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.
FULL TEXT OF THE ORDER OF ITAT JODHPUR
This appeal is filed by assessee and is arising out of the order of the National Faceless Appeal Centre, Delhi dated 01/11/2021 [here in after (NFAC)] for assessment year 2012-13 which in turn arise from the order dated 31.03.2019 passed under section 143(3)/154 of the Income Tax Act, by the ACIT, Circle- Pali.
2. The assessee has marched this appeal on the following grounds:-
“1.The ld. CIT(A), NFAC has erred on facts and in law in upholding the order of AO passed u/s 154 of the Act.
2. The Ld. CIT(A), NFAC has erred on facts and in law in confirming the addition of Rs. 12,85,078/- made by the AO ignoring that Export Profit Reserve, Investment Allowance Reserve and State Investment Subsidy created in earlier years by appropriation of profits is not taxable in the hands of firm on its distribution to its partners.
3. The appellant craves to alter, amend and modify any ground of appeal.
4. Necessary cost be awarded to the assessee.”
3. The fact as culled out from the records is that the assessee is a Firm. During the year under consideration, the assessee derives income from manufacturing and trading of Gwar Gum Powder Cassia Tore, Psyllium Husk, Tamarind Powder. The return of income was e-filed by the assessee on 28.09.2012 declaring total income at Rs. 14,44,83,440/-. The case was selected for scrutiny through CASS. After considering facts and circumstances of the case, the ld. AO disallowed Rs. 4,73,780/- i.e. 1/10th of the various expenses claimed. The assessment u/s 143(3) was completed on 27.02.2015 determining total income at Rs. 14,49,57,220/-. Further, on perusal of the assessment record, it is noticed that:-
“During the previous year, assessee firm has distributed reserve and surplus amongst the partners amount of Rs. 12,85,078/- as below:
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