C/TAXAP/818/2019 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD R/TAX APPEAL NO. 818 of 2019 With R/TAX APPEAL NO. 819 of 2019 With R/TAX APPEAL NO. 820 of 2019 With R/TAX APPEAL NO. 874 of 2019 With R/TAX APPEAL NO. 875 of 2019 With R/TAX APPEAL NO. 788 of 2019 With R/TAX APPEAL NO. 798 of 2019 With R/TAX APPEAL NO. 805 of 2019 PRINCIPAL COMMISSIONER OF INCOME TAX, SURAT-1 Versus M/S KIRAN JEWELLERY Appearance: MRS KALPANAK RAVAL(1046) for Appellant(s) No. 1 for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE J.B.PARDIWALA and HONOURABLE MR. JUSTICE BHARGAV D. KARIA Date : 20/01/2020 COMMON ORAL ORDER (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) 1. Since questions of law as proposed by Revenue in all captioned tax appeals are same, those were heard analogously and are being disposed of by this common order. 2. For sake of convenience, Tax Appeal No.818 of 2019 is treated as lead appeal. 3. This tax appeal under Section 260A of Income Tax Act, 1961 (for short Act, 1961 ) is at instance of Page 1 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER Revenue and is directed against order passed by Income Tax Appellate Tribunal, Surat Bench, Surat in ITA No.193/Srt/2017 for A.Y.2011-12. 4. Revenue has proposed following questions as substantial questions of law arising in this appeal. 1(a) Whether on facts and circumstances of case and in law, Hon'ble ITAT's order is correct when in fact exemption u/s. 10AA of IT Act should be based on total income to be computed as per provisions of section 29 to 43D of Act, after allowing all eligible deductions whether or claimed suo-moto by assessee or not? 1(b) Whether on facts and circumstances of case and in law, Hon ble ITAT is right in upholding decision of Ld. CIT(A) in deleting disallowance made by Assessing Officer without appreciating that assessee firm had taken undue benefits of section 10AA of Act by not claiming interest on Capital and Remuneration which resulted into increase in exempt profit of assessee-firm? 2(a) Whether on facts and in circumstances of case and in law, decision of Hon ble ITAT is perverse in upholding decision of Ld.CIT(A) in deleting disallowance made by Assessing Officer without ascertaining facts as narrated by Assessing Officer in as much as there was partnership deed by which firm was constituted on 10.07.2007 and same was modified after receiving LOA from office of Development Commissioner, SEZ by their letter dated 30.08.2007 by amendment in partnership deed on 01.04.2010 by not providing payment of interest & remuneration to partners by specially inserting clause for non-payment? 2(b) Whether on facts and in circumstances of case and in law, Hon ble ITAT s order is perverse in ignoring important facts which clearly indicate dubious method adopted by assessee which cannot be allowed in view of judgment of Hon ble Supreme Page 2 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER Court in case of Mac Dowel! & Company Vs CIT(154 ITR 148) ? 5. assessment order under Section 143(3) read with Section 147 of Act for A.Y. 2011-12 was passed on 31st March, 2016, determining total income of assessee at Rs.95,05,14,050/- after making addition on account of disallowance and deduction under Section 10AA of Act. assessee had claimed deduction under Section 10AA of Act in each assessment year as under; For Deduction claimed (in Rs.) A.Y. 2011-12 Rs.1,37,57,13,846/- A.Y.2012-13 Rs.1,47,67,42,521/- A.Y.2013-14 Rs.41,88,69,352/- A.Y.2014-15 Rs.56,96,25,581/- 6. Assessee, being dissatisfied with assessment order passed by Assessing Officer, preferred appeal before CIT (A), Surat. CIT ((A), Surat allowed appeal of assessee and deleted addition made by Assessing Officer. CIT (A), while allowing appeal preferred by Assessee, held as under; 6.1.1. l have considered assessment order as well as submissions of appellant. Grounds of appeal- Ground No. 2 to 5 pertains to making additions and disallowances on grounds other than grounds/reasons on which reopening was made and since no additions were made based upon reasons recorded, entire reassessment proceedings are rendered invalid and needs to be quashed and resorting to provisions of section 80(IA)(10) r.w.s. 10AA(9) and thrusting interest and remuneration payment to partners and consequently reducing deduction claimed u/s 10AA to tune of Rs. 89,56,39,225/-. appellant derived income from manufacturing activity and claimed Page 3 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER deduction u/s 10AA of Rs. 1,37,57,13,846/-. AO found that appellant has not claimed interest and remuneration to partners from business income and supplementary partnership deed executed on 10.07.2007 does not provide any provision for payment of interest and remuneration to partners. AO relying on judgment in case of Meridian Impex 37 taxmann.com 22(2013) by ITAT Rajkot Branch, held that interest and remuneration to partners are allowable though it has not been claimed in partnership deed. AO held that non charging of interest on invested capital and no remunerations for working partners has been done to enhance profit of appellant concern which is exempt from taxation and reduce taxable income of individual partners to same extent. AO held that partnership deed itself is vehicle of collusive tax avoiding action and relying on Meridian Impex (supra) calculated payment of interest and remuneration to partners and amount of Rs. 896973755/- was excluded from deduction u/s 10AA of Act. AO had restricted claim of deduction u/s 801A(10) to tune of Rs.48,00,74,621/- as against total claim of deduction of Rs.1,37,57,13,846/- on account of interest to partners and partners remuneration. appellant submitted that AO s finding is incorrect as it was clearly mentioned in supplementary partnership deed that no partner is eligible for interest on capital as well as remuneration. 6.1.2. On perusal of details, it is observed that as per Partnership Deed appellant has not debited interest and remuneration to partners as supplementary partnership deed does not provide any provision for payment of interest and remuneration to partners. main contention of appellant is that interest and remuneration of partners are not claimed by appellant as same was not authorized by or is not in accordance with terms of partnership deed. appellant has relied on circular No.739 dated 25.03.1996 wherein CBDT has clarified that no deduction 40(b)(v) of Act will be admissible unless partnership deed either specifies amount of remuneration payable to each individual working partner or lays down manner of quantifying such remuneration. clause of Partnership Deed specifically restricts payment of Interest to Partners on Page 4 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER their Capital as well as Remuneration to Partners. This is main reason why appellant has not claimed both expenses against Business Income shown in Income Tax Return. 6.1.3. AO has mainly relied in case of Meridian Impex (supra) to disallow interest on capital partner remuneration but facts in this case of Meridian Impex (supra) was different as there was specific clause regarding payment interest on capital and partners remuneration in original partnership Deed submitted at time of scrutiny assessment and supplementary deed was made amending clause regarding non-payment of interest on capital remuneration to partners. This supplementary deed was not submitted before AO during assessment proceedings. In instant case, Partnership deed itself does not have any clause pertaining to payment of interest and remuneration ton partners. 6.1.4. This issue came up for consideration before jurisdictional ITAT Bench, Ahmedabad, in case of M/s Sagar Foods and Shreeji Dehydrate Export, 2017 (3) TMI 1297. Hon ble Bench, in its order dated 22.02.2017, held that AO could not have compelled appellant to charge interest or remuneration by invoking section 40(b)(v) of Act. Similarly in case of M/s Al Reza Food verses ITO, Ward-2(4), Bhavnagar 2017 (3) TMI 1237 - ITAT Ahmedabad similar view was taken relying on judgment in case of M/s Sagar Food and Shreeji Dehydrate Exports verses ITO, Wd-2(4), Bhavnagar. In recent decision of Hon, Gujarat High Court in 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 same are mandatory in nature. These decisions of jurisdictional high Court and ITAT Bench Ahmedabad are squarely applicable in this case of appellant appellant has not charged any interest and remunerations as per Partnership Deed and therefore, appellant cannot be compelled to charge interest or remuneration. 6.1.5. In view of above facts, disallowance made by AO on account of non provision of interest and remuneration of 10AA deduction is erroneous and Page 5 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER incorrect in law and facts. partnership deed clearly lays down that no interest and remuneration is payable and therefore addition made by AO is deleted and grounds of appeal is allowed. 6.2.1. Grounds of appeal-Ground No. 1 pertains to reopening assessment proceedings u/s 148 r.w.s 147 where reason so recorded clearly established that no new information had come in possession of department and whatever reasons were recorded were merely retaliation of information already available with department from day one and reason were merely guise to investigate further and clearly against established judicial principles in this regard and therefore entire reassessment proceedings needs to be quashed. case was reopened u/s 147 of Act and notice u/s 148 was issued on 26.12.2013 which was served on appellant on 13.1.2014. appellant filed return of income on 21.1.2014 in compliance to notice u/s 148 of Act. reasons for reopening was provided to appellant and appellant had filed objections of reopening which was disposed of by AO vide his letter dated 11.03.2016. Since, addition made by AO has already been deleted while adjudicating ground no 2 to 5 above from para 6.1.1 to 6.1.5, therefore this ground become infructuous and is not being adjudicated. 6.3.1. Grounds of appeal- Ground No. 6 pertains to learned AO is not justified in initiating penalty proceedings u/s 271(1)(c) as no inaccurate particulars of income have been furnished by your appellant. This ground is premature at this stage. 7. Revenue, being dissatisfied with order passed by CIT (A), went in appeal before Appellate Tribunal. Tribunal, while dismissing appeal preferred by Revenue, held as under; ''1 Considering totality of facts and in light of above decision of Tribunal in case of Ruta Jewels (supra). We find that in present case, assessee firm has not charged any interest and remuneration as per partnership deed does not prescribed so, therefore, Page 6 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER assessee firm cannot be compelled to charge interest or remuneration. Therefore, we are inclined to hold Ld. ClT(A) was right in observing that disallowance made by AO on account of non provision of interest and remuneration of cannot be disallowed under section 1OAA(9) of Act. Hence, disallowances so made by AO are found to be erroneous arid incorrect in law and facts as in peculiar facts of present case partnership deed clearly lays down that no interest and remuneration is payable and hence, CIT(A) was right in deleting disallowance made by AO on account of non-provision of interest and remuneration from amount of deduction under section 80lA(10) read with section 1OAA(9) of Act. We further observed that issue is covered by decision Co-ordinate Bench of ITAT Surat in favour of assessee in case of Ruta Jewels (supra) and no reason to deviate with finding of Ld. CIT(A), accordingly same is upheld. Thus, grounds of appeal of Revenue are dismissed. We are unable to see any valid reason to interfere with order of learned CIT (A) it and thus, we confirm same. Accordingly, all grounds of appeal of Revenue are dismissed. 8. Thus, Tribunal concurred with finding recorded by CIT (A) that assessee firm had not charged any interest and remuneration in accordance with partnership deed and, in such circumstances, assessee firm cannot be compelled to charge interest or remuneration, more particularly, when partnership deed does not prescribe for same. Tribunal concurred with finding recorded by CIT (A) that disallowance made by AO on account of non provision of interest and remuneration could not have been disallowed under Section 10AA(9) of Act. issue stands squarely covered by decision of this Court in case of Principal Commissioner of Income Tax vs. Alidhara Taxspin Engineers & Anr. rendered in Tax Appeal No.265 of 2017 dated 2nd May, 2017. We quote para-4 of said decision; Page 7 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 C/TAXAP/818/2019 ORDER We have heard Shri Sudhir Mehta, learned advocate appearing on behalf of revenue. On interpretation of partnership agreement and considering wish of partners reflected in partnership deed, not to pay/charge interest on partners capital and remuneration, learned tribunal has rightly deleted disallowance made by Assessing Officer with respect to deduction claimed under Section 80IB of Income Tax Act. As rightly observed by learned tribunal, mere incorporation of interest on partners capital and remuneration does not signify that same are mandatory in nature. We concur with view taken by learned tribunal. We see no reason to interfere with impugned judgment and order passed by learned tribunal. No substantial questions of law arise in present Tax Appeal. present Tax Appeal deserves to be dismissed and is accordingly dismissed. 9. This Court had occasion to consider Alidhara Taxspin Engineers (supra) while deciding batch of appeals being Tax Appeal Nos.165 of 2019 to Tax Appeal Nos. 168 of 2019, decided on 24th June, 2019. 10. Applying dictum as laid in Alidhara Taxspin Engineers (supra), we are in complete agreement with findings recorded by Tribunal in impugned order. In such circumstances, referred to above, in our opinion, none of questions, as proposed, could be termed as substantial questions of law involved in present tax appeals. 11. In result, all tax appeals fail and are hereby dismissed. (J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) Vahid Page 8 of 8 Downloaded on : Thu Jan 23 10:31:08 IST 2020 Principal Commissioner of Income-tax, Surat v. Kiran Jewellery