The issue in dispute before us in respect of remuneration given to the partners, which has been disallowed in terms of section 185 of the Act, which says that “if a firm does not comply with the provisions of section 184 of the Act for any assessment year, then no deduction by way of payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of such firm shall be allowed”. The section 184 of the Act requires that a certified copy of the instrument of the partnership should be accompanied along with the return of income of the firm, whenever assessment of the firm is sought for first time.
Where assessee-firm had submitted only photo copy of the partnership deed which was without any certification, and further the deed was not witnessed by any person as required under section 184, therefore, the issue with respect to deductibility of partners remuneration was remanded back to AO with a direction to assessee to comply with the provisions of section 184(2).
FULL TEXT OF THE ITAT JUDGMENT
This appeal by the assessee is directed against order dated 31/03/2015 passed by the Ld. Commissioner of Income-tax (Appeals)-XX, New Delhi [in short ‘the Ld. CIT(A)’]for assessment year 2011-12 raising following grounds:
1. That the order of learned CIT (A) sustaining the order of the learned Assessing Officer is bad in law and on facts and is liable to be set-aside.
2. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in confirming the action of Ld. Assessing Officer in disallowing remuneration paid by the appellant amounting of Rs. 69,30,000/- u/s 185 of the Income tax Act, 1961 on account of failure to meet the requirement of section 184 of the Income Tax Act, 1961, though there is no failure on the part of the appellant.
3. That the Learned CIT(A) and Assessing Officer have failed to appreciate that appellant is a firm carrying on the profession for the last several years and it is evidenced by Deed of Partnership, copy of which was filed during the course of assessment & appellate proceedings and original deed was produced before the Assessing Officer and CIT (A) for
4. That the learned CIT(A) and Assessing Officer have erred both in law and on facts in adopting the ‘status’ of the appellant, while framing the assessment as that of A.O.P. instead of ‘Firm’.
5. That having regard to the fact and circumstances of the case, the Ld. CIT(A) has erred in confirming the addition of Rs. 175492/- made by learned Assessing Officer on account of vehicle maintenance expenses
6. That the orders passed by learned CIT(A) and Assessing Officer are totally against the principles of natural justice.
7. That the appellant pray for leave to add, alter, amend or delete above ground of appeal either before or at the time of hearing.
2. Briefly stated facts of the case are that the assessee firm was engaged in professional consultancy and for the year under consideration filed return of income on 19/09/2011, declaring total income of Rs.37,71,240/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the ‘Act’) was issued and complied with. The scrutiny assessment under section 143(3) of the Act was completed on 14/03/20 14, after making various disallowances aggregating Rs.71,55,031/-, which includes disallowance of Rs.69,30,000/- on account of remuneration to partners. Aggrieved, the assessee filed appeal before the Ld. CIT(A), who dismissed the appeal of the assessee. Aggrieved, the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
3. The ground No. 1 of the appeal is general in nature and covered by the other grounds raised and, thus, we are not required to adjudicate upon this ground specifically.
4. The grounds No. 2 to 4 are related to disallowance of remuneration to partners of Rs.69,30,000/-. The Assessing Officer made the disallowance under section 185 of the Act observing that the assessee submitted only photo copy of the partnership deed and failed to provide certified copy of the same as required under section 184 of the Act. During appellate proceedings before the Ld. CIT(A), the matter was remanded back to the Assessing Officer and assessee was asked to file certified copy and produce the original copy of the partnership deed for However, the Ld. CIT(A) in the impugned order observed that the claim of the assessee of producing the original partnership deed in letter dated 07/03/2014 was not correct. The Ld. CIT(A) made factual observations as under:
“It is an undisputed fact that the appellant firm was
a. Certified copy was produced during assessment or not
b. Whether the original partnership deed was produced for verification of the Assessing Officer or not
5.8 To verify the true fact the assessment records was perused.
1) The copy of deed produced at the time of assessment was enclosed as annexure to letter dated 30.01.2014 and 03.03.2014. It is apparent from the perusal of the copy filed by the appellant firm that the
>Copy of partnership deed filed by the assessee firm at the time of assessment has not been certified as true copy by the partners.
>The copy of the deed is not witnessed by any person.
>The copy of the deed has not been notarized by the
(The copy of the above deed is enclosed as annexure-1 to this order).
2) The letter dated 07.03.2014 relied upon by the appellant is part of the record in which it has been claimed that the original partnership deed is enclosed. However, as per the order sheet the Assessing Officer has pointed out that the details have been filed only in part and he has asked the AR to produce the remaining details on the next date of hearing. Again on 11.03.2014 the Assessing Officer has reiterated that the certified copy of partnership has not been produced on behalf of the assessee firm. It is apparent from the perusal of the assessment record that the production of original partnership deed in letter dated 07.03.2014 has been mentioned on behalf of the assessee firm without actually producing it.”
4.1 Lastly, the Ld. CIT(A) following the decision of the Hon’ble High Court of Kerala in the case of Bhaskar & Co. Vs. CIT in ITA Nos. 454 and 457 of 2009, upheld the disallowance of remuneration to partners amounting to Rs.69,30,000/ -.
4.2 Before us, the Ld. counsel filed a paper book containing pages 1 to 70 and produced the original partnership deed of the firm. The assessee also filed a photo copy of the partnership deed alongwith the documents filed at the time of appeal. According to the Ld. counsel, only issue in dispute is in relation to verification of the partnership deed, for which the assessee has already produced original copy before the lower authorities, however, they have ignored and sustained the additions. The Ld. counsel submitted that in view of the original partnership deed produced before the Tribunal, the addition in dispute should be deleted.
4.3 On the contrary, the Ld. DR submitted that matter may be restored to the file of the Assessing Officer and before him the assessee may produce the original partnership deed as well as certified copy and the AO may verify the genuineness of the same and then decide the issue in dispute.
4.4 We have heard the rival submission and perused the material on record. The issue in dispute before us in respect of remuneration given to the partners, which has been disallowed in terms of section 185 of the Act, which says that “if a firm does not comply with the provisions of section 184 of the Act for any assessment year, then no deduction by way of payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of such firm shall be allowed”. The section 184 of the Act requires that a certified copy of the instrument of the partnership should be accompanied along with the return of income of the firm, whenever assessment of the firm is sought for first time. How the certified copy shall be filed has been explained in Explanation below to subsection (2), which is reproduced as under:
“Assessment as a firm.
Explanation.—For the purposes of this sub-section, the copy of the instrument of partnership shall be certified in writing by all the partners (not being minors) or, where the return is made after the dissolution of the firm, by all persons (not being minors) who were partners in the firm immediately before its dissolution and by the legal representative of any such partner who is deceased.”
4.5 Further, it is specified in subsection (4) of the section 184 that in case of any change in the Constitution of the firm, a certified copy of the revised instrument of the partnership should be filed alongwith return of income for the relevant assessment year. The said sub-section (4) is reproduced as under:
“Assessment as a firm.
184. (1) …………………….
(4) Where any such change had taken place in the previous year, the firm shall furnish a certified copy of the revised instrument of partnership along with the return of income for the assessment year relevant to such previous year and all the provisions of this section shall apply accordingly.”
4.6 The assessee was assessed as a firm till assessment year 2010-1 1. At the start of the previous year relevant to the assessment year in consideration i.e. 01/04/2010, the firm admitted three new partners i.e. Mr. Nikhil Sharma, Mr. Pankaj Mishra and Mrs. Divya Kashyap. In view of the provision of section 184(4) of the Act, due to change of the Constitution of the firm, the assessee was required to file a copy of the partnership deed certified in writing by the all the partners along with return of income. Under Rule 12 of the Income-tax Rules, 1962, it has been provided that the return of income shall not be accompanied by any document or copy of any account and same shall be filed on being asked by the Assessing Officer during any proceedings before him. Accordingly, in the assessment proceedings, the assessee was asked to produce a copy of the relevant partnership deed duly certified by all the partners.
4.7 Now the claim of the Assessing Officer is that only photo copy of the partnership deed was filed and it was not certified by the partners in writing. The assessee claimed that the original partnership deed was produced before the AO vide letter dated 6/3/2014, however, the Assessing Officer did not mention any reference of the said letter in the assessment order. The Ld. CIT(A) verified the assessment record and found that original copy of the relevant partnership deed was not produced before the Assessing Officer. The assessee has claimed before us that it had filed the original partnership deed before the Ld. CIT(A), however, same was ignored by the Ld. CIT(A) on the ground that no application under Rule 46A of the Income Tax Rules, 1962 was filed. The assessee has produced the original partnership deed before us. Thus, there is no doubt as the original partnership deed exists, but the assessee is required to make compliance of section 184(2) of the Act by way of filing a copy of the partnership deed duly certified in writing by all the partners. When the original copy is available with the assessee, we do not find any difficulty in filing copy of the said partnership deed duly certified by all the partners, as long as the original deed is genuine. In the facts and circumstances, we feel it appropriate to restore this issue to the file of the Assessing Officer, with a direction to the assessee to comply with the provisions of section 184(2) of the Act and submit a copy of the relevant partnership deed duly certified by the then partners in writing before the Assessing Officer, who then may verify the genuineness of the same and decide the issue in dispute in accordance with law. It is needless to mention that the assessee shall be afforded adequate opportunity of being heard. The ground of the appeal is accordingly allowed for statistical purposes.
5. The ground No. 2 of the appeal relates to disallowance of Rs. 1,75,492/- on account of vehicle maintenance expenses. The Assessing Officer observed that the assessee debited vehicle maintenance expenses of Rs. 1,75,492/-, however, no vehicles were owned by the assessee firm as seen from the depreciation chart. The assessee submitted that the expenses actually relate to tour and travel expenses of the partner of the firm. The Assessing Officer, however, noted that Tour and travelling expenses of Rs.3,44,531/- were separately debited in the profit and loss account, therefore, he disallowed the vehicle maintenance expenses of Rs.1,75,492/- claimed by the assessee firm.
5.1 Before the Ld. CIT(A), the assessee filed bills and vouchers supporting the expenses claimed. In respect of the said bills and vouchers, the Ld. CIT(A) commented as under:
“The perusal of the bills enclosed by the appellant show that the expense relate to insurance of vehicle Tlo. 3598 in the name of Saroj Kumar Mohanta and refueling of the same vehicle on different dates. All the refueling expenses pertain to Delhi Petrol Pumps near his residence at Shekh Sarai, New Delhi Similarly there are bills in favour of Benjamin Mathew for repair of vehicle No.0246 on different dates and refueling of the vehicle at different fuel pumps most of which are in Sarita Vihar, New Delhi, i.e., near his residence in Faridabad. Thus the claim of the appellant that the bills relate to travelling expenses is not proved from the perusal of the bills of the expenses claimed by the appellant. The addition is therefore confirmed.”
5.2 Thus, the Ld. CIT(A) is of the opinion that expenses on fuels etc. have been incurred for the personal purposes by the partners in the firm and not for the purposes of the business of the firm.
5.3 Before us, the Ld. counsel submitted that no disallowance of expenditure should be made merely because some entries in respect of expenditure were made by the Accountant under the wrong head of expenditure in the profit and loss account. He further submitted that books of account were produced before the Assessing Officer at the time of assessment proceeding and he did not reject books of account and, thus, disallowance is not justified. According to him, the expenses were actually reimbursement of fuel expenses to partners for the purpose of business of the firm.
5.4 On the contrary, the Ld. DR submitted that no evidence has been filed to substantiate that the vehicle maintenance expenses have been incurred for the purpose of the business of the assessee and therefore, expenses have been rightly disallowed by the Assessing Officer.
5.5 We have heard the rival submission and perused the relevant material on record. In view of the bills and vouchers of vehicle maintenance expenses produced before the Ld. CIT(A), the issue in dispute is limited, whether the said expenses have been incurred for the purpose of the business of the assessee or are in the nature of personal expenses of the partners. In our opinion, the onus is on the assessee to substantiate that the expenses debited under the head “vehicle maintenance expenses” have been incurred wholly and exclusively for the purpose of the business irrespective of the fact, whether the same are incurred on fuels or the repair of the vehicles. In view of the above circumstances, we feel it appropriate to restore this issue to the file of the Assessing Officer and before him the assessee may produce logbook of the vehicles or any other evidences to substantiate its claim of expenses incurred for business purposes. In case of absence of any logbook or other evidence, the Assessing Officer may consider for disallowing reasonable expenditure towards possible personal use by the partners of the firm, in accordance with law. Accordingly the ground of the appeal is allowed for statistical purposes.
6. In the result, the appeal of the assessee is allowed for statistical purposes.
Decision is pronounced in the open court on 27th June, 2018.