2013 (1) TMI 875 - AT - Income Tax

Summary

Issues involved:
The issues involved in this case are the correct computation of deduction u/s 10B of the Income-tax Act, specifically regarding the allowance of interest and remuneration payable to partners as per the partnership deed.

Comprehensive Details:

1. Issue 1 - Deduction u/s 10B:
The Department appealed against the CIT (A) order directing the allowance of total deduction u/s 10B at a higher amount than assessed by the Assessing Officer. The AO had restricted the deduction to a lower amount after considering interest and remuneration payable to partners as per the partnership deed. The Department argued that all expenses, including interest and remuneration to partners, should be excluded from profits eligible for deduction u/s 10B. However, the assessee contended that since no actual payment was made to the partners, the deduction should not be reduced by the amount of interest and remuneration. The Tribunal noted that the partnership deed authorized such payments but they were not made, leading to an artificial inflation of profits for claiming a larger exemption u/s 10B.

2. Issue 2 - Legitimacy of Tax Planning:
The Department contended that the tax planning method adopted by the assessee to reduce tax burden was not legitimate, citing the judgment of the Hon'ble Supreme Court in the case of Mac Dowell & Company Vs. CIT. The Department argued that the non-payment of interest and remuneration to partners, despite provisions in the partnership deed, was a dubious method to avoid tax. The Tribunal agreed with the Department's view that such actions were not sustainable in law and reversed the CIT (A) order.

3. Decision and Ruling:
The Tribunal held that the partnership deed authorized the payment of interest on capital and remuneration to partners, making them eligible for deduction u/s 37 of the Income-tax Act. However, since no actual payments were made, the Tribunal found that the assessee had artificially inflated profits to claim a higher exemption u/s 10B. The Tribunal concluded that such actions were not in line with legitimate tax planning and ordered in favor of the Department, allowing the appeal and restoring the AO's order.

In conclusion, the Tribunal ruled in favor of the Department, emphasizing the importance of correctly computing profits and expenses for claiming exemptions under the Income-tax Act.