Case Law Details
RSVA & Co. Vs ITO (ITAT Mumbai)
ITAT Deletes TDS Disallowance Because Branch Transfer Was Held Internal Adjustment; Disallowance on Payments to Partners Removed as ITAT Treats Them as Remuneration Under Section 40(b); ITAT Allows Related Party Payments Because Revenue Failed to Prove Expenditure Was Excessive; Car Hire and Salary Payments to Relatives Allowed as ITAT Finds No Evidence of Unreasonableness; ITAT Removes Section 40(a)(ia) Addition Because Payments to Partners Did Not Require TDS.
The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) allowed the appeal filed by the assessee, a chartered accountants’ firm, against the order of the CIT(A) for AY 2014-15 concerning disallowances made under Sections 40(a)(ia) and 40A(2)(b) of the Income Tax Act.
The assessee had filed its return declaring income of Rs.31,20,900. During scrutiny assessment, the Assessing Officer (AO) examined professional fees debited by the assessee amounting to Rs.28,93,046. On verification, the AO found that tax had been deducted at source only on payments aggregating to Rs.13,27,500 and disallowed the remaining Rs.14,90,656 for non-deduction of TDS under Section 40(a)(ia). The AO also disallowed Rs.9,28,000 under Section 40A(2)(b) in respect of payments made to related parties, holding that the assessee failed to justify the genuineness of such payments.
Before the CIT(A), the assessee explained that it had 11 partners operating across eight cities. It stated that part of the fees earned by the Ahmedabad branch was mistakenly deposited into the Thane branch account and later transferred through journal entries. According to the assessee, such internal branch transfers did not attract TDS. The assessee further explained that payments of Rs.4,50,000 and Rs.3,00,000 made to two partners, namely Mr. K.G. Anantha Rao and Mr. R.S. Agarwal, were reimbursements or remuneration to working partners and should be considered under Section 40(b), not under TDS provisions.
Regarding the disallowance under Section 40A(2)(b), the assessee stated that vehicle hire charges were paid for use of a Mahindra Xylo owned by the son of one of the partners. It claimed that the rent paid was reasonable. The assessee also explained that remuneration paid to the wives of partners was for services rendered over many years in audit assignments and administrative work connected with the firm’s activities.
The CIT(A) partly upheld the additions. The appellate authority held that the assessee failed to furnish documentary proof regarding the Ahmedabad branch and treated the explanation as insufficient. Payments to partners were also not accepted as remuneration. However, the CIT(A) deleted disallowance relating to certain payments where TDS compliance was demonstrated. The remaining disallowances were sustained.
The Tribunal first condoned a delay of 133 days in filing the appeal after considering the assessee’s explanation that internal disputes among partners prevented access to the registered email account and delayed knowledge of the CIT(A)’s order. The Tribunal observed that the delay was neither deliberate nor intentional and that the assessee intended to pursue the appeal on merits.
On the disallowance under Section 40(a)(ia), the ITAT accepted the assessee’s explanation regarding the Ahmedabad branch after noting that records from the Institute of Chartered Accountants of India (ICAI) showed the existence of the Ahmedabad office since 2008. The Tribunal held that transfer of fees between branches through journal entries amounted to an internal transfer and did not attract TDS liability.
The Tribunal further held that payments made to Mr. R.S. Agarwal and Mr. K.G. Anantha Rao were payments to working partners of the firm. According to the ITAT, such payments, irrespective of nomenclature, partook the character of remuneration to partners and were to be considered under Section 40(b). Therefore, no TDS deduction was required on such payments. The Tribunal also observed that the genuineness of these payments was never doubted by the lower authorities.
On the disallowance under Section 40A(2)(b), the Tribunal held that payments to related parties cannot be disallowed merely because the recipients are related persons. It noted that the lower authorities had not disputed the services rendered by the recipients and had also failed to conduct any comparable analysis to establish that the payments were excessive or unreasonable. The ITAT found no justification for disallowing the car hire charges or remuneration paid to the wives of partners in the absence of findings regarding unreasonableness of expenditure.
Accordingly, the Tribunal deleted both additions and allowed the assessee’s appeal.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
1. This appeal by assessee is directed against the order of Id. CIT(A)/ADDL/JCIT(A)-3, Bengaluru dated 28.02.2025 for Assessment Year (AY) 2014-15. The assessee has raised following grounds of appeal:
“1. The Ld. CJT(A) erred in upholding the addition of Rs. 12,79,000/- under section 40(a)(ia) of the Act.
2. The Ld. CIT(A) erred in upholding the addition of Rs. 9,28,000/- under section 40A(2)(b) of the Act.–
2. Brief facts of the case are that the assessee is a Chartered Accountants firm deriving income from profession. The assessee firm filed its return of income for A.Y. 2014-15 on 30/11/2014 declaring income of Rs. 31,20,900. The case was selected for scrutiny. During the assessment proceedings, the assessee noted that assessee has debited professional fees of Rs. 28,93,046/-. On show cause, the assessee furnished a list of persons to whom such professional fees were paid. On verification of the tax audit report, the Assessing Officer (AO) found that the assessee has made TDS of Rs. 1,32,750/-, being 10% of Rs. 13,27,500. The assessee also furnished a breakup of such payment of Rs. 13,27,500/-. The AO accordingly disallowed the remaining amount of Rs. 14,90,656/- for the want of TDS. The AO further noted that the assessee has made certain payments to related parties. The AO noted that assessee has paid Rs. 9,28,000/- to Mr. Rishi Agarwal, Mrs. Gujarathi and Mrs. S. Ramu. The AO was of the view that the assessee failed to file sufficient supporting evidence to justify such claim. No evidence of genuineness of such payment was furnished. The AO accordingly disallowed Rs. 9,28,000/-under section 40A(2)(b).
3. Aggrieved by the additions in the assessment order dated 28.02.2025, the assessee filed appeal before Id. CIT(A). Before the learned CIT(A), the assessee filed detailed written submissions on both additions. The submissions of the assessee are recorded in para 4 of the order of Id. CIT(A). On the disallowance of professional fees for want of TDS, it was submitted on behalf of the assessee that the assessee firm consists of 11 partners, spread over in 8 cities. The partner in the Ahmedabad branch is mainly looking after case in Income Tax Appellate Tribunal representations (ITAT) and Commissioner of Income Tax (Appeals) level. The part of the fees received on account of service rendered by Ahmadabad officer was wrongly deposited in the account of Thane Branch. Since the client’s cheque was deposited in one branch while belonging to other branch, the credit taken in professional fees at Thane was transferred to Ahmedabad branch which does not attract disallowance under section 40(a)(ia). The assessee furnished ledger account showing the transaction of Rs. 8,29,000/-. The assessee further explained that a professional fees of Rs.4,50,000/- credited to Mr. K.G. Anantha Rao and Rs. 3,00,000/-credited to Mr. R.S. Agarwal who were also partners of assessee firm. It may be considered under section 40(b). It was a reimbursement paid to working partner which was grouped under professional fees and will not attract TDS at source. The copy of partnership firm was furnished. On the disallowance under section 40A(2)(b) of Rs. 9,28,000/-, the assessee stated that partner of assessee namely Mr. R.S. Agarwal used car Mahindra Xylo, which belonged to his son, Mr. Rishi Agarwal. The rent of Rs. 8,40,000/- was paid which is Rs. 7,000/- per month which a reasonable keeping in view that payment made to related parties is on lower side, the car is not available on hire for less than Rs. 10,000/- per month. On the other disallowance of Rs. 4,70,000/- and Rs. 3,74,000/-paid to partners wife, the assessee stated that both these two persons are working in firm for last 15 years and are consistently helping in audit assignments as well as administrative issues pertaining to the activities of the firm. The firm was set up in 2001 with 4 partners in the name of Sudhir Shetty & Co., later through the efforts of one founding partner, Mr. B.N. Rao, and seven more partners merged with this firm in 2008 and the name of firm was changed to RSVA & Co. Mrs. Gujarati and Mrs. S. Ramu are working in the firm since long that is before merger. Thus, the payment is made against the services rendered. Therefore, the payment is not hit by section 40A(2)(b) of the Act. The assessee also explained about each payment in details. The assessee also furnished copy of reconstitution deed of partnership.
4. The Id. CIT(A) after considering the submission of assessee confirmed both the additions / disallowances. On the disallowance under section 40(a)(ia), the Id. CIT(A) held that assessee has not furnished any documentary evidence about existence of branch Ahmedabad and merely rely on partnership deed wherein there is clause that firm is free to set up any branch anywhere so it cannot be accepted its fact value and confirmed the addition/disallowance of Rs. 8,29,000/- with regard to payment made to K.G. Anantha Rao and R.S. Agarwal of Rs. 1,50,000/- & Rs. 3,00,000/- that such payment should be considered as remuneration, the Id. CIT(A) recorded that remand report was called from AO and AO is objected that such explanation is afterthought. The Id. CIT(A), thus, confirmed the entire addition. For other payment that is payment to K.P. Joshi & Co. of Rs. 76,656/- and Rs. 1,35,000/- of Upbeat Innovators Pvt. Ltd. (UIPL), the Id. CIT(A) noted that TDS was made on such payment, therefore, to the extent of Rs. 2,11,656/- was deleted. Thus, the assessee was allowed part relief and remaining addition was upheld.
5. On the disallowance of related party payment that is on account of travelling expenses and remuneration paid to wife of partner. The Id. CIT(A) asked for educational qualification of Mrs. Gujarathi and Mrs. S. Ramu and bank statement of both the parties. Similarly, the details of Xylo car owned by Rishi Agarwal was also asked. The Id. CIT(A) recorded that required details were not furnished. The Id. CIT(A) was of the view that wife cannot be considered “employee” in the traditional sense. No role and responsibility is allocated to this spouse of partner in the partnership deed. The assessee has made payment without explaining role of these spouses. On the payment of vehicle, the Id. CIT(A) recorded that car owns by a son of partner namely R.S. Agarwal, the Id. CIT(A) recorded that prima facie it appears that assessee entered into financial transaction with family members with sole objective of reducing tax liability. No agreement for the purpose of hiring of car is furnished. The car could be used partner without hiring it. On such observations, the Id. CIT(A) confirmed the disallowance under section 40A(2)(b). Further, aggrieved the assessee has filed present appeal before Tribunal.
6. We have heard the rival submissions of both the parties and have gone through the orders of lower authorities carefully. On perusal of record shows that there is delay of 133 days in filing appeal before Tribunal. The impugned order was asked by Id. CIT(A) on 28.02.2025, however his appeal was filed only on 10.09.2025. Thus, there is delay of 133 days. The assessee has filed affidavit of Shri B.N. Rao, partner of assessee firm. The learned authorised representative (Id. AR) of the assessee submits that there was internal bickering among the partner due to which e-mail address given in the tax return could not be assessed. The assessee was not aware about the dismissal of appeal by Id. CIT(A). On receipt of initiation of penalty proceeding under section 271(1)(c), the order of Id. CIT(A) from the portal was downloaded and appeal was filed. The Id. AR of the assessee submits that there is no intentional or deliberate delay in filing appeal before Tribunal. The assessee has good case on merit and likely to succeed. The assessee always made compliance in time. The assessee is really interested in pursuing case on merit. Hence, the delay in filing appeal may be condoned and matter may be heard on merit.
7. On the other hand, learned Senior Departmental Representative (Id. Sr. DR) for the Revenue not seriously opposed the plea of condonation of delay.
8. We have considered the contention of both the parties on condonation of delay. Considering the fact that delay in filing appeal is not intentional or deliberate rather, the assessee is interested in pursuing their appeal on merit. Therefore, the delay in filing appeal is condoned. Now, adverting to merits of the case.
9. Ground no. 1 relates to disallowance under section 40(a)(ia). The Id. AR of the assessee invited our attention on page 2 of para 5 of assessment order wherein the AO identified 5 parties (professionals) to whom payments were made and no TDS under section 1943 as made. The assessee has not deducted TDS on payment to Ahmadabad Branch of Rs. 8,29,000/-, Mr. K.G. Anantha Rao Rs. 1,50,000/- and Shri R.S. Agarwal of Rs. 3,00,000/-. The remaining payment of Rs. 76,656/- and to Upbeat Innovators Pvt. Ltd. UUIPL) of Rs. 1,35,000/- has already been deleted by Id. CIT(A) on furnishing TDS. Thus, dispute remains with regards to three payments only. For first payment which relates to Ahmadabad Branch of Rs. 8,29,000/-. The Id. AR of the assessee submits that admittedly the assessee is a partnership firm of Chartered Accountants having 11 partners spread in 8 cities. The copy of certificate of Chartered Accountant of India about office / locations along with its partners is placed on record. The partners at Ahmedabad is mainly looking after work related to ITAT and CIT(A) matters. The part of fees received on account of service rendered by that branch was wrongly deposited in the bank account of Thane branch and was shown as professional fees of that branch. The AO himself accepted this payment to Ahmadabad Branch and not to individual. We find that at the end of year, such deposit was treated as professional fees of Ahmedabad Branch and by passing journal entry. There is no irregularity on such payment. The internal transfer does not attract TDS. So far as other payment paid to R.S. Agarwal and K.G. Anantha Rao is concern, both are partner of assessee firm. Shri R.S. Agarwal is partner in Andheri Branch and K.G. Anantha is partner at Madhya Karnataka, it may be considered under section 40(b) for allowability. Hence, we find merits in the submissions of Id AR of the assessee that the remuneration paid to working partner does not call for deduction of TDS. The AO objected without application of mind. When payments made to partners for their services in the professional firm whatever may be the nomenclature, it partakes the color of remuneration to partner to be considered under section 40(b) for its allowability or otherwise. Similarly, for payment made to K.G. Anantha Rao, the Id. AR of the assessee submits that he is also one of the partner and managing one of the branches. The payment made to whom is also grouped under professional fees and the same is allowable as explained in case of R.S. Agarwal.
10. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities carefully. We find that this ground of appeal relates to disallowance of payment to Ahmedabad Branch aggregating of Rs. 8,29,000/- and Rs. 1,50,000/- and Rs. 3,00,000/- paid to K.G. Anantha Rao and R.S. Agarwal. We find that the AO disallowed all 3 payments that no TDS as required under section 1943 was made against these 3 payments. The Id. CIT(A) confirmed all 3 payments. The Id. CIT(A) also held that assessee has not furnished any evidence regarding existence of assessee’s office in Ahmadabad. The Id. AR of the assessee while making his submission submitted before us that being a professional and partner of Chartered Accountants firm, he is required to inform to Chartered Accountant Institute about existence of partnership form, copy of details downloaded from the Institute of Chartered Accountant of India (ICAI) is placed on record which clearly shows one of the address of assessee firm in Ahmedabad and that such office is in existence from 2008. All such information is in public domain. The amount was wrongly deposited in bank account of Thane instead of bank account of Ahmedabad. So far as the other disallowance of professional fees paid to K.G. Anantha Rao and R.S. Agarwal, the Id. AR of the assessee submits that both are admittedly partner of assessee firm and it could be considered as remuneration paid to working partner. We find that genuineness of such payment is not doubted by the lower authorities. The lower authorities disallowed for the want of TDS. We find that convincing force in the submission of Id. AR of the assessee that fees of Ahmedabad Branch was wrongly deposited in Thane Branch which was transferred by way of journal entry. Similarly, if the payment is made to working partner, it does not require any TDS. Both the partners are working partner of assessee firm. Therefore, the disallowance is made for branch transfer and profession paid to R.S. Agarwal and K.G. Anantha Rao is also deleted. In the result, ground no. 1 of the assessee is allowed.
11. Ground no. 2 relates to related parties payment. The Id. AR of the assessee submits that Mrs. S. Ramu is working from last 15 years and helping in audit assignments as well as administrative issues of assessee firm. The AO objected in his remand report but have not seen ledger account of salaries paid to Mrs. Srividya Ramu and Mrs. Sonal Gujarati from April 2010. The reasonableness is not doubted. The payment to related parties is not prohibited under the law. It has to be seen with its reasonableness. So far as payment made for use of car of related parties, the Id. AR of the assessee submits that there is prohibition under the law for hiring of vehicle for services from related parties but it has to be seen on the basis reasonableness. The Id. AR of the assessee also submits that relevant evidence has been placed on record to substantiate the claim.
12. On the other hand, the Id. Sr. DR for the Revenue supported the order of lower authorities.
13. We have considered the rival submissions of both the parties and have gone through the orders of lower authorities. We find that lower authorities have objected / disallowed on the ground that payments were made to related parties. We find that services rendered such related parties are not disputed. Such disallowances have to be made if such expenditure is excessive or unreasonableness having regard to the fair markets of services rendered or facilities availed or goods purchase. No comparable analysis is made by lower authorities. Thus, we do not find any justification in absence of observation of reasonableness / unreasonableness of such expenses either on account of car hire charges or the remuneration paid to wives of partners for their services rendered. In the result, ground no 2 of assessee’s appeal is also allowed.
14. In the result, the appeal of assessee is allowed.
Order pronounced in the open court on 06/04/2026
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