2013 (9) TMI 605 - AT - Income Tax

Tribunal excludes partner interest from exempt profits under sec 10B, Revenue appeals allowed

The Tribunal upheld the Assessing Officer's decision to exclude interest and remuneration payable to partners from the profits eligible for exemption ... Exemption u/s 10B - inflated profits - Interest on Capital and Remuneration not debited to profit and loss account – Held that:- payment of interest on capital and remuneration to partners is not hit by section 40(b) of the Income-tax Act. The mere fact that the partners have chosen to forego interest on capital and remuneration payable to them does not ipso-facto mean that they are not admissible for deduction. The fact that the assessee has not debited such interest and remuneration payable to partners to its profit & loss account in spite of their admissibility to deduction makes its intention quite evident, namely, to inflate the profits eligible for exemption u/s 10B. The Assessing Officer has correctly worked out interest on capital and remuneration payable to partners and excluded them from the overall profits of business for working out the profits eligible for exemption u/s 10B of the Income-tax Act. - Decided in favor of revenue. Issues Involved:1. Deletion of addition by charging interest on partners' capital and remuneration to partners.2. Allowance of total deduction under section 10B of the Income-tax Act.3. Legality of non-payment of interest and remuneration to partners despite provisions in the partnership deed.4. Validity of the assessment order passed by the Assessing Officer.5. Admissibility of supplementary partnership deed.Detailed Analysis:1. Deletion of Addition by Charging Interest on Partners' Capital and Remuneration to Partners:The Revenue contended that the CIT(A) erred in law and on facts by deleting the addition of Rs. 11,36,461/- and Rs. 30,61,317/- towards interest on partners' capital and remuneration to partners for the assessment year 2006-07, and Rs. 29,53,516/- and Rs. 14,54,731/- for the assessment year 2009-10. The CIT(A) held that it was not mandatory to pay interest and remuneration to partners even though the partnership deed contained provisions for the same. The CIT(A) based this decision on the flexibility provided in the partnership deed and the mutual consent of the partners not to pay interest and remuneration.2. Allowance of Total Deduction Under Section 10B of the Income-tax Act:The CIT(A) directed to allow the total deduction under section 10B at Rs. 36,02,046/- for the assessment year 2006-07 and Rs. 38,01,492/- for the assessment year 2009-10, as against the deductions worked out by the Assessing Officer at Rs. 18,52,845/- and Rs. 11,72,310/- respectively. The CIT(A) opined that the Assessing Officer could not compel the appellant to charge interest and remuneration by invoking section 40(b) of the Act, as it was discretionary for the assessee to make such a claim.3. Legality of Non-Payment of Interest and Remuneration to Partners Despite Provisions in the Partnership Deed:The Revenue argued that the CIT(A) failed to appreciate that the method adopted by the assessee firm to reduce tax burden was dubious and could not be allowed, citing the Supreme Court judgment in Mac Dowell & Company v. CIT [154 ITR 148]. The CIT(A) countered that the partnership deed allowed for flexibility in the payment of interest and remuneration, and the partners mutually decided not to pay these amounts.4. Validity of the Assessment Order Passed by the Assessing Officer:The original assessment order for the assessment year 2006-07 was set aside by the Commissioner of Income-tax under section 263, deeming it erroneous and prejudicial to the interest of revenue. The Assessing Officer then passed a fresh order, reducing the profits eligible for exemption under section 10B by the amounts of interest and remuneration payable to partners. The CIT(A) reversed this action, but the Tribunal ultimately upheld the Assessing Officer's decision, emphasizing that the profits eligible for exemption under section 10B should reflect actual, not inflated, profits.5. Admissibility of Supplementary Partnership Deed:The supplementary partnership deed, which stated that no interest or remuneration would be paid to partners for FY 2005-06, was not filed during the original assessment proceedings. The Tribunal noted that the supplementary deed was not registered and appeared to be an afterthought to avoid tax liability. The Tribunal found that the mere non-payment of interest and remuneration did not mean they were not admissible for deduction, and the Assessing Officer correctly excluded these amounts from the profits eligible for exemption under section 10B.Conclusion:The Tribunal concluded that the CIT(A) erred in deleting the additions and allowing the total deduction under section 10B. The Tribunal upheld the Assessing Officer's decision to exclude interest and remuneration payable to partners from the profits eligible for exemption under section 10B, reversing the CIT(A)'s order and restoring the Assessing Officer's order. The appeals filed by the Revenue were allowed.