The Jodhpur bench of the Income Tax Appellate Tribunal (ITAT) held that the reserves and subsidy created out of the profit after the deduction of tax shall not be taxable when credited to the partner’s capital account.
The assessee is a Firm that derives income from manufacturing and trading of Gwar Gum Powder Cassia Tore, Psyllium Husk, and Tamarind Powder. The return of income was e-filed by the assessee declaring total income at Rs. 14,44,83,440/-. The case was selected for scrutiny through Computer-Assisted Scrutiny Selection (CASS).
The Assessing Officer disallowed Rs. 4,73,780/- i.e. 1/10th of the various expenses claimed. The assessment under Section 143(3) of the Income Tax Act was completed determining total income at Rs. 14,49,57,220/-. The Assessing Officer issued a notice under Section 154 of the Income Tax Act requesting the assessee to file the reply.
The Assessing Officer stated that the assessee could not prove the distribution of the Export reserve, Investment Allowance reserve, and state investment subsidy reserve was made out of tax-free profit hence distribution of this reserve is subject to tax.
Therefore, the distribution of export reserve of Rs. 6,12,000/-, Investment Allowance Reserve of Rs. 1,01,378/- and State Investment Subsidy reserve of Rs. 5,71,700/- to the credit of the partner’s capital account added to the income of the firm.
In the case of ITO Vs. Volkart Bros. 82 ITR 50 held that a mistake apparent on record must be an obvious and patent mistake and not something that can be established by a long-drawn process of reasoning on points on which there may conceivably be two opinions.
The Two-member bench comprising of S. Seethalakshmi (Judicial member) and Kamlesh Jayantbhai (Accountant member) held that merely by transferring the reserve created out of the tax paid profit subsequently transferred to capital account of the firm is not the real income chargeable to tax in the year when transferred to partner and the reserve so created where statutory reserve created under the old provision of the law and now the same being not carried out to carried in the balance sheet and thereby credited the account of the partner is not a mistake apparent on record and cannot be rectified under the guise of provision of Section 154 of the Income Tax Act and the same cannot be considered as mistake apparent on record.
The Assessing Officer erred in invoking the provision of Section 154 of the Income Tax Act in the instance case based on the facts on record. Therefore, the order under attach passed under Section 154 of the Income Tax Act was quashed. Thus, the appeal of the assessee was allowed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
