2016 (5) TMI 202 - AT - Income Tax

Reopening of assessment - correctness of the computation of section 80IB deduction - Both the lower authorities hold that the assessee has not provided for interest on partners capital as well as their remuneration despite specific clauses in its partnership - Held that - Taking into the account the fact that assessee-firm interest on partners capital and remuneration clauses comprise of mutual agreement provisions as well as the fact that it has not paid or provided for any amount in the books to conclude that the assessee s partners had decided not to charge any interest or remuneration since the relevant clauses hereinabove are not of mandatory nature. We accept assessee s arguments. The Revenue s submissions justifying action of the lower authorities on this fundamental construction of assessee s partnership deed clauses stand rejected. We delete the impugned disallowance of interest on partners capital and remuneration in question. Since we have decided this first fundamental issue of partnership deed s interpretation against the Revenue, other arguments narrated in preceding paragraphs are rendered academic. - Decided in favour of assessee

Summary

Issues Involved:
1. Legality of the reopening of assessment under section 147 of the Income Tax Act.
2. Disallowance of section 80IB deduction due to non-provision of interest on partners' capital and remuneration.

Detailed Analysis:

1. Legality of the Reopening of Assessment:
The first issue concerns the legality of the reopening of the assessment by the Assessing Officer (AO). The assessee argued that the reopening was a change of opinion since all facts were already on record during the original scrutiny assessment. The CIT(A) rejected this contention, stating that no specific inquiry was made on the issue during the original assessment, thus the reopening could not be considered a change of opinion. The assessee cited case law, including Madhukar Khosla vs. ACIT and Jindal Photo Films Ltd. vs. DCIT, which support the view that reopening without new tangible material is not valid. However, the Revenue countered with the decision in Aquagel Chemical Pvt. Ltd vs. ACIT, which upheld the validity of reopening in cases where no express opinion was formed during the original assessment.

2. Disallowance of Section 80IB Deduction:
The second issue pertains to the disallowance of the section 80IB deduction due to the non-provision of interest on partners' capital and remuneration. The AO observed that the assessee had not provided for these payments, which led to an inflated profit figure and thus a higher deduction claim under section 80IB. The AO disallowed notional interest and remuneration, reducing the eligible profits for the deduction. The CIT(A) upheld this view, stating that the gross income must be computed as per the Act before allowing any deductions.

The assessee argued that the partnership deed clauses for interest and remuneration were enabling provisions, not mandatory. The clauses stipulated that interest and remuneration would be paid as mutually agreed, subject to statutory limits. The assessee had not made such provisions in the accounts, indicating mutual agreement not to charge these amounts. The tribunal referred to a similar case, ITO vs. Smt. Mala Tandon, where it was held that mere incorporation of such clauses does not make them mandatory. The tribunal concluded that the partners had agreed not to charge interest or remuneration, and thus the disallowance by the AO was not justified.

Conclusion:
The tribunal found in favor of the assessee on both issues. The reopening of the assessment was not pressed by the assessee, and the tribunal focused on the interpretation of the partnership deed clauses. It held that the clauses were not mandatory and that the partners had mutually agreed not to charge interest or remuneration. Consequently, the disallowance of the section 80IB deduction was deleted, and the assessee's appeal was partly allowed.