WALKER CHANDIOK & CO.,NEW DELHI vs. DCIT, NEW DELHI

The brief facts of the case are that the assessee is a Chartered Accountant firm by profession and deriving income from profession. The assessee filed return of income on 12.10.2010 declaring an income of Rs.14,91,36,320/-. The Head office of the assessee is operated from L-41, Connaught Circus, New Delhi 110001. The Assessing Officer observed that the assessee has debited electricity and water charges of Rs.10,47,690/- and some other firms were also being operated from the said premises. Therefore, he drew inference that the total expenditure debited by the assessee could not be accepted. The other firms operating from the same premises are as under : (i). M/s. Grant Thornton India Pvt. Ltd. (ii). M/s. Unravel Mercantile Pvt. Ltd., (iii). M/s. Pallavi Joshi Bhakru, (iv). M/s. Bhakru & Associates, (v). M/s. Walker Chandiok & Assocates.

In this regard the assessee was asked to show cause why 4/5th of the expenses should not be disallowed for common use of the premises. In this regard, the assessee submitted detailed reply. The Assessing Officer further observed that the branch office of the assessee firm situated at ground floor,

The Assessing Officer further noticed from the details submitted by the assessee that the unpaid cheques for expenses amounting to Rs.65,681/- were transferred to Stale cheques a/c on 31.03.2010, whereas the assessee was following cash system of accounting as per audit report and therefore, the expenses were to be allowed as deduction only when the same were actually paid. Thus, after considering the submissions of the assessee and the system of accounting followed by him, the Assessing Officer disallowed the expenses of Rs.65,681/- and added the same to the total income of assessee.

The Assessing Officer further noticed from Sl. No. 17(b) of Form 3CD Report that 1/6th of partners’ car running and maintenance expenses incurred by the assessee firm are personal in nature. He therefore issued a show cause notice to the assessee to explain as to why 16th expenses pertaining to vehicle depreciation of Rs.32,90,100/- and interest on vehicle loan of Rs.2,96,112/- should not be disallowed by virtue of section 38(2) of the IT Act. After considering the submissions of the assessee, the Assessing Officer disallowed a sum of Rs. 5,97,702/-. In the computation of income, the assessee had himself disallowed 1/6th of the car running expenses. Further,

The Assessing Officer further noticed that a partner Shri Vinod Chandiok has been paid interest of Rs.20,43,675/-. In the partnership deed dated 01.12.2008, clause (5) pertaining to payment of interest is as under : “That the first party shall provide any funds required for the operations of the Firm or otherwise for the purposes of the Firm. The same, in case claimed by the first Party and any funds, other than their respective salaries and / or share of profit in the Firm that is unpaid, provided by the other parties on request of the First Party, shall carry interest at the rate of 12% per annum, computed monthly on the credit balance as at the close of the previous month, and shall be paid/credited to their respective account(s) on the tenth day of the following month.”

Feeling aggrieved from the order of the Assessing Officer, the assessee appealed before the ld. CIT(A) and made a detailed written submissions wherein various case laws have also been relied upon. The ld. CIT(A) after

The ld. AR of the assessee reiterated the submissions made before the ld. CIT(A). In respect of ground Nos. 1, 3 & 4, the ld. AR submitted that the Assessing Officer had no any cogent material to prove that other firms are running from the same building, in which the assessee’s office is situated. Drawing our attention to auditor’s report in regard to payment to specified persons as per section 40A(2)(b), she further submitted that in assessment years 2008-09 and 2009-10, the ld. CIT(A) has deleted the addition in the similar facts and circumstances.

In respect of ground No. 2, it is submitted that undisputedly, the assessee is operating its branch office from W-129 Greater Kailash, New Delhi, which is the property of Mrs. Pallavi Joshi Bhakhru, who is the proprietor of M/s. Bhakhru & Associates and she was also using separate space in that premises for registered office of her proprietary concern, M/s. Bhakhru & Associates. The ld. AR also placed a letter head to support this contention which is placed on record. It was also submitted that no any disallowance was made in the preceding years on this count.

In respect of ground No. 5 & 6 she submitted that the books of account have been maintained on cash basis. The cheques could not be encashed within the validity period, which does not go to support the contention of the Assessing Officer, as the assessee has credited the amount of stale cheques back into its books of account and shown it as current liability and the payment has been made in the succeeding year. Therefore, the credit should be allowed in the assessment year 20012-13 when the balance outstanding in the said account has been written back and declared as income, as the same amount cannot be taxed twice.

In respect of ground No. 7 & 8, it was submitted that the assessee has himself disallowed 1/6th of repair and maintenance expenses and depreciation, which is not out of pocket cost. It is a statutory allowance and has to be allowed in full because the asset was owned by the assessee for use for the purpose of business. Therefore, the Assessing Officer was not justified to make disallowance of 1/6th of the depreciation on car and 1/6th of interest on vehicle loan. It was submitted that since the vehicle was used for the purpose of business, the interest on loan on such vehicles should be allowed in view of the decision of ITAT Mumbai Bench in the case of Mukesh K. Shah vs. STO (2005) 92 TTJ 1060.

In respect of ground No. 9, the ld. AR submitted that the Assessing Officer has not recorded any specific finding as to which of the expenditure was incurred for the personal use of the partners. He has only drawn inference that some of the business development expenses are personal in nature. She also referred to tax audit report in Form No. 3CD at Sl. No. 17(b) who has reported nil expenditure of personal nature.

In respect of ground No. 10 regarding disallowance of interest of Rs.20,43,675/- paid to partner, the disallowance u/s. 40(b), she also referred tax audit report wherein at Sl. No. 17(g), the tax auditor has reported nil interest which is inadmissible u/s. 40(b). It was also submitted that the interest payment was supported by partnership deed clause (5). In the preceding years 2008-09 and 2009-10, similar issue was raised by the Assessing Officer which has been accepted by the ld. CIT(A). Therefore, the consistent view should be followed by the Assessing Officer. The concerned

On the other hand, the ld. DR relied on the orders of the lower authorities, stating that the impugned order of ld. CIT(A) is based on plausible reasons, which needs no interference. It is submitted that every assessment year is separate assessment year and the principle of res judicata is not applicable in the Income-tax Proceedings.

We have heard the submissions of both the parties and have perused the material available on record. It is an undisputed fact that the assessee is a Chartered Accountant firm. On perusal of records, we find that the assessee has successfully explained the facts pertaining to the impugned premises of assessee L-41, Stating the Connaught place premises consists of four units, L- 41 & GIC(first floor), L-25A & L-60 (second floor). It was explained that L-41 is the office of the assessee and Grant Thornton India runs its office fromn GIC portion attached to L-41 and L-25A and L-60 is a business centre run by Rukmani Metals and gaseous Limited. It was also explained that Ms. Pallav Bhakru is a partner in assessee firm and also a proprietor in M/s. Bhakhru & Associates, having its independent registered office at W-129, Greater Kailash, New Delhi. A perusal of the record reveals, that the ld. Authorities below have failed to rebut this explanation of the assessee nor is there any evidence on record to show any spot enquiry made by the Assessing Officer to belie the contentions of the assessee. Moreover, simply because Ms. Pallavi Joshi Bhakru was the partner in the assessee firm, would not imply that the business premises of assessee, i.e., L-41 was being used by her proprietorship concern, M/s. Bhakhru & Associates, having its independent office at W-129,

In respect of ground No. 2, we find that the assessee has explained that M/s. Bhakru Associates (Prop. Ms. Pallavi Joshi) has its registered office at Ground Floor, W-129, Greater Kailash, New Delhi and has attached copy of a letter head of the firm (PB-28) in support. The assessee also states that it has also a branch office at W-129, Greater Kailash, New Delhi. A perusal of assessment order shows that the Assessing Officer has restricted the claim of rent simply on the ground that the said premises was being used by two persons, i.e., assessee and M/s. Bhakru & Associates, the proprietor of which Ms. Pallavi Joshi Bhakhru is the partner in assessee firm. In our considered opinion, as already noted, simply because Mrs. Pallavi Joshi was the partner in the assessee firm, no adverse inference can be drawn that both the assessee and Bhakhru Assocites were using common space for their business or profession. This fact of internal relationship, in our opinion, would not go to belie the contention of the assessee that the assessee has paid rent for the space used by him to operate its branch office to Smt. Pallavi Joshi Bhakhru, Prop. M/s. Bhakhru & Associates, as Pallavi Joshi was the owner of the said premises. There is not even an iota of evidence to justify that the assessee has claimed any rent for the space used by Bhakhru & Associates for its registered office in the same premises or had paid rent for the space over and obove the space used by it for its branch office. No spot enquiry, giving negative results, appears to have been brought to our notice to belie the contentions of the assessee. We, therefore, do not find any justification to disallow the proportionate expenditure claimed on rent paid by the assessee without bringing any cogent material on record to establish that the assessee has claimed rent payment for the space over and above the space used by it. Therefore, the order of the ld. CIT(A) deserves to be set aside on this count

In respect of ground No. 5 & 6, it is clear from the orders of the lower authorities that stale cheques of Rs.65,681/-, could not be encashed within the validity period. Therefore, the stale cheque account has been debited and the relevant expenditure has been credited and shown as current liability at the year end. During the year under consideration, there is no effect in the profit & loss account and the assessee has again issued fresh cheque which has been encashed in the succeeding assessment year 2012-13. The assessee is maintaining cash system of accounting. Therefore, in the impugned year, no benefit of expenditure has been enjoyed by the assessee. The Assessing Officer is, therefore, directed that the benefit should be given to the assessee after due verification from the record of the assessee as to when the current liability has been discharged. Therefore, the alternative ground of the assessee is allowed.

In respect of ground No. 7 & 8, we find that in the order of Assessing Officer, he has disallowed 1/6th of the depreciation on cars amounting to Rs.5,48,340/-. The ld. CIT(A) has confirmed the disallowance as the Assessing Officer has applied the provisions of section 38(2) which provides as under :

Similarly in respect of 1/6th disallowance of interest on vehicle loans, we find that the assessee has himself disallowed 1/6th of vehicle running, repairing and maintenance expenses, which admittedly suggest that partial use of the vehicles was made for personal purpose and not wholly for the purpose of business. Therefore, in view of our finding on disallowance of 1/6th of the depreciation on vehicles, noted above, we find that the ld. Authorities below have rightly disallowed 1/6th of the assessee’s claim of interest on vehicle loans. Accordingly, this ground also deserves to be dismissed.

In respect of ground No. 9 regarding 1/10 of the business development expenses, the Assessing Officer has disallowed this expense only on adhoc basis without pointing out any expenditure of disallowable nature or personal in nature. From the submissions of the assessee before the lower authorities,

In respect of ground No. 10 regarding disallowance of interest u/s. 40(b) of the Act of Rs.20,43,675/- paid to Mr. Vinod Chandiok, we find that it has been calculate as per the terms of partnership deed clause (5), but the IT Act does not permit to allow the interest paid to partners as per the partnership deed. In this regard, the relevant provisions of the IT Act is as under : (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum; or It is clear from the above section that the payment of interest to the partners who are authorized in the partnership deed, has to be calculated in view of the provisions of section 40(b)(iv) of the Act and as per the method given in the partnership deed. The Assessing Officer appears to have wrongly calculated. The contention of the assessee that there is no loss to revenue because the partner has shown this amount as his income and both the partner and the partnership firm are assessable in the same bracket of 30%, is not acceptable for the reason that the intention of the IT Act is to collect tax from the right person as per law. The Assessing Officer also appears to have wrongly interpreted clause (5) of the partnership deed stating that first party was not authorized to receive interest. In presence of these facts, we restore this issue to the file of the Assessing Officer to calculate the interest payable to partner