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TMI Blog2011 (5) TMI 531X X X X Extracts X X X X X X X X Extracts X X X X ..... f, 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. - 2540 (AHD.) OF 2009 - - - Dated:- 20-5-2011 - G.D. AGARWAL, MUKUL KR. SHRAWAT, JJ. G.M. Chauhan for the Appellant. Mukesh M. Patel for the Respondent. ORDER Mukul Kr. Shrawat, Judicial Member. This is an appeal at the behest of the Revenue which has emanated from the order of Learned CIT (Appeals)-Gandhinagar dated 29-6-2009 passed for assessment year 2006-07. 2. The substantive ground is ground No. 1 is reproduced below : "1. The ld. CIT(A) was not justified in deleting the addition on account of Export Profit Reserve Credited to partners capital of Rs. 4,70,000." 2.1 Facts in brief as emerged from the corresponding assessment order passed under section143(3) of the Act dated 18-12-2008 were that the assessee-firm is in the business of manufacturing and export of "Sat Isabgul". It was noticed by the Assessing Officer that a sum of Rs. 41,70,000 was credited in the partners' capital account. The assessee has created a "reserve" as prescribed under section 80HHC of the Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 operative with effect from 1-4-1989 but as per the changed provision, even then there was no statutory mandate as to how the reserve created for the past years, i.e. for assessment years 1986-87 to 1988-89 (upto October 1989) has to be dealt with. The ld. CIT(A) has also compared the said "reserve" created with an another type of reserve created under section 32A as "Investment Allowance Reserve" in respect of which the mandate was clear about its utilization. The ld. CIT(A) has also mentioned that the distribution amongst partners was like in the nature of distribution of dividend amongst shareholders. Relevant portion for ready reference is reproduced below : "2.3.2 However, as already stated, we have no mandate as to how long the reserve is to be maintained and what are consequences. If one looks at the circular dated 11-7-1986 quoted by the Authorised Representative, it has been sated that "it has been decided that the provisions of the above proviso will not be infringed if dividends are distributed by the assessee out of such reserve". Therefore, if, in case of a company, the dividend can be distributed out of this type of reserve, in a partnership concern, such reserves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the reduction was to be allowed and, thereafter to be credited to a "reserve account" to be utilized for the purposes of the business of the eligible assessee. 6. There was a sea-change in the old provisions of the said deduction. Considering the low profitability of Indian Exporters, it was suggested that a shift be made in respect of the quantum of deduction and several exporter's organizations have suggested that the deduction should be turnover based, instead profit based. A turnover based incentive thus took care of the need of those exporters who did not earn enough profit but, however, it was found that those exporters have equally contributed significantly the earning of the foreign exchange on account of their large turnover. With effect from 1987, certain changes were made and vide CBDT Circular No. 469 dated 23-9-1986 certain clarifications were issued. However, it is also worth to mention that the requirement as to the creation of the said "reserve" was no more applicable for and from the assessment year 1989-90. 6.1 With this legal background, two contentions have been raised before us. First plank of the contention was that as per the then old provisions there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of the said section. In the present appeal, this Circular was cited before the Assessing Officer but he has brushed aside the contentions on the ground that the Circular was in respect of the company because the Circular has authorised the distribution of dividend, as against that, the assessee has distributed the "reserve" in the hands of the partners by crediting their respective capital account maintained in the books of account of assessee's firm. We are not going to approve the said logic of the Assessing Officer. The Board has decided to allow the distribution of dividend but they have not specifically mentioned that the said Circular should remain confined to the Indian Companies. Rather we have to go behind the intention of the said Circular that the dividend which was withheld by an assessee in the shape of undistributed "reserve" was thus allowed to be distributed. Appreciating the said intention, we therefore hold that in a situation where the assessee's firm had undergone a change in its constitution and a new partner was introduced, then it was not only logical but also a businessman approach to distribute an old "reserve" amongst the old partners. Assig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We, therefore, hold that there was no violation or infringement of those provisions of section 80HHC. For this legal proposition and to buttress our view, we place reliance on the decision of Hon'ble Bombay High Court pronounced in the case of CIT v. Pravin M. Mehta [2000] 246 ITR 445/[2001] 116 Taxman 505 (Mum.). This ground of the Revenue is, therefore, dismissed. 7. Ground No. 2 reads as under : "2. The ld. CIT (Appeals) was not justified in deleting the addition on account of interest claimed on partners capital account of Rs. 5,00,400. 7.1 Since the Assessing Officer has held that the distribution of "reserve" in the capital account of the partner was not justified, then he has also held that interest granted on the said capital was also unjustified. Accordingly, he has disallowed the interest by applying the rate of 12 per cent and an addition of Rs. 5,00,400 was made. The issue was carried before the first appellate a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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