2019 (9) TMI 436 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on interest and remuneration deductions under Section 10AA.

The Assistant Commissioner of Income Tax, Circle-1 (2), Surat. Versus Kiran Jewellery, Surat

The Assistant Commissioner of Income Tax, Circle-1 (2), Surat. Versus Kiran Jewellery, Surat - TMI Issues Involved:1. Justification of the CIT(A) in deleting the disallowance made by the AO by invoking provisions of Section 80(IA)(10) r.w.s 10AA(9) related to deductions of interest on capital and remuneration to partners.2. The impact of not providing interest and remuneration to partners on the firm's higher profits and higher claim of deduction u/s 10AA, which allegedly deprived the revenue of due tax.Issue-wise Detailed Analysis:1. Justification of the CIT(A) in Deleting the Disallowance:The Revenue's appeals challenged the CIT(A)'s decision to delete the disallowance made by the AO under Section 80(IA)(10) r.w.s 10AA(9). The AO had disallowed the deduction claimed by the assessee firm under Section 10AA, arguing that the firm had artificially enhanced its exempt profits by not claiming interest on capital and remuneration to partners. The AO relied on the judgment in the case of Meridian Impex, where it was held that interest and remuneration to partners are allowable even if not claimed in the partnership deed.The CIT(A) observed that the partnership deed explicitly stated that no interest or remuneration was payable to the partners, and thus, the assessee had not claimed these expenses. The CIT(A) relied on CBDT Circular No.739, which clarified that no deduction under Section 40(b)(v) would be admissible unless the partnership deed specified the amount or manner of quantifying such remuneration. The CIT(A) also referred to various decisions, including those of the ITAT Ahmedabad Bench and the Gujarat High Court, which supported the view that the AO could not compel the assessee to charge interest or remuneration if the partnership deed did not provide for it.2. Impact of Not Providing Interest and Remuneration to Partners:The AO argued that by not providing interest and remuneration to the partners, the firm claimed higher profits, leading to a higher deduction under Section 10AA, thereby depriving the revenue of due tax. The AO's stance was that the partnership deed was a vehicle for collusive tax avoidance. However, the CIT(A) found that the partnership deed did not have any clause for payment of interest and remuneration, and thus, the assessee's actions were in accordance with the deed.The Tribunal upheld the CIT(A)'s findings, stating that the partnership deed clearly laid down that no interest and remuneration were payable. The Tribunal also noted that the issue was covered by the decision in ACIT, Circle-1(2), Surat Vs. Ruta Jewels, where it was held that the AO could not compel the assessee to charge interest or remuneration if the partnership deed did not mandate it. The Tribunal concluded that the disallowance made by the AO was erroneous and incorrect in law and facts, and thus, the CIT(A) was right in deleting the disallowance.Conclusion:The Tribunal dismissed the Revenue's appeals, confirming that the CIT(A) was justified in deleting the disallowance made by the AO. The Tribunal reiterated that the partnership deed did not provide for payment of interest and remuneration, and therefore, the assessee could not be compelled to charge these expenses. The Tribunal's decision was based on the consistency of the partnership deed with the assessee's claims and supported by relevant legal precedents.