R.P. Garg, A.M. - (1.) THIS is an appeal by the Revenue against the order of the CIT(A) for asst. yr. 1990-91. The ground raised in this appeal read as under : "On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the addition of disallowance of Rs. 3,81,000 on account of transfer of Export Reserve into the capital account of the partner."
(2.) The assessee is a firm. It did export business in 1988-89. For claiming deduction under s. 80HHC of the Act, it created a reserve of Rs. 3,71,000 as required under the second proviso to sub-s. (1) thereof. On 1st October, 1989, one of the partners, viz., Miss F.I.P. Shroff retired and one more partner was inducted to the firm with change of share ratio to the profit and loss of the partners. In order to give due accounting treatment it transferred the reserve created in 1988-89 to the original three partners' capital account. The AO, therefore, added back this sum of Rs. 3,81,000 to the income of the assessee by observing as under : "Export Reserve : Scrutiny of the partners' capital accounts revealed that there is transfer of Export Reserve of Rs. 3,81,000 as under : JUDGEMENT_11430_TLIT0_19990.htm By disbursing this amount of export reserve and especially capitalising this amount of export reserve into partners' capital account, the assessee-firm appropriated the funds on which the assessee cannot exercise any control over usage of such funds by the partners of the firm in the subsequent years. The contention of the assessee that all the export reserve has been done away with from asst. yr. 1989-90 onwards and even if the character of this reserve changes into and forms capital of the partners, which also remains in the business as shown in the chart submitted, is not found to be acceptable for the obvious reason that the partner Miss Farida I.P. Shroff has retired from the partnership firm with effect from 2nd October, 1989, and to the extent of Rs. 1,71,450 out of export reserve has been taken away by her. Under the circumstances, the contention of the assessee that the allocated/disbursed amount of export reserve is in the business in the form of capital in partners' accounts is not tenable for the reason mentioned above. In my opinion the assessee's argument is not justified and would not stand the base for such transfer of business funds into partners' personal capital accounts. In respect of the other two partners existing in the firm, there would be no control over use of those funds once the funds are transferred to partners' capital accounts. Therefore, the sum of Rs. 3,81,000 being transfer of export reserve into partners' capital account is disallowed and added back to the income of the assessee." 4. The CIT(A) allowed the assessee's appeal and deleted the addition by observing in para 3 of his order as under : "3. I have carefully considered the submissions of the appellant and the reasoning of the AO. I am of the view that the AO has not been able to show how the amount of Rs. 3,81,000 was the income of the appellant chargeable to tax for the asst. yr. 1990-91. Even if the contention of the AO is accepted that by transferring the reserve account to partners' capital accounts, the export reserve ceased to be utilised for the purposes of business, it cannot be held that the amount of Rs. 3,81,000 became the income of the appellant taxable for the asst. yr. 1990-91. In view of this, the addition of Rs. 3,81,000 is deleted." 5. The learned Departmental Representative submitted that the assessee has violated the requirement contained in the second proviso to sub-s. (1) of s. 80HHC by distributing the reserve to the partners' capital accounts and that the assessee had no control over the said money and the partner Miss Farida I. P. Shroff had taken away her share and, therefore, the money could not at all have been available for the use in the business of the assessee. The learned counsel for the assessee, on the other hand, submitted that it was only a reclassification of the accounting and the reserve account was continuing with the firm in the partners' capital account insofar as the continuing partners were concerned and in the partners' loan account insofar as the retiring partner was concerned. The money continued with the firm for use in the business. Therefore, it was submitted that there was no violation at all. He also referred to the Board's Circular regarding the utilisation of reserve for distribution of profits as dividends and, therefore, contended that the transfer of the reserve to the account of the partners was distribution of profits and consequently it was utilised for the purposes of the business of the firm. In any case, the learned counsel submitted, the second proviso was deleted w.e.f. 1st April, 1989, when a new sub-s. (1) was substituted in s. 80HHC of the Act and, therefore, no requirement was there to keep the amount in the reserve account in the year under consideration. It was, therefore, submitted that even if the amount was transferred there was no violation of any of the provisions of s. 80HHC of the Act. 6. The parties were heard and their submissions have been considered. Sec. 80HHC(1) as it was in force at the relevant time read as under : "(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of section, be allowed, in computing the total income of the assessee, a deduction equal to the aggregate of : (a) four per cent of the net foreign exchange realisation; and (b) fifty per cent of so much of the profits derived by the assessee from the export of such goods or merchandise as exceeds the amount referred to in cl. (a) : Provided that the deduction under this sub-section shall not exceed the profits derived by the assessee from the export of such goods or merchandise : Provided further that an amount equal to the amount of deduction claimed under this sub-section is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised for the purposes of the business of the assessee." 7. The second proviso no doubt, provides for a requirement of creating reserve out of the profits of equivalent amount of deduction claimed and utilisation of the same for the purposes of the business. However, how long that reserve was to be kept like is not provided in the said proviso or in any of the provisions of the Act. Is that requirement for that year alone in which the reserve was created or is to be for all the times to come till the concern survives or any other period ? The law is silent on this and no time-limit is provided for retaining such reserve. The Institute of Chartered Accountants has clarified that it should be kept at least upto the date of completion of assessment of the relevant year. It states "The condition of creation of reserve to claim the benefit under s. 80HHC was relevant upto the asst. yr. 1988-89. The section provided for the utilisation of the reserve for the purposes of the business. The CBDT have clarified in Circular No. 463, dt. 11th July, 1986, that the distribution of dividends out of the reserve created under s. 80HHC will be considered utilisation for the purpose of the business. There is no further requirement of creation of reserve from asst. yr. 1989-90 onwards. It may, however, be noted that it will be prudent to retain the reserve created upto asst. yr. 1988-89 at least upto the date of completion of the assessment of the relevant year." In the absence of any such limit of retaining the reserve fixed by the Act. I am of the opinion that the opinion of the Institute of Chartered Accountants be taken as a reasonable limit. Furthermore, this requirement is dispensed with from 1st April, 1989. The year under appeal being subsequent to asst. yr. 1989-90. I hold that there is no violation committed by the assessee so as to lose the benefit under s. 80HHC of the Act. Whenever such time-limit was contemplated, the legislature provided for the disallowance in the year of allowance like s. 32A(5)(b), r/w s. 155(4A); s. 34(3), r/w s. 155(5); s. 33A(3) r/w s. 155(5A) and s. 32AB(5A) of the Act. 8. Looked at from another angle, even if it is assumed that there was a violation, it can be used against the assessee in the year in which the deduction was claimed. The provision was created in asst. yr. 1988-89. There is no provision in the proviso to s. 80HHC or elsewhere in the Act which provides that the transfer of reserve can be treated as income in the year of its transfer. Whenever such a violation was contemplated the legislature has provided for its assessment in the year of violation. See the provisions of s. 80CC(5) in this regard. In the absence of any provision for treating the amount of reserve created as income of the assessee in the year in which the reserve was transferred to the accounts of the partners, no assessment, in my opinion, can be made by treating the amount transferred to the capital accounts of the partners. The order of the CIT(A), therefore, does not call for any interference. 9. Before parting with the case, it may be pointed out that the fact that the money remained in the firm is not very relevant as it was only a transfer to partners' account and not the money actually withdrawn. What is relevant is the utilisation of the reserve for the purposes of the business. The retention of the reserve is a must. Again the equation of withdrawal of money by the partners to the distribution of dividends by putting both of them at par, in my view, is not a correct proposition. If the reserve is transferred to the capital account of the partners and the money to that extent is withdrawn, it cannot be said to be utilisation for the purposes of the business of the firm and the reliance on the Board's Circular in this regard, which opines that distribution of dividends is a utilisation of the reserve for the purposes of the business, is of no help. 10. In the result, the order of the CIT(A) is upheld and the appeal filed by the Revenue is dismissed.;