2014 (11) TMI 1280 - AT - Income Tax

Deduction u/s 80IC - CIT(A) held that deduction allowable on the total gross profit without reducing the remuneration and interest payable to the partners - HELD THAT - deduction under various provisions of this Chapter are allowable only if the income of the nature on which deduction is claimed has been included in the total income and further deduction has to be allowed on the basis of above gross total income. Gross total income has itself been defined in Sec 80B which clearly shows that deduction can be allowed on that income which is computed in accordance with the provisions of the Act before allowing deduction under Chapter VIA. Under Income-tax Act the income has to be computed under various heads as per the provisions of a particular head. Before allowing deduction u/s 80IC the income has to be computed as per the provisions of Sections 32 to 43 of the Act. This position has been confirmed by the Hon ble Supreme Court in case of CIT V. Kotagiri Industrial Co-operative Tea Factory Ltd. 1997 (3) TMI 1 - SUPREME COURT Above position has been followed later on in various decisions by the Hon ble Supreme Court like H.H. Sir Rama Verma 1993 (11) TMI 2 - SUPREME COURT and Motilal Pesticides (I) Pvt Ltd. 2000 (2) TMI 9 - SUPREME COURT Therefore it becomes clear that deduction could have been allowed only after computing the income under a particular head. In this case the income in the hands of the a firm was computed in terms of Sec 28 to 43D and Sec 40(b) in respect of allowance of interest and salary falls between these two provisions and therefore full effect has to be given to this provisions also. As later on it was decided not to pay salary and interest to the partners - This does not seems to be correct because before the Assessing officer it was admitted that remuneration and interest has not been paid as per the partnership deed. Further there is no evidence for the same and in any case this will not make a difference - As for making deduction under chapter VIA the profits has to be computed specifically as per a particular provision of a particular head of income because of the definition of gross total income u/s 80B(5). In view of the above clear position the deduction u/s 80IC was allowable only after reducing the interest and remuneration payable to the partners. The Assessing officer has invoked the provisions of section 80IA which are not relevant and the Ld. CIT(A) has decided the issue only on this decision without looking at the specific provisions of the Act and the decision of Hon ble Supreme Court which are binding on all authorities. Therefore we set aside the order of Ld. CIT(A) and restore that of the Assessing officer (though on a different reasoning). Appeal of the revenue is allowed.

Summary

Issues Involved:

1. Whether the deduction under section 80IC should be computed on the total gross profit without reducing the remuneration and interest payable to the partners.
2. Applicability of section 80IA(10) to section 80IC.
3. Interpretation of the partnership deed regarding the payment of remuneration and interest to partners.
4. Application of the provisions of sections 80A, 80AB, and 80B.
5. Relevance of Supreme Court judgments in computing deductions under Chapter VIA.

Issue-wise Detailed Analysis:

1. Deduction under Section 80IC:

The primary issue was whether the deduction under section 80IC should be computed on the total gross profit without reducing the remuneration and interest payable to the partners. The Revenue contended that the deduction should be reduced by the remuneration and interest payable to the partners, as per the partnership deed. The assessee argued that no such payments were made, and thus, the deduction should be allowed on the gross profit.

2. Applicability of Section 80IA(10) to Section 80IC:

The Assessing Officer invoked section 80IA(10), which is applicable to section 80IC through section 80IC(7). Section 80IA(10) allows the Assessing Officer to recompute the profits if the business transactions between closely connected persons result in more than ordinary profits. The Tribunal analyzed whether the non-payment of remuneration and interest to partners could be considered as an arrangement leading to more than ordinary profits. It concluded that the payment of remuneration and interest does not fall within the scope of "business transacted" under section 80IA(10).

3. Interpretation of the Partnership Deed:

The partnership deed authorized the partners to reduce or waive the payment of remuneration and interest by mutual agreement. The Tribunal noted that the partners had not acted upon the clause to take remuneration and interest, as evidenced by their signatures on the profit and loss account. Therefore, there was no actual liability for such payments, and the Assessing Officer was not justified in reducing the profits on this ground.

4. Application of the Provisions of Sections 80A, 80AB, and 80B:

The Tribunal emphasized the importance of sections 80A, 80AB, and 80B, which require that deductions under Chapter VIA be computed based on the gross total income, defined as the total income computed in accordance with the provisions of the Act before allowing any deductions. The income under the head "business and profession" must be computed as per sections 30 to 43D, which includes section 40(b) regarding the allowance of interest and salary to partners.

5. Relevance of Supreme Court Judgments:

The Tribunal referred to the Supreme Court judgment in CIT v. Kotagiri Industrial Co-operative Tea Factory Ltd., which held that deductions under Chapter VIA should be allowed only after computing the income as per the provisions of the Act. The Tribunal also cited other Supreme Court judgments, including H.H. Sir Rama Verma v. CIT and Motilal Pesticides (I) Pvt Ltd. v. CIT, which reinforced the principle that deductions should be based on the gross total income computed as per the Act's provisions.

Conclusion:

The Tribunal concluded that the deduction under section 80IC was allowable only after reducing the interest and remuneration payable to the partners. The Assessing Officer's invocation of section 80IA(10) was deemed incorrect, but the Tribunal ultimately upheld the Assessing Officer's decision to reduce the profits by the remuneration and interest payable to partners, based on the provisions of sections 80A, 80AB, and 80B, and the relevant Supreme Court judgments. The order of the CIT(A) was set aside, and the appeal of the Revenue was allowed.