DEPUTY COMMISSIONER OF INCOME TAX , , JABALPUR vs. ANAND MINING CORPORATION , KATNI

IN THE INCOME TAX APPELLATE TRIBUNAL JABALPUR BENCH, JABALPUR BEFORE SHRI SANJAY ARORA, HON‟BLE ACCOUNTANT MEMBER & SHRI MANOMOHAN DAS, HON'BLE JUDICIAL MEMBER I.T.A. No. 79/JAB/2022 (Asst. Year: 2016-17) Dy. CIT, Central Circle, vs. Anand Mining Corporation, Jabalpur. Yash Tower, Pathak Ward, Katni (MP) [PAN : AAGFA 0187 Q] (Appellant) (Respondent) Appellant by : Shri Shiv Kumar, Sr. DR Respondent by : Shri Dhiraj Ghai, FCA Date of hearing : 09/11/2022 Date of pronouncement : 11/11/2022

O R D E R Per Sanjay Arora, AM: This is an Appeal by the Revenue agitating the Order by the Commissioner of Income Tax (Appeals)-3, Bhopal („CIT(A)‟, for short) dated 20/04/2022, allowing the assessee‟s appeal contesting the processing of it‟s return of income for Assessment Year (AY) 2016-17 vide Intimation under section 143(1) of Income Tax Act, 1961 („the Act‟ hereinafter) dated 21/04/2017. 2. The brief facts of the case are that the assessee, a partnership firm, filed it‟s return of income for the relevant year on 17/10/2016 at an income of Rs. 709.60 lacs, which was processed u/s. 143(1) of the Act at an income of Rs. 899.07 lacs. The difference, i.e., Rs. 189.47 lacs, as detailed in the annexure (copy on record) accompanying the Intimation (copy on record), was in respect of partner‟s remuneration. The assessee, in appeal, explained that one of the partners, Shri Sanjay Pathak s/o Sh. Satyendra Pathak, who was the only working partner in the 1 | P a g e

ITA No. 79/JAB/2022 (AY 2016-17) Dy. CIT v. Anand Mining Corporation firm at the time (PB pgs. 44-48), retired w.e.f. 25/8/2015, vide deed dated 26/8/2015 (PB pgs.32-34). His remuneration was, accordingly, provided by the assessee-firm only up to 25/8/2015, by preparing two profit & loss accounts for the relevant previous year, i.e., from 01/4/2015 to 25/8/2015 (P1) and from 26/8/2015 to 31/3/2016 (P2), determining the net profit, i.e., prior to the partners‟ remuneration, for each, at Rs. 314.28 lacs and Rs. 526.38 lacs for P1 and P2 respectively (PB pg.9). Remuneration allowed to the retiring partner at Rs. 189.47 lacs on the profit for the first period (P1), in terms of Clause 2 of the partnership deed dated 01/04/2011, subject to the monetary limit specified u/s. 40(b), was claimed u/s. 37(1). However, as presumably his name did not appear in the names of the partners as on 31/03/2016, the year-end, in the tax audit report for the relevant year (PB pgs.21-31), the same was disallowed. The ld. CIT(A) has, discussing these facts, allowed the assessee‟s claim on that basis. Aggrieved, the Revenue is in appeal, raising the following Grounds:- 1. Whether on the fact and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting addition of Rs. 1,89,47,097 made by the Dy. CIT (CPC) on account of disallowance of remuneration paid to partner, Shri Sanjay Pathak.

ITA No. 79/JAB/2022 (AY 2016-17) Dy. CIT v. Anand Mining Corporation Remuneration shall be paid to the working partners profit ratio to be worked out as under: (1) In case book profit is negative Rs. 1,50,000 (2) In case book profit is positive On first Rs. 3,00,000 of book-profit Rs. 1,50,000 or 90% of book profit, whichever is more. (3) On the balance of the book-profit 60% of book-profit. Explanation: For the purpose of this clause, the book profit shall mean the “BOOK PROFIT” as defined in section 40(b) of the Income Tax Act, 1961 or any statutory modification or reenactment thereof for the time being in force. The remuneration is payable to the working partner shall be credited to his account on ascertainment of book profit. It is thus clear that the firm has incorporated the terms of section 40(b), providing for the maximum amount of remuneration payable to the working partners of a partnership firm with reference to it‟s „book-profit‟, as defined therein, in the partnership deed itself for quantifying the said remuneration. As the same is thus based on book-profit, the firm prepared two profit & loss accounts, i.e., for the period up to the date of retirement (P1), and thereafter (P2), computing the remuneration to the working partner separately for each period, i.e., for settling the accounts between the partners, even as it filed, as is required to by law (s.184 r/w ss. 187 to 189), one return of income for the entire year. It is nobody‟s claim that the remuneration allowed is not in terms of the partnership deed, or exceeds the maximum sum stipulated under law (s. 40(b)). Sure, being only a case of change of constitution of the firm during the year, and not it‟s dissolution, preparation of two profit & loss accounts was not required, and does not have the sanction of law. A consolidated profit & loss account for the year was required to be prepared, which profit or loss is to be then appropriated amongst the partners, including remuneration as well as interest payable thereto, which is only their business income assessable u/s. 28(v), in terms of the partnership deed. Reference in this context be made to the decision in CIT v. Ashokbhai Chimanbhai [1965] 56 ITR

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ITA No. 79/JAB/2022 (AY 2016-17) Dy. CIT v. Anand Mining Corporation 42 (SC), wherein it stands explained that profits do not accrue from day to day or even from month to month, and have to be ascertained by a comparison of assets at two stated points. Unless the right to profit comes into existence, there is no accrual of profit, and the destination of profits must be determined by the title thereto on the day on which they arise. The concept of accrual of the profits of a business involves their determination by the method of accounting at the end of the accounting year or any shorter period determined by law. The appropriation of profit between the partners is to be in the terms of the partnership deed which, in case of it being silent thereon, as appears to be case inasmuch as some of the clauses of the earlier deeds (not on record) have been incorporated, could be on any cogent basis. The allocation by the firm in the instant case for P1 is at 37.39% (of the total profit for the year), as against at 40.27% if the said profit is allocated on time (147/365) basis. The remuneration to the retiring partner, Sanjay Pathak, would therefore work to a still higher amount if such a method was adopted. Coming back to the Revenue‟s objection, the same is based on book-profit which, as afore-stated, is to be worked out for the entire year and, further, the remuneration allowed to the retiring partner is only up to the date of his retirement, i.e., with reference to profit relatable to the period for which he was a partner. Working, for which the partner is to be remunerated, being a function of time, we find the same as a valid basis. What, then, we wonder is the controversy about, to which no answer could be provided during hearing by Sh. Kumar? We accordingly find no substance in the Revenue‟s case.

3.2 Before parting with our order, we consider it appropriate to state that no document evidencing the retirement of Shri Sanjay Pathak, i.e., in terms of section 32 read with section 72 of the Indian Partnership Act, 1932, which concern the need to, and the manner of, public notice, in case of retirement of a partner from a partnership firm, has been placed before us as also, as apparent, before the ld. CIT(A); his order being sans any reference thereto. The same, however, would

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ITA No. 79/JAB/2022 (AY 2016-17) Dy. CIT v. Anand Mining Corporation only impact the liability of the retiring partner vis-a-vis the obligations of the firm to third parties, and has no bearing on the instant case, which relates to the deductibility of the remuneration allowed to the retiring working partner up to the date of his retirement, and no further, and qua which the relevant facts are not in dispute. 3.3 We, in view of the foregoing, decline interference. We decide accordingly. 4. In the result, the Revenue‟s appeal is dismissed. Order pronounced in open Court on November 11, 2022 Sd/- Sd/- (Manomohan Das) (Sanjay Arora) Judicial Member Accountant Member Dated: 11/11/2022 vr/- Copy to: 1. The Appellant: Dy. CIT, Central Circle, Jabalpur. 2. The Respondent: Anand Mining Corporation, Yash Tower, Pathak Ward, Katni (MP) 3. Principal CIT, Central, Bhopal. 4. CIT(A)-3, Bhopal. 5. The Sr.D.R., ITAT, Jabalpur. 6. Guard File. By order

(VUKKEM RAMBABU) Sr. Private Secretary, ITAT, Jabalpur.

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