2007 (6) TMI 195 - HC - Income Tax

Deduction u/s 80HH - interest and remuneration to partner - in the light of the amended provisions of Section40(b) of the Act, the Tribunal was justified in holding that the interest and remuneration paid to the partners were liable to be excluded from the Gross Total Income for the purpose of deduction under Section 80HH of the Act.

Summary

Issues:
- Interpretation of deduction under Section 80HH of the Income Tax Act, 1961 on Gross Total Income before deducting interest and remuneration to partners forming part of business income.

Analysis:
1. Facts and Background:
The appellant, engaged in manufacturing and selling snuff, filed two appeals against the Tribunal's order concerning the deduction under Section 80HH of the Income Tax Act for the assessment years 1997-98 and 1994-95.

2. Appellant's Contention:
The appellant claimed that as per the partnership deed, partners were to be paid interest and remuneration only after considering the deductions under Section 80HH and 80I of the Act. The appellant relied on a judgment of the Gujarat High Court to support this argument.

3. Revenue's Argument:
The revenue contended that the issue raised by the appellant had been settled in previous court decisions, including the case of Indian Rayon Corporation Ltd. vs. C.I.T. The revenue argued that the interest and salary paid to partners were deductible under Section 40(b) of the Act.

4. Legal Analysis:
The Court noted that prior to the assessment year 1993-94, distributing profits to partners as interest and remuneration was not allowable as business expenditure under Section 40(b) of the Act. However, the Finance Act, 1992, allowed such deductions from 01/4/1993 onwards. The Court emphasized that the deduction under Section 80HH is on the gross total income computed as per specific provisions of the Act.

5. Decision and Rationale:
The Court held that the interest and remuneration paid to partners, deductible under Section 40(b) of the Act, should not be included in the Gross Total Income for the purpose of deduction under Section 80HH. The Court distinguished the Gujarat High Court's decision cited by the appellant, stating that it was not applicable due to the amendment in Section 40(b) by the Finance Act, 1992. Consequently, the appeals were dismissed, affirming the Tribunal's decision.

6. Conclusion:
The Court found no merit in the appeals and dismissed them without costs, upholding that the interest and remuneration paid to partners should be excluded from the Gross Total Income for calculating the deduction under Section 80HH of the Income Tax Act.