Case Law Details
Panda Fuels Vs ITO (ITAT Cuttack)
We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case the Assessing Officer disallowed deduction for remuneration paid to partners of Rs.6,64,923/- on the ground that the partnership deed does not provide for remuneration to partners. The same was confirmed in appeal by the CIT(A) on the ground that the remuneration to individual partners has neither fixed in the deed nor the deed provides for the manner of quantification of such remuneration.
As per the provisions of Income tax At, the partnership deed should provide for payment of remuneration to working partners. It does not provide that the remuneration paid to working partners should be fixed by the partnership deed or that the partnership deed should provide for the method of remuneration to the working partners.
As partnership deed provides for payment of remuneration to partners which would be as per the provisions of the Act, which meant that the remuneration payable to partners would be quantified as per the provisions of the Act and shall not exceed the maximum remuneration provided. It is not in dispute that the partners were paid remuneration, which was less than the maximum provided by the Act. None of the authorities have disputed the payment of remuneration and has accepted the books of account of the assessee as correct and, therefore, the remuneration was deductible while computing the income of the assessee firm. We, therefore, set aside the orders of lower authorities and delete the disallowance of Rs.6,64,923/- and allow this ground of appeal of the assessee.
FULL TEXT OF THE ITAT JUDGMENT
This is an appeal filed by the assessee against the order of the CIT(A), Sambalpur dated 27.10.2017 for the assessment year 2013-2014.
2. In Ground No.1 of appeal, the grievance of the assessee is that the CIT(A) erred in confirming the addition of Rs.11 lakhs as unexplained cash credit, which was capital introduced by the partner.
3. The Assessing Officer found that one of the partners, Smt. Lalita Jain introduced capital of Rs.11 lakhs by cash during the year under consideration. He treated the same as unexplained cash credit in the hands of the assessee firm and added Rs.11 lakhs to the income of the assessee u/s.68 of the Act.
4. On appeal, the CIT(A) confirmed the addition observing that Smt. Lalita Jain did not have the creditworthiness to introduce Rs.11 lakhs as capital in the firm and, therefore, the capital introduced was not genuine.
5. Before us, ld A.R. argued that Smt. Lalita Jain was an income tax assessee and had filed her return of income for the assessment years 2011-2012 and 2012-2013. He enclosed copy of the balance sheet of Smt. Lalita Jain for the year ended 3 1.3.2011 and pointed out therefrom that she had cash in hand of Rs.11,34,850/-. He further pointed out that it can be seen from the balance sheet as on 3 1.3.2012 that Smt Lalita Jain had cash in hand of Rs.13,39,090/-. Hence, it was his submission that from her cash in hand of earlier assessment years, Smt. Lalita Jain introduced her capital in the firm of Rs.11 lakhs by cash. Hence, the Assessing officer and the CIT(A) were not justified in holding that the transaction was not genuine and that Smt. Lalita Jain did not have the creditworthiness for introducing capital in her name in the firm. He further submitted that no addition in the hands of the firm can be made on account of introduction of capital by the partner of the firm where the partners have owed that the monies deposited in their account are their own. The Assessing Officer is entitled or may proceed against the partners and assess the same in their hands if their explanation is not found satisfactory. For this, he relied on the decision of Hon’ble Allahabad High Court in the case of CIT s. Jaiswal Motor Finance, 141 ITR 706 (All).
6. On the other hand, ld D.R. supported the orders of lower
7. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case, the partner of the assessee firm Smt. Lalita Jain introduced 11 lakhs in cash towards her capital in the assessee firm. The assessee produced copy of income tax return for assessment years 2011-12, 2012-13 and 2013-14 together with balance sheet of Smt. Lalita Jain, which is placed at page Nos.22-27 of the paper book. It was pointed out from the balance sheet of Smt Lalita Jain that she had cash in hand of Rs.11,34,830/- as on 31.3.2011 and Rs.13,39,090/- as on 31.3.2012. It was submitted that from this cash balance of the earlier assessment years, Smt. Lalita Jain introduced Rs.11 lakhs as her capital in the firm in cash. Thus, the genuineness of the transaction and creditworthiness of the partner Smt. Lalita Jain is established. The Assessing Officer did not accept the explanation of the assessee as satisfactory and hence made addition of Rs.11 lakhs u/s.68 of the Act to the income of the assessee as unexplained cash credit.
8. On appeal, the CIT(A) confirmed the action of the Assessing
9. Before us, ld A.R. submitted that the creditworthiness of the partner Smt. Lalita Jain was proved from the balance sheet for the previous assessment years 2011-12 and 2012-13 filed with the department alongwith the income tax return. He submitted that she had sufficient cash in hand as on 31.3.2012 as revealed from her balance sheet, copy of which is placed in the paper book at pages 22 to 27. Thus, the Assessing officer and the CIT(A) were not justified in treating the sum of Rs.11 lakhs as unexplained cash credit u/s.68 of the Act in the hands of the He relied on the decision of Hon’ble Allahabad High Court in the case of Jaiswal Moors Finance (supra), wherein, it was held that it is well settled that if there are cash credit entries in the books of a firm, in which the accounts of the individual partners exist, and it is found as a fact that cash was received by the firm from its partners, then, in the absence of any material to indicate that they were the profits of the firm, it could not be assessed in the hands of the firm. No material has been brought on record by the Revenue to show that the amount of Rs.11 lakhs shown as capital introduced by the partner Smt. Lalita Jain was the profits of the firm. Therefore, in view of the decision of Hon’ble Allahabad High Court in the case of Jaiswal Motor Finance (supra), no addition in the hands of the firm can be made as unexplained cash credit u/s.68 of the Act. We, therefore, set aside the orders of lower authorities and delete the addition of Rs.11 lakhs and allow this ground of appeal of the assessee.
10. In Ground No.2 of the appeal, the grievance of the assessee is that the CIT(A) erred in confirming the action of the Assessing Officer in not allowing deduction for partner’s remuneration u/s.40(b) of the Act.
11. The facts of the case are that the Assessing Officer observed that the assessee has claimed deduction of Rs.6,64,923/- towards remuneration to partners. He observed that as per clause -11 of the partnership deed, remuneration will be payable to partners as per provisions of section 40(b) of the Act. He observed that this quantification of the remuneration is not apparent from clause -11 of the partnership deed and, therefore, he disallowed deduction for remuneration of Rs.6,64,923/- and added the same to the income of the assessee.
12. On appeal, the CIT(A) confirmed the action of the Assessing Officer by observing that remuneration to partners were allowable deduction u/s 40(b) of the Act if in the deed of partnership either the amount of remuneration payable to individual working partners is fixed or the deed provides for the manner of quantifying such remuneration. In the case of the assessee, the remuneration to the individual partners has neither been fixed in the deed nor the deed provide for the manner of quantification of such remuneration. Hence, the Assessing Officer is justified in disallowing the remuneration payment to the partners.
13. Before us, ld A.R. submitted that the requirement of law is that remuneration should have been authorised and amount of remuneration shall not exceed amount as mentioned in sub-clause (v) of Section 40(b) of the Act. The relevant provisions have used word ‘authorised’ and not the word ‘ quantify’. Therefore, the Assessing Officer and the CITA) were not justified in disallowing remuneration payable to partners. He relied on the decision of Hon’ble Rajasthan High Court in the case of CIT vs. Asian Marketing, (2012) 254 CTR 453 (Raj) and also the decision of Hon’ble HP High Court in the case of Durga Das Devaki Nandan vs ITO, 342 ITR 17 (HP).
14. Ld D.R. supported the orders of lower authorities.
15. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case the Assessing Officer disallowed deduction for remuneration paid to partners of Rs.6,64,923/- on the ground that the partnership deed does not provide for remuneration to partners. The same was confirmed in appeal by the CIT(A) on the ground that the remuneration to individual partners has neither fixed in the deed nor the deed provides for the manner of quantification of such remuneration.
16. Ld A.R. of the assessee relied on the decision of Hon’ble HP High Court in the case of Durga Das Devaki Nandan (supra).
17. Ld D.R. supported the orders of lower authorities.
18. We find that Hon’ble H.P.High Court in the case of Durga Das Devaki Nandan (supra) has held as under:
“It is settled law that the Central Board of Direct Taxes cannot issue a circular which goes against the provisions of the Income-tax Act, 1961. The Board can only clarify issues but cannot insert terms and conditions which are not part of the main statute.
A reading of section 40(b)(v) clearly shows that amount of remuneration which does not exceed the amount specified in the Act is deductible. The Board has provided that either the amount of remuneration payable to each individual should be fixed in the agreement or the partnership agreement deed should lay down the manner of qualifying such remuneration. The circular has to be read along with section 40(b)(v) and has to be made subject to section 40(b)(v) . This section does not lay down any condition of fixing the remuneration or the method of remuneration in the partnership deed. All that the section provides is that in case the payment of remuneration made to any working partner is in accordance with the terms of the partnership deed and does not exceed the aggregate amount as laid down in the subsequent portion of the section the deduction is permissible.
The assessee was a firm. The partnership deed provided that the working partners were to be actively engaged in looking after the affairs of the business of the firm diligently and honestly and each of them would be paid a monthly salary as per the Income-tax provisions and which could be revised from time to time in the best interest of the partnership. The Assessing Officer was of the opinion that the partnership deed did not provide for payment of remuneration in terms of CBDT Circular No. 739, dated March 25, 1996, because it did not specify the amount of remuneration payable to the individual working partner or lay down the manner of quantifying such remuneration. The remuneration was not deductible. This was upheld by the Tribunal. On appeal to the High Court :
Held, that when the partnership deed provided that the remuneration would be as per the provisions of the Act, it clearly meant that the remuneration payable to the partners would be quantified as per the provisions of the Act and would not exceed the maximum remuneration provided. It was not disputed that the partners were paid remuneration which was less than the maximum provided by the Act. None of the authorities had doubted the payment of remuneration and in fact account books of the assessee had been accepted to be correct. The remuneration was deductible.”
19. A reading of the same shows that as per the provisions of Income tax At, the partnership deed should provide for payment of remuneration to working partners. It does not provide that the remuneration paid to working partners should be fixed by the partnership deed or that the partnership deed should provide for the method of remuneration to the working partners. We find that clause -11 of the partnership deed provides for payment of remuneration as under:
Clause-11
“That both the partners shall be the working partners who shall devote to the affairs of the firm. They are entitled to remuneration and commission for their service rendered to the firm. Total remuneration/ commission to the working partners shall be calculated as per the provisions of section 40(b) of the Income Tax Act 1961 or any modification thereof. And accordingly total remuneration/commission payable to the working partners computed shall not exceed the amount calculated in the following manner:
(a) In respect of loss or book profit: Rs 150000/- or 90% of book up to Rs 300000/- profit which ever is higher.
(b) On the balance of the book Profit :60% of the book profit. However in case of loss or inadequate profit, the partners may reduce the remuneration to NIL or up to available Profit.”
20. Thus, we find that above clause of the partnership deed provides for payment of remuneration to partners which would be as per the provisions of the Act, which meant that the remuneration payable to partners would be quantified as per the provisions of the Act and shall not exceed the maximum remuneration provided. It is not in dispute that the partners were paid remuneration, which was less than the maximum provided by the Act. None of the authorities have disputed the payment of remuneration and has accepted the books of account of the assessee as correct and, therefore, the remuneration was deductible while computing the income of the assessee firm. We, therefore, set aside the orders of lower authorities and delete the disallowance of Rs.6,64,923/- and allow this ground of appeal of the assessee.
21. In Ground No.3 of the appeal, the grievance of the assessee is that the CIT(A) erred in confirming adhoc disallowance of 20% out of salary paid to employees by the firm.
22. The Assessing Officer observed that the assessee claimed salary of Rs.35,50,800/- during the year under consideration. The Assessing Officer observed that the assessee has shown gross profit of Rs.49,05,425/- and salary claimed of Rs.25,50,800/- towards staff is around 52% of gross profit. The salary paid to each of the employee on monthly basis exceeded Rs.5000/- per month and also in round figures. He observed that no individual ledger account maintained and each employee have been paid by cash. Thus, the little evidence produced by the assessee in support under salary could not be accepted as it is not corroborated with justifiable facts supported with evidence. Accordingly, he disallowed 20% of the salary expenses claimed by the assessee and added Rs.5,10,160/-.
23. On appeal, the CIT(A) observed that the only thing to be considered is whether the disallowance of 20% is reasonable or He observed that in his opinion disallowance of 10% of salary would be reasonable in the facts and circumstances of the case and, therefore, reduced the disallowance to Rs.2,55,080/-.
24. Before us, ld A.R. submitted that the disallowance out of salary expenses has been made by the Assessing Officer on adhoc basis which has been confirmed by the CIT(A) partially. He submitted that no material has been brought on record by the Assessing Officer or CIT(A) to show that the salary expenses claimed by the assessee is either bogus or inflated. Hence, without bringing any material on record, no disallowance can be made out of genuine business expenditure of the assessee incurred wholly and exclusively for the purposes of business of the assessee.
25. On the other hand, ld D.R. supported the orders of lower
26. We have heard the rival submissions, perused the orders of lower authorities and materials available on record. In the instant case, the assessee claimed salary of Rs.25,50,800/-. The Assessing Officer observed that the same works out to 52% of the gross profit of Rs.49,05,425/- shown by the assesse which was very high. He observed that such a claim cannot be accepted as it is not corroborated with justifiable facts supported with evidence and hence, disallowed 20% of the salary expenses an added Rs.5,10,180/- to the income of the assessee.
27. On appeal, the CIT(A) reduced the same to 10% of the total salary expenses claimed by the assessee and sustained addition of 2,55,080/-.
28. The contention of the ld A.R. of the assessee is that no disallowance out of genuine business expenditure of the assessee incurred wholly and exclusively for the purposes of business can be made without bringing any material on record to show that either the expenses claimed are excessive or bogus. As no such material has been brought on record, the disallowance cannot be made and sustained.
29. We find force in the submission of ld A.R. of the assessee. We find that no material has been brought on record by the revenue to show that the expenses claimed on account of salary expenses to staff is excessive or inflated. The disallowance made by the Assessing Officer is only on the ground that in his opinion, the expenses claimed are not corroborated with justifiable facts. In our considered view, merely on the basis of surmises and conjectures of the Assessing Officer, no disallowance of expenditure made by him out of genuine business expenditure of the assessee can be sustained in law without any material being brought on record to show that either the expenses are not genuine or they are inflated. We, therefore, set aside the orders of lower authorities and vacate the disallowance of Rs.2,55,080/- and allow this ground of appeal of the assessee.
30. In the result, appeal filed by the assessee is allowed.
Order pronounced on 27/08/2018.
