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2011 (5) TMI 531 - AT - Income TaxExport Profit Reserve Credited to partners capital - Addition - Held that - If the CBDT had clarified provisions by the said Circular No. 463, dated 11-7-1986 and approved that the distribution of dividend constituted the utilization of the reserve as prescribed, then the same analogy has to be applied in the present case, i.e., in the case of the firm where the said reserve is transferred to the capital account of the partners - Therefore, held that there was no violation or infringement of those provisions of section 80HHC - See CIT v. Pravin M. Mehta 2000 (8) TMI 55 - BOMBAY High Court - Decided in favour of assessee. Interest claimed on partners capital - Held that - Once the credit of reserve in the capital account was held as lawful and that the Partnership Deed authorizes payment of interest obviously the interest to partners should not be disallowed. No fallacy in the said view of the CIT(A) because once the credit of reserve in the respective capital account of the partners have been approved in above paras, in consequence thereof, the partners are entitled for interest on the credit balance of their capital accounts, undisputedly as provided in the Partnership Deed - Appeal of the Revenue is dismissed.
Issues Involved:
1. Deletion of addition on account of Export Profit Reserve credited to partners' capital. 2. Deletion of addition on account of interest claimed on partners' capital account. Issue-wise Detailed Analysis: 1. Deletion of Addition on Account of Export Profit Reserve Credited to Partners' Capital The primary issue in this appeal concerns the deletion of an addition of Rs. 41,70,000 made by the Assessing Officer (AO) on account of Export Profit Reserve credited to the partners' capital accounts. The assessee-firm, engaged in the manufacturing and export of "Sat Isabgul," had created a reserve under section 80HHC of the Income-tax Act for the assessment years 1986-87 to 1988-89. This reserve was distributed among the partners due to a change in the partnership. The AO contended that this distribution was not for the benefit of the business and treated it as the firm's income. The CIT(A), however, referenced the Finance Act, 1985, and CBDT Circular No. 463, dated 11-7-1986, which allowed the distribution of dividends from such reserves without infringing the provisions of section 80HHC. The CIT(A) noted that there was no specific mandate on how long the reserve should be maintained or its usage, comparing it to the Investment Allowance Reserve under section 32A. The CIT(A) concluded that the distribution among partners was akin to distributing dividends among shareholders and thus justified the deletion of the addition. The Tribunal examined the old provisions of section 80HHC and the relevant CBDT Circular, agreeing with the CIT(A) that the statute was silent on the utilization and duration of the reserve. The Tribunal upheld the CIT(A)'s decision, emphasizing that the reserve had been utilized for the business for a substantial period (18-20 years) and that the distribution among partners was logical and in line with the business approach. The Tribunal also cited the Supreme Court's decision in CIT v. Ajax Products Ltd. [1965] 55 ITR 741, supporting a strict interpretation of charging provisions, and the Bombay High Court's decision in CIT v. Pravin M. Mehta [2000] 246 ITR 445/[2001] 116 Taxman 505 (Mum.), affirming the CIT(A)'s view. 2. Deletion of Addition on Account of Interest Claimed on Partners' Capital Account The second issue relates to the addition of Rs. 5,00,400 made by the AO on account of interest claimed on partners' capital accounts. The AO's disallowance was based on his earlier finding that the distribution of the reserve was unjustified. Consequently, he disallowed the interest calculated at 12%. The CIT(A) held that since the credit of the reserve in the partners' capital accounts was lawful and the Partnership Deed authorized the payment of interest, the interest should not be disallowed. The Tribunal found no fault in the CIT(A)'s reasoning, noting that once the credit of the reserve in the partners' capital accounts was approved, the partners were entitled to interest on their capital balances as per the Partnership Deed. Conclusion The appeal of the Revenue was dismissed on both grounds. The Tribunal upheld the CIT(A)'s decision to delete the additions made by the AO on account of the Export Profit Reserve credited to the partners' capital and the interest claimed on partners' capital accounts. The Tribunal's decision was based on the interpretation of the provisions of section 80HHC, relevant CBDT Circulars, and judicial precedents, affirming that the actions of the assessee were within the legal framework.
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