ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -1(2), SURAT vs. M/S. DESIRE JEWELLERY, SURAT

Assessee by Shri Sapnesh R Sheth, CA Revenue by Shri Deependra Kumar, Sr-DR Date of hearing 27.10.2021 Date of pronouncement 01.11.2021 Order under section 254(1) of Income Tax Act PER PAWAN SINGH, JUDICIAL MEMBER: 1. This appeal by revenue is directed against the order of ld. Commissioner of Income tax (Appeals)-2 Surat dated 14.08.2017 for assessment year (AY) 2013-14. The Revenue has raised the following grounds of appeal:- “1. Whether on the fact and circumstances of the case and in law, the Ld. CIT(A) was justified in deleting the disallowance made by the Assessing Officer by invoking provisions of Section 80(IA)(10) 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 facts and circumstances of the case and in law, the CIT(A) is justified in not appreciating the fact that buy 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?

2. Brief facts of the case are that assessee is a partnership firm engaged in manufacturing and export of diamonds studded jewellery in Special Economic M/s Desire Jewellery Zone (SEZ). The assessee filed its return of income for AY 2013-14 on 07.09.2013 declaring nil income. In the computation of income, the assessee claimed deduction under section 10AA of the Income Tax Act, 1961 (in short ‘the Act’) of Rs.3.37 crores. On perusal of record, the Assessing Officer noted that assessee has not claimed interest on capital contribution and remuneration to its partners from the business income. The Assessing Officer issued show cause notice, for allowance of remuneration to the partners and interest to their capital contribution. The assessee filed its reply dated 18.03.2016. The contents of the reply is extracted in para-2.1 in assessment order. In reply, the assessee claimed that the partners had not claimed interest on their capital interest and remuneration and that similar treatment was accepted in earlier years. For the day-to-day affairs of firm, the assessee has paid salary to their Manager so there is no need to claim notional expenses in profit and loss account and accordingly no such expenses on account of remuneration and interest on capital contribution of partners claim. The explanation furnished by the assessee was not accepted by the Assessing Officer. The Assessing Officer by invoking the provision of Section 80IA(10) worked out the remuneration and interest on capital contribution of Rs.2,08,76,390/- in the following manner:- Name of the partner Amount of allowable remuneration Allowable interest to the partners to the partner computed as per of the firm on their capital @ section 40(b) interest is 12% per annum 4867323/- 19256/- Shri Sailesh P Lukhi ITA No.187/SRT/201 M/s Desire Jewellery 4867323/- 142737/- Shri Nandesh P Lukhi 4867323/- 392238/- Smt. Jalapa S Lukhi 4867323/- 852867/- Smt. Neeeta N Lukhi A+B = 2087631/- Total 3. The A.O. thereby restricted the eligible deduction to the extent of Rs.1,28,29,529/-. Aggrieved by the disallowance on account of partners remuneration and interest on capital contribution the assessee field appeal before Ld. CIT(A). Before Ld. CIT(A) the assessee made detailed written submission. Detailed written submission of the assessee is recorded in para-5 of the order of Ld. CIT(A). In the written submission, the assessee stated that assessee is deriving income from manufacturing activity and claimed deduction under section 10AA of the Act of Rs.3.37 crores. The assessee has not debited interest on partners’ capital contribution and remuneration as partnership deed does not provide such provision for payment of interest and remuneration to partners. The Assessing Officer issued show cause notice on the basis of order of co-ordinate Bench of Rajkot Bench in the case of ACIT vs. Meridian Impex (37) Taxmnann.com 22 (2013). In reply to show cause notice, assessee is specifically contended that interest and remuneration of partners are not claimed by the assessee as the same is not authorized by or not in accordance with terms of partnership deed. The assessee also relied on the CBDT Circular No.739 of 1996 dated 25.03.1996, wherein it was clarified that no deduction under section M/s Desire Jewellery 40(b)(v) will be admissible unless partnership deed either specified the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. The assessee has shown their partnership deed that there is no such interest or remuneration is payable to the partners. The assessee also stated that Assessing Officer cannot compel the assessee to charge interest and remuneration by invoking the section 40(b)(v) of the Act well it is not mandatory but discretionary for the assessee who have made such claim. The Ld. CIT(A) after considering the submission of the assessee, contents of the partnership deed and decision of Hon'ble jurisdictional High Court in the case of Pr. Commissioner of income Tax vs. Alidhra Taxspin Engineers Tax Appeal No.265 of 2017 dated 02.05.2017, wherein it was held merely incorporation of interest on partners’ capital account and remuneration does not signify that same are in mandatory in nature. The Ld. CIT(A) also relied upon the order of ITAT Ahmedabad Benches in the case of M/s Al Reza Food vs. ITO Ward-2(4) Bhavnagar 2017 (3) TMI 1237 – ITAT Ahmedabad and directed the Assessing Officer to delete the disallowance made by the Assessing Officer for restricting the claim under section 10AA of the Act. aggrieved by the order of Ld. CIT(A) the Revenue has filed appeal before the Tribunal. M/s Desire Jewellery 4. We have heard the submissions of Ld. Senior Departmental Representative (DR) for the Revenue and Ld. Authorized Representative (AR) for the assessee. The ld. Sr. DR for the Revenue submits that ld. CIT(A) has not appreciating the fact in proper manner. The deduction under section 10AA of the Act is allowable on net income and not on gross income. The assessee has deliberately not incorporated such clauses in the partnership deed. The Assessing Officer has rightly apply the provision of section 80IA(10) by bringing the fact on record that assessee has made arrangement in the partnership deed which does not provide for interest or remuneration to the partners, which resulted in excessive profit of eligible business. The Ld. Sr. DR prayed for restoring the order of Assessing Officer.