
35. After considering the rival submissions we find that identical issue came up for consideration before the Tribunal in the case of ITO vs M/s GNG Enterprises (supra) and the same was adjudicated vide paras 8 to 13 which are as under:-
"8 We 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 assesses, 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 80IC 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.10
1(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 80-1 or section 80-lA [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.] 1(4) Notwithstanding anything to the contrary contained in section WA or section 10AA or section 108 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 108 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 WBA 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 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 an 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 11 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;] [(Hi) 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.}."
80AB - [ Deductions to be made with reference to the income included in the gross total income , - Where any deduction is required to be made or allowed under any section [* * * ] included in this Chapter under the heading " C .-- Deductions in respect of certain incomes " in respect of any income of the nature specified in that section which is included in the gross total income of the assessee , then, not withstanding anything contained in that section, for the purpose of computing the deduction under that section, the amount of income of that nature as computed in accordance with the provisions of this Act (before making any deduction under this Chapter) shall alone be deemed to be the amount of income of that nature which is derived or received by the assessee and which is included in his gross total income] 80B - 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 total income has itself been defined in Sec 808 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:
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"Sec 29- 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 [43DJ."
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 /TO 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 Act for the purpose of Chapter VIA of the Act, it is necessary for the purpose of making deduction u/s SOP 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 SOP."
On the basis of above observation it was held as under:
"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 tosses 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/s80P(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 (Ij 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 13 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:
"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 Cambay Electric Supply Industrial Company. 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 computing 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:
"The 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 14 assessee has also claimed 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 af 20 per cent was applicable to the total income of Rs.100 without deducting ' appreciation. 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 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, lays 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 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. WE 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. While 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 ofRs. 80 and therefore the judgment of 15 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 id. 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)." Following the above, we decide this issue against the assessee Respectfully following the same, it is held that the eligible profits have to be 'computed after debit of all expenses required to be debited in view of section 80A,80AB, 80B r.w.s. 29 of the I.T.Act. Accordingly, an addition of Rs.63,58,197/- is directed to be made to the taxable profits of the appellant's firm after reducing an equivalent amount from the profits claimed as eligible profit for deduction u/s 80IC."
17. Aggri eved by th e same the ass essee has rai se d the above grounds of appeal before us.
18. We have h e a rd the rival co n t e n t i o ns . The undi sputed facts emergi ng are that the asse ssee is a partnershi p fi rm el i gi bl e for de ducti on u/s 80 I C of the I ncome Ta x Act, 1961. Further th e partnershi p I s evi denced by a deed dated 21-12 -09, cl ause 11 & 12 of whi ch deal wi th the pa yment of i nterest on capi tal and remunerati on to partners as reproduced above. That profi ts for the i mpugned year have been cal cul ated wi thout chargi ng sal ar y and i nterest of partners and de ducti on of the s ai d profi ts cl ai med u/s 80 IC of the I ncome Ta x Act, 1961. 16
19. We fi nd that th e AO has hel d that sal ar y and i nterest was to b e deducted for c al cul ati ng the profi ts of the assessee fi rm. The Assessi ng Offi cer has further hel d that the same was chargeabl e i n the hands of the partners but si nce he coul d n ot ascertai n whether partners had fi l ed thei r return and therefore ta xed i t i n the hands of the assessee fi rm provi si onal l y.
20. Ld.CI T( A) , we fi nd, uphel d the a ddi ti on but for a di fferent reason hol di ng that the sal ar y and i nterest were to be deducted for cal cul ati ng the p rofi ts el i gi bl e for deducti on u/s 80I C,thus reduci ng the quan tum of deducti o n avai l abl e to the assessee as per secti on 80 IC.
21. Si nce the presen t appeal before us i s agai nst th e order of the Ld.CI T( A) , the i ssue before us i s whether, i n the backdrop of the above facts, the profi ts el i gi bl e for deducti on u/s 80I C was to be cal cul ated after reduci ng i nterest and remunerati on pa yabl e to partners as per the p artnershi p deed .
22. Duri ng the cours e of arguments b efore us the Ld. counsel for asse ssee rai sed a nu mber of contenti ons agai nst the addi ti on made whi ch i ncl uded ;
i) That the ori gi nal Partnershi p Deed di d not speci f y the quantum of remunerati on and i nterest whi ch was pa yabl e and hen ce no i nterest an d remunerati on was to be deducted u/s 40( b) ( v) i n vi e w of the CBD T Circular No.39 dated 25. 3.1996 i n thi s regard and al so the deci si on of the Hon'bl e Punjab & Har yana Hi gh Court i n 17 the case of Sood Bhandari & Co. & Ors. Vs. CBD T & Anr.( 2012) 246 C TR 89.
i i ) That even othe r wi se the ori gi nal partnershi p deed had been amended del eti ng the enabl i ng cl auses ,vi de addendum dated 08-02-2010 and the sai d Amended Partnershi p Deed coul d not be r e jected merel y b ecause i t was not regi stered.
iii) That i n any case by deducti ng sal ar y and i nterest the net profi t of the assessee w oul d al so be re duced resul ti ng i n no effect to the ta xabl e i ncome of the assessee and further that i n any case the sal ary and i nterest pai d to the partners coul d not have been brought to ta x i n the hands of t he assessee fi rm even provi si onal l y.
23. Addressi ng the fi rst contenti on rai sed before us, Ld. counsel for assessee stated that a perusal of the rel evant cl auses of the ori gi nal partnershi p deed, deal i ng wi th remunerati on an d i nterest to be pai d to partners outl i ned at cl ause Nos.11 and 12 of the Deed, reveal that the y do not speci f y the amount to be pai d to the partners. The Ld. counsel for assessee dre w our attenti on to the rel evant cl auses reproduced at para 12 of the CI T( Appeal s ) 's order, whi ch read as under:
"Clause No.11 That each party to this deed shall be entitled for interest on their respective capitals at the rate prescribed under the I.T. Act or any other enactment in succession thereof and all the partners will be working partners and they shall performed such duty from time to time as they mutually agree.
Clause No. 12 That the working partners shall be entitled for the remuneration to be mutually agreed by them for each year which shall be subject to the ceiling prescribed under the I.T. Act, 1961 or any other enactment in succession thereof."18
24. The Ld. counsel for assessee thereafter referred to the CBD T Ci rcul ar No.739 dated 25.3.1996 and p oi nted out that i t i s speci fi cal l y stated therei n that where Partnershi p Deed do not speci f y the amount of remunerati on payabl e the same woul d not be admi ssi bl e. The rel evant CB D T Circul ar i s reproduced hereunder:
Provisions of section 40(b)(v) of the Income-tax Act, 1961, regarding admissibility of remuneration of working partner in the assessment of firms--Regarding 25/03/1996 BUSINESS EXPENDITURE SECTION 40(b), The Board -have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided under section 40(b)(v) of the Income-tax Act. In particular, the representations have referred to two types of clauses which are generally incorporated in the partnership deeds. These are :
(i) The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)(v) of the Income-tax Act; and
(ii) The amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.
It has been represented that the Assessing Officers are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.
2. The Board have considered the representations. Since the amended provisions of section 40(b) have been introduced only with effect from the assessment year 1993-94 and these may not have been understood correctly the Board are of the view that liberal approach may be taken for the initial years. It has been decided that for the assessment years 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at l(i) above.
3. In cases where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners a the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of firm's income.
4. It is clarified that for the assessment years subsequent to the assessmentyear1996-97,nodeduction under section 40(b)(v) will 19 be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.
25. The Ld. counsel for assessee further dre w our attenti on to the deci si on of the juri sdi cti onal Hi gh Court i n the case of Sood Bhandari & Co. & Ors ( supra) poi nti ng out that i t uphel d the val i di t y of the aforesai d ci rcular and hel d that i t di d not r un counter to a ny of the provi si ons of the Act. The Ld. counsel for assessee thereafter stated that si nce the ori gi n al Partnershi p Deed di d not s peci f y the amount of remun erati on and i nter est to be pai d to partners, the CBD T Ci rcul ar and the dec i si on of the juri sdi cti onal Hi gh Court was appl i cabl e i n the present case and in vi e w of the same, no d educti on on acc ount of remune rati on and i nterest to partners was to be al l o wed to the assessee.
26. The Ld. DR, on the other han d, countered by stati ng that the ori gi nal partner shi p deed cl earl y provi ded for pa yment of sal ar y and i nterest to partners and in i denti cal ci rcumstances the I TAT Chandi garh Be nch i n the case of I TO Nahan Vs. M/s GNG Enterpri ses, Si rmour i n I TA No.606/Chd/2013 dated 11.11.20 14 and i n the ca se of M/s Shi vam I ndustries in I TA No.5 10/Chd/2012 rel ati ng to assessment year 2008-09,hel d t hat the same are to be deducted to arrive at the profi ts el i gi bl e for deducti on u/s 80I C of the Act.
27. At thi s juncture the Ld. counsel for the assesse e poi nted out that the deci si ons in the cases of M/s Shi vam I ndustri es and M/s GNG Enterpri ses ( supra) were 20 di sti ngui shabl e on facts si nce in the sai d cases the Partnershi p Deed cl earl y sp eci fi ed the a mount of remunerati on to be pai d to the p artners as al so t he amount of i nterest to be pai d to the par tners. The Ld. counsel for assessee dre w our attenti on to these facts reproduced at page 2 of the order i n M/s GNG Enterpri ses ( supra) .
28. Havi ng heard bot h the parti es, we fi nd meri t in the contenti on of the Ld. counsel for assessee. As de monstrated to us the rel evant cl auses of the ori gi nal Partnershi p Deed , by vi rtue of whi ch the Revenue has sought to deduct remunerati on and i nterest for the purpose of cal culati ng the net profi t earned by the assessee, does not speci f y the amount to be pai d on account of t he same. The y m erel y state that the same shal l be pai d as per the rates or l i mi ts prescri bed by the I ncome Ta x Act,1961 or any other enactment i n successi on thereof. The CBD T Ci rcu l ar cl earl y states that i n such ci rcumstances no deducti on shall be al l o wed to the fi rm. Further, the Hon'bl e juri sdi cti onal Hi gh Court i n the case of Sood Bhandari & Co & Ors. Vs Central Board of Di rect Ta xes ( 2012) 246 C TR 89,has hel d the sai d ci rcul ar to be cl ari fi cator y in nature and not runni ng counter to any of the provi si ons of the Act. The Hon'bl e Hi gh Court i nter preted the meani ng of the word "a uthori zed"
used i n secti on 40( b) ( i i ) of the Act, whi ch states that sal ar y and i nterest pai d to partners shal l be al l o wabl e onl y when i t i s authori zed by a partnershi p de ed, and hel d tha t i t means to quanti f y the amount to be pa i d. I t was hel d thus that 21 deni al of deducti on of sal ar y and i nterest to part ners , when the y are not quanti fi ed i n the deed, as di rected by the CBD T i n i ts ci rcul ar, was i n accordance wi th l a w . The findi ngs of the Hon'bl e Hi gh Court i n thi s regard at para 8-12 of the order are as under:
"8.The argument that the partnership deed authorizes the payment of salary and interest to the partners, therefore, such amount is deductible as expenditure, is misconceived. In terms of s. 40(b)(ii) of the Act, any payment of remuneration to any partner, who is a working partner, or payment of interest to any partner on his capital contribution, which is not authorized by, or is not in accordance with the terms of the partnership deed is not allowable as expenses.
9. In fact, there is no material distinction between the terms of the original partnership deed dt. 16th May, 1988 and the subsequent agreement dt. 1st April, 1992. In the original partnership deed dt. 16th May, 1988, the term is as under :
"8. That the partners of the firm shall be paid salary from time to time as may be mutually agreed upon by the partners of the firm for whole time work done by them for the running of the business of the partnership firm."
Whereas, the agreement dt. 1st April, 1992 contains the following recitals :
"2. That all the three partners contributing capital for the proper running of the business of the partnership firm shall be paid interest on their capital contribution at the rate mutually fixed by all the three parties referred to above in this agreement from time-to-time.
3. That all the partners of the firm attending to the business of the firm, shall be paid salary from time to time at the rate mutually decided by all the parties in this agreement."
10. A reading of the two extracts reproduced above, would show that there was no agreement in respect of quantification of the salary or the rate of interest on the capital contribution of the partners. Such payment was left to the discretion of the partners at the end of the financial year. Sec. 40(b)(ii) contemplates the authorization of remuneration or interest. The authorization does not mean an agreement to pay, but to quantify the amount of salary or the rate of interest payable to the partners. If the said aspects are not determined prior to the financial year, the same are capable of adjustment at the end of the financial year keeping in view the profits earned with a view to increase expenditure and reduce income. The 22 circular issued by the Board explains the expression authorized in the aforesaid Circular dt. 25th March, 1996. The said circular does not run counter to any of the provisions of the Act. Therefore, the circular being clarificatory in nature cannot be said to be beyond the powers of the Board conferred on it under s. 119 of the Act.
11. The reliance of the petitioner that liberal approach is required to be given while applying the provisions of s. 40(b) of the Act is again not tenable. The case of the petitioner falls in category (ii) of para 1 of the said circular as the amount of remuneration to working partner has not been fixed. In respect of the said issue, the Board has clarified in its para 3 that payment of remuneration to partners cannot be allowed, if the same has not been specified, but has been left to be determined by the partners at the end of the accounting period. The said circular is, in fact, in tune with the intention and language of cl. (ii) of s. 40(b) of the Act, as mentioned above.
12. In view of the above, the writ petition and appeals filed by the assessee are dismissed whereas the reference sought by the Revenue on the aforesaid question of law is answered in favour of the Revenue and against the assessee."
29. The CBD T ci rc ul ar and the deci si on of the juri sdi cti onal Hi gh Court i n the case of Sood Bhandari & Co. ( supra) cl earl y a ppl y i n the prese nt case, fol l o wing whi ch we hol d that no de ducti on on acco unt of remuner ati on and i nterest was to be made.
30. The rel i ance pl ac ed by the Revenue on the decisi on of the coordi nate Bench of the I TAT i n the case of M/s GNG Enterpri ses ( supra) , we fi nd, i s di sti ngui shabl e on facts and thus not appl i ca bl e i n the facts of the present ca se si nce i n that case quantum of i nterest & remunerati on to be pai d was speci fi ed i n the Partnershi p Deed and, therefore, the I TAT hel d that the same was to be deducted for arri vi ng at the profi ts el i gi bl e for deducti on under chapter VI A of the Act. Cl earl y the benefi t of the aforementi oned CBD T Ci rcul ar as al so the deci si on of the Hon'ble juri sdi cti onal Hi gh Court 23 was not appl i cabl e i n that case. For the aforesai d reasons we hol d that no deducti on on acc ount of i nterest and sal ar y pai d to the part ners was to be made whi l e cal cul ating net profi t of the assessee.
31. The Ld. counsel for assessee ha s al so contende d before us that t he Assessi ng Of fi cer has added back the remunerati on and i nterest of partners on provi si onal basi s i n the hands of the assessee an d thereafter di sa l l owed the e xcess deducti on cl ai med u/s 80IC thus maki ng addi ti on i n the present ca se. The Ld. c ounsel for ass essee has contended that there i s no l egal basi s at al l for maki ng addi ti on on acc ount of remune rati on and i nter est i n the hands of the assessee on provi si onal basi s.
32. We fi nd no meri t i n thi s contention rai sed by the Ld Counsel for the assessee, since we fi nd that the Ld. CI T( A) has uphel d the addi ti on on a di fferent reasoni ng by reduci ng the quantum of deducti on avai l abl e u/s 80 I C of the Act after ded ucti on of the sal ar y and i nterest of partners from the profi ts of the assessee.
33. The Ld. counse l for assessee had al so rai sed another argument rel ati ng to the val i di t y of subsequent partnershi p Deed though not dul y regi stered. The Ld. DR had vehementl y contested the same. Si nce we have al ready hel d that the addi ti on i n the present case made was agai nst the l a w and have di rected the same to be del eted, we fi nd no 24 reason to deal wi th thi s contenti on of the Ld. counsel for assessee si nce i t woul d merel y be academi c i n nature.
34. I n vi e w of the above, the addi ti on made amounti ng to Rs.63,58,197/- on account of interest and sal ar y pai d to partners i s di rected to be del eted and the order of the CI T( Appeal s) on thi s i ssue i s, therefore, set asi de. The ground Nos.3, 4 and 5 rai sed by the assessee are, therefore, al l o wed i n above terms.
35. Ground No.6 rai sed by the assessee i s as under:
"6. That the Id CIT(A) has wrongly sustained the addition of Rs.1789573/- on account of notional interest income on the advances given to various persons without appreciating the fact that no interest has been received on advances given by the appellant firm & CIT(A) has also wrongly applied the decision of Abhishek Industries 286 ITR1 & ignored the subsequent decision by Honble Supreme Court & Jurisdictional ITAT decision.."
36. In the aforesai d ground the assessee has chal l enged the acti on of the Ld.CI T( Appeal s) i n confi rmi ng the addi ti on made of Rs.17,89,573/- u/s 36( 1) ( i i i ) of the Act.
37. The facts rel eva nt to the i ssue are that duri ng assessment proceedi ngs the Assessi ng Offi cer found that the assessee had gi ven i nterest free l oans amounti ng to Rs.2,08,06,400/- to vari ous persons. The Assessi ng Offi cer al so found that t he assessee had pai d i nterest on borro wi ngs amounti ng to Rs.17,89,573/-. On bei ng asked, to substanti ate busi ness purpose for advanci ng i nterest free amounts, the a ssessee fi l ed co pi es of account of some 25 l oanees. The A ssessi ng Offi cer hel d that there was no busi ness purpose i n advanci ng the sai d amounts. Thereafter rel yi ng upon the deci si on rendered by the juri sdi cti onal Hi gh Court i n the case of CI T Vs. Abhi shek I ndustri es Ltd., 286 I TR 1, the Assessi ng Offi cer hel d that si nce the assessee had fai l ed to di scha rge i ts obl i gati on to prove that the l oans rai sed from fi nanci al i nsti tuti on were uti l i zed for busi ness purpose onl y and there was no justi fi cati on and reasonabl eness to advance i nterest free funds for non busi ness purpose, di sal l o wance u/s 36( 1) ( i i i ) of the Act was warranted and cal cul ati ng the i nterest on the i nterest free advance @ 12% made a di sal l o wance of Rs.23,76,800/-.
38. The CI T( Appeal s ) uphel d the di sal l o wance made but at the same ti me restri cted i t to Rs.17,89,573/- bei ng the total i nteres t pai d and cl ai m ed as i nterest e x penses by the assessee.
39. Before us, the Ld . counsel for ass essee rel i ed upon the submi ssi ons made before the l o wer authori ti es and stated that the sai d advances were made for busi ness purpose l i ke purchase of furni ture, purchase of factor y, pl ot, etc.
40. The Ld. DR, on the other hand rel i ed upon the order of the CI T( Appeal s) .
41. We have heard the contenti ons of both the parti es. We fi nd no reason to di sagree wi th the fi ndi ngs of the Ld.CI T( Appeal s) on thi s i ssue. The Ld.CI T( Appeal s) has 26 uphel d the di sal l o wance si nce no evi dence to sho w that the advances were made for busi ness purpose had been fil ed by the assessee. Even before us the Ld.Couns el for the assessee has fai led to substanti ate i ts cl ai m. I n the absence of same, the sai d submi ssi on of the assessee hol ds no grounds and the di sal l o wance made u/s 36( 1) ( i i i ) , we hol d i s l i abl e to be uphel d. I n vi e w of the same, we uphol d the di sal l o wance made amounti ng to Rs.17,89,573/-. The ground of appeal No.6 rai sed by the assessee i s, therefore, di smi ssed.
42. Ground No.7 rai sed by the assessee reads as under:
"7. That the Id CIT(A) has erred by not allowing deduction u/s 80IC on the resultant business income after disallowances made by assessing officer & confirmed by CIT(A) ."
43. The onl y contenti on of the Ld. counsel for assessee on the sai d grou nd i s that deduc ti on u/s 80I C be granted on the resul tant i ncome after di sal l o wances made in the case of the assessee. The Ld. coun sel for assessee has rel i ed upon the CBD T Ci rcul ar No.37/16 dated 2.11.2016 i n thi s regard.
44. We have gone th rough the afores tated Ci rcul ar of the CBD T and we fi nd that the Board has i n the sai d Ci rcul ar accepted that the di sal l o wances made u/s 32, 40( a) ( i a) , 40A( 3) , 43B, etc. of th e Act rel ati ng to busi ness acti vi t y and agai nst whi ch Chapter VI -A i s admi ssi bl e resul t 27 i n enhancement of the profi t of the el i gi bl e bu si ness and that deducti on under chapter VI A is admi ssi bl e on the profi ts so i ncreased by the di sal l o wance.
45. In the present case di sal l o wance made u/s 36( 1) ( i i i ) amounti ng to Rs.17,89,503/- has been uphel d by us and the sa me bei ng rel ate d to the busi n ess acti vi t y resul ti ng i n enhancement of the busi ness profi ts of the assessee, the assessee i s enti tl ed to cl ai m deduction u/s 80I C of the Act on account of enh anced profi ts at t he el i gi bl e rates i n vi e w of t he CBD T Ci rcul a r as above. We, therefore, di rect the Assess i ng Offi cer to gr ant benefi t to th e assessee of the sai d Ci rc ul ar of the CBD T and c ompute t he taxabl e profi ts thereafter. I n vi e w of the same, ground N o.7 rai sed by the assessee stands al l o wed.
46. I n t he r e s u l t, t he a p p e a l o f t h e as s e s s e e i s p a rt l y allowed.
O r d e r p r on o u n c ed i n t h e o p e n cou r t .
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 12 t h June, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh