Firm Can’t be Compelled to Charge Interest/Remuneration If Same Wasn’t Charged Following Partnership Deed | ITAT

Case Details: Dinesh India Co. v. ACIT - [2024] 158 taxmann.com 153 (Surat-Trib.)

Judiciary and Counsel Details

• • Pawan Singh, Judicial Member & Dr. Arjun Lal Saini, Accountant Member
  • Aditya Nemani, C.A. for the Appellant.
  • S.M. Keshkamat, CIT-DR for the Respondent.

Facts of the Case

The assessee, a partnership firm, was engaged in the manufacturing and trading of tobacco, gutka and other tobacco products. It executed a supplementary partnership deed on 19-6-2014, wherein all the partners mutually agreed not to charge any interest on their capital contribution and any remuneration to them with effect from 1-4-2014 onwards.

The Assessing Officer disallowed a portion of the deduction under section 10AA, contending that the interest on partners’ capital and remuneration to the working partner, as per section 40(b), was payable but not paid by the assessee. Consequently, the officer reduced the computed interest and remuneration from the business profit eligible for deduction under section 10AA.

The CIT(A) confirmed the action of the Assessing Officer. The matter reached before the Tribunal.

ITAT Held

The Tribunal held that the firm, in accordance with the partnership deed and a supplementary agreement, has chosen not to charge interest or remuneration on the partner’s capital contribution. Therefore, compelling it to do so is not warranted.

The grounds of appeal raised by the assessee were also covered by the decision of the Gujarat High Court in the case of Pr. CIT v. Alidhra Taxspin Engineers [Tax Appeal No. 265 of 2017, dated 2-5-2017], wherein the Court has held that mere incorporation of interest on partners’ capital account and remuneration does not signify that the same is mandatory.

Thus, the reduction of interest on capital and remuneration from the computation of profit allowable for deduction under section 10AA was not correct and was deleted. Accordingly, the Assessing Officer was directed to allow full relief to the assessee.

List of Cases Reviewed

• • Pr. CIT v. Alidhra Taxspin Engineers [Tax Appeal No. 265 of 2017, dated 2-5-2017] (para 14) followed.

List of Cases Referred to

• • Pr. CIT v. Alidhra Taxspin Engineers [Tax Appeal No. 265 of 2017, dated 2-5-2017] (para 6)
  • Asstt. CIT v. Mukta Enterprise [2018] 100 taxmann.com 44/[2019] 174 ITD 259 (Surat – Trib.) (para 6)
  • Asstt. CIT v. Kiran Jewellery [IT Appeal No. 192 and 193 (Srt.) of 2017, dated 6-6-2019] (para 6)
  • ITO v. Devine Impex [IT Appeal No. 279 (Rjt) of 2012, dated 24-1-2013] (para 9)
  • ITO v. Shivam Industries [IT Appeal Nos. 510 and 616 (Chd.) of 2012] (para 9)
  • Pr. CIT v. Ruta Jewels [Tax Appeal No. 165 of 2019, dated 24-6-2019] (para 10)
  • Al Reza Food v. ITO [IT Appeal no. 663 (Ahd.) of 2014, dated 23-3-2017]
  • Sagar Foods Mahuva v. ITO [IT Appeal No. 750 (Ahd) of 2014, dated 22-2-2017] (para 10).