Case Law Details
DCIT Vs Astitva Exim (ITAT Surat)
Section 10AA Deduction Cannot Be Denied for Non-Provision of Partners’ Interest and Remuneration; Section 147 Reassessment Cannot Travel Beyond Recorded Reasons: ITAT Surat
The Revenue filed an appeal before the Income Tax Appellate Tribunal (ITAT), Surat against the order of the National Faceless Appeal Centre (NFAC)/CIT(A) dated 26.12.2024 for Assessment Year 2012-13 arising from reassessment proceedings under Sections 143(3) read with 147 of the Income Tax Act.
The assessee had filed its return of income on 29.09.2012 declaring nil income after claiming deduction of ₹16,82,06,879 under Section 10AA. The original assessment under Section 143(3) was completed on 25.03.2015 at nil income. Subsequently, the assessment was reopened under Section 147 based on information received from ADIT (Investigation)-2, Surat regarding an alleged excess deduction under Section 10AA arising from differences between import figures reported in the audit report and the data available with DGCIS, Kolkata. A notice under Section 148 was issued on 31.03.2019.
During reassessment, the Assessing Officer accepted the assessee’s reconciliation of imports as reflected in the audit report and the DGCIS data. However, instead of making any addition on that issue, the Assessing Officer made an addition of ₹11,68,26,920 on a different issue relating to disallowance of remuneration and interest payable to the partners. The reassessment under Sections 143(3) read with 147 was completed on 28.12.2019 determining the total income at ₹11,68,26,920.
The assessee appealed before the CIT(A), who partly allowed the appeal and directed deletion of the addition. Aggrieved by this relief, the Revenue preferred the present appeal.
The Revenue contended that although the assessee had not claimed deduction for interest and remuneration paid to partners in its profit and loss account, Clauses 7 and 8 of the original partnership deed dated 21.12.2010 provided for payment of interest at 12% and remuneration to partners in accordance with Section 40(b). According to the Revenue, these clauses were deleted through a revised partnership deed dated 02.12.2012 with the object of increasing exempt income. It was argued that, under the original partnership deed, the assessee ought to have provided for interest and remuneration payable to partners for the relevant period and debited the same to its profit and loss account. By not doing so, the assessee had allegedly inflated eligible profits and claimed excess deduction under Section 10AA. The Revenue further alleged that the revised partnership deed was a self-serving and collusive arrangement and relied upon the Supreme Court decision in McDowell Vs. CTO.
No one appeared on behalf of the assessee before the Tribunal.
The Tribunal examined the findings of the CIT(A), who had observed that the core issue was whether business profits eligible for deduction had been inflated by not charging partners’ remuneration and interest on capital. The CIT(A) relied upon the judgment of the Gujarat High Court in Pr. CIT v. Alidhara Taxspin Engineers, holding that where the partnership agreement reflected the partners’ intention not to pay or charge interest on capital and remuneration, the disallowance could not be sustained. The CIT(A) also noted that the Gujarat High Court decision had subsequently been followed by the Surat Bench of the ITAT in DCIT v. Regent Corporation and Desire Jewellery. Following the Gujarat High Court judgment, the CIT(A) directed deletion of the disallowance of ₹11,68,26,920.
The Tribunal upheld the CIT(A)’s decision. It observed that, according to the Revenue itself, interest and remuneration payable to partners were admissible deductions. The Tribunal further noted that even if the assessee had debited such interest and remuneration in accordance with the original partnership deed, the resultant business profits would still have been eligible for deduction under Section 10AA, and this position had not been disputed by the Revenue. Accordingly, whether or not interest and remuneration were debited to the profit and loss account had no effect on the assessee’s ultimate total income under the Act, since both the interest and remuneration payable to partners and the resultant profits were eligible for deduction. The Tribunal therefore found no error in the CIT(A)’s order deleting the addition.
The Tribunal also considered another aspect of the matter. It noted that the assessee had challenged before the CIT(A) the Assessing Officer’s authority to make an addition on an issue that did not form part of the reasons recorded for reopening. Although the CIT(A) had rejected that ground, the Tribunal observed that such rejection was not in accordance with the decision of the Gujarat High Court in CIT v. Md. Junaid Dadani [30 taxmann.com 01]. Referring to that judgment, the Tribunal stated that where no addition is ultimately made on the issue forming the basis of reopening, the Assessing Officer cannot make additions on other issues not forming part of the recorded reasons. Since the reassessment had been reopened only on the issue of differences in import figures and no addition was ultimately made on that issue, the Assessing Officer could not make an addition relating to partners’ remuneration and interest, which was not part of the recorded reasons.
Holding that the Revenue’s grounds lacked merit, the Tribunal rejected all the grounds raised by the Revenue and dismissed the appeal.
FULL TEXT OF THE ORDER OF ITAT SURAT
This appeal is filed by the Revenue against the order of National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘CIT(A)’] dated 26.12.2024 for the Assessment Year (A.Y.) 2012-13 in the proceeding u/s 143(3) r.w.s. 147 of the Income Tax Act [hereinafter referred as “the Act”].
2. The brief facts of the case are that the assessee had filed its return of income for A.Y. 2012-13 on 29.09.2012 at Nil income after claiming deduction of Rs.16,82,06,879/- u/s. 10AA of the Income Tax Act. The original assessment was completed u/s. 143(3) of the Act on 25.03.2015 at Nil Thereafter, the case of the assessee was reopened u/s. 147 of the Act, on the basis of information received from ADIT(Investigation)-2, Surat regarding excess deduction claimed u/s. 10AA of the Act, due to difference in the figure of imports as mentioned in the audit report and as per data available with DGCIS Kolkata. Accordingly, a notice u/s. 148 of the Act was issued on 31.03.2019. In the course of reassessment, the AO was satisfied with the explanation of the assessee regarding the re-conciliation of imports as per audit report and as per DGCIS Kolkata data. However, the AO had made an addition of Rs.11,68,26,920/- in respect of an altogether different issue of disallowance of remuneration and interest payable to the partners. The reassessment was completed u/s. 143(3) r.w.s. 147 of the Act on 28.12.2019 at total income of Rs.11,68,26,920/-.
3. Aggrieved with the order of the AO, the assessee had filed an appeal before the first appellate authority, which was decided by the Learned CIT(A) vide the impugned order and the appeal of the assessee was partly allowed. Th
4. Now the Revenue is in appeal before us. The following grounds have been taken in this appeal:
1. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the addition made of Rs.11.68.26.920/- on account of the reworking of the eligible profits of the business within the meaning of the provisions of section 10AA of the Act.
2. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in deleting the addition made of Rs. 11.68,26,920/- and has not appreciated that the original partnership deed of the assessee has provided for payment of the remuneration and interest on capital and revised partnership deed has been made for self-serving purpose and to increase the exempted profit of firm and to avoid the taxable income in the hands of the partners and the same is an collusive arrangement within the meaning of section 10AA(9) r.w.s 801A(10) of the Act.
3. On the facts and circumstances of the case and law, the Ld.CIT(A) has erred in allowing the claim ignoring the judicial pronouncement by the Hon’ble Supreme Court in the case of McDowell Vs CTO wherein it was held that “Colorable devises cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges”.
4. On the basis of the facts and circumstances of the case and in law, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer.
5. It is therefore prayed that the order of Ld. CIT(A) may kindly be set aside that of the Assessing Officer be restored.
6. The appellant craves leave to add, alter, amend and/or withdraw any ground of appeal either before or during the course of hearing of the
5. Shri Mukesh Jain, the Ld. CIT-DR, submitted that the assessee did not claim any interest and remuneration paid to the partners of the firm as deduction in its P&L account. However, as per clause 7 and 8 of the partnership deed dated 21.12.2010, there was a provision for payment of interest at the rate of 12% and also remuneration to the partners as per provision of section 40(b) of the Income Tax, w.e.f. 15.12.2010. He explained that the said partnership deed was revised on 02.12.2012, as per which clause 7 and 8 of the original partnership deed dated 21.12.2010 was deleted, in order to increase the exempt income. The Ld. CIT-DR submitted that as per the original partnership deed, the assessee should have made provision for interest and remuneration to the partners for the period from 01.04.2011 to 02.02.2012 i.e. till the date when the partnership deed was modified and should have accordingly debited the same to its P&L account. By not doing so, the assessee had claimed excess deduction u/s. 10AA of the The Ld. CIT-DR submitted that the Ld. CIT(A) was not correct in deleting the addition made on account of excess deduction claimed u/s 10AA of the Act, by not claiming deduction for interest and remuneration payable to the partners.
6. On behalf of the assessee no one was present.
7. We have carefully gone through the order of the Assessing Officer as well as that of the Ld. CIT(A). On merits the findings of the Ld. CIT(A) is found to be as under:
“5.3.8 It is seen that the moot issue was inflating business profit, which is otherwise exempt or is entitled to deduction, by not charging partners’ remuneration and/or interest on capital. The Hon’ble High Court has held that on interpretation of the partnership agreement and considering the wish of the partners reflected in the partnership deed, not to pay /charge interest on the partners capital and the remuneration, such disallowance was not sustainable The ratio laid down in the above judgment of the Hon ble High Court of Gujarat, the jurisdictional High Court, which has been followed by the Hon’ble jurisdictional ITAT in the decisions relied upon by the appellant, are identical to the issue involved in the present appeal. It is further mentioned here that the decision of the Hon’ble High Court of Gujarat in the case of Pr. CIT V Alidhara Tax spin Engineers (supra) has been followed by the Hon’ble ITAT, Surat in the case of DCIT V Regent Corporation [ITA No 190/SRT/2017] and in the case of Desire Jewellery [ITA No 187/SRT/2017] vide orders dated 20.09.2021 and 01.11.2021, which have been relied upon by the appellant. These orders were passed subsequent to the impugned assessment order.
5.3.9 Therefore, respectfully following the decision of the Hon’ble High Court of Gujarat in the case of Pr. CIT V Alidhara Tax spin Engineers (supra), I hold that the disallowance of exemption u/s 10AA which is attributable to non-payment of partners remuneration and interest on capital to partners, cannot sustain. Accordingly, I direct the Assessing Officer to delete the disallowance of Rs. 11,68,26,920/-
8. The contention of the Revenue is that by not claiming the deduction for interest and remuneration payable to the partners, the assessee had inflated its business profit and claimed excess deduction u/s. 10AA of the Act. Even if the assessee had debited the remuneration and interest payable to the partners as per the original partnership deed, the resultant business profit was eligible for deduction u/s. 10AA of the Act and this fact has not been controverted by the Revenue. Further, as admitted by the Revenue, the deduction for interest and remuneration payable to the partners as per partnership deed, was an admissible deduction. Therefore, the factum of debiting the interest and remuneration payable to the partners to the P&L account or otherwise, has no impact on the ultimate total income of the assessee as per the provisions of the The interest and remuneration payable to the partners as well as the resultant profit, both were eligible for deduction. We, therefore, do not find anything wrong with the order of the Ld. CIT(A) on this issue.
9. In fact, the assessee had also raised a ground before the CIT(A) that the AO was not correct in making addition on a different issue which was not part of the reason as recorded by him. The Ld. CIT(A) had rejected this ground of the assessee, which is not found to be in accordance with the decision of Hon’ble Jurisdictional High Court on this issue. The Hon’ble Gujarat High Court has held in the case of CIT Vs. Md. Junaid Dadani [30 taxmann.com 01], that that when on the ground on which reopening of the assessment was passed, no addition was made by the Assessing Officer in the order of the assessment; he could not make addition on some other grounds which did not form part of the reason recorded by him. In the present case, the reason recorded by the AO was only on the issue of difference in the figure of imports made by the assessee and no addition was made by the AO on this issue while completing the reassessment. Under the circumstances, the AO could not have made addition on any other issue which was not part of the reason as recorded by the AO. Following the decision of the Hon’ble Jurisdictional High Court, no addition was called for in the present case on the issue of remuneration and interest payable to the partners, which was not part of the reason as recorded by the AO. We, therefore, do not find any merit in the grounds as taken by the Revenue. Accordingly, all the grounds taken by the Revenue are rejected.
10. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Court on 09/06/2026 at Ahmedabad.
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