M/S. H.H. ENGINEERS,PUNE vs. ADDL. COMMISSIONER OF INCOME TAX, PUNE

This appeal filed by the assessee against the order dated 16-01-2017 passed by the Commissioner of Income Tax (Appeals)-7, Pune [‘CIT(A)’] for assessment year 2007-08.

The brief facts of the case on hand are that the assessee is a firm and undertakes Railway contract works etc. i.e. breaking hills, making tunnels, construction of bridges, Railway tracks and supply of stone ballast. The assessee declared total income of Rs.87,45,600/-. The AO determined the same at Rs.94,44,300/- inter-alia making addition on account of excess remuneration paid to partners and on account of payments of sub-contractors vide its order dated 17-12-2009 passed u/s. 143(3) of the Act. The CIT(A) confirmed the same. Having aggrieved by the order of CIT(A), the assessee is before us.

Ground No. 1 raised by the assessee challenging the action of CIT(A) in confirming the addition of Rs.1,68,000/- on account of salary paid to partners in the facts and circumstances of the case.

Heard both the parties and perused the material available on record. We note that the assessee paid Rs.14,40,000/- as remuneration to its five partners as noted vide Para No. 4 of the assessment order. According to the AO, the partnership deed authorized payment only up to Rs.12,72,000/- to working partners and there is no specification of amount of remuneration to each individual held that the assessee cannot lay down the manner of quantifying the remuneration to each other. The CIT(A) also confirmed the same. The ld. AR submits that the partnership deed dated 01-04-1998 mentions that the terms can be modified in future looking to the efforts put by each working partner from time to time. The said partnership deed was further modified on 09-04-2001 and referred to Page Nos. 72 and 76 of the paper book and submitted though it is not mentioned the distribution of salary amongst the partners but clearly explained that the salary shall not exceed the prescribed limits to working partners as contemplated in the Income Tax Act. We note that Clause 2 of the partnership deed at Page No. 74 speaks that all the partners shall be entitled to salary for looking to the day to day activities of the firm and shall not exceed the prescribed limits as contemplated in the Income Tax Act. Further, at Clause 4 speaks that such salary shall be modified looking to the volume of business and the time devoted by each working partner and such salary shall be charged to profit and loss account at the end of the financial year. In view of the same it is examined the provisions u/s. 40(b)(v) which explains any payment of remuneration to any partner who is working partner is not deductible if such payment exceeds under Clause (a) and (b) of section 40(b)(v) of the Act. Clause (a) of section 40(b)(v) explains the remuneration on the first Rs.1,00,000/- is Rs.50,000/- or at the rate of 90 per cent of the book-profit whichever is more. Clause (b) explains the remuneration at the rate of 60 per cent on the next Rs.1,00,000/- of the book-profit. If we go by the provisions u/s. 40(b)(v) of the Act, the remuneration paid to five partners totaling to Rs.14,40,000/- is not excessive and the assessee is entitled to pay such amount in accordance with the provisions of Income Tax Act. Further, as discussed above Clause 2 and 4 of partnership deed also empowers the assessee to pay remuneration by way of a salary by looking to the day to day activities of the firm which means by way of modifying the same looking to the volume of business. The financials of the assessee are at Page Nos. 31 to 62 of the paper book wherein we note that the total income as disclosed by the assessee at Rs.1,24,06,317/-, in our opinion, the payment of remuneration to five partners is in accordance with the Clause (a) and (b) of section 40(b)(v) of the Act. Therefore, the order of CIT(A) is not justified and the addition of difference (Rs.14,40,000/- - Rs.12,72,000/-) made on account of salary to an extent of Rs.1,68,000/- is deleted. Thus, the ground No. 1 raised by the assessee is allowed.

Ground No. 2 raised by the assessee challenging the action of CIT(A) in confirming the addition of Rs.5,30,698/- on account of payments to sub-contractors in the facts and circumstances of the case.

Heard both the parties and perused the material available on record. We note that the details of sub-contractors are reproduced by the AO at Para No. 5. The assessee raised bills and the payments were made by deducting TDS and at the same time Form No. 16A also issued to all the sub-contractors. We note that the necessary evidences are filed before us in the paper book at Page Nos. 77 to 122 of the paper book. The AO held the assessee did not prove the identity of sub-contractors, confirmation letters of sub-contractors and further held the evidences filed by the assessee are self-made vouchers. We note that the assessee is engaged in execution of railway contract works which are located at various places and the assessee made petty payments to contractors in cash. It is also noted that the said payments were not violation of provisions u/s. 40A(3) of the Act which was not disputed by the Revenue. The CIT(A) confirmed the order of AO by observing the evidences filed by the assessee are self-made vouchers. On perusal of the relevant details as furnished at Page Nos. 77 to 122 which clearly shows that the assessee had furnished identity of sub-contractors, counterfoils, ledgers of sub-contractors, details of works contract and Form No. 16A. Therefore, we find force in the arguments of ld. AR that the necessary evidences filed before the AO and holding the same as self-made vouchers is untenable. Admittedly, the necessary evidences were filed by the assessee but the AO doubting the veracity of the same, rejected which in our opinion, is not maintainable. Thus, the order of CIT(A) in this regard are not justified. Accordingly, ground No. 2 raised by the assessee is allowed.

In the result, the appeal of assessee is allowed.