Shreeji Corporation Vs JCIT (ITAT Ahmedabad)
The issue under consideration is whether remuneration paid to a partner acting in a representative capacity as karta of HUF is allowed u/s 40(b)?
ITAT states that the expression ‘person’ as defined in the Indian Income-tax Act as well as in the Excess Profits Tax Act, HUF is not juristic person for all purposes. When two kartas of two Hindu undivided families enter into a partnership agreement the partnership is popularly described as one between the two Hindu undivided families hut in the eye of law it is partnership between the two kartas and the other members of the families do not ipso facto become partners. There is, however, nothing to prevent the individual members or one Hindu undivided family from entering into a partnership with the individual members of another Hindu undivided family and in such a case it is a partnership between the individual members and it is wholly inappropriate to describe such a partnership as one between two Hindu undivided families. This decision has been noted in the case of Van-son Kids Suff 83 ITD 268 wherein also the partner representing in HUF capacity was held to be a working partner in his individual capacity and the remuneration was allowed within the meaning of section 40(b) read with Explanation thereto. Further, ITAT states that salary paid to the partner who was partner in his representative capacity as karta of HUF cannot be considered to be payment to HUF but to karta as an individual. The karta of HUF is a working partner and, therefore, the remuneration paid to him is allowable. Respectfully following the aforesaid decisions, ITAT are of the opinion that the revenue authorities were not justified in disavowing the-claim of the assessee. The two partners though they were representatives of their respective HUFs were partners in their individual capacity and, therefore, the remuneration paid to them would be an allowable deduction. Accordingly, ITAT allow the claim of the assessee.
FULL TEXT OF THE ITAT JUDGEMENT
This assessee’s appeal for A.Y. 2011-12, arises from order of the CIT(A)-7, Ahmedabad dated 30-11-2015, in proceedings under section 143(3) of the Income Tax Act, 1961; in short “the Act”.
2. The assessee has raised following grounds of appeal:-
“1. Ld. CIT (A) erred in law and on facts in confirming disallowance of Rs. 37, 28, 270/- to the extent of 25% of labour expenses incurred instead of 50% disallowed by AO. Ld. CIT (A) ought to have deleted disallowance in toto when discrepancies noted by AO are duly explained by the appellant. It be so held now.
2. Ld. CIT (A) erred in law and on facts in justifying disallowance of 25% of labour expenses since the appellant could not categorically prove that all expenses were wholly and exclusively incurred for the purpose of business Ld. CIT (A) ought to have deleted disallowance of genuine business expenses duly supported by documentary evidence. It be so held now.
3. CIT (A) erred in law and on facts in confirming disallowance of Rs. 4, 25, 000/- by AO out of total salary expenses claimed by the appellant. Ld. CIT (A) ought to have deleted disallowance appreciating the fact that salary to the staff recruited for timely completion of the project is incurred wholly and exclusively for the purpose of business. It be so held now.
4. CIT (A) erred in law and on facts in confirming disallowance by AO of supervision charges of Rs. 2, 22, 200/- (amount debited in Profit & Loss a/c Rs. 1,61, 600/-) paid for the purpose of construction work supervision. Ld. CIT (A) ought to have deleted disallowance of expenses incurred for the purpose of business.
5. Ld. CIT (A) erred in law and on facts in confirming addition by AO of Rs. 19, 40,000/- advance booking receipt by treating it as unexplained credits. Ld. CIT (A) ought to have deleted addition made by AO appreciating sale deed on record substantiating receipt of booking amount from the members that under no circumstances be treated as unexplained credits.
6. Ld. CIT (A) erred in law and on facts in confirming disallowance made by AO of Rs. 4,12,500/- on account of unexplained expenditure. Ld. CIT (A) ought to have deleted disallowance of expenses not debited to profit & loss account but given as advance towards work assigned for the business.
7. Ld. CIT (A) erred in law and on facts in confirming further disallowance of Rs. 3, 34, 874/- by AO on account of unexplained expenditure. Ld. CIT (A) ought to have deleted such unwarranted disallowance being difference in purchase register arising due to change in grouping of expenses.
8. Ld. CIT (A) erred in law and on facts in confirming disallowance by AO of Rs. 7, 50, 375/-remuneration to partner Dashrathbhai S. Chaudhary HUF. Ld. CIT (A) ought to have deleted disallowance of remuneration paid to the partner duly offered to tax in the hands of HUF. It be so held now.
9 Levy of interest u/s 234A/234B/234C & 234D of the Act is unjustified.
10 Initiation of penalty proceedings u/s 271(l)(c) of the Act is unjustified.”
3. The fact in brief is that return of income declaring income of Rs. 21,24,554/- was filed on 30th Sep, 2011. The case was subject to scrutiny and notice u/s. 143(2) of the act was issued on 28th Sep, 2012. Assessment order u/s. 143(3) of the act was passed on 25th Jan, 2014 and total income was assessed at Rs. 1,36,92,398/- after making several additions under various heads mainly on account of disallowance of various expenses.
4. Aggrieved assessee has filed appeal before the ld. CIT(A) and the ld. CIT(A) has partly allowed the appeal of the assessee. The remaining facts of the case are discussed while adjudicating the various grounds of appeal filed by the asssessee as under:-
Ground Nos. 1 & 2 are interconnected and pertained to mainly restricting the disallowance out of labour expenses at 25%
5. During the course of assessment, the assessing officer noticed that assessee had claimed Rs. 1,65,31,290/- as labour expenses incurred during the year under consideration. On verification of the detail furnished, the assessing officer observed various discrepancies in the supporting material furnished by the assessee i.e. bills were undated, unsigned, no address, no serial no etc. Considering such discrepancies as elaborated at page no. 4 to 8 of the assessment order, the assessing officer has disallowed 50% of such labour expenses and added to the total income of the assessee.
6. Aggrieved assessee has filed appeal before the ld. CIT(A) on this issue and the ld. CIT(A) has partly allowed the appeal of the assessee by restricting the disallowance to 25% of the labour expenses as against disallowance 50% of labour expenses made by the assessing officer.
7. During the course of appellate proceedings before us, the ld. counsel has filed paper book comparing various detail and submission made before the assessing officer and ld. CIT(A) during the course of assessment and appellate proceedings. The ld. counsel has contended that disallowance of labour expenses is not correct as all the labour expenses were genuine and related to the business activity of the assessee. The ld. counsel has referred the copies of labour account pertaining to the labour expenses and other submission placed in the paper book. On the other hand, ld. departmental representative has supported the order of ld. CIT(A).
8. We have heard both the sides and perused the material on record. During the course of assessment, the assessing officer observed that assessee has not made proper quality of compliance during the course of assessment proceedings, therefore, the assessing officer has pointed out various discrepancies in respect of supporting evidences furnished towards claim of labour expenses. The assessing officer pointed out that nature of work done was not described and there was no date, serial no., address etc. on the bills. It was also stated that assessee has not produced proper supporting documents therefore after observing various discrepancies the assessing officer has disallowed 50% of such labour expenses and added to the total income of the assessee. During the course of appellate proceedings, the ld. CIT(A) has noticed that gross profit of the assessee firm has gone up from 4.89% to 14.01% during the year under consideration. However, after considering the fact that assessee has failed to furnish the proper relevant detail in respect of claim of the expenditure, the disallowance was restricted to 25% of labour expenses. It is noticed that during the course of appellate proceedings before the ld. CIT(A), the assessee has clarified the various discrepancies observed by the assessing officer briefly as under:-
(i) The nature of work was very transparent as per the copy of plant and permission obtained for construction.
(ii) Advance used to be given on the basis of work in progress and the bills are raised at the end of the year.
(iii) It is also explained that some payment remained outstanding due to some dispute in the bills
(iv) The bill itself specifies the nature of work and the rate of work are varied from party to party.
(v) Some of the contractors under group of contractors therefore the address and phone no. were the same.
The submission furnished by the assessee was reproduced at page no. 10 to 18 of the ld. CIT(A)’s order. The CIT(A) has stated that assessee has also produced bills in respect of most of the discrepancies and the gross profit of the assessee firm has tremendously gone up from 4.89% to 14.01% in the earlier years. The ld. CIT(A) has held that many discrepancies noted by the assessing officer were explained by the assessee during the course of appellate proceedings but many have not been explained. Therefore, the ld. CIT(A) has restricted he disallowance to the extent of Rs. 25% to the amount of Rs. 37,28,270/-. In the light of the findings of the ld. CIT(A) and considering the there was tremendous jump in the gross profit from 4.89% to 14.01% in the year, we consider it will be reasonable to restrict the disallowance to the extent of 12.5% to meet the end of justice for want of verification on account of not providing proper supporting bill/vouchers. Therefore, addition to the extent of Rs. 18,64,135/- is confirmed. This ground of appeal is partly allowed.
Ground No. 3 (Disallowance of salary expenses of Rs. 4,25,000/-)
9. During the course of assessment, the assessing officer noticed that assessee has claimed salary expenses of Rs. 9,47,366/-. On verification, the assessing officer stated that assessee could not produce relevant evidences in support of claim of salary expenses to the amount of Rs. 4.25 lacs and the detail of such expenses reported in the assessment order were as under:-
