2014-TIOL-115-ITAT-DEL
IN THE INCOME TAX APPELLATE TRIBUNAL
BENCH 'F' NEW DELHI
BENCH 'F' NEW DELHI
ITA No.3235/Del/2012
Assessment Year: 2008-09
Assessment Year: 2008-09
INCOME TAX OFFICER
WARD-15(2), NEW DELHI
WARD-15(2), NEW DELHI
Vs
M/s RAJAT DEEP OVERSEAS (P) LTD
179-A, LIG FLATS, RAJOURI GARDEN
NEW DELHI
PAN NO:AABCR4099N
179-A, LIG FLATS, RAJOURI GARDEN
NEW DELHI
PAN NO:AABCR4099N
ITA No.2309/Del/2012
Assessment Year: 2008-09
Assessment Year: 2008-09
M/s RAJAT DEEP OVERSEAS (P) LTD
179-A, LIG FLATS, RAJOURI GARDEN
NEW DELHI
179-A, LIG FLATS, RAJOURI GARDEN
NEW DELHI
Vs
INCOME TAX OFFICER
WARD-15(2), NEW DELHI
WARD-15(2), NEW DELHI
R P Tolani, JM And Shamim Yahya, AM
Date of Decision: January 10, 2014
Appellant Rep by: Shri Vivek Kumar Sr. DR
Respondents Rep by: Shri Ved Jain FCA & Smt Rano Jain, CA
Respondents Rep by: Shri Ved Jain FCA & Smt Rano Jain, CA
Income Tax - Sections 80HH, 80-IA(8), 80IC, 115JB, 143(3) – Whether merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be wily nily reduced on presumption – Whether deduction claimed under section 80IC is eligible while computing the book profit under section 115JB.
The assessee is an industrial undertaking situated at Haridwar and is claimed to be an eligible unit u/s 80-IC of the Act. AO though held the assessee is eligible for deduction u/s 80-IC, however, the amount of deduction u/s 80IC was reduced holding that the profitability of the company was very high as comparable to market and a substantial part of it was attributable to brand value, experience and knowledge of the directors and activities of branches. AO also hed that the assessee is liable to pay MAT under Section 115JB and is not covered by exemption provided under sub-section (6) of Section 115JB.
CIT (A) held that the AO was not justified in reducing the deduction u/s 80IC on account of experience and knowledge of directors. CIT (A) also held that AO was not correct in estimating 20% of the turnover as the profit on account of brand and reduced the same to 10% of the sale. Further it was held that AO was not correct in restricting the balance deduction to 12% of the total profit on account of the expenses of branches. CIT (A), however, confirmed the order of the AO holding that assessee to be liable to MAT u/s 115JB of the Act and is not exempt under clause (6) of Section 115JB.
Assessee contended that the prime condition of allowing deduction u/s 80IC is to the effect that eligible unit should be engaged in manufacturing or production of the article or thing. There is no condition about the ownership of brand in allowing deduction u/s 80IC. The calculation of ratio of 20% by the AO and 10% by CIT(A) is purely a guess work which is evident from the fact that the 20% of the sale comes to 61% of the net profit. Assessee has not paid any expenditure paid as royalty or brand value to anyone. The goods manufactured and sold pertain to the impugned Haridwar unit which is corroborated by the Excise and VAT returns. The eligible income is to be ascertained on the ordinary principle of commercial accounting. There is no provision in sec. 80IC to reduce the profit of any industrial undertaking attributable to any estimated or hypothetical brand value. The turnover shown in the balance sheet is correct, fully vouched and no error or discrepancy whatsoever has been pointed out.
After hearing both the parties, the ITAT held that,
++ the assesses books have been accepted, brand is owned by it which is integral part of the assets of the eligible unit. The sales have not been disturbed; profits of the eligible unit have gone up to 33% from preceding year's 29% due to its product superiority. The basis given by authorities below for reduction of claim is vague and factually incorrect based on an assumption that brand does not belong to the assessee. Without any material or basis, it is assumed that it may belong to some other concern connected to its directors. The fact of the matter is that the brand is owned by assessee and the products manufactured at Haridwar unit are the only products. There exists no other entity which is identified as owner of the brand by AO thus the allegation is factually incorrect;
++ merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be wily nily reduced on presumptions. Thus, CIT(A)'s order retaining the reduction of 10% is deleted;
++ the Directors are employees of the company and they have been suitably compensated. It is settled law that revenue cannot sit in the armchair of businessman and decide which business expenditure should be incurred in which manner. The AO cannot sit on assesses business acumen and judgment to decide that which percentage of the turnover should be paid to the directors for their experience and knowledge;
++ assessee filed a consolidated financial statement in which the expenses incurred by all the units and the head office have been reduced before arriving at the total eligible profit for claiming deduction u/s 80IC. AO has not controverted this statement in any manner. All sales, purchases and manufacturing activities are carried out by the Haridwar Unit. The other branches are providing sales promotion and after sales service The income earning activities thus cannot be held to the carried out from places other than the eligible unit besides in consolidated financial statement the income of these branches has already been reduced;
++ on going through the sub-section (6) of section 115JB it is clear that the exemption is available "from any business carried on.......... in a unit." The assessee has carried on the business in its unit at Haridwar and hence it is eligible for deduction under Section 115JB of the Act. The word between Unit and Special Economic Zone is not 'of', it is 'or'. Thus the unit does not get quantified with Special Economic Zone. The word 'Unit' is independent and hence the deduction cannot be restricted to a unit of SEZ. The deduction will be available from any business carried on in a Unit.
The assessee is an industrial undertaking situated at Haridwar and is claimed to be an eligible unit u/s 80-IC of the Act. AO though held the assessee is eligible for deduction u/s 80-IC, however, the amount of deduction u/s 80IC was reduced holding that the profitability of the company was very high as comparable to market and a substantial part of it was attributable to brand value, experience and knowledge of the directors and activities of branches. AO also hed that the assessee is liable to pay MAT under Section 115JB and is not covered by exemption provided under sub-section (6) of Section 115JB.
CIT (A) held that the AO was not justified in reducing the deduction u/s 80IC on account of experience and knowledge of directors. CIT (A) also held that AO was not correct in estimating 20% of the turnover as the profit on account of brand and reduced the same to 10% of the sale. Further it was held that AO was not correct in restricting the balance deduction to 12% of the total profit on account of the expenses of branches. CIT (A), however, confirmed the order of the AO holding that assessee to be liable to MAT u/s 115JB of the Act and is not exempt under clause (6) of Section 115JB.
Assessee contended that the prime condition of allowing deduction u/s 80IC is to the effect that eligible unit should be engaged in manufacturing or production of the article or thing. There is no condition about the ownership of brand in allowing deduction u/s 80IC. The calculation of ratio of 20% by the AO and 10% by CIT(A) is purely a guess work which is evident from the fact that the 20% of the sale comes to 61% of the net profit. Assessee has not paid any expenditure paid as royalty or brand value to anyone. The goods manufactured and sold pertain to the impugned Haridwar unit which is corroborated by the Excise and VAT returns. The eligible income is to be ascertained on the ordinary principle of commercial accounting. There is no provision in sec. 80IC to reduce the profit of any industrial undertaking attributable to any estimated or hypothetical brand value. The turnover shown in the balance sheet is correct, fully vouched and no error or discrepancy whatsoever has been pointed out.
After hearing both the parties, the ITAT held that,
++ the assesses books have been accepted, brand is owned by it which is integral part of the assets of the eligible unit. The sales have not been disturbed; profits of the eligible unit have gone up to 33% from preceding year's 29% due to its product superiority. The basis given by authorities below for reduction of claim is vague and factually incorrect based on an assumption that brand does not belong to the assessee. Without any material or basis, it is assumed that it may belong to some other concern connected to its directors. The fact of the matter is that the brand is owned by assessee and the products manufactured at Haridwar unit are the only products. There exists no other entity which is identified as owner of the brand by AO thus the allegation is factually incorrect;
++ merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be wily nily reduced on presumptions. Thus, CIT(A)'s order retaining the reduction of 10% is deleted;
++ the Directors are employees of the company and they have been suitably compensated. It is settled law that revenue cannot sit in the armchair of businessman and decide which business expenditure should be incurred in which manner. The AO cannot sit on assesses business acumen and judgment to decide that which percentage of the turnover should be paid to the directors for their experience and knowledge;
++ assessee filed a consolidated financial statement in which the expenses incurred by all the units and the head office have been reduced before arriving at the total eligible profit for claiming deduction u/s 80IC. AO has not controverted this statement in any manner. All sales, purchases and manufacturing activities are carried out by the Haridwar Unit. The other branches are providing sales promotion and after sales service The income earning activities thus cannot be held to the carried out from places other than the eligible unit besides in consolidated financial statement the income of these branches has already been reduced;
++ on going through the sub-section (6) of section 115JB it is clear that the exemption is available "from any business carried on.......... in a unit." The assessee has carried on the business in its unit at Haridwar and hence it is eligible for deduction under Section 115JB of the Act. The word between Unit and Special Economic Zone is not 'of', it is 'or'. Thus the unit does not get quantified with Special Economic Zone. The word 'Unit' is independent and hence the deduction cannot be restricted to a unit of SEZ. The deduction will be available from any business carried on in a Unit.
Revenue's appeal dismissed and assessee's appeal partly allowed
ORDER
Per: R P Tolani:
These are two cross appeals, filed by the revenue as well as the assessee, arising from CIT(A) order dated 29th March, 2012 relating to A.Y. 2008-09. Both the appeals are heard together and disposed of by a common order for the sake of convenience.
2. Respective grounds, effectively raised, are as under:
Assessee's appeal :-
Ld. CIT(A) erred in law and on facts in upholding the reduction in assesses claim u/s sec. 80IC on following issues:i. 10% of total turnover attributing it to market value of brand of the assessee., despite no such expenditure was incurred by it.ii. Upholding AO's action in holding that provisions of sec. 115JB is applicable to assesses case.
Revenue appeal:-
Ld. CIT(A) erred in law and on facts in upholding the reduction in assesses claim u/s sec. 80IC on following issues:(i) Restricting apportionment of profits in respect of Brand valuation to 10%.(ii) Deleting reduction of claim u/s 80IC by Rs. 29,75,890/- worked out by AO as attributable to directors due to high net profit of 33%.(iii) Assessee carried out only assembling of imported parts at Haridwar. CIT(A) failed to appreciate that profits reported by assessee were generated by joint activities of head office and branches. Hence the eligible profits have been rightly apportioned by AO between head office and branches.
2.1. A perusal of the grounds reveal that the main and common issue involved in both the appeals pertains to claim of deduction under Section 80-IC beside assesee's ground about application of 115JB.
3. Brief facts are the assessee is an industrial undertaking situated at Haridwar (Uttrakhand) and is claimed to be an eligible unit u/s 80-IC of the Act. It is engaged in the manufacture of auto parts like power locks, car locks and other similar parts used in the automobile industry. Its manufacturing operations commenced in preceding assessment year i.e. 2007-08 resulting in income of Rs.78.34 lacs on sales of Rs.2.72 crores on which deduction u/s 80IC was allowed by AO at Rs.78.34 u/s 80-IC by assessment u/s 143(3) dated. on 17-12-04.
3.1. During the year under consideration, assessee's turnover and book results improved resulting into income of Rs.3.69 Crores on the sales of Rs.10.55 croes, on which deduction u/s 80IC is claimed. The AO, though held that the assessee is eligible for deduction under Section 80-IC, however, the amount of deduction u/s 80IC was reduced holding that the profitability of the company was very high as comparable to market and a substantial part of it was attributable to the following factors:-
i) Brand valueii) Experience and knowledge of the directorsiii) Activities at the Branches
3.2. Based on these observations, AO held that Rs.2,11,03,237/- being 20% of the sale of Rs.10,55,16,186/- as the element of profit attributable to the market value of these factors i.e. brand value which is not eligible for deduction u/s 80-IC.
3.3. Ld. AO further held that the profit of Rs.52,75,809/- (being 5% of sale value of Rs.10,55,16,186/-) is attributable to the experience and knowledge of the directors, to whom Rs. 23.00 lacs were paid by assessee which was also not eligible for deduction under Section 80-IC.
3.4. It was further held that out of the balance profits i.e.Rs.1,07,68,503/-, 12% thereof was the profit eligible for deduction under Section 80-IC as against Rs.3,48,05,903/- claimed by assessee. Besides further holding that assessee is liable to pay MAT under Section 115JB and is not covered by exemption provided under sub-section (6) of Section 115JB.
3.5. Aggrieved assessee preferred appeal before ld. CIT(A) who held that the AO is not correct in estimating 20% of the turnover as the profit on account of brand and reduced the same to 10% of the sale. The CIT(A) further held that the AO was not justified in reducing the deduction u/s 80IC on account of experience and knowledge of directors which increased the income of the undertaking, and deleted the reduction of claim on this count. It was also held that the AO was not correct in restricting the balance deduction to 12% of the total profit on account of the expenses of branches.
3.6. Ld. CIT(A), however, confirmed the order of the AO holding that assessee to be liable to MAT under Section 115JB of the Act and is not exempt under clause (6) of Section 115JB.
3.7. Aggrieved both, the parties are before us; assessee against the partial disallowance of 10% of the turnover as profit on account of the market value of the brand; upholding the liability u/s 115JB and the revenue in respect of the relief granted by the learned CIT(A).
4. Ld. Counsel for the assessee Shri Ved Jain contends that ground. 1 of departmental appeal and ground 5 of assessee's appeal pertain to the first issue i.e. the determination of the profits eligible for deduction under section 80-IC. It has not been disputed that assessee is having an industrial undertaking at Haridwar which is eligible for deduction under section 80-IC. The entire sales of Rs.10,55,16,186/- has been made from Haridwar unit and assessee does not have any other unit or any other sales, purchases or income. The sale and purchases are fully vouched, there is no whisper of any allegation that sales have been over-invoiced or the purchases are understated by assessee. Books of accounts have been fully accepted. Thus there is neither any dispute about the veracity of accounts and their audit nor the computation of net profit of Rs.3,48,47,549/-.
4.1. Ld. AO has observed that assesses profits in preceding year are 29% and in current year 33%. Thus there is marginal increase in the profits as compared to earlier year. Despite these observations AO n page 1, para 2 has further held as under:-
"The net profit of the assessee works out to be 33% of the turnover which is very much higher as compared to the Industry average which is 3-5% of the turnover."
4.2. It amounts to observation based on surmises and conjectures. This fact is neither based on comparative instances nor any factual data, it is a generalized observation and unfounded allegation. It is vehemently argued that the observation is factually incorrect as no cogent basis whatsoever is placed on record to support it.
4.3. In appeal ld CIT(A) reduced it to 10% by following observations:
"AO has held that the appellant company had been showing high profit from the very first day and has attributed the high percentage of profit to the brand value established by the company before it started its manufacturing operation. The AO ha held that any extra profit realized by the assessee as a result of brand cannot be attributed to the business of the industrial undertaking and thus cannot be held to be eligible for deduction u/s 80IC of the Act. Since profit attributable to the brand value cannot be said to be derived by the industrial undertaking and hence eligible for deduction u/s 80IC, the contention of the AO in this regard is correct. As it has already been discussed above, only that profit which is derived by the industrial undertaking is eligible for deduction u/s 80IC.The AO has estimated the brand value to be 20% of the sale value of the products and has accordingly held that 20% of the sale value is attributable to the brand and not to the eligible industrial undertaking. The AO has computed the brand value on the basis of the total turnover of the appellant company. Computing the brand value on the basis of turnover is correct as the value of brand would have an impact on the total sales i.e. the turnover of the company. The estimation made by the AO however seems to be on the higher side as the sales turnover during the period ending 31-03-2006 was Rs. 1.21 crore as against Rs. 10.55 crore in the relevant period i.e. 10% of the present turnover approximately. Keeping in view, the growth of the company in the two years after start of manufacturing process and the profit attributable to the reduced cost of the goods as result of manufacturing, a against goods purchased by the appellant company from the market, the brand value of the goods is valued at 10% of the total turnover which in the current year was Rs. 10,55,16,186/-. Thus, out of the total profit the eligible profit for the purpose of section 80IC would be reduced by 10% Rs. 10,55,16,186 i.e. Rs. 1,05,51,618/-."
4.4. It is pleaded that ld. CIT(A) failed to appreciate that there is no reference to any expense on brand building incurred by the undertaking out of books or utilization of any brand owned by some other entity. Copy of registration certificate of brand in assesses name was already filed. Thus the brand is also a commercial asset of the eligible undertaking and is part of its income generating apparatus and is an integral part of the eligible profits for deduction u/s 80IC. The claim has been allowed on same lines in preceding year by an assessment u/s 143(3) after due verification. When assessee has demonstrated that the sale proceeds pertain to eligible unit, brand is owned by it and there is no allegation that any out of books expenditure has been incurred by unit for brand expenditure; there is no justification at all to reduce the claim u/s 80IC, ignoring these glaring facts.
4.5. Ld. counsel further contends that the prime condition of allowing deduction u/s 80-IC is to the effect that eligible unit should be engaged in manufacturing or production of the article or thing. There is no condition about the ownership of brand in allowing deduction u/s 80IC. The calculation of ratio of 20% by the AO and 10% by CIT(A) is purely a guess work which is evident from the fact that the 20% of the sale comes to 61% of the net profit. It is an admitted fact that assessee has not paid any expenditure paid as royalty or brand value to anyone. The goods manufactured and sold pertain to the impugned Haridwar unit which is corroborated by the Excise and VAT returns which are placed on PB pages 62 to 68. It is settled law that the eligible income is to be ascertained on the ordinary principle of commercial accounting. There is no provision in sec. 80IC to reduce the profit of any industrial undertaking attributable to any estimated or hypothetical brand value. The provision stipulates deduction of profits of industrial undertaking and do not refer to any reduction whatsoever on assumptions.
4.6. The assessee is subject to excise laws under which assesses product prices are approved after due inspection/ verification and in case of exigencies even referred to the cost audit, The major purchases of the assessee are by way of import of raw material which are subject to verification at the time of import. Hence the turnover shown in the balance sheet is correct, fully vouched and no error or discrepancy whatsoever has been pointed out.
4.7. It is pleaded that the reference made by ld CIT(A) to the judgment of the Authority for Advance Ruling in the case of Shams Tabrez Vanti [2005] 273 ITR 0299 = (2005-TIOL-06-ARA-IT)for upholding the disallowance of 10% of the turnover as income not arising from industrial undertaking is not proper. In this case the issue pertained to the interest income on the fixed deposit and the Authority for Advance Ruling has held that "source of income is independent of the export and hence cannot be considered to be an eligible income."
4.8. Similarly the reference by CIT(A) to the judgment of the Supreme Court in the case ofLiberty India vs. CIT [2009] 317 ITR 0218 = (2009-TIOL-100-SC-IT) is also not correct. It was a case of a Duty Drawback/DEPB and not of deduction i/s 80IC, there it was held that Duty Drawback and DEPB are independent source of income and cannot be included while determining the eligible income for deduction.
4.9. In the present case there is no dispute about the income earned being only from manufacture or production of article or thing. The only source of income as is evident from the profit and loss account is sales of Rs.10,55,16,186 from Haridwar unit only, where the manufacturing activities are being carried on and there is no other source of income like interest or DEPB or Duty Drawback or interest on FDR. On the contrary, both the lower authorities by apportioning a part of it towards market value of brand are going against the judgment of Hon'ble Supreme Court itself rendered in Liberty India (Supra). The entire sales being out of the manufacturing of product, there cannot be any bifurcation of sales that a percentage is on account of manufacturing and the other to brand value. The entire sales being from manufacturing no notional or hypothetical splitting is possible as endeavored by both the authorities below by arbitrarily assigning part of sales as estimated value of brand. More so when there is nothing on record to support the notion that assessee is using any technology owned by somebody else.
4.10. Reliance is placed by ld. Counsel on following judgments:-
(i) Ram Panjwani and Co vs IAC 39 ITD 21 (Delhi) –15. As regards the issue of bifurcation of income for the purposes of section 80HH, we find considerable merit in the submissions of the learned counsel for the assessee. The decision of the Supreme Court in the case of Anglo-French Textile Co. Ltd. was in an altogether different context. In that case the question was of bifurcation of income attributable to the taxable territories (British India) and attributable to the non-taxable territories. In that case bifurcation had to be made and was justified. The language of section 80HH, however, is different. While applying the provisions of the said section one has to see whether there was an industrial undertaking and what were the profits and gains derived from such an industrial undertaking. There is no manner of doubt that the assessee was running two industrial undertakings at Jammu and Yamuna Nagar. The assessee was manufacturing sleepers out of the forest trees. The income was derived from these industrial undertakings. It could not be said that the profit was derived partly from manufacturing activities and partly from trading activities. According to us the activity of getting a forest on lease, of felling the trees, of manufacturing the sleepers, of transporting them to the branches and of selling them was one integrated activity which could not be bifurcated or partitioned.Once the source was identified, namely, that the income had been derived from the industrial undertaking, no further enquiries could be made by the Revenue authorities. Shri Sapra's reliance on the decision of Karnataka High Court in Sterling Foods case is wellfounded. It is significant to note that where the legislature itself wanted bifurcation it had made provision for the same in the relevant section. Section 80HHC of the Act is a case in point. That section makes a clear distinction between the export sales and other sales because such a distinction was inherent in the situation and was called for. There is no such distinction contemplated under section 80HH. Manufacture or production of an article or thing is a condition precedent for an undertaking to become an industrial undertaking. That, however, does not mean that the profits derived from manufacture alone can be taken into consideration for working out the deduction under section 80HH. Once a particular undertaking is held to be an industrial undertaking then there is no alternative, but to go to the profits and gains derived from such an industrial undertaking for working out the relief under section 80HH. The use of the word "manufacture" is in a different context which should not be lost sight of. There is no justification for stretching it further and to hold that only manufacturing profits in the backward area would be considered for the purposes of section 80HH and not the trading profits. In a case where an assessee was manufacturing sleepers and was also purchasing sleepers for trading purposes it could perhaps be said that the assessee was having two separate activities and perhaps the income derived from the sale of sleepers which were purchased by the assessee it could be said that relief under section 80HH was not admissible. That is, however, not the case with the assessee. The assessee was not purchasing any sleepers from outside parties in its branches at Yamuna nagar and Jammu. The activity of manufacture and sale of the sleepers by the assessee has been held by us to be an integrated activity which could not be bifurcated or divided. It is also a salutary and well-settled principle of law that while construing the exemption provision a liberal approach should be adopted. As regards the Jammu branch there was no justification for reducing the profits by Rs. 9,99,133 as the sales were also taking place at Jammu which is a backward area. So even as per the learned CIT's own reasoning, such deduction from the profits was unjustified. Having regard to the entire facts and circumstances of the case including the one that assessment year 1985-86 was not the initial year. We hold that the learned CIT was in error in deducting amounts of Rs. 6,51,026 and Rs. 9,99,133 from the Yamuna Nagar branch and Jammu branch respectively for working out relief under section 80HH.(ii) Commissioner of Income Tax Versus M/s Godawari Power & Ispat Ltd. (Chhattisgarh High Court)'Whether on the facts and in the circumstances of the case, the "market value", as specified in Section [80-IA (8)] of the Act would be the same as the "sale price" of the State Electricity Board when the assessee did not incur any transmission loss or administrative or any other charges which the State Electricity Board has to incur for the same?'31. The market value of the power supplied to the Steel-Division should be computed considering the rate of power to a consumer in the open market and it should not be compared with the rate of power when it is sold to a supplier as this is not the rate for which a consumer or the Steel- Division could have purchased power in the open market. The rate of power to a supplier is not the market rate to a consumer in the open market.32. In our opinion, the AO committed an illegality in computing the market value by taking into account the rate charged to a supplier: it should have been compared with the market value of power supplied to a consumer.33. It is admitted by the Department that in Chhattisgarh the power was supplied to the industrial consumers at the rate of Rs. 3.20/- per unit for the AY 2004-05 and Rs. 3.75/- per unit for the AYs 2005-06 and 2006-07. It was this rate that was to be considered while computing the market value of the power.34. The CIT-A and the Tribunal had rightly computed the market value of the power after considering it with the rate of power available in the open market namely the price charged by the Board. There is no illegality in their orders.35. In view of above, the question is decided against the Department and in favour of the Assessee. The tax appeals have no merit. They are dismissed.(iii) Commissioner of Income-tax -III Versus Velankani Information Systems (P.) Ltd., (ITA Nos. 374 & 375 of 2011 and 273 to 276 of 2012 dated - April 2, 2013 (Karnataka)But if the assessee is in the business of taking land, putting up commercial buildings thereon and letting out such buildings with all furniture as his profession or business, then notwithstanding the fact that he has constructed a building and he has also provided other facilities and even if there are two separate rental deeds, it does not fall within the heading of income from house property. Therefore, firstly what is the intention behind the lease and secondly what are the facilities given along with the buildings and documents executed in respect of each of them is to be seen. Thirdly it is to be found out whether it is inseparable or not. If they are inseparable and the intention is to carry on the business of letting out the commercial property and carrying at complex commercial activity and getting rental income therefrom, then such a rental income falls under the heading of profits and gains of business or profession. In fact, any other interpretation would defeat the very object of introduction of Section 80-IA as well as the scheme which is framed by the Government for development of industrial parks in the country. In that view of the matter, the finding recorded by the Appellate Authority as well as the Tribunal is in accordance with law and does not suffer from any legal infirmity which calls for interference. Accordingly, the substantial questions 1 and 2 are answered in favour of the assessee and against the revenue.
5. Ld. DR supported the order of AO.
6. We have heard the rival contentions and perused the material available on record. We find merit in the contentions of ld counsel that assesses books have been accepted, brand is owned by it which is integral part of the assets of the eligible unit. The sales have not been disturbed; profits of the eligible unit have gone up to 33% from preceding year's 29% due to its product superiority. The basis given by authorities below for reduction of claim is vague and factually incorrect based on an assumption that brand does not belong to the assessee. Without any material or basis, it is assumed that it may belong to some other concern connected to its directors. The fact of the matter is that the brand is owned by assessee and the products manufactured at Haridwar unit are the only products. There exists no other entity which is identified as owner of the brand by AO thus the allegation is factually incorrect.
6.1. The provision of sec 80IC have been introduced by legislature to promote the industrial activity and their profitability. Merely because the industrial undertaking earned higher profits does not call for an inference that claim of deduction is to be wily nily reduced on presumptions. In consideration of entirety of facts and circumstances we see no justification in CIT(A)s order retaining the reduction of 10% from the deduction, same is deleted. Revenues ground is dismissed and that of assessee is upheld on this issue.
7. Apropos second issue raised by revenue facts are, disallowance of Rs.29,75,809/- made by the AO, computed @ 5% of the turnover as the value of the directors' experience and knowledge.
8. Ld. DR supports the order of AO.
9. Ld. Counsel for the assessee contends that the Directors are employees of the company and they have been suitably compensated. It is settled law that revenue cannot sit in the armchair of businessman and decide which business expenditure should be incurred in which manner. The AO cannot sit on assesses business acumen and judgment to decide that which percentage of the turnover should be paid to the directors for their experience and knowledge.
9.1. Ld. CIT(A) on page 20 of his order has elaborately dealt with the facts and contentions and objectively held that the payment of Rs.23 Lacs to director is adequate and calls for no further estimation based on surmises. It is pleaded by the assessee that reasonings given by the CIT(A) for deletion of the addition are objective and correct the order needs to be upheld.
10. We have heard the rival contentions and perused the material available on record. Ld. CIT(A) has deleted this disallowance by following observations:
"The AO has held that any extra profit realized by the assessee as a result of the services know-how and special knowledge of the director cannot be attributed to the business of the industrial undertaking and thus cannot be held to be eligible for deduction u/s 80IC of the Act. The AO has estimated the value of services know-how and special knowledge of the director to be 5% of the sale value of the products and has accordingly held that 5% of the sale value is attributable to the service, know-how and special knowledge of the director and not to the eligible industrial undertaking. As per the profit & loss a/c and as per the assessment order a sum of Rs. 23,00,000/- is being paid to the directors as salary and another Rs. 13,00,000/- is being paid to M/s R.D. Enterprises, the distributor of the products of the company. The AO has held that 5% of the turnover of the company is attributable to the experience and specialized knowledge of the director and not to the eligible unit. As per the P&L a/c for the period ending 31-03-2006, the director's remuneration was Rs. 60,000/-. Over a period of two years it has been increased to Rs. 23,00,000/-. This shows that adequate compensation is being provided to the director for his services, knowledge, contract and skills. As the company ha adequately compensated the director for using their experience and specialized knowledge, therefore, the benefit accruing to the company belongs to it and would form part of its eligible profit. Benefit accruing a company as a result of experience or knowledge of its employees (Directors) cannot be used to bifurcate the eligible profit derived by the industrial undertaking u/s 80IC. Therefore, the decision of the AO that 5% of the sale value does not form part of the eligible profit is not sustained."
9.2. In our view the reasoning adopted by CIT(A) is proper and justified. While dealing with the first issue raised by revenue we have given elaborate reasons to hold that claim u/s 80IC can not be reduced on surmises and assumptions. For the same reasons we uphold the order of ld CIT(A) on this issue. Revenue ground is dismissed.
10. The facts about third issue raised by revenue are – ld. AO held that entire profits derived by industrial undertaking at Haridwar cannot be allowed as it is to be allocated to other branches on the basis of salary and wages expenses. Thus only 12% of the profit derived from the industrial undertaking will be eligible for deduction under section 80-IC. Assessee claimed that all the purchases, sales and manufacturing activities are carried out at Haridwar industrial undertaking only. There is no rationale to hold that expenses incurred at the Branch offices/head office will be the basis for allowing deduction under section 80-IC of the Act. Rejecting assesses explanation AO reduced the claim u/s 80IC.
10.1. Aggrieved assessee preferred first appeal, where it was contended that it is not the case of the AO that all the expenses of head office or branches have not been deducted while computing 80-IC of the Act. The AO's contention is baseless as an assumption may be possible when there is a finding that part of these expenses is not deducted while working of the eligible income. When it un disputed that relevant expenses have been properly and correctly accounted for in the books which are duly audited and considered while computing the income of the eligible unit, there is no rationale in the assuming that any other activity is carried out by the appellant.
10.2. Ld. CIT(A) deleted the reduction of claim u/s 80IC by observing as under:
"The AO has held that the entire profit cannot be held to be derived from the undertaking at Haridwar and has allocated the profit to different branches on the basis of expense under the head salary and wages. The AO has held that the entire profit cannot be held to be derived from the undertaking at Haridwar and has held that most of the income earning activities resulting in profit to the assessee is carried from places other than the eligible unit and thus this income cannot be held to be eligible for deduction u/s 80IC of the Act. The entire sales are being made from the Haridwar branch. This is further confirmed from the VAT details filed by the appellant. The excise records also confirm that the entire manufacturing activities is being carried out at Haridwar Unit. The affidavit has also been filed by the Director of the appellant company during assessment proceedings confirming that all sales and purchases are being made by the Haridwar Unit. The other units of the appellant company are providing sales promotion and after sales service The income earning activities thus cannot be held to the carried out from places other than the eligible unit. Further, the appellant company has prepared a consolidated financial statement in which the expenses incurred by all the units and the head office have been reduced before arriving at the total eligible profit for claiming deduction u/s 80IC. Keeping in view the above facts and circumstances, the decision of the AO is not sustained."
11. Ld. DR relied on the order of AO and ld. Counsel for assessee on the order of CIT(A).
12. We have heard the rival contentions and perused the material available on record. It is not disputed that assessee filed a consolidated financial statement in which the expenses incurred by all the units and the head office have been reduced before arriving at the total eligible profit for claiming deduction u/s 80IC. AO has not controverted this statement in any manner. All sales, purchases and manufacturing activities are carried out by the Haridwar Unit. The other branches are providing sales promotion and after sales service The income earning activities thus cannot be held to the carried out from places other than the eligible unit besides in consolidated financial statement the income of these branches has already been reduced. In consideration of all these facts and circumstances we uphold the order of CIT(A), this ground of the revenue is dismissed.
13. Apropos assesses remaining issue about MAT, Ld. AO held that the assessee is liable to pay MAT under Section 115JB. The CIT(A) has upheld the order. In this regard it may be relevant to refer to sub-section (6) of Section 115JB which reads as under:-
"(6) The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered, by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be."
13.1. The authorities below have held that this exemption is available to SEZ only and that too when the assessee is a developer. On going through the above sub-section (6) it is clear that the exemption is available "from any business carried on.......... in a unit." The assessee has carried on the business in its unit at Haridwar and hence it is eligible for deduction under Section 115JB of the Act. The word between Unit and Special Economic Zone is not 'of', it is 'or'. Thus the unit does not get quantified with Special Economic Zone. The word 'Unit' is independent and hence the deduction cannot be restricted to a unit of SEZ. The deduction will be available from any business carried on in a Unit.
14. After hearing both the parties and perusing the material available on record we see no infirmity in the orders of authorities below which are upheld. Assessee's ground in this behalf is dismissed.
15. In the result revenue's appeal is dismissed and assessee's appeal is partly allowed.
(Order pronounced in open court on 10.1.2014.)
IT: Claim of reduction from book profits computed under section 115JB of amount of deduction eligible under section 80-IC is an incorrect claim
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[2013] 35 taxmann.com 233 (Delhi - Trib.)
IN THE ITAT DELHI BENCH 'G'
Assistant Commissioner of Income-tax, Circle - Hardwar
v.
SBL Industries (P.) Ltd.*
J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
AND C.M. GARG, JUDICIAL MEMBER
AND C.M. GARG, JUDICIAL MEMBER
IT APPEAL NO. 3957 (DELHI) OF 2012
[ASSESSMENT YEAR 2010-11]
[ASSESSMENT YEAR 2010-11]
MAY 23, 2013
Section 115JB, read with section 80-IC, of the Income-tax Act, 1961 - Minimum alternate tax [Deduction under section 80-IC] - Whether a deduction under section 80-IC is not an item of adjustment in Explanation 1 to section 115JB; thus, while computing book profits under section 115JB, reduction of amount deductible under section 80-IC cannot be claimed - Held, yes [Para 10] [In favour of revenue]
IT : Provisions of section 115JB would apply in case of an assessee who is entitled to deduction under section 80-IB
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[2013] 31 taxmann.com 166 (Karnataka)
HIGH COURT OF KARNATAKA
Sankhla Polymers (P.) Ltd.
v.
Income-tax Officer, Ward 12(2), Bangalore*
D.V. SHYLENDRA KUMAR AND B SREENIVASE GOWDA, JJ.
IT APPEAL NOS. 1100 OF 2006 & 33-34 OF 2013
JANUARY 29, 2013
Section 115JB, read with section 80-IB, of the Income-tax Act, 1961 - Minimum alternate tax [Scope of] - Assessment years 2002-03 to 2004-05 - Whether provisions of section 115JB would apply in case of an assessee who is entitled to deduction under section 80-IB - Held, yes [In favour of revenue]
[2011] 199 TAXMAN 75 (Uttarakhand)
HIGH COURT OF UTTARAKHAND
Sidcul Industrial Association
v.
State of Uttarakhand*
BARIN GHOSH, CJ. AND NIRMAL YADAV, J.
WRIT PETITION NOS. 1 TO 3 OF 2010(M/B)
NOVEMBER 26, 2010
Section 115JB, read with section 80-IC, of the Income-tax Act, 1961 - Minimum alternate tax - Whether section 115JB will apply to an assessee, being a company, even if it is entitled to deductions mentioned in section 80-IC - Held, yes
FACTS
On 7-1 2003, the Joint Secretary to the Government of India, in the Ministry of Commerce and Industry, issued an Office Memorandum and thereby propounded a new industrial policy and other concessions for the States of Uttaranchal (now Uttarakhand) and Himachal Pradesh. In the said policy it was indicated, amongst others, that new industrial units and existing industrial units, on their substantial expansion, as defined in the policy and set up in those areas as mentioned in the policy and in other areas as may be notified, would be entitled to, amongst others, 100 per cent income-tax exemption for the initial period of 5 years and, thereafter, at 30 per cent for companies and at 25 per cent for other companies for a further period of 5 years for the entire States of Uttaranchal and Himachal Pradesh, from the date of commencement of commercial production. Subsequent thereto, by the Finance Act, 2003, section 80-IC was inserted in the Act with effect from 1-4-2004. In terms of section 80-IC, an assessee-company, which begins to manufacture or produce, or being a manufacturer or producer, undertakes substantial expansion during the period between 7-1-2003 and 1-4-2012 through an undertaking or an enterprise situated in the notified areas of the State of Uttaranchal would be entitled to 100 per cent deduction in computing its total income of the profits and gains made therefrom for the first 5 assessment years and, thereafter, at 30 per cent thereof.
On 20-2-2008, the Principal Secretary, Industrial Development, Uttarakhand, wrote a letter to the CBDT stating that representations had been received from companies contending that they had set up industries in the State of Uttarakhand believing that the minimum tax prescribed in section 115JB would not be applicable to them, on the assumption and belief that 100 per cent income-tax exemption for initial 5 years, and at 30 per cent thereafter for a further period of 5 years, would be applicable to them. The object of the said letter was to obtain clarification in that regard. The CBDT made it clear that section 115JB would apply.
Accordingly, the instant writ petitions were filed contending that in relation to the assessee-companies, covered by section 80-IC, section 115JB was not applicable.
[2009] 32 SOT 207 (AHD.)
IN THE ITAT AHMEDABAD BENCH 'B'
Ganesh Housing Corporation Ltd.
v.
Assistant Commissioner of Income-tax*, Circle-4, Ahmedabad
T.K. SHARMA, JUDICIAL MEMBER AND P.K. BANSAL, ACCOUNTANT MEMBER
IT APPEAL NOS. 509, 602, 762 AND 831 (AHD.) OF 2008
[ASSESSMENT YEARS 2004-05 AND 2005-06]
DECEMBER 12, 2008
Section 115JB, read with section 80-IB, of the Income-tax Act, 1961 - Minimum alternate tax - Assessment years 2004-05 and 2005-06 - Whether deduction under section 80-IB cannot be allowed while computing book profit under section 115JB - Held, yes
FACTS
The assessee-company was engaged in the business of building and development of housing projects. The assessee, while computing the book profit under section 115JB, reduced the deduction available under section 80-IB(10) on the plea that its entire profit was exempt under section 80-IB(10) and the said exempted profit could not form part of the book profit in pursuance of section 115JB(5). The Assessing Officer disallowed the assessee's claim.
On appeal, the Commissioner (Appeals) held that as per the provisions of section 115JB, book profit was allowed to be reduced by the amount of profits eligible for deduction under sections 80HHC, 80HHE and 80HHF as per Explanation to section 115JB, whereas there was no such provision to deduct the profit eligible for deduction under section 80-IA or 80-IB. He, therefore, upheld the order of the Assessing Officer.
On second appeal :
HELD
From a perusal of the provisions of section 115JB, it is apparent that if in the case of an assessee being a company the income-tax computed in accordance with the provisions of the Act comes to less than 10 per cent of the book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income, i.e., book profit will be computed at the rate of 10 per cent. In such a situation, no other provisions contained in the Act will be applicable. Sub-section (2) stipulates that for the purpose of this section, the profit and loss account for the relevant previous year shall be prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. It has further been laid down that while preparing the annual accounts including the profit and loss account, the accounting policies, accounting standards, the methods and rates adopted for calculating the depreciation shall be the same as have been adopted for the purpose of preparing such accounts including the profit and loss account and laid before the company at the Annual General Meeting in accordance with the provisions of section 210 of the Companies Act, 1956. Explanation 1 to section 115JB(2) defines 'book profit' for the purpose of section 115JB to mean the net profit as shown in the profit and loss account for the relevant previous year as prepared under sub-section (2) and increased with the items as has been stipulated under clauses (a) to (h) of Explanation 1 and has to be reduced by the items as stipulated under clauses (i) to (viii). Thus, the book profit will be the net profit as shown in the profit and loss account as has been laid before the company at its Annual General Meeting in accordance with the provisions of section 210 of the Companies Act, 1956, and as has been arrived at by following the accounting policies, accounting standards and the methods and rates adopted for calculating the depreciation as has been adopted for preparing the profit and loss account as laid before the Annual General Meeting. Thus, the net profit as shown in the profit and loss account laid before the Annual General Meeting will be the book profit, but this book profit is subject to the adjustment as laid down under Explanation 1, clauses (a) to (h) and clauses (i ) to (viii). Clauses (iv), (v ) and (vi), no doubt, state that the profit has to be reduced by the amount of profit eligible for deduction under section 80HHC, under section 80HHE and under section 80HHF, respectively. Clauses (i) to (viii) under Explanation 1 nowhere provide for the reduction of the deduction allowable under section 80-IB out of the book profit. Sub-section (3) states that the provisions of section 115JB(1) will not affect the determination of the amounts in relation to the relevant previous years to be carried forward to the subsequent year or years under section 32(2) or 32A(3) or 72(1) or 73 or 74A(3). Section 115JB(4) makes it mandatory on the part of the assessee-company to whom section 115JB is applicable to furnish a report in the prescribed form from the chartered accountant, certifying that the book profit has been computed in accordance with the provisions of this section and such report should be furnished along with the return of income filed under section 139(1) or in response to a notice under section 142(1)(i). Sub-section (5) provides that all the provisions of this Act shall apply to every assessee being a company, except to the extent otherwise provided in this section. The assessee's basic contention was that the deduction available under section 80-IB since fell under Chapter VI-A and had to be allowed to the assessee even a company while computing the total taxable income, therefore, in view of sub-section (5) of section 115JB, the assessee should be allowed the deduction in respect of the income eligible for deduction under section 80-IB while computing the book profit under this section. The assessee's contention could not be accepted. The deduction under section 80-IB is available out of the gross total income, provided the gross total income of an assessee includes any profits and gains derived from the eligible business. Section 115JB is concerned with the computation of book profit, and not the total income. The terms 'book profit' and 'total income' both are having different meanings. 'Book Profit' is defined under Explanation 1 to section 115JB, while the 'total income' is defined under section 66. Under section 115JB, one is concerned with the determination of the book profit, and not the total income or the gross total income. [Para 8]
Charge of income-tax as per section 4 is on the total income of the previous year of every person. The scope of the total income is defined under section 5 which is different in the case of residents and non-residents. The resident in India or non-resident has to be determined in accordance with the provisions of section 6. Sections 10 to 13A deal with the income which does not form part of the total income. Section 14 deals with as to how the total income is to be computed under different heads of income, viz., 'Salaries,' 'Income from house property', 'Profits and gains of business or profession', 'Capital gains' and 'Income from other sources'. After computing the income under the different heads as per the provisions of sections 14 to 59, there are certain incomes of other persons, which are to be included in the assessee's total income. They are being dealt with under sections 60 to 65. Section 66 lays down that in computing the total income of the assessee, there shall be included all the income on which no income-tax is payable under Chapter VII. Sections 67 to 79 falling under Chapter VII deal with the aggregation of the income and set-off and carry-forward of the losses while computing the total income of the assessee. However, Chapter VI-A deals with various provisions relating to the deductions to be made in computing the total income of the assessee. These deductions are to be made out of the gross total income. Gross total income is defined under section 80B(5) to mean the total income computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. The deduction under section 80-IB is allowable to the assessee on the profits of the eligible business included in the gross total income and it falls under Chapter VI-A. Section 80A(1) provides that in computing the total income of an assessee, there shall be allowed from his gross total income in accordance with and subject to the provisions of this Act, the deductions specified in sections 80C to 80U. Thus, the income computed prior to the deduction under Chapter VI-A has to be regarded as the gross total income and once the deductions under Chapter VI-A are allowed, the total income is arrived at. On this total income, the tax is computed subject to the provisions contained in Chapters VII and VIII of the Act. Section 115JB itself distinguishes in the terms 'total income' and 'book profit'. It clearly states that firstly, the total income of the assessee has to be computed in accordance with the provisions of the Act. Secondly, the income-tax payable on the total income so computed has to be determined. Thirdly, the book profit has to be worked out in accordance with the provisions of section 115JB. Fourthly, the income-tax payable on the total income has to be compared with the book profit and on comparison, if it is found that the income-tax payable is less than 10 per cent of the book profit, the book profit so worked out shall be deemed to be the total income of the assessee and the tax payable by the assessee on such book profit shall be the amount of income-tax at the rate of 10 per cent. Thus, the 'book profit' and 'total income' have to be computed independently. Therefore, the assessee could not be allowed deduction under section 80-IB while computing the book profit under section 115JB. [Para 9]
In view of aforesaid, the order of the Commissioner (Appeals) was to be upheld. [Para 11]
Regards,
Pawan Singla , LLB
M. No. 9825829075 IT : Partners are entitled to claim exemption under Section 10(2A), on the share of profit received from the firm even if it includes that income also which was exempted in the hands of the firm under various provisions of Section 10.
Facts:
| (a) | The assessee, a private Ltd. company, was partner in the partnership firm. Its case was selected for scrutiny and the show-cause notice was issued to it as to why exempt income of the firm would not be excluded while computing the exemption to the assessee under Sec.10(2A); | |
| (b) | Assessee challenged the explanation to Section 10(2A) on the ground that it was discriminatory and in violation of Articles 14 and 265 of the Constitution. | |
| (c) | Further, a declaration was sought by the assessee that it was entitled to claim exemption under Section 10(2A) in respect of its total share of profit received as partner of the firm which would include the income exempted from tax in the hands of the firm. |
The High Court held as under:
| (1) | Although the dividends income and income derived from mutual funds were not includible in the taxable income of the firm yet they were nevertheless part of its profits; | |
| (2) | The expression total income of a firm in the Explanation to section 10(2A) would not mean taxable income of the firm but gross total income of a firm which included exempted income as well; | |
| (3) | The Assessing Officer had lost sight of this aspect and had held that 'total income' for the purpose of Explanation to Sec. 10(2A), as defined in Section 2(45), would mean the total amount of income as referred to in Sec. 5,computed in the manner laid down in the Act; | |
| (4) | Therefore, the AO was not right in holding that the income which was excluded from the total income of the firm under Sec. 10, would have to be taxed in the hands of the partners on the reasoning that only income which was taxed in the hands of the firm would be exempted from tax in the hands of the partner; | |
| (5) | The Explanation to section 10(2A) would not call for any striking down in the hands of this Court. The Explanation could not be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment was to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includable while computing the total income of the partner under the Act; | |
| (6) | Thus, the assessee was entitled to claim exemption under Section10(2A), on the share of profit of the firm, inclusive of the income, which is exempted under sub-sections (34), (35) and (38) of Section 10, as the total income referred to in Section 10(2A), includes exempted income of the partnership firm. |
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[2014] 43 taxmann.com 1 (Karnataka)
HIGH COURT OF KARNATAKA
Vidya Investment & Trading Co. (P.) Ltd.
v.
Union of India
B.V. NAGARATHNA, J.
W.P. NO. 18813 OF 2013 (T-IT)
FEBRUARY 7, 2014
Venkataraman, A. Shankar and M. Lava for the Petitioner. E.R. Indra Kumar, E.I. Sanmathi, K.V. Aravind and N. Padmabhushan for the Respondent.
ORDER
The petitioner, a private limited company incorporated under the provisions of the Companies Act, has assailed the Assessment Order dated 28/03/2013 passed by the fourth respondent under sub-section (3) Section 143 of the Income-tax Act, 1961 (hereinafter referred to as "the Act") for the Assessment Year 2010-11 (Annexure-A) as well as the notice of demand for the payment of Rs.21,84,85,240/- (Annexure-B). The explanation to sub-section (2A) of Section 10 of the Act is also challenged on the ground that it is discriminatory and in violation of Articles 14 and 265 of the Constitution insofar it relates to a partnership firm and a further declaration is sought by the petitioner that it is entitled to claim exemption under sub-section (2A) of Section 10 of the Act on its share of profit as partner of the firm income inclusive of the income, which is exempted from tax under sub-section (34) of Sections 10 and sub-section (35) of Section 10 of the Act. In substance, a declaration is sought to the effect that the total income referred in sub-section (2A) of Section 10 of the Act does not include income of the partnership firm which is exempted from tax. Having regard to the aforesaid prayers, the petitioner has filed this writ petition under Articles 226 and 227 of the Constitution.
FACTS
2. The facts in brief are that the petitioner is a private limited company and the petitioner-company is a partner in the partnership firm of M/s.Prazim Traders, entitled to a share of 30% in the profit of the firm. Petitioner filed its Return of Income for the Assessment Year 2010-11 declaring a loss of Rs.87,293/-. The assessment was selected for scrutiny under sub-section (2) of Section 143 of the Act. The petitioner furnished details as called for by the Assessing Officer and by its letter dated 7/2/2013 stating that sub-section (2A) of Section 10 was inserted to the Act in order to ensure that there was no taxation of the share of profits of the partnership firm in the hands of the partner of the firm, as it was exempted. However, show-cause notice was issued to the petitioner as to why such exempted portion of the income of the firm should not be excluded while computing the total income under sub-section (2A) of Section 10 of the Act. A detailed reply was submitted by the petitioner on 4/3/2013, followed by a detailed submission before the third respondent. By order dated 25/3/2013, the third respondent observed that sub-section (2A) of Section 10 does not allow deduction in respect of income of the firm in the hands of the partner, which has not suffered tax in the hands of the firm. Consequently, the fourth respondent computed the assessment and considered the tax payable under Section 115JB of the Act. By disallowing exemption under sub-section (2A) of Section 10 of the Act, to an extent of Rs.47,27,28,981/-, the fourth respondent passed the Assessment Order under sub-section (3) Section 143 of the Act. It is also averred that in the case of the other partner namely, M/s.Prazim Trading and Investment Co. Pvt. Ltd., for the very same Assessment year the Assessing Officer at Mumbai has not disallowed the share of income from the partnership firm under sub-section (2A) of Section 10 of the Act. Having regard to the interpretation given to sub-section (2A) of Section 10 of the Act, particularly the explanation thereto by the third and fourth respondents, the petitioner has assailed the Assessment Orders and demand notices as well as the validity of the explanation to sub-section (2A) of Section 10 of the Act.
3. Statement of objection has been filed on behalf of the fourth respondent Assessing Officer contending that sub-section (2A) of Section 10 of the Act clearly and unambiguously provided exemption of only such income which suffered taxation in the hands of the firm. The same cannot be treated as total income as is referred to in the said Section. That sub-section (2A) of Section 10 refers to total income, which means taxable income of the partnership firm and does not include exempted income in the hands of the firm. Defending the validity of the explanation to sub-section (2A) of Section 10 of the Act, it is averred that the explanation only clarifies what is stated in sub-section (2A) of Section 10 of the Act. That the share of a partner in a firm has to be computed by dividing the taxable profits of the firm in the same proportion as the profit sharing ratio mentioned in the partnership firm. According to the Revenue, the income of the partner is exempted from tax only to the extent that the same is subjected to tax in the hands of the partnership firm. But the exempted income in the hands of the firm is not exempted from tax in the hands of the partner. It is contended that the challenge made to the constitutional validity of the explanation to sub-section (2A) of Section 10 of the Act is misplaced. The language of the section speaks of the share in the total income and therefore, the exemption has been accorded to the extent of the share in the total income of the firm as against the share claimed in the book profits. That there is no discrimination or violation of Article 14 of the Constitution. That the 1993 amendment seeks to recognize a partner as a distinct entity from the firm so as to provide a benefit of exemption to the extent of the income that falls within the ambit of the term total income in the hands of the firm. Defending the Assessment Order passed by the fourth respondent in the petitioner's case, it is contended that each of the submissions of the petitioner has been considered and answered and that there is no legitimate reason to invoke the writ jurisdiction of this Court by assailing explanation to sub-section (2A) of Section 10 of the Act. It is stated that as against the impugned Assessment Order and demand notice, petitioner has a remedy by way of an appeal. That there is no jurisdictional issue which has been raised by the petitioner in the matter of the Assessment Order and therefore, filing of the writ petition is wholly unwarranted.
4. That M/s.Prazim Trading & Investment Co. Pvt. Ltd., has disclosed the share of its profit in the partnership firm, in its books of account. But the petitioner, while computing the taxable income, has claimed deduction for the entire amount received as its share of profit invoking sub-section (2A) of Section 10 of the Act as exempted income. The Assessing Authority, therefore, considered as to whether the exemption in terms of sub-section (2A) of Section 10 of the Act is in respect of the share of profit released to the partner on the basis of the book profit of the partners or on the basis of taxable profit computed. That the explanation to sub-section (2A) of Section 10 categorically clarifies that the share of a profit of a partner has to be computed by dividing the taxable profit of the firm in such profit sharing ratio as mentioned in the partnership deed. This would entitle a partner to claim deduction under sub-section (2A) of Section 10 of the Act only on the amount received by the partner out of the taxable profits of the firm on such profit sharing ratio as stipulated in the partnership deed. While contending that there is no ambiguity whatsoever in sub-section (2A) of Section 10 as well as its explanation, it is contended that the object of the said Section is to afford exemption in the hands of the partner only to the extent of income, which suffered tax in the hands of the firm. As a logical corollary, that Section would not allow deduction in respect of income of the firm in the hands of the partner, which has not suffered tax in the hands of the firm.
5. It is also averred that there is no double taxation in relation to income from dividend received from domestic company, mutual funds and income arising from transfer of long term capital asset pertaining to Sections 115-O, 115-R and sub-section (38) of Section 10 of the Act. That the aforesaid provisions provide for relief in the hands of the recipient i.e., the partnership firm in the instant case. But when that amount is transferred to the hands of the partner such as the petitioner herein, it is a share in the profit which is taxable. The partnership firm has not been taxed on the aforesaid sources of income on the principle that the company paying dividend or company dealing with units of mutual fund would have paid taxes or in the case of long term capital gains, the security transaction tax would have been paid. But when that income is distributed to the partners of the firm, the exemption cannot be claimed by the partner. Contending that the assessments are in order and that there is no discrimination as against the petitioner, which has received income as a partner in a firm vis-Ã -vis an individual who would have received similar income namely, dividend income, income from mutual funds and profits of share transfer, the fourth respondent has sought for disposal of the writ petition.
6. Rejoinder to the statement of objections has been filed by the petitioner by reiterating the petition averments and it is contended that dividend income, income from units of mutual funds and income received on long term capital gains on sale of shares would not be taxable in the hands of the firm as these sources of income namely, dividend income would have been liable to tax under Section 115-O read with sub-section (34) of Section 10 of the Act; in respect of income from units of mutual funds, Section 115-R read with sub-section (35) of Section 10 of the Act and with regard to profits from transfer of shares under sub-section (38) of Section 10 of the Act, the tax is exempted in the hands of the partnership firm. When that amount is distributed to the partners in proportion to their share of profits in the partnership firm, having regard to sub-section (2A) of Section 10 of the Act, no tax is liable to be paid on receipt of such income in the hands of the partner.
CONTENTIONS:
7. I have heard learned Senior Counsel, Sri.Venkataraman alongwith Sri A.Shankar, learned counsel for the petitioner and the learned Senior Counsel, Sri.E.R.Indrakumar and other counsel for the respondents.
8. Pointing out various errors in the interpretation placed by the Assessing Officer in the impugned Assessment Order, it is contended by the learned senior counsel for the petitioner that the Assessment Order is not concluded in terms of the object of sub-section (2A) of Section 10 of the Act. That the benefit of exemption on the aforesaid three sources of income are to be given in the hands of the partner under sub-section (2A) of Section 10 of the Act. That the Assessing Officer has failed to appreciate that income, which is exempted in the hands of the firm also stands exempted in the hands of the partner as profits of the firm after taxation is distributed to the partners of the firm in proportion to their share in the profits of the firm. Referring to various provisions of the Partnership Act, 1932, it was contended that partners are not different from a partnership firm and that a firm is a conglomerate of partners. That a firm is not a separate entity independent of its partners. It is so only for making separate assessments under the Act. Referring to the methodology of assessment prior to 01/04/1993 and subsequent to that date and the changes brought about in the Finance Act, 1992, petitioner's counsel explained as to how sub-section (2A) of Section 10 of the Act would now have to be interpreted, by referring to the expression "total income" appearing in sub-section (2A) of Section 10 of the Act and the definition of total income in sub-section (45) of Section 2 of the Act. On the aforesaid premise, the petitioner sought interpretation of sub-section (2A) of Section 10 of the Act, particularly, the explanation thereto and has also sought for striking down the explanation.
9. Countering the aforesaid arguments, learned Senior Counsel for the respondents with reference to the statement of objections, contended that there is no ambiguity in sub-section (2A) of Section 10 or the Explanation thereto and that the challenge made to the Explanation in this writ petition is wholly unwarranted. That the Explanation only clarifies what is stated in subsection (2A) of Section 10 of the Act. That the share of a partner in a firm has to be computed by dividing the taxable profits of the firm in the same proportion as the profit sharing ratio mentioned in the partnership deed. The income of the partner is exempted from tax only to the extent that the same is subjected to tax in the hands of the partnership firm but the income exempted in the hands of the firm is not exempted in the hands of the partner. Defending the assessment order passed by the fourth respondent it was contended that the submission of the petitioner has been considered and answered by the Assessing Officer. That the partner can claim a deduction under sub-section (2A) of Section 10 only to the amount received by the partner out of the taxable profits of the firm in the profit ratio as stipulated in the partnership deed. No doubt, the dividend income received from a domestic company, mutual funds and income arising from transfer of long term capital asset are not taxable in the hands of the partnership firm but when that amount is transferred as profit to the hands of the partner, it is a share in the profit of the firm, which is taxable. In fact, the firm has not been taxed on the aforesaid sources of income as the party paying that income would have paid the tax and when that income is distributed between the partners of the firm, the exemption cannot be claimed by the partner. He therefore, contended that there is no merit in this writ petition and that the petitioner may be directed to approach the appellate authority.
HISTORICAL PERSPECTIVE:
10. Before considering the rival contentions of the parties, it would be useful to give a historical perspective to the issue raised in this writ petition.
11. Prior to 1-4-1993, Section 182 of the Act dealt with Assessment of registered firms. It prescribed that after assessing income of the firm; (i) the income tax payable by the firm itself would be determined and (ii) the share of each partner in the income of the firm would be included in his total income and assessed to tax accordingly. Under Section 158 of the Act, an order had to be passed determining total income of the firm as well as an apportionment of the income between the partners. Section 67 of the Act prescribed the methodology of partners sharing profits of the firm by stating that the income tax payable by the registered firm had to be deducted from its total income and the balance ascertained and apportioned among the partners while computing the total income of each partner of the firm. Further the total income of the partner included his share in the profits of the firm in addition to interest, salary, commission or other remuneration or payments made to the partner of the firm, other than in the nature of share profit which were deducted in the hands of the firm. In substance, income was taxed at two stages. One in the hands of the firm at a specified rate and the second, after its allocation in the hands of the partners of the firm. Therefore, the income received by the partnership firm was subject to tax in the hands of the firm and subsequently in the hands of the partner on its allocation. But in case of interest, salary, commission or other remuneration paid to the partners of the firm, the same were allowed as deductions in the hands of the firm. But in the hands of the partners it suffered single tax.
12. In the "Budget Speech of Minister of Finance for 1992-93" held on 29-2-1992, reference has been made to Chelliah Committee Report, which stressed that double taxation of the partnership firms as well as the partners should be avoided. It was stated that the partners would not be taxed on their share in the income of the firm though they will be liable to pay tax on salary and interest income derived from the firm. Salary and interest payments made to the partners by the firm would be treated as deduction in the income of the firm. The object was to have simplification from the point of view of tax payers as well as tax administration as the proposed scheme was to do away for complexities, associated with the procedure relating to registration of firms, rectification of partners' assessments when firms' assessments are revised, etc.
Thus, while restructuring the taxation of firms, it was stated that tax payable by the firm is allowed by deduction before the apportionment of profits, and in order to avoid double taxation of the same income in the assessment of the firms and partners. The salient features of the proposed scheme was that the firm was to be taxed as a separate entity. There was to be no distinction between registered and unregistered firms. Also, the share of the partner in the income of the firm was not to be included in computing his total income. Any salary, bonus, commission or remuneration, by whatever name called, which was due to or received by a partner was to be allowed by deduction subject to certain restrictions in the firms total income. The amendment came into effect from 01/04/1993 for the assessment year 1993-94 and subsequent assessment years thereafter.
13. The Finance Act, 1992, thus, brought about a radical change in the assessment of the partnership firm and its partners. The practice of taxation at two stages was done away with. A firm was to be taxed as a separate unit and there was no distinction between a registered firm and an unregistered firm. After deducting the payments made to the partners, the balance income of the firm was taxed in the hands of the firm. Partners were not liable to be taxed in respect of the share of the income of the firm. However, payments made by the firm to the partners such as remuneration, commission, interest etc., were chargeable to income tax in the hands of the respective partners. Thus, the share of the partner in the income of the firm was to be exempted from tax by virtue of insertion of sub-section (2A) of Section 10 of the Act. However, payments made to the partner by the partnership firm such as interest, salary, bonus, commission or other remuneration were liable to be taxed as business income in the hands of the partner having regard to clause (ve) of sub-section (24) of Section 2 and clause (v) of Section 28 of the Act. sub-section (2A) and explanation were also inserted to the Act. The controversy in this writ petition surrounds the explanation to sub-section (2A) of Section 10 of the Act.
Partnership Firm and status of partners in a Firm:
14. Partnership is a relationship resulting from a contract expressed or implied, the partners commercially and legally or collectively referred to as an entity, distinct from its members and with independent rights and obligations. Consequently, where money is due to or from a partner he will be normally shown as a creditor or debtor of the firm and not as a creditor or debtor of his copartner. But legally speaking, the firm is generally not recognized as an entity distinct from the partners comprising it. Also central to an understanding of the law of partnership is the dual capacity in which a partner acts, i.e., both as a principal and an agent.
| (a) | In Malbar Fisheries Co. v. CIT [(1979) 120 ITR 49], the Hon'ble Supreme Court discussed the nature and character of a partnership under the Indian Law and held that a partnership firm under the Indian Partnership Act, 1932, defined in sub-section (23) of Section 2 of the Act, is not a distinct legal entity apart from the partners constituting it and equally, in law the firm as such has no separate rights of its own in the partnership assets and when one talks of the firm's property or assets of the firm, all that is meant is property or assets in which all partners have a joint or common interest. In particular, the Court held that Indian Law in this respect is akin to English Law and different from the Scottish Law. | |
| However, for the purpose of taxation under the Income Tax Law, a firm is treated as an entity distinct from its partners. But that is so only for the purpose of assessment, otherwise and as stated in Section 25 of the Partnership Act, 1932 "Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner". Relying on that section, it has been held by the Hon'ble Supreme Court that after an assessment of the firm is made, when a notice of demand is issued requiring the demand of tax liability, the stage of assessment is left behind and also distinction between the firm and partners, the liability of the partners being joint and several, recovery could be made from any of the partners. | ||
| (b) | In Jagatram Ahuja v. Commissioner of Gift Tax, Hyderabad [(2000) 8 SCC 249], the Hon'ble Supreme Court compared the status of a partner in relation to a partnership firm to that of a coparcener in Hindi Joint Family. The Court observed that as in the case of a Hindu Joint Family, the coparceners do not have exclusive rights on any specific property of the family and the property is allotted specifically in terms of their shares at a partition. The same is the position in case of a partner of a firm. No partner of a firm can claim exclusive or specific right in any specific asset of the property of a firm. Coparceners have definite share in the Hindu undivided family, just as partners have a definite share in the partnership profits or losses. | |
| (c) | In Commissioner of Income-Tax, Madras v. R.M.Chidambaram Pillai, etc., [1977] 106 ITR 292) Hon'ble Supreme Court has reiterated as under:- | |
| "A firm is not a legal person even though it has some attributes of personality. Partnership is a certain relation between persons, the product of agreement to share the profits of a business. "Firm" is a collective noun, a compendious expression to designate an entity, not a person. In income-tax law a firm is a unit of assessment, by special provisions, but is not a full person which leads to the next step that since a contract of employment requires two distinct persons, viz., the employer and the employee, there cannot be a contract of service, in strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in. Section 13 of the Partnership Act brings into focus this basis of partnership business. | ||
| The legal ideology expressed itself in the Income-tax Act in section 10(4)(b) and section 16(1)(b). A firm, partner and partnership according to section 2(6B) of the Act, bear the same sense as in the Partnership Act". |
Referring to Addanki Narayanappa v. Bhaskara Krishnappa [AIR 1966 SC 1300], it was held that a partnership firm as only a collective of separate persons and not a legal person in itself, leads to the further conclusion that the salary stipulated to be paid to a partner from the firm is in reality a mode of division of the firm's profits, no person being his own servant in law since a contract of service postulates two different persons.
Reliance was also placed on Commissioner of Income-tax v. Ramniklal Kothari [(1969) 74 ITR 57 (SC)], to hold that business of the firm was business of the partners, that profits of the firm were profits of the partners and that expenditure incurred by partners in earning such share was admissible for deduction in arriving at the total income. In that case, Hon'ble Supreme Court ruled that salary paid to a partner by a firm represents a specific share of the profits and retains the same character of the income of the firm.
Partnership taxation under English Law:
15. In the development of partnership taxation under English law also it is well settled that a partnership generally has no legal status or existence independently of the individual partners of which it is composed. The rights and liabilities of a partnership are nothing more than the aggregate of the rights and liabilities of the individual partners. Therefore, in theory, it is possible to dissect the partnership accounts and make an apportionment of overall expenses and gross receipts amongst the individual partners in order to determine their respective net incomes. But under the Income Tax Act, 1918, it was provided that where a trade was carried on by two or more persons jointly, the tax was to be computed and stated jointly and in one sum and was to be treated as separate and distinct from any other tax chargeable on those persons. These provisions were re-enacted and altered in Section 111 of the Income and Corporation Taxes Act, 1988. But with the introduction of the Finance Act, 1994, the individual assessment of each partner of the firm has been by reference to his share of the partnership profits. Under sub-section (3) of Section 111 of that Act, a person's share or profits or gains or losses of the partnership had to be determined according to the interests of the partners during that period. The approach adopted by the new Section 111 was to treat the partnership as a separate person, but only for the purposes of computing the partnership profits. Once the computation was complete and the share of each partner was determined, he had to be taxed thereon as if that share was derived from a separate trade, profession or business carried on by him. Thus, the income tax law in U.K. also recognizes that partnership is a relationship which subsists between persons carrying on business in common with a view of profit. [Source: Lindley on Banks on Partnership-7th Edition.]
Legal Frame Work:
16. Before considering the respective contentions of the parties, it would be useful to refer to the following relevant provisions of the Act:
Definitions:
Section 2:- In this Act, unless the context otherwise requires,-
| ** | ** | ** |
(23)(i) "firm" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 if 2009);
(ii) "partner" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include:-
| (a) | any person who, being a minor, has been admitted to the benefits of partnership; and | |
| (b) | a partner of a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009); |
(iii) "partnership" shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Partnership Act, 2008 (6 of 2009).
Section 2 (24):- "income" includes-
| (i) | profits and gains: | |
| (ii) | dividend; | |
| (iii) | the value of any perquisite or profit in lieu of salary taxable under clauses (2) and (3) of section 17; |
(ve) any sum chargeable to income-tax under clause (v) of section 28;
| ** | ** | ** |
Charge of income-tax:
Section 4:- (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person:
Provided that where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.
(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act.
Scope of total income:
Section 5:-
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-
| (a) | is received or is deemed to be received in India in such year by or on behalf of such person; or | |
| (b) | accrues or arises or is deemed to accrue or arise to him in India during such year; or | |
| (c) | accrues or arises to him outside India during such year: |
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section(6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.
(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-
| (a) | is received or is deemed to be received in India in such year by or on behalf of such person; or | |
| (b) | accrues or arises or is deemed to accrue or arise to him in India during such year. |
Explanation 1.-Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.
Explanation 2.- For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
| ** | ** | ** |
Chapter III
Incomes not included in total income:
Section 10:- In computing the total income of a previous year of any person, any income falling within any of the following clause shall not be included-
| ** | ** | ** |
Section 10 (2A):- in the case of a person being a partner of a firm which is separately assessed as such, his share in the total income of the firm.
Explanation:- For the purposes of this clause the share of a partner in the total income of a firm separately assessed as such shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed bears to such profits.
| ** | ** | ** |
Section 10(34):- any income by way of dividends referred to in section 115-O;
Explanation:- For the removal of doubts, it is hereby declared that the dividend referred to in section 115-O shall not be included in the total income of the assessee, being a Developer or entrepreneur;
Section 10(35):- any income by way of –
| (a) | income received in respect of the units of a Mutual Fund specified under clause (23D); or | |
| (b) | income received in respect of units from the Administrator of the specified undertaking; or | |
| (c) | income received in respect of units from the specified company: |
Provided that this clause shall not apply to any income arising from transfer of units of the Administrator of the specified undertaking or of the specified company or of a mutual fund, as the case may be.
Explanation- For the purposes of this clause,-
| (a) | "Administrator" means the Administrator as referred to in clause (a) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); | |
| (b) | "Specified company" means a company as referred to in clause (h) of section 2 of the Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 (58 of 2002); |
| ** | ** | ** |
Section 10(38):- any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where-
| (a) | the transaction of sale of such equity share or unit is entered into on or after the date on which Chapter VII of the Finance (No.2) Act, 2004 comes into force; and | |
| (b) | such transaction is chargeable to securities transaction tax under that Chapter: |
Provided that the income by way of long-term capital gain of a company shall be taken into account in computing the book profit and income- tax payable under section 115JB.
Explanation- For the purposes of this clause, "equity oriented fund" means a fund-
| (i) | where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five per cent of the total proceeds of such fund; and | |
| (ii) | which has been set up under a scheme of a Mutual Fund specified under clause (23D) |
Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.
| ** | ** | ** |
Section 14:- Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:-
| A. | Salaries | |
| B. | Interest on securities | |
| C. | Income from house property | |
| D. | Profits and gains of business or profession | |
| E. | Capital gains | |
| F. | Income from other sources |
| ** | ** | ** |
Section 28:- The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",-
Section 28(v) any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm:
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted.
17. While considering judicial approach to construction of a statute, there are three modern methods namely; (i) the Literal; (ii) by employing the Golden Rule; and (iii) by considering the mischief that the statute was designed to obviate or prevent.
18. While construing a statute in the literal sense, the rule generally followed is that general statutes use words in their popular sense. If they are used in connection with some particular business or trade, they will be presumed to be used in a sense appropriate to or usual in such business or trade. At the same time, it is presumed that words in statutes are used precisely and exactly and not loosely or inexactly. Where the words are plain, their literal and simple meaning is to be adopted. If more than one meaning can fairly be attributed to them, then considerations of policy or even convenience may be admitted. At the same time, the same words may often receive a different interpretation in different parts of the same Act for "words used with reference to one set of circumstances may convey an intention quite different from what the same set of words used with reference to any set of circumstance would or might be produced".
19. If the language of a statute is clear, it must be enforced though the result may seem unfair and inconvenient. The Court cannot cut down the plain words so as to limit the application of the statute in accordance with public policy which prevailed before the statute was passed. At the same time, statutes have to be construed as far as possible to avoid absurdity. This is called the provision against absurdity. The presumption against absurdity is part of the larger principle that statute has to be construed in a manner to give it validity rather than invalidity - ut res magis valeat quam pereat. In the case of possible alternative meanings, one which would lead to an absurdity and one which would avoid it, the rule is that the Court is entitled to look at the results of adopting each of the alternatives respectively, in its quest for the true intention of the Parliament. But when there is no alternative, the Court is bound to construe the words in their natural sense whatever the consequences; the danger of adopting any other course would make that Court into legislators instead of interpreters.
20. The second method of judicial approach to the construction of a statute namely, Golden Rule, states that all statutes must be construed in their grammatical and ordinary sense of the words, unless that would lead to some absurdity or inconsistency with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified so as to avoid that absurdity and inconsistency, but no further. This Golden Rule is a corollary to the literal Rule.
21. When, to a judicial mind, words are not plain, then the object and scope of the Act has to be considered. This is popularly known as the Mischief Rule evolved in Heydon's case. Four things have to be considered under this Rule as stated in Heydon's case:- "(1) what was the common law before passing of the Act. (2) what was the mischief and defect for which the common law did not provide. (3) what mischief the Parliament has resolved and appointed to cure the disease of the commonwealth. (4) The true reason of the remedy. The idea is to suppress the mischief and advance the remedy."
22. The aforesaid test implies that a statute is not passed in a vacuum, but in a framework of circumstances, so as to give a remedy for a known state of affairs. In order to arrive at its true meaning, one should know the circumstance with reference to which the words are used and what was the object appearing from those circumstances which Parliament had in view. In carrying out this exercise, Courts have to take judicial notice of the previous state of law and other matters generally known to well informed people. This is done in order to give a construction to statute which is in harmony with an intention. [Source - Odgers' Construction of Deeds and Statutes - Fifth Edition]
23. An explanation is appended to a section to bring out the true meaning of the words contained in the section. It is a part and parcel of the enactment. While construing an explanation, one has to see whether it is in line with the main section, so as to promote the object of that section. Some times, an explanation is added to include something within or to exclude something from the ambit of the main enactment or the connotation of some word occurring in it. An explanation, normally, should be read so as to harmonise with and clear up any ambiguity in the main section and should not be so construed as to widen the ambit of the section. It is also possible that an explanation may have been added in a declaratory form to retrospectively clarify a doubtful point in law and by way of abundant caution.
24. While applying the aforesaid principles, to taxation statutes, it has been observed as under in various decisions of the Hon'ble Supreme Court:-
In R.M. Chindmbaram Pillai (supra) His Lordship Krishna Iyer J., has said that first principles plus the bare text of the statute furnish the best guidelight to understanding the message and meaning of the provisions of law. Thereafter, the sophisticated exercises in precedents and booklore. This should be the approach in the instant case.
| (a) | In K.P. Varghese v. Income-Tax Officer, Ernakulam, and another [1981 (131) ITR 597], it has been held that statutory provisions must be so construed, if possible, that absurdity and mischief may be avoided. Where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the legislature, the Court may modify the language used by the legislature or even do some violence to it, so as to achieve the obvious intention of the legislature and produce a rational construction. Speeches made by the members of the legislature on the floor of the House when the Bill is being debated are inadmissible for the purpose of interpreting the statutory provision but the speech made by the mover of the Bill explaining the reason for its introduction can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and purpose for which the legislation is enacted. This, according to the Hon'ble Supreme Court, is in accord with the recent trend in juristic thought not only in western countries but also in India, that the interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible. In that case, the Court was interpreting the word, declared in Section 52 of the Act under consideration. | |
| (b) | In Commissioner of Income-Tax, Bangalore v. J.H. Gotla [1985 (156) ITR 323], it has been observed that if a strict and literal construction of the statute leads to an absurd result, i.e., a result not intended to be sub-served by the object of the legislation ascertained from the scheme of the legislation, and if another construction is possible apart from the strict literal construction, then, the latter construction should be preferred to the strict literal construction. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational result. The Court further observed that "though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than injustice, then such construction should be preferred to the literal construction". In this case, the Court was considering the meaning of the expression "income", in Section 16(3) of the Act, to include loss. | |
| (c) | In Goodyear India Ltd., v. State of Haryana and another [1991 (188) ITR 402], also, it is observed that a reasonable construction of the taxing statute should be followed and literal construction not ought to be adopted, if that defeats the manifest purpose and object of the statute. | |
| (d) | In Tata Power Company Ltd. v. Reliance Energy Ltd., [(JT) 2009 (8) SC 562], the Hon'ble Supreme Court has held that chapter headings and marginal notes are parts of the statute and they can be used as an aid of the construction when there is any ambiguity in the statute. |
25. Sub-Section (45) of Section 2 defines the expression "Total Income" to mean the total amount of income referred to in Section 5 computed in the manner laid down in the Act. Chapter III of the Act deals with incomes which do not form part of total income. The expression "total income" in Section 2(45) has to be examined in the context of the expression "total income" in Chapter III. In Chapter III, incomes which do not form part of total income are enumerated. But in sub-section (45) of Section 2, ' total income' means, the total amount of income referred to in Section 5. Section 5 deals with the scope of total income. Total income has to be computed in the manner laid down in the Act. Chapter IV onwards deals with computation of total income commencing with Section 14. Therefore, Chapter III pertains to such of those incomes, which are outside the scope of computation of total income. Thus, while computing the total income in the context of sub-section (45) of Section 2 such of those incomes stated in Chapter III have to be excluded. In other words, Chapter III pertains to such of those incomes, which are exempt from computation of total income as defined in sub-section (45) of Section 2 of the Act. All these expressions have already been considered in several decisions of this Court as well as by the Hon'ble Supreme Court.
| (a) | In Commissioner of Income-Tax v. Yokogawa India Ltd. [(2012) 341 ITR 385 (Karn)], a Division Bench of this Court had occasion to consider the effect of exemption granted in Chapter-III of the Act, in the context of Section 10A. This Court held that under the scheme of the Act, while various deductions are allowed in computing the total income, once the total income is computed, no further adjustment to it is envisaged. The scheme of the Act provides for deduction in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of tax by applying the applicable rates on the total income. | |
| Therefore, the expression "total income" in its strict sense requires computation for the purpose of levy of tax. Since computation of "total income" begins only with Chapter IV and "incomes which do not form part of total income", in Section 10A is placed under Chapter III, the expression "total income" in Chapter-III cannot be understood in the same sense as it is in sub-section (45) of Section 2. The Division Bench stated that the phrase "total income" has been used in the Act in several places with different connotations and shades. The phrase "total income" used in Section 10A is one such variant. The phrase need not necessarily mean total income as computed under the Act. Also definition of any term given in Section 2 will apply only when the context requires and not otherwise. Therefore, the Division Bench stated that the placement, language and setting of Section 10A cannot mean "total income" computed in accordance with the provisions of the Act. This aforesaid reasoning squarely applies to Section 10 as well which is also part of Chapter III of the Act. | ||
| Further, Section 14 provides for classification of income under various heads for the purpose of charge of income-tax and computation of total income, subject to twin conditions: Firstly, income is subject to charge of income-tax and secondly, income is includable in ' total income'. But, Section 10 which is in Chapter-III of the Act, is in the nature of exemption and as such, is neither subject to charge of Income-tax nor includable in the ' total income'. Therefore, the twin conditions of Section 14 do not apply to Section 10 of the Act and relief under Section 10 has to be given before computation of ' total income' in Chapter IV. The exemption has to be first considered and then, the process of computation of profits and gains of business or profession would commence. | ||
| Sub-section (2A) of Section 10 was inserted by the Finance Act of 1992 and 1993, the Parliament was conscious of placing it in Chapter-III of the Act, which deals with "incomes which do not form part of total income". Therefore, intention of the Parliament was to regard it as an exemption and not a deduction. This reasoning also applies to explanation to sub-section (2A) of Section 10 of the Act. | ||
| Further, Chapter-VII specifically deals with incomes which form part of the total income on which no income-tax is payable. These are incomes exempted from charge, but included in the total income of the assessee. It was also held that though Section 10A used the word 'deduction', in substance, it was an exemption provision. The implication being that, an exemption is that particular income exempt from tax which does not enter the field of taxation and is not subject to any computation. Therefore, computation provisions of the Act do not get attracted at all to the exempted income. | ||
| (b) | Following the Division Bench decision of this Court in Yokogawa (supra), the Delhi High Court in case of Commissioner of Income Tax v. TEI Technologies (P) Ltd., [(2012) 78 DTR Judgments], held that incomes which are enumerated in Chapter-III have traditionally been considered as incomes which are exempt from tax rather than as deductions in the computation of total income. Exempted income does not enter computation of the total income at all, whereas a deduction, in the very nature of things, is first included in the total income and a deduction is given subject to fulfillment of several conditions. | |
| (c) | Earlier, in Stumpp, Schuele Somappa Pvt. Ltd. v. Second Income-Tax Officer, Company Circle, Bangalore [(1976) 102 ITR 320], this Court was concerned with Rule 4 of the Second Schedule to the Companies (Profits) Surtax Act, 1964. That Rule stated that where a part of the income, profits or gains of a company cannot be included in the "total income" as computed under the Income-tax Act, then the capital of the company ascertained in accordance with Rules 1, 2 and 3 should be diminished proportionately by an amount which bears to that sum the same proportion as the amount of the aforesaid income, profits and gains bears to the total amount of its income, profits and gains. While referring to Chapter-III of the Income-tax Act, it was observed that the expression "shall not be included", which is found in Section 10, refers to incomes which do not form part of "total income". The latter expression is not used in Chapter-IV of the Act, which provides for the method of computation of income under which the assessee is allowed deductions by way of expenses, allowances, rebates etc. | |
| Delineating on the distinction between a deduction and income not includable in total income, this Court held that an income which is not part of total income is not subject to any deduction which can be claimed under Chapter VI-A of the Act. For instance agricultural income is an item referred to in Section 10(1) of the Income-tax Act. Agricultural income is not subject to any other deduction because that income is not "includable in total income". | ||
| This Court further stated that the expression ' not includable' means not capable of being included. It cannot refer to an amount which already formed part of the total income. It refers to the classes of income, which Chapter III directs, ' shall not be included' in the total income of the assessee'. Thus, Incomes which are enumerated in Chapter III of the Act, are incomes which are exempt from tax. Section 10 groups in one place various incomes which are exempt from tax. The incomes enumerated in Section 10 are not only excluded from the taxable income of the assessee but also in total income of a person. The exemption embodied in Section 10 can be divided into two categories, namely, exemption to which certain classes of income from their very nature are entitled and the second category concerns exemption which the character of the assessee entitles him to claim. Giving examples of this, the Court held that in the first category is agricultural income whereas in the second category of exempted income is the income of local authorities and diplomatic officers. | ||
| Also, there is a vital difference between income not chargeable to tax and not includable in the total income and income which forms part of total income but which is made tax-free. Agricultural income is neither chargeable nor includable in the total income but on the other hand, incomes under Chapter VI-A (earlier Chapter-VII), are part of total income but which are tax free. | ||
| (d) | In Commissioner of Income-Tax, Delhi (Central) v. Dalmia Cement [1980 (126) ITR 736], also, it has been stated that the income which is not taxable though includable in the computation of the "gross total income", is a different concept but that income cannot be included in the total income as computed for Income-tax purposes. Also, it was stated that the use of the word "includable" means, importance is to be attached to the general nature of a class of income rather than to the factual inclusion or otherwise, of a particular amount or portion of the assesse's income in the total income. |
The aforesaid view of this Court is consistent with the decision of the Hon'ble Supreme Court, inCommissioner of Income-Tax v. Williamson Financial Services [(2008) 297 ITR 17 (SC)], while considering the definition of the term ' total income', the Hon'ble Supreme Court held that it involves two ingredients: firstly, the income must consist of the total amount of income referred to in Section 5; and, secondly, it must be computed in the manner laid down in the Income-tax Act. Therefore, the manner of computation laid down in the Income-tax Act forms an integral part of the definition of total income. The correct method of approach is to treat nothing as being charged to tax until by the process laid down by the Act, the status of income, profits and gains emerges. The tax is on income and not on gross receipts. It was further held that agricultural income is not only exempt from tax under the Income-tax Act but the scheme of the Act it is also to be excluded from computation of the total income. Income covered by Sections 10 and 11, which is not chargeable to tax, does not fall under Section 14 and under the various computation sections, Section 15 to Section 59. Exempted income is tax-free income. On the other hand, deduction under Chapter VI-A is for income which forms part of total income but is free of tax.
26. Thus, what emerges from the aforesaid rulings is that, the expression "total income" as defined in sub-section (25) of Section 2 of the Act is distinct from the expression total income used in Section 10 of the Act. Sub-section (45) of Section 2 defines total income in the context of Section 5 and as is computed in the manner laid down in the Act. Once the total income is determined, the tax would have to be paid in accordance with the rate envisaged. But what Section 10 states is that certain incomes do not form part of total income. In fact, the heading of Chapter-III itself states "incomes which do not form part of total income". Thus, the concept of total income has to be interpreted as income which is not includable for the purpose of computation of tax.
27. Keeping in mind the rules of interpretation elaborated above while considering sub-section (2A) of Section 10, along with the decisions discussed above, what surfaces is the fact that the Act intended that certain incomes cannot be included in the gross total income of a person while computing the tax payable thereunder.
28. A perusal of Section 10 of the Income-tax Act would make it clear that the Parliament intended that certain incomes should not be included in the total income of a person i.e., gross total income. Examples are, agricultural income; any sum received by an individual as a member of a Hindu undivided family, where such sum has been paid out of the income of the family and in the case of a person being a partner of a firm, which is separately assessed as share in the total income of the firm. While the expression "total income" in the beginning of Section 10, would refer to total income of a person as computed from Chapter-IV onwards, the expression total income in the heading of the Chapter is quite different. The intention of the Parliament is to exclude income such as agricultural income, income of a coparcener from a Hindu undivided family or income of a partner of a firm from their gross income while computing the persons' total income for the purpose of taxation. In other words, after taking into consideration, the income of a person from all sources to arrive at the gross total income, incomes such as, agricultural income; income received as a individual by an individual as a member of the Hindu undivided family etc., have to be excluded in the same way after considering the total gross income of a partner of the firm from various sources including his share in the profits of the firm and his share in the profits of the firm has to be excluded from the gross total income and from the remaining amount, computation has to be made in accordance with the Act, in order to arrive at the total income of the partner for the purpose of taxation. Thus, the share of a partner of a firm in the total income of the firm is not includable in the gross income of the partner of a firm i.e., whatever amount the partner of a firm receives from the firm as his share of profits would have to be kept aside and not be taken into consideration for the purpose of computing the total income for the purpose of taxation under the Act. The explanation to sub-section (2A) of Section 10 only highlights this aspect. It states that the share of a partner in the total income of a firm separately assessed as such, shall, notwithstanding anything contained in any other law, be an amount which bears to the total income of the firm the same proportion as the amount of his share in the profits of the firm in accordance with the partnership deed which bears to such profits. It provides that the share of the partner in the total income of the firm would not mean the share of the partner in the taxable income of the firm. The share of the partner in the profits of the firm which is after taxation of the firm, would also include that portion of the income on which the firm would not have paid any tax on account of the firm also having the benefit of certain provisions of Chapter-III but which would nevertheless be part of the profits of the firm. The provision and the explanation under consideration can be better understood if they are related to the facts of the present case.
29. Annexure "E", is the return of income filed by the partnership firm M/s.Prazim Traders. On a perusal of the same, it is noted that income received by way of dividend, income received from mutual funds and profits earned from sale of long term capital assets are excluded from the computation of income of the firm. This is because, while applying Chapter-III to the computation of the income of partnership firm, the firm has the benefit of exemption of income earned by way of dividends referred to Section 115-O, under sub-section (34) of Section 10 of the Act; income arising from transfer of long-term capital asset, being an eligible equity share in a company under sub-section (36) of Section 10 of the Act as well as income arising from the transfer of a long term capital asset being an equitable share in a company or a unit on equity oriented fund referred to in Section 115–R (Mutual Funds) under sub-section (36) of Section 10 of the Act. Therefore, the aforesaid three sources of income which are the subject-matter of the controversy in this case have to be excluded while computing the total income of the firm for the purpose of taxation under the Act. The total income of the firm is Rs.3,73,40,610/- on which tax has been paid by the firm. But the profits of the firm would definitely become income received by way of dividends or from mutual funds or by sale of long term capital assets of shares, on which the firm need not pay tax as it is paid on these heads at source. Therefore, while dividing the profits of the firm between the partners of the firm, the income which is excluded from total income of the firm for the purpose of taxation of the firm would also have to be divided. In the instant case, as the dividends paid by the company, or income derived from mutual funds or from transfer of equity shares are not includable in the income of the firm for the purpose of taxation, but are reflected in the return of income filed by the firm, the firm would not have paid any tax on those amounts but they are nevertheless part of the profits of the firm. While dividing the profits of the firm between the partners, those incomes which are not includable in the income to be considered for the purpose of taxation or exempted incomes, would have to be also divided as profits of the firm. Thus, as discussed earlier, when profits of the firm are divided amongst the partners of the firm, under sub-section (2A) of Section 10 of the Act, such income would not be includable in the total income of the partners of the firm in view of the amendments to the Act and this is with the object of avoiding double taxation.
30. Further, any share of profits derived from a firm by a partner, is not includable in the total income of the partner as it is an exempted income. The underlying reasoning is that the partnership firm would have already reckoned that income for computation of tax under the Act. Therefore, the explanation to sub-section (2A) of Section 10 of the Act must be read in consonance with the above interpretation. The expression total income of a firm in the explanation would not mean taxable income of the firm but gross total income of a firm in which certain incomes would not be assessable to tax or exempted income. But it would nevertheless, form part of the profits of the firm. Therefore, total income of the firm cannot be equated with taxable income of the firm, as contended by the respondents, but, gross total receipts of the firm.
31. The reason as to why the partnership firm would not have paid any tax on the income received by way of dividends or from mutual funds or from sale of equity shares is because the company paying the dividends or income derived from mutual funds or company paying the amounts would have paid the tax on these incomes and the balance amounts are received by the partnership firm. Similarly, when the shares are transferred, tax is paid under the Security Transactions Act [long term capital assets] and the partnership firm in question would not have to pay tax on that amount once again. Thus, when the partnership firm itself would not pay any tax on the aforesaid three sources of income and when that income as profits, is divided between the partners, the partners need not pay tax from their hands. These three sources of income would have already suffered the tax at source. It is because of that reason, the partnership firm in the instant case, when it has received income from those three sources, was not liable to pay any tax on those incomes and when the profits of the firm is divided and paid to the partners, the partners cannot be asked to pay tax on those three sources of income received by the firm. This can be explained further, by an illustration. If a partner in the firm has in his individual capacity and not as a partner invested his funds in companies or mutual funds or transferred shares and earned dividends etc., then also, the partner would not have to pay any tax on the dividends etc., received by him or income derived from mutual funds or profits from long term equity shares. This is because, the income derived from these sources by the partner would have already suffered tax at source.
32. Having regard to the concept of partnership and the status of a partner in a partnership firm which has been explained supra and with the object of avoiding double taxation once at the hands of the firm and subsequently when the profits of the firm are distributed to the partners of the firm, in the hands of the partners, the amendment has been introduced with effect from 01/04/1993 under the Finance Act of 1992. That is why, a partner's share in the income of the firm will not be included in his total income.
33. The Assessing Officer has lost sight of this aspect of the matter and has held that "total income" in the explanation to sub-section (2A) of Section 10 of the Act, is defined in sub-section (45) of Section 2 of the Act, means the total amount of income referred to in Section 5, computed in the manner laid down in the Act. The Assessing Officer was also not right in holding that subsequent to the amendment, there are two distinct entities, one being the firm and the other being the partners of the firm, who are sought to be taxed separately on distinct incomes at different rates with diverse deductions. He is also not right in stating that the whole entity of the firm is delinked from that of a partner while introducing the provisions of sub-section (2A) of Section 10 of the Act.
34. It is reiterated that the object of sub-section (2A) of Section 10 is to avoid double taxation vis-Ã -vis, the profits of the firm, which is distributed in the hands of the partners. It does not mean that income which is taxed in the hands of the firm is taxable in the hands of the partners and on the same principle, when the income is not taxed in the hands of the firm, it becomes taxable in the hands of the partner. The Assessing Officer is also not right in holding that the incomes which are excluded from the total income of the firm by operation of various clauses of Section 10 and which form part of the share of profits of the firm would have to be taxed in the hands of the partners, as only income which is taxed in the hands of the firm is exempted from tax in the hands of the partner. The Assessing Officer has focused his attention on income that is subjected to tax in the hands of the firm rather than income which is excludable from total income in the hands of the partner but which is a share in the profits of the firm. The Assessing Officer has given a literal interpretation to the explanation to sub-section (2A) of Section 10 of the Act, which is contrary to the object of the amendment made to Section 10 of the Act. However, having regard to the principles of statutory interpretation culled out supra, from precedents, it is abundantly clear that a reasonable construction of a taxing statute ought to be preferred over a literal construction, if the latter defeats the manifest purpose and object of the statute. Such a reasonable construction of the explanation to sub-section (2A) of Section 10 with respect to its placement in Chapter III, does not envisage taxation of the shares of profits of the firm at the hands of the partners.
35. The Assessing Officer has lost sight of the fact that insofar as the three sources of income of the firm under consideration which are not includable in the total income of the firm, as they have already suffered tax at source i.e., before the receipt of income by the partnership firm, they cannot be liable to be taxed once again as profits of the firm distributed to the partners in the hands of the partner. The Assessing Officer is also not right in holding that income which remains exempted in the hands of the firm would become taxable in the hands of the partner in view of sub-section (2A) of Section 10 of the Act. The flaw in the reasoning of the Assessing Officer can be better understood in light of sub-section (v) of Section 28, which says that any interest, salary, bonus, commission or remuneration etc., by whatever name called, due to, or received by, a partner of a firm from such firm shall be income chargeable to Income-tax under the head "Profits and gains of business or Profession". Thus, if a partner of a firm receives any interest, salary, bonus, commission or remuneration etc., from a firm that income in the hands of the partner is chargeable to tax, sub-section (v) of Section 28 does not include the share of a partner in the total income of the firm, which is the profit of the firm. Infact, sub-section (v) to Section 28 of the Act was inserted with effect from 01/04/1993 precisely because of the amendment made to Section 10 of the Act by inserting sub-section (2A) and explanation thereof. Therefore, the Parliament has clearly made a distinction between certain incomes received by a partner from the firm and profits which are received by a partner from the firm. This is because the partners are not distinct from the firm though they may be distinct from the point of view of taxation. But in law, a partnership is a collective name of partners and the firm cannot be recognized as an entity distinct from the partners comprising it.
36. The analogy of a partner to partnership firm is found in a coparcener in relation to Hindu undivided family. Hindu undivided family is separately assessed to tax under the Act. Any sum received by a coparcener by an individual member of a Hindu undivided family where the income is paid out of the income of the family is not to be taxed once again in the hands of the individual member, otherwise, it would amount to double taxation.
37. Therefore, the explanation would not call for any striking down in the hands of this Court. The explanation has to be interpreted in light of the aforesaid discussion. It cannot be given a literal interpretation, so as to defeat the object of the amendment made to the Act. The object of the amendment is to make it clear that the distribution of profits and gains of a firm in the hands of the individual partners shall not be considered to be income of the partners and therefore, not includable while computing the total income of the partner under the Act. Such interpretation is also in line with the decisions of this Court as well as Delhi High Court and the Hon'ble Supreme Court.
38. Therefore, if the aforesaid precedents are to apply, then the share of a partner in the total income of a firm has to be excluded before arriving at the gross total income of the partner. While computing the profits of a partner of the firm, the share of a partner in the total income has to be excluded from the gross total itself and not in the total income of the partner as understood in sub-section (45) of Section 2 of the Act. Hence, the income eligible under sub-section (2A) of Section 10 would not enter into computation as the same is exempted income just as agricultural income or income received by an individual as a member of Hindu undivided family is exempted from computation of total income under sub section (45) of Section 2 of the Act.
39. Learned Senior Counsel for the petitioner has pressed into service Article 14 of the Constitution, to contend that there is discrimination between a partner of a firm and an individual, who receives income from dividends or mutual funds or by sale of equity shares; that the partner of the firm by the interpretation given by the Assessing Officer would be liable to pay tax on these sources of income once again; whereas, an individual who has received such income is not liable to pay tax again. That contention would now not arise in the instant case, having regard to the interpretation given to the explanation to sub-section (2A) of Section 10 of the Act. Therefore, reliance placed on K.T.Moopil Nair v. State of Kerala [AIR 1961 SC 552], would not be of any assistance in this regard. Thus, what sub-section (2A) of Section 10 r/w explanation thereof envisages is the amount to be determined as not includable in the total income of the partner. For this, three factors have to be considered:-
| (a) | total income of the firm, | |
| (b) | share of partners' profit in the firm, | |
| (c) | business share profits of the firm. |
In this context, the total income of the firm is not the taxable income of the firm. The total income from business of the firm is Rs.1,63,65,79,390/-. In the instant case, the formula has to be applied to determine the eligible amount, which is as follows:-
Eligible amount = Total income of the firm × Share profit of the firm ÷ profits of the firm, which is:-
Rs.1,63,65,79,390 × 48,39,31,164 ÷ 1,61,31,03,881
and eligible amount is Rs.49,09,73,817, which has to be exempted under sub-section (2A) of Section 10 of the Act. The aforesaid calculation has been submitted by the Revenue in its written submissions as approximate figures.
40. In the result, the appeal is allowed in part in the following terms :-
| (1) | The explanation to sub-section (2A) of Section 10 does not require any striking down as sought by the petitioner. That section has been interpreted in this order having regard to the object of the amendment and the principles of Partnership Law. | |
| (2) | The Assessment Order dated 28/03/2013 for the year 2010-11 (Annexure "A") and the Notice of Demand, issued under Section 156 of the Act by fourth respondent, dated 28/03/2013 (Annexure "B"), are quashed. | |
| (3) | The petitioner is entitled to claim exemption under sub-section (2A) of Section 10 of the Act, on the share of profit of the firm, inclusive of the income, which is exempted under sub-sections (34), (35) and (38) of Section 10 of the Act, as the total income referred to in sub-section (2A) of Section 10 of the Act, includes exempted income of the partnership firm. | |
| (4) | No costs. |
Regards,
Pawan Singla ,
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