Case Law Details
Sarda Gums & Chemicals F-54 Vs ACIT (ITAT Jodhpur)
ITAT Jodhpur held that merely by transferring the reserve created out of the tax paid profit subsequently transferred to capital account of the firm is not a mistake apparent on record and cannot be rectified under the guise of provision of section 154 of the Act
Facts- The assessee is a Firm. The assessee derives income from manufacturing and trading of Gwar Gum Powder Cassia Tore, Psyllium Husk, and Tamarind Powder. The case was selected for scrutiny through CASS. AO disallowed Rs. 4,73,780/- i.e. 1/10th of the various expenses claimed. The assessment u/s. 143(3). AO issued a notice u/s. 154 of the Income Tax Act requesting the assessee to file the reply. AO noted that the assessee was not able to prove that the export reserve of Rs. 6,12,000/- distributed by M/s. Sarda Gums and Chemicals were created after payment of tax liability and assessee could not establish the fact that the reserve creation was done subject to tax. Therefore, ld AO taken a view that the assessee could not prove the distribution of Export reserve, Investment Allowance reserve and state investment subsidy reserve was made out of tax free profit hence distribution of these reserve is subject to tax. Therefore, distribution of export reserve Rs. 6,12,000/-, Investment Allowance Reserve of Rs. 1,01,378/- and State Investment Subsidy reserve of Rs. 5,71,700/- to the credit of partner’s capital account in A. Y. 2012-13 added to the income of the firm.
CIT(A) dismissed the appeal. Being aggrieved, the present appeal is filed.
Conclusion- Merely by transferring the reserve created out of the tax paid profit subsequently transferred to capital account of the firm is not the real income chargeable to tax in the year when transferred to partner and the reserve so created where statutory reserve created under the old provision of the law and now the same being not carried out to carried in the balance sheet and thereby credited the account of the partner is not a mistake apparent on record and cannot be rectified under the guise of provision of section 154 of the Act and the same cannot be considered as mistake apparent on record.
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Author Bio
whether a private limited can transfer entire amount of profit and loss amount after tax to its reserve and surplus account showing in the balance sheet