MEGATRENDS INC,CHENNAI vs. ACIT, CHENNAI

the Order of Commissioner of Income Tax (Appeals)-4, Chennai, in 2012-13/CIT(A)-4 dated 19.12.2016 for the AY 2012- 13 & Order of Commissioner of Income Tax (Appeals)-4, Chennai, in ITA No.85/2015-16/AY 2013-14/CIT(A)-4 dated 20.01.2017 for the AY 2013-

Mr. N.Madhavan, ACIT, represented on behalf of the Revenue and Ms.T.C.A.Sangeetha, Adv., represented on behalf of the assessee.

As both the appeals involved identical issues, the same are disposed off by this common order.

It was submitted by the Ld.AR that the assessee is a partnership firm which is doing trading and manufacturing industry. For the AY 2012- 13, the assessee had filed its return of income declaring total income of Rs.1,74,36,050/- and for the AY 2013-14, a taxable income of Rs.1,44,99,640/-. It was a submission that in the course of the assessment, the AO had examined the donations given by the assessee to various organizations and claimed weighted deduction u/s.35(1)(ii) of the Act. It was a submission that for the relevant Assessment Year, the disputed donations were in respect of Herbicure Healthcare Bio Herbal Research Foundation (in short “HHBHRF”), Kolkata and Community Rural Orient Service Society (in short “CROSS”), Guntur, for the AY 2012-13 and for the AY 2013-14 are related to M/s.School of Human Genetics and Population Health (in short “M/s.SHGPH”). It was a submission that for the AY 2012-13, the assessee had given donations of Rs.1.25 Crs to HHBHRF and Rs.25.00 lakhs to CROSS, totaling to Rs.1.50 Crs. and had claimed deduction u/s.35(1)(ii) of the Act to an extent of Rs.2,62,50,000/- . For the AY 2013-14, the assessee had given donation of Rs.1,45,00,000/- to M/s.SHGPH and had claimed deduction u/s.35(1)(ii) & 740/Chny/2017 :- 3 -: of the Act to an extent of Rs.2,53,75,000/-. The AO had received information that HHBHRF was providing accommodation entries and CROSS had specified that they were not eligible for deduction u/s.35(1)(ii) of the Act and that receipt had not been issued to the assessee for any donations received. For the AY 2013-14, in respect of M/s.SHGPH, it was noticed that the said organization was also providing accommodation entries. Consequently, the AO had disallowed the claim of deduction u/s.35(1)(ii) of the Act. For the AY 2013-14, the AO had also questioned the status of partnership firm in the case of the assessee on the ground that the partners of the smaller firm which were the partners in the assessee’s larger firm had not signed the Partnership Deed and consequently, the assessee could not be treated as partnership firm and that the assessee was also in the business of money lending and as the number of partners exceeds 10 partners, the assessee could not be treated as a partnership firm and liable to be treated as AOP.

On appeal, the Ld.CIT(A) confirmed the Assessment Order for the AY 2013-14 and for the AY 2012-13 enhance the assessment by treating the assessee as an AOP instead of partnership firm. It was a submission that the assessee was not in the business of money lending. It was also a submission that it was not necessary for the partners of the smaller partnership to sign the Partnership Deed of the assessee partnership in so far as the Partnership Deed of the smaller partners had authorized the managing partner to enter into partnership with other partnership firms & 740/Chny/2017 :- 4 -: which may be considered beneficial to the interest of the firm. The Ld.AR drew our attention to Partnership Deed of M/s.DCP Trading Co., more specifically Clause-10(G) found at Page No.6 of the Paper Book-2 so also the Clause-10(G) of the Partnership Deed in the case of M/s.Krupa Trading Co., which were two minor partnerships, which were found at partners 14 & 15 of the Partnership Deed of the assessee. It was a submission that in view of the decision of the Hon’ble Supreme Court in the case of Kylasa Sarabhaiah reported in 56 ITR 219 (SC), the smaller partnerships were entitled to become partners in the larger partnership. It was a submission that the Hon’ble Supreme Court has specifically held that “if the statutory conditions which qualify the appellants for registration were fulfilled, an arrangement between some of the partners of the appellants which binds them to distribute the profits under a stipulation which was not a part of the partnership agreement does not affected the right to claim registration of the partnership agreement”. It was a submission that the assessee was liable to be granted the registration as a partnership firm. It was a further submission that in respect of the donation, the assessee had given the donation on the basis of the pamphlets issued by the organization namely HHBHRF and CROSS as also M/s.SHGPH. It was a submission that the statement given by Mr.Swapan Ranjan Das Gupta of HHBHRF cannot be a basis for disallowing the donation in the case of the assessee in so far as such statement had not been put to the assessee for cross-examination.

In reply, the Ld.DR submitted that all the parties to the smaller firm had not signed the Partnership Deed of the assessee bigger firm. It was also a submission that the assessee was in the business of money lending and consequently, as the Partnership Deed showed more than 10 partners, the assessee was liable to be assessed as an AOP. In regard to the donations, it was a submission that the donation was given without verification of the credentials and the parties to whom the donations have been given and were clearly for evading the payment of tax and for obtaining the benefit of accommodation entries.

He vehemently supported the order of the AO & the Ld.CIT(A).

We have considered the rival submissions.

Coming to the issue as to whether the assessee is to be assessed as a partnership firm or an AOP. A perusal of the Partnership Deed of the assessee clearly shows that partners at 14 & 15 of the Partnership Deed & 740/Chny/2017 :- 6 -: namely M/s.DCP Trading Co., and M/s.Krupa Trading Co., respectively. A perusal of the Partnership Deed in the case of both the smaller Partnership Deed clearly shows that in Clause-10(G), the Partnership Deed mentions that the partners have authorized the managing partner to enter into partnership with other partnership firms. This being so, we do not find necessity for all the partners of the smaller partnership firm to sign Partnership Deed of the assessee larger firm. Consequently, we are of the view that the partnership is a valid partnership in the case of the assessee and the status of the assessee is to be considered as firm.

Coming to the issue of the assessee doing business of money lending, it is noticed from the balance sheet of the assessee as also P&L A/c that the loans have been given by the assessee to the employees of the assessee partnership firm and the interest earned is nominal being in the range of about Rs.50,000/-. Giving loans to the employees of the assessee firm would not make the assessee firm to be in the business of money lending. This being so, we are of the view that the assessee is liable to be assessed only as a partnership firm and not as an AOP.

Coming to the issue of the donations in respect of which, the assessee has claimed weighted deduction u/s.35(1)(ii) of the Act, it is noticed that the AO has disbelieved the donations on the basis of statement recorded from one Mr.Swapan Ranjan Das Gupta, one of the major shareholders of HHBHRF and on account of a letter from CROSS and & 740/Chny/2017 :- 7 -: in respect of M/s.SHGPH on the basis of Survey Report. It is noticed that the onus of proving the genuineness of the donation rests on the assessee. However, the AO has taken up himself the onus to disprove the genuineness of the donation much before the assessee has proved the genuineness of the donation. When an assessee steps forward to give donations of Rs.1.25 Crs, Rs.25.00 lakhs, Rs.1.45 Crs. respectively, the assessee would have adequate reasons to give such donations. Here, it is noticed that the assessee has not been given any opportunity to prove the genuineness but the assessment has been made based on the evidences collected by the Revenue in the course of the survey conducted on the respective organizations. This is not permissible. This being so, in the interest of natural justice, the issue of the genuineness of the donations are restored to the file of the AO for re-adjudication. The AO must keep in mind that the onus of proving the donations are actually donations and not accommodation entries and that the said organizations were eligible for claiming deduction u/s.35(1)(ii) of the Act rests on the assessee. If the AO does have any evidence to the contrary, it is to be put to the assessee for his rebuttal. The assessee shall produce the recipients of the donation for examination along with the evidences to prove the receipt of the donation. The internal communications of the Revenue are evidences for drawing an opinion on possible wrong claims but they are not the final evidence. This being so, the issue of the donation in these appeals are restored to the file of the AO for re-adjudication after granting the assessee adequate opportunity to prove the genuineness of the donation. & 740/Chny/2017 :- 8 -:

The assessee has also raised additional grounds which are not supported by the Memo for filing additional grounds. At the time of hearing, when this was pointed out by the Ld.AR, it was submitted by the Ld.AR that the issue in the additional grounds are covered in the concise grounds filed and consequently, the same need not be adjudicated upon. Consequently, the additional grounds of the appeal filed by the assessee are dismissed as not admitted.

In the result, the appeals filed by the assessee in & 740/Chny/2017 are partly allowed for statistical purposes.