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PER N.K. SAINI, VICE PRESIDENT
This is an appeal by the Assessee against the order dt. 18/02/2019 of Ld. CIT(A)Shimla, H.P.
Following grounds have been raised in this appeal:
That under the facts and circumstances notice u/s.154 is fatally defective, which makes the impugned order u/s.154 as illegal and unsustainable in law.
That under the facts and circumstances the issue of allowability of deemed interest paid ' payable to the partners as per deed of partnership, is a highly debatable issue and outside the scope of provisions of Sec.154 of the l.T. Act.
That without prejudice, under the facts, no interest is to be allowed to the partners in terms of partnership deed read with the relevant law applicable on the subject, hence the findings of the A.C). in order u/s.154 are contrary to law and facts.
That without prejudice, the Ld. A.O. further erred in law and on merits in giving only part treatment to his action by treating Rs.7,17,782/- separately as taxable income in the hands of assessee firm and thus by reducing the deduction u/s.80IC by Rs.7.1 7.782/-. while correctly, he was required to reduce the total assessable income of the assessee firm by Rs.7,17,782/-. in which situation, the balance income of the firm was eligible u/s.80IC leaving behind no tax liability in the hands of the assessee firm.
That under the facts and circumstances no proper and reasonable opportunity of hearing has been allowed.
Facts of the case in brief are that the assessee established an industrial unit during the year 2010-11 and date of commencement of production was 01/04/2010, so the year under consideration was the second year of the production of the assessee. The return of income was filed by the assessee on 30/09/2012 declaring a NIL income which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’). Subsequently the case was selected for scrutiny. The assessee produced books of account i.e; cash book, ledger alongwith bills and vouchers etc., which were test checked.
3.1 The A.O. asked the various information and details during the course of assessment proceedings which were furnished and examined with reference to the books of account by the A.O., who observed that the assessee furnished the various documents in support of its claim of deduction under section 80IC of the Act which was accepted as there was no change in the manufacturing as well as trading activity of the assessee.
3.2 The A.O. also observed while framing the assessment under section 143(3) of the Act vide order dt. 05/03/2015 that the assessee was having three partners namely Smt. Sonia Sahni, Smt. Archana Sahni and Smt. Pooja having equal share i.e; 33.33% each. The A.O. accepted trading results shown by the assessee which were verified with reference to the books of account and assessed the income returned at NIL. Thereafter the A.O. invoked the provisions of Section 154 of the Act and observed that the partners of the assessee were entitled to get interest @ 12% on their capital in terms of the partnership deed but no interest to the partners had been given and debited in the P&L Account on their credit balances of capital during the year relevant to the assessment year under consideration. The A.O. worked out the said interest @ 12% on the credit balances of capital of the partners as on 01/04/2011, at Rs. 7,17,782/-. The A.O. held that the aforesaid amount of Rs. 7,17,782/- was liable to be reduced from the deduction claimed under section 80IC of the Act. The A.O. computed the deduction under section 80IC of the Act at Rs. 15,21,957/- instead of R. 22,39,739/- claimed by the assessee.
Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under:
Asstt. Has been completed U/s 143(3) at returned income. Thereafter, Ld. A.O ahs observed that assessee has not paid any interest on capital to partners whereas partnership deed provided for payment of interest on capital @ 12% Ld. A.O. held that interest on capital of Rs. 7,17,782/- is to be allowed and deduction U/s 80IC is to be reduced by this amount. Hence, he made addition of Rs. 7,17,782/- by disallowing deduction U/s 80IC to this extent. The inference drawn by A.O. is unsustainable of the following submissions: A. At the outset, it is a debatable issue which is outside the preview of scope of Sec. 154. Further, sec. 154 can be invoked only in case of error apartment from record which is not the case here. B. Further, payment of interest on capital is not mandatory. As per partnership deed interest on capital can be given maximum @12%. However, nowhere it is mandatory to pay interest on capital. It is mutually exclusive decision of partners and Firm. C. Further, in the preceding year’s and succeeding year’s also assessee has not claim any deduction of interest on capital and has been accepted by Deptt. U/s 143(3)/143(1). Following documents are attached • Asstt. Order U/s 143(3) for AY 2013-14 • Balance sheet for A.Y. 2013-14 • Profit & Loss A/c for A.Y. 2013-14 D. Further without prejudice interestingly Ld. A.O. has held that interest on capital of Rs. 7,17,782/- is to allowed and deduction U/s 80IC is to be disallowed to this extent. However, in the income computation portion A.O has not reduced the profits but only disallowed the deduction U/s. 80IC correctly for argument stake only, if the version of the A.O. is to accepted then profits and consequentially deduction U/s. 80IC is to be reduced by Rs. 7,17,782/-. Hence this issue has no tax implication. Hence, disallowance of deduction U/s. 80IC by A.O. is not warranted.
4.1 The Ld. CIT(A) after considering the submissions of the Assessee observed that the Clause 13 & 14 in the partnership deed dt. 01/02/2009 provided as under :
"13 That each partner shall be entitled to draw a monthly salary from the partnership business. The amount of the salary may be increased/decreased by the partners from time to time with mutual consent.
That the partners will also be entitled to charge interest on the opening balance of capital as standing in their credit on the first day of April & 12% per annum."
4.2 The Ld. CIT(A) on the basis of the provision in the aforesaid clauses observed that the salary payable to each of the partners may be increased or decreased by mutual consent while there is no such similar wording in the clause pertaining to
payment of interest on the credit balances of the partners, therefore the contention of the assessee that the payment of interest was not mandatory was not based on correct facts. The Ld. CIT(A) referred to the decision of the Hon'ble Apex Court in the case of Plastibends India Ltd. Vs. Additional Commissioner of Income Tax, Mumbai [2017] 86 taxmann.com 137(SC) wherein the issue relating to deduction of depreciation which they wanted to utilize in the subsequent years was directed to be reduced from the profit. The Ld. CIT(A) upheld the action of the A.O. and did not accept this contention of the assessee that the income should also be recomputed, for the reason that the interest was never paid to the partners nor reflected by the partners as their income.
Now the assessee is in appeal.
Ld. Counsel for the Assessee reiterated the submissions made before the authorities below and further submitted that in the preceding year as well as succeeding year no such action of rectification was taken by the A.O. even when no interest was provided to the partners on their capital. It was further submitted that the issue relating to the providing of interest on the capital of the partners was a debatable, as the department has approved the action of the assessee for not providing the interest on the capital of the partners in the preceding and succeeding years.
It was stated that the interest clause in the partnership deed did not provide that the interest under all circumstances has to be provided, it was the option of the partners to claim interest or not and since the partners did not claim interest from the firm therefore it was not necessary to provide for interest. It was further stated that the debatable issues are outside the scope of Section 154 of the Act which covers within its ambits only such errors which are apparent from the records, hence there cannot be two opinions on such issue. The reliance was placed on the judgment of the Hon'ble Apex Court in the case of ITO Vs. Volkart Brothers And Ors. reported at 82 ITR 50 (SC).
It was also stated that the assessee is eligible for 100% deduction under section 80IC of the Act and that the A.O. who made the reduction of Rs. 7,17,782/- from the eligible profit was also required simultaneously to allow the deduction under section 80IC on this amount particularly when after this adjustment the
assessable income remained at NIL. It was further submitted that the decision relied by the Ld. CIT(A) was distinguishable on facts since the issue in the said case was relating to the charging of depreciation which is mandatory as per the provisions of section 32(1) of the Act and is a statutory deduction while the interest on capital of partners is an issue of agreement only between the partners. Moreover the Hon'ble Apex Court noted that the assessees in the said case wanted 100% deduction without taking into consideration the depreciation which they wanted to utilize in the subsequent years, however the interest on capital if forgone in this year cannot be claimed in subsequent years, therefore the case law relied by the Ld. CIT(A) was distinguishable on fact.
In her rival submissions the Ld. DR reiterated the observations made by the Ld. CIT(A) and strongly supported the impugned order. It was further submitted that the issue relating to non charging of the interest in the earlier and subsequent years was to be verified by the A.O. It was stated that the assessee claimed higher deduction under section 80IC of the Act by increasing the profit, therefore, the A.O. rightly considered the amount of Rs. 7,17,782/- as taxable particularly when this income as interest was not shown by the partners in their individual hand.
I have considered the submissions of both the parties and perused the material available on the record. In the present case it is not in dispute that the A.O. framed the original assessment under section 143(3) of the act vide order dt. 05/03/2015 after verifying the books of account vis a vis the bills & vouchers produced by the assessee. The A.O. allowed the deduction under section 80IC on the eligible profit of the industrial undertaking, the A.O. invoked the provisions of section 154 of the Act and reduced the deduction under section 80IC of the Act. by observing that the assessee did not charge interest on the opening balance of the capital contributed by the partners. However, in the preceding as well as succeeding years no such action was taken by the A.O. and the claim of the assessee was accepted for deduction under section 80IC of the Act, as such this issue pertaining to the charging of interest on the credit balances of the capital of the partners was highly debatable, therefore, the rectification made by the A.O. under section 154 of the Act was not justified and the Ld. CIT(A) wrongly upheld the action of the A.O. On merit also the A.O. accepted the profit of the assessee eligible for deduction under section 80IC of the Act. He himself computed the profit at Rs.
15,21,957/- which was allowable as deduction under section 80IC of the Act. Therefore in the present case the whole of the profit worked out by the A.O. at Rs. 15,21,957/- was to be allowed as deduction under section 80IC of the Act and no addition was called for.
8.1 As regards to the case law relied by the Ld. CIT(A) in the case of Plastiblends India Ltd. Vs. ACIT (supra) is concerned, it was distinguishable on facts. Since in the said case the assessee manipulated the profit by not charging the depreciation under section 32 of the Act and carry forwarded the said depreciation to be adjusted in the subsequent years. However in the present case the interest on the capital of the partners, if any, was not allowed to be carry forward in the subsequent years, if not charged in the year under consideration. Therefore the said case law relied by the Ld. CIT(A) was on different fact. In view of the aforesaid discussion and by considering the totality of the facts, I am of the view that the A.O. wrongly treated the income of Rs. 7,17,782/- as taxable in the hands of the assessee and the Ld. CIT(A) was not justified in upholding the action of the A.O..
In the result, appeal of the assessee is allowed.
(Order pronounced on 16/11/2021). Sd/- एन.के.सैनी, ( N.K. SAINI) उपा�य� / VICE PRESIDENT AG Date: 16/11/2021
आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :
अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File
1 Draft dictated 16/11/2021 P.S 2 Draft first placed before author 17/11/2021 P.S 3 Approved draft comes to Sr. PS/PS 25/11/2021 P.S 4 Final draft placed before author 25/11/2021 P.S 5 Order signed and pronounced on 6 File sent to the Bench Clerk 7 Date on which file goes to the AR 8 Date on which file goes to the Head Clerk 9 Date of dispatch of order