BHARATNAGAR BUILDCON LLP (FORMERLY KNOWN AS ABIL BUILDCON LLP),PUNE vs. PRINCIPAL COMMISSIONER OF INCOME-TAX -2, , PUNE

आदेश / ORDER

PER R.S. SYAL, VP :

This appeal by the assessee is directed against the order dated

17-03-2021 passed by the Chief Commissioner of income-tax

(CCIT) u/s.263 of the Income-tax Act, 1961 (hereinafter also called

‘the Act’) Act in relation to the assessment year 2016-17.

filed an affidavit stating the reasons of corona infection, which led

to the late filing. The ld. DR did not seriously object to the delay.

Therefore, the delay is condoned and the instant appeal is admitted

for disposal on merits.

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its return declaring total income at Rs.78,29,61,960/-. The return

was selected for Limited scrutiny through Computer Aided Scrutiny

Selection (CASS). After certain notices and compliance by the

assessee, the Assessing Officer (AO) completed the assessment

u/s.143(3) of the Act at the returned income vide his order dated

26-12-2018. On perusal of the assessment record, the ld. CCIT held

the assessment order to be erroneous and prejudicial to the interest

of the Revenue on two scores viz., (1) the issue of cost of

acquisition of the debentures transferred by the assessee was not

looked into by the AO and (2) that the assessee wrongly claimed

deduction towards the Remuneration to partners anent to its income

from long term capital gain. Eventually, he set-aside the assessment

order and directed the AO to make the assessment afresh.

Aggrieved thereby, the assessee has come up in appeal before the

Tribunal.

relevant material on record. The first point taken note of by the ld.

CCIT is that the assessee wrongly computed the income under the

head “Capital gains” by considering the cost of acquisition of

debentures at Rs.56.00 crore. He noticed that the debentures were

acquired only for Rs.50.00 crore but the assessee capitalized a sum

3 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

of Rs.6.00 crore towards interest paid on loans. The act of the AO

in accepting the cost of acquisition at Rs.56.00 crore was held to be

a raison d’etre for the revision.

31-03-2012 and depicted the amount of Rs.50.00 crore as

`Investment’ in its balance sheet. The position remained as such for

the next year as well. However, in the financial year ending

31-03-2014, the assessee increased the cost of acquisition of

debentures to Rs.56.00 crore from the original Rs.50.00 crore by

capitalizing the amount of interest of Rs.6.00 crore paid. The

money required for purchasing the debentures was originally

introduced by one of the partners in the partnership firm. However,

in the financial year ending 31-03-2014, the said partner wanted his

money back. The assessee firm borrowed funds for repaying

Rs.50.00 crore to the partner. It is on such borrowing, that the

assessee had to pay interest of Rs.6.00 crore, which was capitalized

to the debenture account in its balance sheet dated 31-03-2014 and

not claimed as deduction. The same position continued in the

balance sheet as on 31-03-2015. It is during the year under

consideration, namely, financial year ending 31-03-2016, that the

assessee sold the debentures and reduced the amount of investments

shown in the balance sheet at Rs.56.00 crore from the full amount of

4 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

consideration for computing the amount of long term capital gain.

It is ostensible that the assessee never claimed deduction towards

interest of Rs.6.00 crore in the past, but capitalized it to the value of

investment initially acquired at Rs.50.00 crore. Naturally, when the

debentures were sold in the year under consideration, the amount of

interest capitalized along with the purchase cost, was also liable to

be deducted from the full value of consideration for computing the

amount of long term capital gain. It is this principle of law which

was followed by the AO in the computation of capital gain. In fact,

the interest cost was capitalized in an earlier year and represented a

part of the opening balance of debentures for the year under

consideration. Ergo, the opinion canvassed by the ld. CCIT that the

interest of Rs.6.00 crore could not have been added to the cost of

debentures, in our considered opinion, is not tenable. We, therefore,

set-aside the impugned order on this score.

wrongly claimed deduction towards remuneration to partners

amounting to Rs.22.50 crore with reference to Long term capital

gain offered on sale of debentures, which was not allowable in

terms of section 40(b)(v) of the Act.

was selected for Limited scrutiny (CASS) and the reason assigned

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for such scrutiny, as reproduced in notice dated 11-07-2017

u/s.143(2) by the AO, is: “Whether capital gains/loss is genuine

and has been correctly shown in the return of income”. We have

gone through the computation of income furnished by the assessee

along with the return of income. In this computation, income under

the head “Profits and gains of business or profession” has been

depicted at a loss of Rs.22,51,06,820/- by starting the computation

with the `Net profit before tax as per the Profit and loss account’ at

Rs.78,48,93,180/-. The Profit and loss account shows gross income

at Rs.101.00 crore. Thereafter, deductions towards Operating and

other expenses at Rs.1,06,820/- and Remuneration to partners at

Rs.22.50 crore have been made, thereby computing the amount of

Net profit at Rs.78.48 lakh. It is this figure, which is the starting

point for calculating the income under the head “Profits and gains

of business or profession”. Coming back to the computation of

income, the second head is “Capital gains”, under which Long term

capital gain has been computed at Rs.101.00 crore. It is this figure

of Rs.101.00 crore which has been taken to the Profit and loss

account as the only income item. Schedule-2 to the computation of

income deciphers the determination of income under the head

“Long term capital gain” by showing the sale consideration of

unlisted debentures/bonds at Rs.157.00 crore with the cost of

6 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

acquisition at Rs.56.00 crore, giving net figure of taxable capital

gain at Rs.101.00 crore. The AO accepted the returned income as

such. The ld. CCIT, too, has not disputed the correctness or

genuineness of the income from “Long term capital gain” at

Rs.101.00 crore. His entire focus has been on the grant of

deduction towards remuneration to partners at Rs.22.50 crore,

which, in his opinion, was not deductible in view of income under

the head “Profits and gains of business or profession” being Nil.

solitary issue identified for examination can be divided into two

limbs. The first, whether capital gains/loss is genuine and the

second, whether it has been correctly shown in the return of income.

The ld. CCIT has not disputed the genuineness of capital gain

shown by the assessee at Rs.101.00 crore. Thus, the first limb of

the reason for limited scrutiny is through. The second limb is as to

whether the capital gain “has been correctly shown in the return of

income”. Again, it is seen from the computation of income and is

not disputed that the assessee did correctly show income of

Rs.101.00 crore under the head “Capital gains”. It, therefore,

clearly brings out that both the limbs of the reason for the limited

scrutiny, viz., whether the capital gains/loss is genuine and whether

such capital gain has been correctly shown in the return of income,

7 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

have successfully passed the scrutiny by the ld. CCIT as well, who

chose not to offer any adverse comment thereon.

remuneration to partners at Rs.22.50 crore because there was Nil

income from operations. The ld. DR meticulously pointed out that

since inception from A.Y. 2012-13, the assessee did not carry out

any business activity till the assessment year under consideration.

This decodes that the assessee was not engaged into any business

activity and claimed remuneration to partners with reference to the

income shown as “Long term capital gains”.

with the heading `Amounts not deductible’ opening with a non-

obstinate clause anent to sections 30 to 38. It provides that the

amounts covered under this section shall not be deducted in the

computation of income chargeable under the head “Profits and gains

of business or profession”. Clause (b) to section 40 deals with the

firms assessable as such. Sub-clause (v) of clause (b) of section 40

provides that “any payment of remuneration to any partner who is

working partner, which is authorized by, and is in accordance with

the terms of the partnership deed and relates to any period falling

after the date of such partnership deed insofar as the amount of such

payment to all the partners during the previous year exceeds the

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aggregate amount computed as hereunder. . . . . .”. As per the

command of this provision, the remuneration allowable to partners

is to be computed with reference to the “book-profit”. Explanation

3 to section 40(b) defines the term “book profit” to mean `the net

profit, as shown in the profit and loss account for the relevant

previous year, computed in the manner laid down in Chapter IV-D

as increased by the aggregate amount of the remuneration paid or

payable to all the partners of the firm if such amount has been

deducted while computing the net profit’. On a consideration of the

relevant parts of section 40(b), it is manifested that the remuneration

to the partners is allowable with reference to book-profit and the

term book-profit means the net profit shown in the Profit and loss

account computed in the manner laid down in Chapter IV-D. The

Chapter exclusively deals with the income under the head “Profits

and gains of business or profession”. Since the opening part of

section 40 provides that the amounts enumerated herein shall not be

deducted in computing the income chargeable under the head

“Profits and gains of business or profession” and sub-clause (b) (iv)

read with Explanation 3 to section 40 provides for deduction of

remuneration only with reference to the book-profits computed in

the manner laid down in Chapter IV-D, the sequitur which follows

is that remuneration allowable to partners is to be computed with

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reference to the income chargeable under the head “Profits and

gains of business or profession” and not other incomes falling under

other heads, such as, Capital gains or Income from other sources.

Hon’ble Calcutta High Court, relied by the ld. AR, in Md.

Serajuddin & Brothers Vs. CIT (2012) 210 Taxman 84 (Calcutta)

providing that for purpose of computation of allowable

remuneration to partners, book-profits should be ascertained not

only with reference to income from business but also under other

heads, such as, Income from other sources. This judgment lays

down that the remuneration to partners should be computed with

reference to the income under all the heads and should not be

confined only to “Profits and gains of business or profession”. The

issue of remuneration to partners again cropped up before the

Hon’ble Rajasthan High Court in CIT Vs. Allen Career Institute

(2018) 403 ITR 375 (Rajasthan). In this later judgment, the

Hon’ble Rajasthan High Court took a view contrary from the one

taken by the Hon’ble Calcutta High Court and held that the

remuneration to partners should be computed only with reference to

the income falling under the head “Profits and gains of business or

profession” and no other head. This shows that when the

assessment order was passed u/s.143(3), there existed two views,

10 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

one in favour and the other against the assessee. None of the two

judgments is from the Hon’ble jurisdictional High Court. Out of the

two possible views, the AO followed the one in favour of the

assessee and allowed deduction towards remuneration to partners

with reference to the book-profits computed by considering the

income chargeable under the head “Capital gains”.

Limited Vs. CIT (2000) 243 ITR 83 (SC) has held that if two legally

sustainable views exist on a point and the AO adopts one of such

views, the CIT cannot revise the order on such a debatable issue.

We have noticed above that the case of the assessee was selected for

Limited scrutiny (CASS) and the scope of verification was confined

only to the genuineness of capital gain and its correct reflection in

the return of income. In that view of the matter, it is palpable that

the scope of the AO’s verification did not cover the issue of

remuneration to partners. Notwithstanding the fact that the AO did

not examine the issue of deduction towards remuneration to partners

in the assessment order because the same was not covered within

the scope of limited scrutiny, it is vivid that the issue of

remuneration to partners, being, confined only to the income under

the head `Profits and gains of business or profession’ is debatable

11 ITA No.284/PUN/2021 Bharatnagar Buildcon LLP

and hence falls outside the ambit of the scope of revision u/s.263 of

the Act.

converted ‘limited scrutiny’ into ‘complete scrutiny’ to cover the

aspect of remuneration to partners and this act of non-conversion

per se made the assessment order erroneous and prejudicial to the

interest of the Revenue. On a specific query, it was conceded that

the ld. CCIT in his order u/s.263, did not touch upon the issue of

converting ‘limited scrutiny’ into ‘complete scrutiny’. In our

considered opinion, the scope of arguments by the DR is restricted

to the issues decided in the impugned order. He cannot travel

beyond such issues and step into the shoes of the authority(ies)

which passed the order(s). Coming to the revision, the DR cannot

characterize the assessment order to be erroneous and prejudicial to

the interest of the Revenue on a new count other than those taken

note of in the revisionary order. Such an attempt, if allowed, would

clothe the DR with the power of revision, which obviously, is not

feasible. As the ld. CCIT did not make out any case of converting

‘limited scrutiny’ into ‘complete scrutiny’ as a ground for revision,

we are afraid that the contention of the ld. DR on this score cannot

be entertained. It is, therefore, held that the ld. CCIT was not

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justified in branding the assessment order erroneous and prejudicial

to the interest of the Revenue on this ground as well.

Order pronounced in the Open Court on 07th September, 2023.

Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 07th September, 2023 सतीश आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The respondent 2. 3. DR, ITAT, ‘A’ Bench, Pune गाड� फाईल / Guard file. 4.

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

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Date 1. Draft dictated on 05-09-2023 Sr.PS 2. Draft placed before author 06-09-2023 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *