2015 (4) TMI 46 - AT - Income Tax

Tribunal quashes revisionary order, rules deductions valid, interest not justified

Kaizen Switchgear Products Versus ACIT

The Tribunal allowed all the appeals, quashing the revisionary order under Section 263. It held that the assessment orders were not erroneous, and the ... Revision u/s 263 - not provided for the interest and remuneration to the partners though authorized in the partnership deed thus had earned more profits than the reasonable profit and this attracts provisions of section 80IA(10) r.w.s. 10B(7) - whether the issue sought to be raised in order passed u/s 263 of the Act was not on the basis of material thrown up by search u/s 132 of the Act and cannot be subject matter of addition while framing assessment u/s.153A ? - Held that:- Commissioner has not restored the issue for examination to the file of the AO but held that the interest and remuneration was to be taken into account for the purpose of the calculation of the business income eligible for the deduction u/s.10B of IT Act. This is not a case where learned Commissioner wanted a relook the issue by the Revenue Department but directed in absolute terms to recompute the claim hence in the interest of justice, we hereby hold that such an order of the learned Commissioner was not sustainable in the eyes of law. We have already held that the impugned orders of the AO were not an erroneous order because ultimately the calculation of the claim of deduction u/s.10B should be made on the basis of the case laws as discussed in the case, therefore, there was no ultimate gain to the Revenue Department. Such an order of the AO cannot be termed as prejudicial to the interest of the Revenue. While granting the deduction u/s.10B it was not a situation that an incorrect application of law was applied by the AO. We therefore conclude that the revisionary order passed u/s.263 of the learned Commissioner was not sustainable in the eyes of law; hence quashed. - Decided in favour of assessee. Issues Involved:1. Validity of the order passed under Section 263 of the Income-tax Act, 1961.2. Jurisdictional challenge to the addition proposed under Section 263.3. Examination of the partnership deed and its implications on interest and remuneration to partners.4. Applicability of Section 80IA(10) read with Section 10B(7) of the Income-tax Act.5. Examination of precedents and case laws related to Section 40(b) and Section 263.Issue-wise Detailed Analysis:1. Validity of the order passed under Section 263 of the Income-tax Act, 1961:The appellant contested that the order passed under Section 263 was void as it lacked jurisdiction. The assessment orders were neither erroneous nor prejudicial to the interests of the Revenue as required by Section 263. The Tribunal examined the assessment orders, which were detailed and included discussions on the provisions of Section 10B. The Tribunal concluded that the orders were not erroneous and the calculation of deduction under Section 10B was correct. Thus, the Tribunal quashed the revisionary order passed under Section 263.2. Jurisdictional challenge to the addition proposed under Section 263:The appellant argued that the issue raised in the order under Section 263 was not based on material from the search under Section 132 and could not be subject to addition while framing assessment under Section 153A. The Tribunal noted that the assessments for the years in question were completed under Section 153A read with Section 143(3). The Tribunal held that the learned Commissioner was not justified in directing the AO to recompute the deduction under Section 10B after deducting interest and remuneration from the business profit, as there was no jurisdiction for the proposed addition.3. Examination of the partnership deed and its implications on interest and remuneration to partners:The appellant's partnership deed, executed on April 8, 1995, and a supplementary deed executed on April 24, 1995, stated that no interest or remuneration would be paid to the partners. This arrangement continued until the assessment year 2008-09. The Tribunal found that the partnership deed did not authorize any such payments, and thus, the firm could not be compelled to pay interest or remuneration. The Tribunal cited several case laws supporting the view that interest and remuneration could not be forced upon the firm if the partnership deed did not authorize such payments.4. Applicability of Section 80IA(10) read with Section 10B(7) of the Income-tax Act:The learned Commissioner argued that by not providing for interest and remuneration, the firm earned more profits and claimed higher exemption under Section 10B, attracting provisions of Section 80IA(10) read with Section 10B(7). The Tribunal, however, held that the AO's assessment orders were not erroneous as the calculation of deduction under Section 10B was correct. The Tribunal emphasized that the provisions of Section 40(b) did not compel the payment of interest and remuneration, and thus, the learned Commissioner was not justified in invoking Section 263.5. Examination of precedents and case laws related to Section 40(b) and Section 263:The Tribunal reviewed various case laws cited by the appellant, including decisions from ITAT Calcutta, ITAT Delhi, ITAT Ahmedabad, and others. These precedents supported the appellant's contention that interest and remuneration could not be thrust upon the firm if not authorized by the partnership deed. The Tribunal also noted that the learned Commissioner did not restore the issue for examination but directed the AO to recompute the deduction, which was not sustainable in law. The Tribunal concluded that the revisionary order under Section 263 was not justified and quashed it.Conclusion:The Tribunal allowed all the appeals of the appellant, quashing the revisionary order passed under Section 263. The Tribunal held that the assessment orders were not erroneous or prejudicial to the interests of the Revenue and that the learned Commissioner was not justified in directing the AO to recompute the deduction under Section 10B.