Demarte Silk and Sarees Vs ITO (ITAT Chandigarh)
The issue under consideration is whether A.O. is correct in disallowing the expense of retainership debited in P & L on the basis of non deduction of TDS u/s 194C when the Same was shown as salary by recipient in their Income Tax return?
In the present case, A.O. during the course of assessment proceedings noticed that the assessee had debited Rs. 3,00,000/- in the Profit & Loss account under the head ‘Retainership Expenses’ paid to Shri Daljeet Singh amounting to Rs. 1,20,000/- and Sh. Pawan Kumar amounting to Rs. 1,80,000/-. A.O. made an addition of Rs 3,00,000 by stating that assessee did not deduct TDS u/s 194C hence expense is disallowed u/s 40(1)(ia). The contention of the assessee was that the payments were made during the festive season and it was remuneration in respect of sales boys who were not the regular sales employees of the assessee.
ITAT states that, both those persons filed their Income Tax Return and claimed in the said return that the amount in question was received as a salary from the assessee and furnished copies of their returns of income before finalization of the assessment proceedings. In the present case the returns of income were furnished by Shri Daljeet Singh wherein the income of Rs. 1,20,000/- has been shown as salary received from the assessee. Similarly Shri Pawan Kumar furnished the return of income and had shown the salary of Rs. 1,80,000/- received from the assessee. In the present case when the income shown by the recipients had been accepted, there was no reason to doubt explanation given by the Assessee. I therefore, by considering the totality of the facts deem it appropriate to delete the addition made by the A.O. and hence appeal filed by assessee allowed.
FULL TEXT OF THE ITAT JUDGEMENT
This is an appeal by the Assessee against the order dt. 05/03/2018 of Ld. CIT(A)-3, Ludhiana.
2. In the present appeal Assessee has raised the following grounds:
1. That the impugned order is against facts and law.
2. That on law, facts and circumstances of the case, the Worthy CIT(A) was not justified in confirming the disallowance of Salary to Partners of Rs. 2,52,000/-by erroneously holding that the same has not been paid according to the terms of partnership deed even when the original partnership deed and addendum thereto were duly produced by the appellant firm.
3. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the disallowance of retainership expenses of Rs. 3,00,000/-paid on account of Technical and Professional services to 2 persons namely Daljeet Singh and Pawan Kumar even when the same were duly offered to tax in the return of income by those persons and the amounts were paid in lieu of services rendered by them.
4. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the disallowance of 1/5th of the total claimed expenses of Rs. 6,04,300/- i.e. Rs. 1,20,860/- in relation to vehicles of the appellant firm by holding them to be of personal nature.
5. That on law, facts and circumstances of the case, the Worthy CIT(A) has erred in confirming the disallowance of Rs. 1,00,000/- out of total claimed expenses of Rs. 6,13,924/- on estimated basis related to various office expenses by holding them to be partially unvouched.
6. That on law, facts and circumstances of the case, the worthy CIT(A) has erred in confirming the disallowance of Rs. 19,683/- u/s 36(1)(iii) on account of advance of Rs. 1,64,030/- by applying notional interest rate of 12% p.a.
7. That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same.
3. Ground Nos. 1 & 7 are general in nature and Ground No. 4 to 6 were not pressed so these grounds do not require any comment on my part.
4. Vide Ground No. 2, the grievance of the assessee relates to the confirmation of disallowance of Rs. 2,52,000/- paid as salary to the partners.
4.1 The facts related to this issue in brief are that the assessee filed its return of income on 28/09/2012 declaring the income of Rs. 5,45,720/- which was processed under section 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’), later on the case was selected for scrutiny.
5. During the course of assessment proceedings the A.O. noticed that the assessee had debited salary to the partners at Rs. 4,32,000/- i.e; Rs. 1,44,000/-each to Shri Jaimal Singh, Shri Parvinderpal Singh and Shri Amanpreet Singh. He asked the assessee to furnish the copy of the partnership deed. From the said partnership deed the A.O. noticed that as per terms of the partnership deed salary to each of the partners would be Rs. 5,000/- per month. He asked the assessee to show cause as to why excess salary claimed may not be disallowed. In response the assessee submitted that Addendum Partnership Deed was made on 01/04/2011 to include a clause, according to which salary @ Rs. 12,000/- per month was allowed (copy of the said Addendum Partnership deed was furnished which has been reproduced by the A.O. at page no. 6 of the Assessment Order dt. 13/02/2015). It was also claimed that salary paid by the assessee had been shown by the partners in their respective return of income. The A.O. however did not find merit in the submissions of the assessee and made the disallowance of Rs. 2,52,000/- by observing in para 2.8 of the assessment order dt. 13/02/2015 as under:
2.8 From the above facts, it is evident that the contention of the assessee is not acceptable as the same has no force. As per the provisions of section 40(b)(v) of the Income Tax Act 1961, no deduction will be admissible if the amount of remuneration payable to each working partner is not specified in the partnership deed. In the case of the assessee, as per the partnership deed, it has been quantified & specified that salary of Rs. 5,000/- will be given to the partners whose names have been also mentioned therein. Therefore, salary of Rs. 1,80,000/- (60,000 X3) is allowable to the assessee concern in accordance with terms of partnership deed and excess salary claimed at Rs. 2,52,000/-(4,32,000-1,80,000) is disallowed and added back to the income of the assessee in view of the following facts:-
(i) Limits of salary to the working partners have been specified in the partnership deed that salary of 5,000/- per month will be given to three partners. Hence, excess salary claimed is to disallowed.
(ii) The assessee has willfully failed to produce the legible copy of partnership deed and furnished only after receiving final opportunity-from this office.
(iii) The assessee produced a copy of addendum only after receiving the final show cause notice that why excess salary be not disallowed in view of the provisions of the partnership deed. From these facts, it is evident that the so called addendum has been prepared after thought.
(iv) The said addendum has been claimed to made on 01.04.2011 whereas document on which the same has been written is purchased on 01.12.2002, This shows that this is after thought exercise.
(v) The assessee failed to produce the original addendum in this office for verification.
(vi) During the assessment proceedings, the assessee was again 8s again requested to furnish the legible copy of partnership deed but the assessee never stated that an addendum is also made. The assessee only came out with the plea that an addendum was made after receiving the show cause notice for disallowing the excess salary claimed.
6. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submissions which had been incorporated by the Ld.CIT(A) in para 4.1 of the impugned order and read as under:
It is submitted that during the year in question the appellant firm, debited the partner’s salary of Rs. 4,32,000/- to its Profit & Loss A/c duly conforming to the provisions of section 40(b) of the Act. The salary at the rate of Rs. 12,000/- pm to the partners was paid as per the terms of the partnership deed of the appellant firm. The original partnership deed of the appellant firm was made on 01.12.2002 which included the term of Partner’s salary @ Rs. 5000/- pm to all the three partners of the appellant firm with the condition of freedom to change the amount of salary as per the mutual understanding of the partners of the appellant firm. On the same day i.e. 01.12.2002, an addendum to the partnership deed was also made which was made to take effect from the date 01.04.2011. The addendum to the partnership deed was made to increase/revise the amount of partner’s salary to the value of Rs. 12,000/- pm from the already existing rate of Rs. 5,000/- pm. The term/caption of the addendum clearly entails that the addendum partnership is made effective on 01.04.2011 (although made on 01.12.2002). In this position, disallowance of salary of Rs. 2,52,000/- by Ld. AO is unjustified. Point wise submission on the allegations of the Ld. AO (as per the page-8 of assessment order) is as follows:-
