VENUGOPALA CONSTRUCTIONS Vs. INCOME TAX OFFICER

JUDGEMENT

(1.) Mr. Y. Ratnakar, learned counsel for the petitioners strenuously urges in these petitions the inapplicability of Circular No. 737 dt. 23rd February, 1996 [(19996) 131 CTR (St) 9 : (1996) 218 ITR (St) 97], with retrospective effect issued by respondent No. 2 purporting to clarify/withdraw the earlier Circular No. 684 dt. 10th June, 1994 [(1994) 119 CTR (St) 25 : 208 ITR (St) 8], which explained the scope of S. 44AD of the IT Act, 1961. It is submitted that S. 40(b) deals with amounts not deductible from the profits and gains of business of firms and sub-cls. (iv) and (v) provide for payment of interest or remuneration to any partner as not deductible from the profits of the business in computing the income. According to sub-clause (iv) of clause (b), the payment of interest to a partner which is authorised by, and is in accordance with, the terms of the partnership deed and relating to any period falling after the date of the partnership deed insofar as such amount exceeds the amount calculated at the rate of 18 per cent simple interest per annum shall not be deducted. So far as remuneration is concerned, according to sub-clause (v) of clause (b), any remuneration which is paid to a working partner and which is authorised by, and in accordance with, the terms of the partnership deed and is related to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as provided in the section, shall not be deducted. It is the case of the petitioners that S. 44AD was enacted for simplifying the procedure and provided that notwithstanding anything to the contrary contained in Ss. 28 to 43C (S. 40 included), in the case of an assessee engaged in the business of civil construction or supply of labour for civil construction, a sum equal to eight per cent of the gross receipts paid or payable to the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income, shall be deemed to be the profits and gains of such business chargeable to tax under the head "profits and gains of business or profession". A circular was issued by respondent No. 2 on 10/06/1994, being Circular No. 684, which provided in paras 31.3 and 32.2 as follows :

(2.) The CBDT later found that the circular dt. 10/06/1994, had created confusion and ambiguity and hence, issued another Circular No. 737, on 23/02/1996, of which paras 3 and 4 are as follows :

(3.) Since the earlier circular had in effect given a benefit to the assessee that the permissible deductions under S. 40(b) of the IT Act were also available while calculating the comprehensive rate of 8 per cent under S. 44AD, it is the argument of Mr. Ratnakar, that the latter circular can have only prospective application and could not have any retrospective effect so as to deprive the assessee of the benefit of deductions in respect of the salary and interest as was permissible under S. 40(b) and as had been clarified in Circular No. 684.