ACIT Vs Desire Jewellery (ITAT Surat)
The ITAT Surat dismissed the Revenue’s appeal against the order of the Commissioner of Income Tax (Appeals) deleting the disallowance made by the Assessing Officer under Section 80IA(10) read with Section 10AA(9) of the Income Tax Act for Assessment Year 2013-14. The assessee, Desire Jewellery, a partnership firm engaged in manufacturing and export of diamond-studded jewellery from a Special Economic Zone (SEZ), filed its return declaring nil income after claiming a deduction of ₹3.37 crore under Section 10AA. During assessment, the Assessing Officer observed that the assessee had not provided for interest on partners’ capital contributions or remuneration to partners and issued a show-cause notice proposing to reduce the eligible deduction by computing notional interest and remuneration. The Assessing Officer invoked Section 80IA(10), calculated partners’ remuneration and interest aggregating to ₹2.08 crore, and consequently restricted the Section 10AA deduction to ₹1.28 crore.
Before the Commissioner (Appeals), the assessee contended that the partnership deed did not authorize payment of interest on partners’ capital or remuneration to partners. It relied on CBDT Circular No. 739 dated 25 March 1996, which clarified that deduction under Section 40(b)(v) is admissible only where the partnership deed specifies the remuneration payable or prescribes the manner of its quantification. The assessee submitted that, since the partnership deed expressly excluded such payments, the Assessing Officer could not compel the firm to claim notional interest or remuneration for the purpose of reducing the deduction under Section 10AA. The Commissioner (Appeals), after examining the partnership deed and relying on the decision of the jurisdictional High Court in Pr. Commissioner of Income Tax v. Alidhra Taxspin Engineers and the Ahmedabad Bench decision in M/s Al Reza Food v. ITO, directed the Assessing Officer to delete the disallowance and allow the deduction as claimed.
