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Income Tax Appellate Tribunal, ALLAHABAD BENCH ‘SMC’ ALLAHABAD
Before: SHRI.VIJAY PAL RAO
IN THE INCOME TAX APPELLATE TRIBUNAL ALLAHABAD BENCH ‘SMC’ ALLAHABAD [THROUGH VIRTUAL COURT] BEFORE SHRI.VIJAY PAL RAO, JUDICIAL MEMBER ITA No.139/ALLD/2019 Assessment Year: 2012-13 & ITA No.140/ALLD/2019 Assessment Year: 2013-14 M/s. Shree Bhagwan Theatres v. Income Tax Officer, Ward- 166. Bai Ka Bagh, Allahabad - 1(5) 211003. Allahabad-211001. TAN/PAN: AAYFS0529E (Appellant) (Respondent) Appellant by: Shri K. K. Srivastava Shri Sumit Agrawal, C.A. Respondent by: Shri A.K. Singh, CIT ( Sr. DR) Date of hearing: 12.07.2021 Date of pronouncement: 15.07.2021 O R D E R PER SHRI VIJAY PAL RAO, JUDICIAL MEMBER: These two appeals by the assessee are directed against two separate orders of CIT(A)- Allahabad, both dated 08.08.2019 for the A.Ys. 2012-13 & 2013-14 respectively. 2. For the A.Y.2012-13, the assessee has raised the following grounds.- “1. Because the authorities below erred in law and on facts in dismissing the appellants grounds on the issue of jurisdiction. 2. Because the appellants ground that the authorities below could not travel recorded was illegally and unjustifiably dismissed legal aspects as has been brought by the of hearing of Appeal. 3. Because the Ld. CIT(A) unjustifiably disallowed part of the remuneration of partner Smt. Meera Gupta and Smt. Sita Gupta without provisions of section 40(b)
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of the income Tax Act, 1961 specify the maximum permissible amount of partners remuneration. 4. In any case and without prejudice to above, the appellant maintains paper books of accounts as required under Rule 6 of the Income Tax Rides, 1962, hence, there was absolutely no justification to interfere in disallowance of the remuneration of the partners. 5. Because even the part disallowances of remuneration under the impugned head was not called for under any of the provisions of Income Tax Act. when the assessing officer himself recognized the status of the two lady partners (i) Smt. Meera Gupta and (ii) Smt. Sita Gupta as "active partners" of the appellant firm. 6. Because the authorities below were not justified in mis-interpreting the statement of the lady partners and draw an adverse inference regarding their statements as recorded by the AO. 7. Because the Ld. CIT(A) was not justified in confirming the disallowance to the extent of 20% (Rs. 13,890/-) of total expenses claimed at Rs. 42,892/-. Whereas the appellant was never asked to produce any vouchers before the AO. 8. Because the disallowances are too high and excessive and deserves to be reduced suitably. 9. Because the order appealed against is contrary to facts, law and principles of natural justice.” 3. Ground nos. 1 & 2 are regarding validity of assessment framed u/s 147 r.w. Section 143(3) of the Act. At the time of hearing, the Ld. Counsel for the assessee has stating at Bar that the assessee does not press ground nos. 1 & 2 of the appeal and the same may be dismissed as not pressed. The Ld. DR has raised no objection, if, ground nos. 1 & 2 of the assessee appeals are dismissed as not pressed. Accordingly, ground nos. 1 & 2 of the assessee appeals are dismissed being not pressed. 4. Ground nos. 3 to 6 are regarding part of disallowance of remuneration paid to the partners of the assessee firm. The assessee is a partnership firm and filed its return of income u/s 139 of the I. T. Act, 1961 declaring rental income from letting out of Theater to ADLABS Film Ltd. The Assessing Officer reopened the assessment by issuing the notice u/s 148 of the Act on 13.11.2014. During the re-assessment proceedings, the 2
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Assessing Officer also recorded the statement of the partners of the assessee to whom the remuneration @ Rs.10,000/- per month each was paid. Since there was some discrepancy of statements of the partners therefore, the Assessing Officer proposed to make the disallowance of 50% of the remuneration to Smt. Meera Gupta as well as Smt. Suneeta Gupta respectively. The Assessing Officer made the total disallowance of Rs.1,20,000/- on account of remuneration paid to two partners namely Smt. Suneeta Gupta and Smt. Meera Gupta. The assessee challenged the action of the Assessing Officer before the CIT(A) but could not succeed. 5. Before the Tribunal the Ld. Counsel for the assessee has submitted that the remuneration paid by assessee to the partners is strictly u/s 40(b) of the I. T. Act. Once the remuneration paid by assessee is in compliance of the provisions of Section 40(b) of the IT. Act the Assessing Officer cannot be make the disallowance of the remuneration paid to the partners. The only requirements for claiming the deduction of remuneration paid to the partners is that the payment of remuneration is in accordance with provision of Section 40(b) of the I. T. Act. In support of his contentions, he has relied upon the judgment dated 10.12.2012 of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Great City Manufacturing Co. (I.T.A. No.461 of 2009. Thus, the Ld. AR has submitted that once there is provision for payment of remuneration to the partners in the partnership deed and the amount of remuneration is within the limit prescribed u/s 40(b) (v) of the I. T. Act the Assessing Officer is not justified in re-working the remuneration of the partners and making disallowance. Hence, the Ld. AR has submitted that the issue is covered by judgment of Hon'ble Jurisdictional High Court. 6. On the other hand, Ld. DR has submitted that in the statement of partners recorded by Assessing Officer, she admitted the receipt of remuneration @ of Rs.5,000/- per month and not Rs.10,000/- as claimed by assessee. Therefore, the Assessing Officer allowed the remuneration to the extent of actual amount received by partners of the assessee firm. He has relied upon the orders of the authorities below.
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I have considered the rival submissions as well as relevant material on record. The assessee has claimed payment of remuneration to its partners namely Smt. Suneeta Gupta and Smt. Meera Gupta @ Rs.10,000/- per month each. The said amount of remuneration @ Rs.10,000/- per month is duly credited in the capital account of the partners and the Assessing Officer has not disputed this fact of the credit of remuneration amount of Rs.1,20,000/- each in the capital account of these two partners. Further, it is also admitted for that these partners have drawn the amount more than the remuneration received from the respective capital accounts and the closing balance of the capital accounts of the partners was debit balance. Thus, the payment of Rs.10,000/- per month as remuneration two these partners is not in dispute as having from the books of account of the assessee. The Assessing Officer has not disputed the books of account of assessee and corresponding withdrawal/drawing made by these two partners hence, any discrepancy in the statement of the partners is not going to change the condition prescribed u/s 40(b) (v) for allowing the claim of payment of remuneration to partners. The Assessing Officer has not disputed the fact that the payment has claimed by assessee to the partners on account of remuneration is not exceeding the limit provided u/s 40(b)(v) of the Act. Once the remuneration paid to the partners is in accordance of the provisions of Section 40(b)(v) and the actual payment of the said amount being credited to the capital account of the partners and corresponding withdrawal of the partners is not in disputed then the mere mistake in the statement of the partners would not rendered the claim of the partners firm not disallowed. The Hon'ble Jurisdictional High Court in the case of CIT Vs. Great City Manufacturing Co. (supra) while considering and identical issue has held as under.:- “Feeling aggrieved the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) who vide order dated 13.03.2008 had partly allowed the appeal accepting the plea raised by the assesses and deleted the addition. Feeling aggrieved, the Revenue preferred an appeal before the Tribunal. The Tribunal by impugned order dismissed the appeal with the following findings: "We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that all the three partners to whom the impugned 4
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remuneration was paid were its working partners and this position was accepted even by the AO while allowing remuneration paid to them to the extent of Rs.4 lakhs each. It is also not in dispute that there was a specific clause contained in the partnership deed of the assesses firm allowing payment of remuneration to the working partners and the quantum of such remuneration was agreed to be in accordance with the provisions of Section 40(b)(v). The remuneration paid by the assessee firm to its working partners for the year under consideration amounting to Rs. 3931165/- was within the ceiling prescribed in the provisions of Section 40(b) and it is not the case of the department that the said remuneration was in excess of such ceiling. The only contention raised by the learned DR before us has been that the remuneration paid by the asssssee firm to its working partners aggregating to Rs.3931165/- was highly excessive and unreasonable having regard to all the facts of the case as highlighted by the AO and such excessive portion of the said remuneration worked out by the AO at Rs.2731965/- was rightly disallowed by him invoking the provisions of Section 40A(2). In this regard, the learned counsel for :he assessee has cited before us the decision of Ahmedabad Bench of ITAT in the case of Chhajed Steel Corporation Vs. AClT-77 ITD 419 wherein it was held that the provisions of Section 40(b) and 40A(2) operate in different fields and the provisions of Section 40A have no application in the cases where Section 40(b) has been applied. It was held by the Tribunal that the AO thus has no power to go into Ithe question of reasonableness of remuneration paid by the firm to its partners and he can only examine whether the remuneration is not exceeding the prescribed limits as laid down in Section 40(b). To the similar effect is the decision of Hon'ble Karnataka High Court in the case of N.M. Anniah & Co. Vs. CIT-101 ITR 348 cited by the learned counsel for the assessee wherein it was held that Section 40A has no application to the matters contained in Section 40(b) and the overriding effect given to Section 40A is only in respect of matters not covered by Section 40(b). In our opinion, the ratio of these two judicial pronouncements cited by the learned counsel for the assessee is directly applicable to the issue involved in the present case and respectfully following the same, we hold that the dis-allowance made by the AO on account of partners' remuneration covered u/s 40(b} by invoking the provisions of Section 40A(2) was not sustainable. In that view of the matter, we uphold the impugned order of the
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learned CIT(A) deleting the said dis-allowance and dismiss this appeal filed by the Revenue." We have heard Sri S. Chopra learned counsel for the appellant and Sri Piyush Kaushik, learned counsel on behalf of the respondent-assessee. Sri Chopra submitted that in the partnership deed the terms and nature of the duties of each of the .partners is not specified and therefore, if the Assessing Officer has found that they have been paid excessive remuneration even though the partnership deed provided such payment he could have disallowed the same. He placed reliance upon Section 40A(2)(a) of the Act. He submitted that when the total payment of salary to all its employee was only Rs.4,86,918/- then there was no justification for payment of Rs.39,31,165/- as remuneration to the partners. The submission is wholly misconceived. It is not in dispute that all the three partners are working partners in the assessee opp party firm and the Assessing Officer has himself allowed the remuneration of Rs4,00,000/- per annum to each of the partners. It is also not in dispute that the terms of the partnership deed specifically provided the payment of remuneration to the working partners. Section 40(b)(v) of the Act prescribed limit of remuneration which can be allowed to its partner as deduction while computing the business income. It is not in dispute that the remuneration paid 1o the working partners was within the provision of clause (v) of sub-section (b) of Section 40 of the Act. The Parliament in Us wisdom had fixed a limit on allowing the remuneration to the working partners and if the remuneration are within the ceiling limit provided then recourse to provision of Section 40A(2)(a) of the Act cannot be taken. The assessing officer is only required to see as to whether the partners are the working partners mentioned in the partnership deed, the terms and conditions of tie partnership deed provide for payment of remuneration to the working partners and whether the remuneration provided is within the limits prescribed under Section 40(b)(v) or not. If all the aforementioned conditions are fulfilled then he cannot disallow any part of the remuneration on the ground that it is excessive. Since in the present case, all the conditions required has been fulfilled the question of disallowance does not arise. In tile present case, we find that the Tribunal has found all the three conditions are fulfilled and we do not find any illegally in the impugned order. Thus the appeal fails and is dismissed.”
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Thus, once the claim of payment of remuneration to partners is within the celling prescribed under Section 40(b) of the I. T. Act, 1961 the Assessing Officer cannot question the reasonableness of the remuneration when the genuineness of the payment is not in disputed. Accordingly, in view of the facts and circumstances of the case as well as by following the judgments of Hon'ble Jurisdictional High Court this issue is decided in favour of the assessee against the revenue. The disallowance made by the Assessing Officer is deleted. 9. Ground nos. 7 & 8 are regarding 20% disallowance made by Assessing Officer on account of office expenses. The assessee has claimed expenditure of Rs.69,450/- under the head office expenses. During the assessment proceedings, the Assessing Officer noted that the assessee has produced only ledger account of the expenses but no voucher has been produced. Accordingly, the Assessing Officer made the disallowance of 20% of the expenses amounting to Rs.13,890/-. On appeal, the CIT(A) has deleted the adhoc addition made by Assessing Officer on this account. 10. I have heard the Ld AR as well as Ld. DR and considered the relevant material on record. At the outset, it is noted that the Assessing Officer made 20% disallowance of the office expenses of vouchers. However, the CIT(A) has deleted the said adhoc disallowance while passing the impugned order as under.:- “With regard to adhoc disallowance of expenditure made by AO, it is held that the same is not proper. There is no dispute that the expenditure has been incurred for the purposes of business. It is also clear that the assessee had filed all the details of the expenses under various heads. AO has not pointed out any specific defects in these details filed. The AO has failed to bring any material on record to demonstrate that these expenses have not been incurred and are not verifiable. No disallowance can be made on mere suspicion. This addition is deleted.”
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Since the CIT(A) has deleted the disallowance made by Assessing Officer, therefore, ground nos. 7 & 8 does not arise from the impugned order of the CIT(A) and accordingly the same are dismissed. 12. For the A.Y. 2013-14, the assessee has raised the following grounds.- “1. Because the authorities below erred in law and on facts in dismissing the appellants grounds on the issue of jurisdiction. 2. Because the appellant's ground that the authorities below could not travel beyond the "reasons recorded" was illegally and unjustifiably dismissed without considering the legal aspects as has been brought by the appellant in the course of hearing of Appeal. 3. Because the Id. CIT(A) unjustifiably disallowed part of the remuneration of the appellant's partner Smt. Meera Gupta and Smt. Sita Gupta without invoking the provisions of section 40(b) of the Income Tax Act, 1961 which specify the maximum permissible amount of partners remuneration. 4. In any case and without prejudice to above, the appellant maintains proper books of accounts as required under Rule 6 of the Income Tax Rules, 1962, hence, there was absolutely no justification to interfere in disallowance of the remuneration of the partners. 5. Because even the part disallowances of remuneration under the impugned head was not called for under any of the provisions of Income Tax Act when the assessing officer himself recognized the status of the two lady partners (i) Smt. Meera Gupta and (ii) Smt. Sita Gupta as "active partners" of the appellant firm. 5. Because the authorities below were not justified in mis-interpreting the statement of the lady partners and draw an adverse inference regarding their statements as recorded by the AO. 7. Because the Ld. CIT(A) was not justified in confirming the disallowance of whole of advertisement expenses claimed at Rs. 25,298/-. Whereas the appellant was never asked to produce any vouchers before the AO. 8. Because the disallowances are too high and excessive and deserves to be reduced suitably. 9. Because the order appealed against is contrary to facts, law and principles of natural justice.” 8
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Ground nos. 1 & 2 are regarding validity of re-assessment. At the time of hearing, the Ld. Counsel for the assessee stated at Bar that the assessee does not press the ground nos. 1 & 2 of the appeal and the same may be dismissed as not pressed. The Ld. DR has raised no objection, it ground nos. 1 & 2 of the assessee appeal are dismissed as not pressed. Accordingly, ground nos. 1 & 2 of the assessee appeal are dismissed being not pressed. 14. Ground nos. 3 to 6 are regarding disallowance of remuneration fact to the partners. 15. I have heard Ld. CIT(A) as well as Ld. Assessing Officer and considered the relevant material on record. At the outset, it is noted that the issue involved in the ground nos. 3 to 6 is identical to the issue involved in the ground nos. 3 to 6 for A.Y.2012-13. Accordingly, in view of the finding of this Tribunal for the A.Y.2012-13 in the preceding para of this order this issue of disallowance of remuneration paid to the partners is decided in favour of the assessee and against the revenue. 16. The ground nos. 7 & 8 are regarding disallowance of advertisement expenses. The Assessing Officer has disallowed the claim of advertisement expenses to the tune of Rs.25,298/- on the ground that the assessee is not running the theatre in question but the same was the let out to Reliance Media Works Ltd. On appeal, the CIT(A) has confirmed the disallowance made by Assessing Officer. 17. I have heard the Ld. AR as well as Ld. CIT(A) and carefully perused the order of the authorities below. There is no dispute that the assessee has let out the theatre in question to Reliance Media Works Ltd and not running the said theatre itself. Once the theatre is let out to third part for running then the claim of advertisement expenditure cannot be regarded as expenditure incurred wholly and exclusively for the purpose of the business assessee. Even otherwise, the assessee has not produced 9
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any supporting vouchers to prove that the expenditure was incurred for the purpose of the business of the assessee. The CIT(A) has considered this issue for the A.Y. 2012- 13 as under.:- “I have gone through the facts and the order of AO and submissions made by appellant. AO disallowed these advertisement expenses because there is no clause mentioned in the agreement made between Reliance Media Works Ltd. with regard to such nature of expenditure. The firm has no relation with that of running of film. No proof in support of his contention regarding that expenditure has been furnished during the course of assessment proceedings. Appellant has not been able to give any evidence in support of its contention, hence this addition made by AO is confirmed.” 18. Thus, an identical addition was confirmed by the CIT(A) for and A.Y.2012-13 the assessee has not challenged the said decision for the A.Y.2012-13. Even otherwise, once the assessee has let out the theatre to Reliance Media Works Ltd then the claim of the assessee cannot be accepted being incurred wholly and exclusively for the purpose of business of the assessee. Hence, I do not find any error or illegality in the CIT(A) order. The ground nos. 7 & 8 of assessee appeals are dismissed. 19. In the result, the appeals of the assessee are partly allowed. Order pronounced in the open Court on 15/07/2021
Sd/- [VIJAY PAL RAO] JUDICIAL MEMBER DATED: 15/07/2021 Allahabad Vijay Pal Singh (Sr. PS)
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