Salary and interest, which is given to the partners in terms of the partnership deed, the tax liability of the said amount shifts upon the partners and cannot be taken as tax liability of the firm. The applicability of section 28(v) cannot be excluded in the matter of best judgement assessment in respect of an assessee firm. It was the specific case of the assessee that the partners were working partners and they were entitled to salary and interest, as per terms of the deed in accordance with section 40(b).
Since as per section 28(v) tax liability of salary and interest paid to the partners in terms of partnership deed, shifts upon the partners and cannot be taken as tax liability of the firm; therefore the applicability of section 28(v) could not be excluded even in when best judgment assessment is made. Further, the partners were working partners and were entitled to salary and interest, as per terms of the deed in accordance with section 40(b), therefore the same should have been allowed while estimating the profit.
FULL TEXT OF THE ITAT JUDGMENT
The above said two appeals by the revenue and the assessee are directed against the order both dated 11.03.2014 passed by the Ld. CIT(Appeals) Jamshedpur for A.Y. 2 007-08.
2. We shall take up the appeal in ITA 203/Ran/2014 by the Revenue.
3. Ground No. 1 raised by the revenue is in respect of restriction of addition of net profit by the Ld. CIT(A). During the course of assessment proceedings, the assessee claimed total profit of Rs. 32,33,563/-. The A.O. examining the profit and loss account in respect of Djibouti Project found that the credit entries aggregating to a sum of RS. 9,29,48,245/- and estimated the profit at 7% of this aggregate. The A.O. added the difference of profit i.e. (Rs. 55,76,895/- – Rs. 32,33,563/-) Rs. 2 3,43,322/- to the total income of the assessee.
4. The Ld. CIT(A) considered the submissions of the assessee in respect of allowing the deduction of Rs. 16,85,940/- being a salary paid to partners of the assessee by placing reliance on the decision of High Court of Rajasthan in the case of CIT vs Jain Construction Co. reported 245 ITR 527 and restricted the net profit of Rs. 16,83,331/-.
5. The contention of the learned AR is that while estimating the profit a separate deduction is to be given for interest and salary paid to the partners of the assessee. The provision of section 44AD is applicable from 01.04.2011 wherein the legislature has given benefit of allowance in respect of interest and salary separately while computing income. The learned AR placed reliance the decision of Co-ordinate Bench of ITAT Hyderabad and placed on record the said order and referred to para no 8 and argued the CIT(A) has rightly given deductions in respect of interest and salary paid to the partners from the net profit estimated. The learned AR supported the order of the CIT(A).
6. The learned DR supported the order of A.O.
7. Heard both parties and perused the record. We find that the Co-ordinate Bench of the ITAT Hyderabad while dealing in the case of M/s. Adarsh Construction discussed the ratio laid down by the Hon’ble High Court of Andhra Pradesh in the case of Indwell Construction reported in 232 ITR 776 for the assessment year 1981- 82 as relied on by the Revenue therein which held that no deduction is available towards payments of interest on capital and remuneration to partners. The Co-ordinate Bench held that the ratio laid down by the Hon’ble High Court of Andhra Pradesh is not applicable to the facts and circumstances therein in view of the amendment to statutory provisions of section 40(b) of the Act w.e.f. 1993-94. The relevant portion of which is reproduced herein below:
“8. The next contention is with reference to allowance of interest on partners’ capitals and partners’ remuneration. Assessee has claimed : 5 : ITA No. 164/Hyd/2013 M/s. Adarsh Constructions an amount of Rs. 4,95,401/- as interest on partners’ capitals and Rs. 84,000/- as remuneration to the partners and arrived at net profit of Rs. 8,87,273/-. Due to variation in the depreciation claims etc., the income offered by assessee as can be seen from the assessment order was at Rs. 6,36,055/-. One of the deductions allowed by the CIT(A) is with reference to remuneration and interest to the partners which was contested by the revenue as not allowable u/s 40(b) relying on the decision of the jurisdictional High Court in the case of Indwell Constructions vs. CIT (232 ITR 776). It was the contention of the revenue that once the books of accounts were rejected and profit was estimated, all expenditures are deemed to have been allowed, therefore, there is no need for allowing depreciation, interest and salary to partners. Revenue is not contesting the issue of depreciation in this case as the CIT(A)s order considered it as deemed allowance. The issue is only restricted to the statutory allowance of deduction u/s 40(b). Even though in the above referred case, the Hon’ble A.P. High Court considered the provisions and held that no further disallowance are required to be made once income is estimated, the said judgment relates to A.Y. 1981 -82. The provisions of section 40(b) then existing provides for disallowance of payment of interest, salary, bonus commission or remuneration made by the firm to the partner. These amounts are not allowable as deduction in the assessment of a partnership firm then existing. At the relevant point of time up to the change of provisions with effect from 01.04.1993, the firms are classified as registered firms u/s 185 or as un-registered firms. The income of the registered firm was not taxed at the normal rates and the same was distributed among the partners in accordance with the provisions of section 67 of the Act. While distributing the income among the partners interest, salary, commission or remuneration paid to partners are to be reduced from the gross income of the partnersip firm. The balance is divided among the : 6 : ITA No. 164/Hyd/2013 M/s. Adarsh Constructions partners in their profit sharing ratio, the amounts paid to partners i.e. interest salary, bonus, commission or remuneration are added to the income of the individual partner. The profits distributed were assessed in the assessment of the partners. However, the provisions with regard to the assessment of partnership firms have undergone change from 01.04.1993 i.e. for the A.Y. 1993-94 onwards. Now, all firms are uniformly assessable as firms only and there is no difference in tax rates. The profit derived from the partnership firm is exempt in the assessment of the partners as the same is being taxed at normal rates in the assessment of the partnership firm itself. Only salary or interest paid to the partners is subject to tax in the assessment of the partners as the same is excluded from the assessment of the partnership firm. Provisions of section 40(b) allows interest paid to partners and remuneration paid to the partners as an allowable deduction, subject to certain conditions mentioned in section 40(b) of the Act. Therefore, there is a change in the provisions itself from a disallowance provisions to allowance provisions subject to restrictions. Thus, w.e.f. 1993-94, section 40(b) is enabling a deduction towards interest and remuneration paid to the partners by way of statutory deduction. Therefore, jurisdictional High Court judgment given for A.Y. 1981-82 in the context of the provisions then existing is no longer applicable to the revised assessment procedure. This same view was held by various co-ordinate Benches. In the case of M/s. C. Eswara Reddy and Co. In ITA No. 668 & 670/Hyd/2009 and cross appeals in ITA No. 685 & 686/Hyd/2 009 for A. Y.s 2003-04 & 2004-05, the Co-ordinate Bench vide order dated 31.01.2011 held as under:
’15. We have carefully gone through the judgement of the jurisdictional High Court in the case of Indwell Construction (supra). The assessment year under consideration before the jurisdictional High Court was assessment year 1981-82. Section 44AD was introduced in the statute book with effect from 01.04.1994. Therefore : 7 : ITA No. 164/Hyd/2013 M/s. Adarsh Constructions the jurisdictional High Court had no occasion to consider the provisions of section 44AD as it is applicable for the assessment year under consideration and as it would be applicable with effect from 1.4.2011. In view of the provisions of section 44AD as it is applicable for the assessment year under consideration and the amendment made with effect from 1.4.2011 it is obvious that the legislature intended to allow the interest and salary separately from the estimated income. Therefore, the judgement of the jurisdictional High Court in the case of Indwell Construction (supra) may not be of any assistance to the revenue in this case. Accordingly, we direct the Assessing Officer to allow the salary and interest paid to the partner subject to the limitation provided in section 40(b) of the Act.’
“9. Similar view was also taken in the case of co-ordinate Bench decision in the case of Maruthi constructions, Vijayawada vs ACIT in ITA No. 67 & 373/Vizag/12 dtd. 03.03.2014. The view expressed by the co-ordinate benches is also consistent with the judgements of the Hon’ble High Court of Allahabad in the case of CIT vs Vijay Constructions (213 CTR 105) wherein on similar facts of rejection of Books of Accounts, it was held that statutory deductions allowable u/s 40(b) cannot be denied merely because its books of accounts have been rejected and best judgment assessment has been made. It was held:
‘The procedure for making assessment in a matter where voluntary return submitted by the assessee under section 139(1) is not accepted by the A.O. has been given under section 143(3) whereas procedure for giving best judgment assessment is given under section 144. Merely because the procedures for such assessments have been separately provided in the aforesaid two section relating to an assessee where the voluntary return has not been found as acceptable by the A.O. and where the books of account have been rejected and best judgment assessment has been made, it would not in itself be sufficient to hold that the statutory deductions which are otherwise available to the assessee, would not be available to the assessee who has been assessed under best judgment assessment by the AO, unless, of course, any rule or provision of the Act expressly excludes the benefit of statutory deductions to such an assessee. If the interpretation given by : 8 : ITA NO. 164/Hyd/2013 M/s. Adarsh Constructions the revenue is accepted, it would mean that in a case where the assessee’s books of account have been rejected or for any other reasons, whatsoever, best judgment assessment has been made that would entail penalty or adverse civil consequences of depriving the assessee from having the statutory deductions, which would have been otherwise available to him in case his voluntary return filed under section 139(1) has been accepted or regular proceedings under section 143(3) were taken. This interpretation would lead to an anomalous situation, besides the same does not flow from the scheme of assessment under the Act. It is only the method of assessing the income of the assessee firm which either has to be done by accepting the voluntary return filed under section 139(1) or it has to be regularly assessed under section 143(3) or best judgment assessment is to be made under section 144. The final outcome of the assessment of the income of the assessee firm calls for consequential imposition of tax and realisation thereof. The statutory deductions thus which are available to the assessee firm cannot be taken away of snatched away from the firm merely because their books of account have been rejected and best judgment assessment has been made’
Salary and interest, which is given to the partners in terms of the partnership deed, the tax liability of the said amount shifts upon the partners and cannot be taken as tax liability of the firm. The applicability of section 28(v) cannot be excluded in the matter of best judgement assessment in respect of an assessee firm. It was the specific case of the assessee that the partners were working partners and they were entitled to salary and interest, as per terms of the deed in accordance with section 40(b). In the absence of any material having brought by the revenue in rebuttal and more so when no such plea was ever taken or raised in the appeal, as also no substantial question of law has been framed in this regard, the plea is bound to fail.”
8. In view of the above propositions of law laid down by the co-ordinate bench of ITAT we find no infirmity in the order of CIT(A). Thus ground no 1 raised by the revenue fails and dismissed.
9. Ground No. 2 is regarding the deletion of addition made on account of payment of EPF beyond specified due date. The AO added an amount of Rs. 1,30,475/- for non-payment of employees contribution to the account of Government within due date. The CIT(A) considering the submissions of the assessee restricted the addition, upto Rs. 20,498/- and allowed the remaining portion of the addition on being satisfied the said contribution was paid before the due date of filing of the return of income in terms of the decision of the Hon’ble Supreme Court in the case of Alom Extrusion Ltd. reported in 319 ITR 306 (SC), We find the CIT(A) rightly restricted the addition to Rs. 20,498/-. Therefore, we find no infirmity in the order of CIT(A) and accordingly ground no 2 raised by the revenue is dismissed.
10. Now, we shall take up the appeal in ITA 195/Ran/2014 by the
11. Ground No. 2 to 4 are relating to allowance of interest and salary paid to the partners. We find that the similar issue was decided in the appeal of the revenue in the above-mentioned paragraph. We held that though the net profit of the assessee is estimated, the salary and interest paid to the partners have to be separately computed in estimating the income in terms of the decision in the case of M/s. Adarsh Construction of Co-ordinate Bench of ITAT Hyderabad. In view of the same, we delete the addition made by the AO and confirmed by the CIT(A). Thus ground no 2 to 4 are allowed.
12. Ground No. 5 is relating to delayed payment of Rs. 2 0,498/-. The issue is similar and identical to the ground no 2 raised by the revenue in their appeal. We held that in the said appeal, the CIT(A) is justified in restricting the addition to the amount raised in ground no 5 in assessee’s appeal. Therefore, we adopt the same view as expressed in revenue’s appeal. Therefore, ground no 5 raised by the assessee fails and is dismissed.
13. In the result, the appeal of the Revenue is dismissed and the appeal of the Assessee is allowed in part.
Order Pronounced in the Open Court on 4th May, 2018.