Bombay Snuff Co. vs Commissioner of Income Tax

Heard Mr. M. V. Samarth, learned counsel for the appellant and Mr. A. S. Jaiswal, learned counsel for the respondent. These two appeals are filed by the appellant/assessee against the common order of the Tribunal dated October 12, 2001, in I. T. A. Nos. 985 and 986/Nag/1996. The common question of law raised by the assessee in these appeals is :

"Whether, on the facts and in the circumstances of the case, in view of the specific terms of the partnership deed in case of the partnership firm the deduction u/s 80HH of the income tax Act, 1961, is to be allowed on gross total income before deducting the interest and remuneration to partner forming part of the business income being share income ?"

The assessment year involved herein are 1997-98 and 1994-95 respectively.

For the sake of convenience we set out the facts in Appeal No. 17 of 2002 relating to assessment year 1997-98.

The assessee is engaged in the manufacture and sale of snuff.

In the assessment year in question the assessee claimed deduction u/s 80HH of the Act on the gross total income without reducing therefrom the interest and salary paid to the partners which was deductible u/s 40(b) of the income tax Act, 1961. Rejecting the contention of the assessee, the Assessing Officer held that in view of section 80B of the Act, the deduction u/s 80HH of the Act has to be computed on the total income arrived at after deducting the interest and the remuneration paid to the partners u/s 40(b) of the Act.

The assessee filed appeals against the said orders before the Commissioner of income tax (Appeals) who upheld the order of the Assessing Officer. Further appeal filed by the assessee before the income tax Appellate Tribunal was also dismissed. Hence, these appeals are filed by the assessee u/s 260A of the Act.

Mr. Samarth, learned counsel appearing on behalf of the assessee, submitted that as per the partnership deed, the partners were to be paid interest on their capital as also the remuneration only after taking into account the deduction admissible under sections 80HH and 80-I of the Act. He submitted that since the share income of the firm is paid to the partners in the form of interest and remuneration, the said amount cannot be deducted as an expenditure in the profit computation of the firm. In sup port of the above contention he has relied upon the judgment of the Gujarat High Court in the case of Commissioner of Income Tax Vs. Kedraj Agricultural Industries, .

Mr. Jaiswal, learned counsel for the Revenue, on the other hand, while supporting the order of the Tribunal, submitted that the issue raised by the assessee is no longer res integra and is covered by several decisions of this court including the decision in the case of (2002) 75 TTJ 511 .

It is pertinent to note that prior to the assessment year 1993-94 the distribution of profits of the firm to the partners in the form of interest and remuneration was not allowable as business expenditure in view of the specific provision contained in section 40(b) of the Act. However, by the Finance Act 1992, with effect from April 1, 1993, section 40(b) has been amended so as to allow deduction of such expenditure as more specifically set out therein. Therefore, in the assessment year in question payment of interest and salary to the partners was deductible and in fact the assessee had claimed the said amount as business expenditure.

The question is, for computing the deduction under sections 80HH and 80-I of the Act, whether the gross total income has to be reduced from the amount of interest and salary paid to the partners which is deductible u/s 40(b) of the Act ? This court in the case of Indian Rayon Corporation Ltd. Vs. Commissioner of Income Tax, has held that the deduction u/s 80HH is on the gross total income computed as per the provisions of section 29 to 43A of the Act. In the present case, it is not in dispute that the amount of interest and salary paid to the partners is deductible u/s 40(b) of the Act and in fact the assessee has claimed the deduction of the said amount and the same is allowed. Therefore, the decision of the Tribunal as well as the lower authorities that the gross total income for the purpose of deduction u/s 80HH has to be reduced from the amount deductible u/s 40(b) of the Act cannot be faulted. The decision of the Gujarat High Court in the case of Commissioner of Income Tax Vs. Kedraj Agricultural Industries, does not support the case of the assessee because what is held in that case is that the amount of interest and salary paid to the partners which is disallowed u/s 40(b) of the Act is to be included in the gross total profit. As stated earlier, in the present the amount of interest and salary is allowable u/s 40(b) as amended by the Finance Act, 1992. It is pertinent to note that the decision of the Gujarat High Court in the above case related to the assessment years 1977-78 to 1979-80, that is, prior to the amendment of section 40(b) by the Finance Act, 1992. Thus, the aforesaid decision has no application to the facts of the present case. Thus, in the light of the amended provisions of section 40(b) of the Act, the Tribunal was justified in holding that the interest and remuneration paid to the partners were liable to be excluded from the gross total income for the purpose of deduction u/s 80HH of the Act. In this view of the matter, we do not find any merit in these appeals. Accordingly, both the appeals are dismissed with no order as to costs.