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Income Tax Appellate Tribunal, JAIPUR BENCHES, JAIPUR
Before: SHRI BHAGCHAND, AM & SHRI KUL BHARAT, JM vk;dj vihy la-@ITA No. 701/JP/2016
PER SHRI KUL BHARAT, JM.
This appeal filed by the Assessee is directed against the order of the Ld.
CIT(A)-I, Jaipur dated 09-05-2016 pertaining to the Assessment Year 2011-12.
The Assessee has raised the following grounds of appeal:-
“1. That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) grossly erred in sustaining a disallowance of Rs. 3,18,253/- u/s/ 40(a)(ia) of the Income-tax Act, 1961, for non deduction of tax at source on interest paid to financial institutions.
That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) grossly erred in sustaining a disallowance of Rs. 2,36,916/- u/s 40(b)(ii) of Income-tax Act, 1961, in respect of remuneration paid to partner Shri Rajiv Jain.
2 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
That on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) grossly erred in sustaining an addition Rs.20 000/- on account of interest income from M/s Yash Pharma.
That on the facts and in the circumstances of the case and in law and in the principles of natural justice, the learned Commissioner of Income Tax (Appeals) grossly erred in not allowing sufficient opportunity of being heard to the appellant and also to furnish additional documents/evidences for adjudication in the interest of justice.
That the appellant craves to add, amend, alter, modify, substitute or delete any ground or grounds of appeal on or before the hearing of the appeal.”
Briefly stated the facts are that the case of the assessee was picked up for
scrutiny assessment and the assessment u/s 143(3) read with section 144 of the
Income Tax Act, 1961(hereinafter referred to as the Act) was framed vide order
dated 28.01.2014. While framing the assessment, the Assessing Officer rejected the
books of accounts and estimated the profit. After rejecting books of accounts the
assessing Officer made lump-sum addition of Rs. 50,000/-. Further, the Assessing
Officer observed that the assessee has made interest payment to financial
institutions namely M/s Cholamandlam DBS Finance Ltd. of Rs. 2,14,225/- and M/s
Future Money of Rs. 1,04,028/- no tax was deducted on these amounts. Therefore,
the Assessing Officer disallowed the expenditure of Rs. 3,18,253/- and added same
to the total income of the assessee. Further, the Assessing Officer made addition on
account of disallowance of excessive salary to partners amounting to Rs. 236916/-.
The AO also made addition of Rs. 20,000/- on account of non-disclosure of income
receipt from Yash Pharma. Further the AO made adhoc disallowance of expenditure
at 10% on telephone expenses, car running maintenance exp., Running &
3 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
Maintenance of vehicles, depreciation on Cars. Against this, the assessee preferred
an appeal before Ld. CIT(A), who after considering the submissions partly allowed
the appeal. Thereby, the Ld. CIT(A) deleted the addition of Rs. 50,000/- made on
account of lump-sum disallowance. Further, the Ld. CIT(A) confirmed the addition
on account of non-deduction of tax excessive payment of salary. Further confirming
the addition made on account of non-disclosure of receipt from Yash Pharma.
Against this, the assessee preferred the present appeal before this Tribunal.
Ground No. 1 is against non-deduction of tax in respect of the interest paid
to financial institutions.
3.1 Ld. Counsel for the assessee reiterated the submissions as made in the
written brief.
3.2 On the contrary, Ld. D/R opposed the submissions.
3.3 We have heard the rival contentions, perused the material available on
record. During the course of hearing, Ld. Counsel for the assesee submitted that the
financial institutions have disclosed this receipt in their return of income. This fact
requires to be verified at the end of the AO. We therefore, set aside this issue to the
file of the AO to verify whether recipient has paid tax on such receipt. In case, the
recipient has paid taxes and disclosed receipts in their respective income tax return
the AO would delete the disallowance. This ground of appeal is allowed for
statistical purpose.
Ground no. 2 is against sustaining the disallowance of Rs. 2,36,916/- in
respect of remuneration paid to partner Shri Rajiv Jain.
4 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
4.1 Ld. Counsel for the assessee reiterated the submissions as made in the
written brief and he submitted that authorities below were not justified in making
the addition. He submitted that as per clause 13 of the partnership deed, the profits
ratio of the partners was 50%. In support of this, he drew our attention to the
partnership deed and enclosed at the Paper Book.
4.2 Per contra Ld. D/R opposed the submission and stated that there is no
ambiguity in law, the remuneration to partners are allowable as per deed of
partnership.
4.2 We have heard the rival contentions, perused the material available on record
and gone through the order of the authorities below. Ld. CIT(A) in para 3.4.2 has
decided this issue by observing as under:-
“3.4.2. Determination:- (i) The appellant firm is constituted by two partmers i.e. Sh. Rajeev Jain and Sh. Sanjeev Jain and it paid remuneration of Rs. 6 lac to only one partner Sh. Rajeev Jain. The total remuneration as per the partnership deed dated 07.12.2004 payable to the partners worked out to Rs. 7,26,168/- by the AO in the assessment order. The AO, in view of the terms and conditions of partnership deed determined the remuneration payable to each partner at Rs. 3,63,084/- i.e. 50% of Rs. 7,26,168/- and thus disallowed the excess claim of Rs. 2,36,916/-(6,00,000- 3,63,084) u/s 40(b) (ii) of the Act. (ii) During the appellate proceedings, it was the contention of the appellant that as per partnership deed, it has been agreed amongst the partners that the salary shall be given to the partners looking after the affairs of the firm and who are known as working partners in the manner as agreed between them. Shri Rajiv Jain has been paid Rs.6,00,000/- as remuneration as working partner as he was actively engaged in the affairs of the above mentioned firm as in the past years which has been accepted by the department in
5 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
assessment proceedings of the earlier years and there is change of opinion by the AO. (iii) I have duly considered the submission of the appellant, assessment order and the material placed on record. It would be relevant to reproduce here the provision of section 40(b) of the Act as under:
Notwithstanding anything to the contrary in sections 30 to 19[38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (b) in the case of any firm assessable as such,— Explanation 4.—For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;]
(iv) Thus, any payment of remuneration to any partner who is a working partner, which is not authorized by, or is not in accordance with, the terms of the partnership deed cannot be deducted in computing the income chargeable under the head 'profit and gains of business or profession'. (v) As per clause 13 of the partnership deed, the profit sharing ratio between the two partners was 50% each. It is evident from clause No. 6 of the partnership deed that the total allowable remuneration shall be shared amongst the working partners in their profit sharing ratio or as being mutually agreed amongst them. Thus both Shri Rajeev Jain and Shri Sanjiv Jain were having 50% share each in the allowable remuneration i.e. Rs. 3,63,084/- each. As per provisions of section 40(b) of the Act, the remuneration which is paid to a working partner and, is not authorized by, or is not in accordance with, the terms of the partnership deed cannot be allowed as a deduction. (vi) The appellant firm has paid remuneration of Rs. 6 Lac to Shri Rajeev Sain which is not in accordance with the terms of the partnership deed. During the
6 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
appellate proceedings, the AR placed reliance on the decision of Hon'ble ITAT, Amritsar in the case of ITO vs. J.M.P Enterprises [2006] 101 ITD 324 (Asr.). The said judgment is of no help to the appellant as in that case, the remuneration was paid to 4 partners out of the 5 working partners but within the permissible limit of Rs. 1.20 Lac of each partner and the remuneration payable to the fifth partner was not distributed amongst the four other partners. In the instant case, under consideration, part of the share of remuneration was also given to the other partner. (vii) Therefore, in view of the above discussion, it is held that the AO was justified in restricting remuneration paid to Shri Rajeev Jain at Rs. 3,63,024/- and making addition of Rs. 2,39,916/- to the income of the appellant firm. Hence, this ground of appeal is hereby rejected.”
The above finding on fact is not controverted by the assessee. Since the partnership
deed allows expenditure of remuneration paid to the partners in the ratio as
recorded in the partnership deed paying less to one partner and paying in excessive
of the ratio so fixed, in our considered view would not help the assessee.
The only explanation of the assessee is that the other partner has no objection to
this effect. In our view, there is no ambiguity into the provisions, if any
remuneration is paid in excess of the amount mentioned or the percentage
mentioned in the partnership deed that is not allowable expenditure. Therefore, we
do not see any infirmity into the order of the Ld. CIT(A), same is hereby affirmed.
This ground of appeal is dismissed.
Ground no. 3 was sustaining the addition of Rs. 20,000 on account of
interest income from M/s Yash Pharma.
7 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
5.1 Ld. Counsel for the assessee reiterated the submissions as made in the
written brief. He submitted that the amount is offered for taxation on receipt basis
this being revenue neutral would not make any difference. Therefore, he urged that
the addition may be deleted.
5.2 On the contrary Ld. D/R supported the order of the authorities below.
5.3 We have heard the rival contentions. The Ld. CIT(A) has given a finding on
fact in para 3.5.2 as under:-
“3.5.2 Determination:
(i) The AO noted that the appellant has shown interest income of Rs. 60,000/- from M/s Yash Pharma whereas as per 26AS statement, the appellant has received Rs. 80,000/- and the appellant has claimed credit of TDS on interest income of RS. 80,000/- in its return of income and consequently the AO made addition of Rs. 20,000/- to the income of the appellant. (ii) During the appellate proceedings, it was the contention of the appellant that during the year under consideration, it has not received any such income in its bank account and same has been received in next assessment year which has been declared in his return of income and paid income tax due on income declared. (iii) I have duly considered the assessment order, submissions of the appellant and the material placed on record. As per tax audit report, the appellant is following mercantile system of accounting. Therefore, the commission of Rs. 20,000/- was accrued to the appellant during the year under consideration. Further, the appellant has claimed credit for TDS on the entire amount of Rs. 80,000/- and not on Rs. 60,000/-. It is, therefore, held that the AO was justified in making addition of Rs. 20,000/- to the income of the appellant and thus the addition of Rs. 20,000/- is hereby sustained.”
8 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.
This finding on fact is not controverted by the Ld. Counsel for the assessee. Since
the assessee has been following mercantile system of accounting. Hence, the receipt
is requires to be tax on accrual basis. Therefore, we do not see any infirmity finding
into the order of the Ld. CIT(A), same is hereby affirmed. This Ground of assessee’s
appeal is dismissed.
In respect of Ground nos. 4 & 5, no arguments were addressed.
Therefore, both these grounds are dismissed.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open court on Wednesday, the 25th day of October 2017.
Sd/- Sd/- ( HkkxpUn ½ ( dqy Hkkjr) ( BHAGCHAND) ( KUL BHARAT ) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Jaipur Dated:- 25/10/2017. Pooja आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू
The Appellant- M/s Geet Medicals, Jaipur. 2. The Respondent – ITO, Ward-1(2), Jaipur. 3. The CIT(A). 4. The CIT, 5. The DR, ITAT, Jaipur 6. Guard File (ITA No. 701/JP/2016) vkns'kkuqlkj@ By order,
सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत
9 ITA No.701/JP/2016. M/s Geet Medicals, Jaipur.