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Facts
The assessee appealed against the CIT(A)'s order regarding disallowances for A.Y. 2016-17, primarily concerning salary paid to partners (Rs. 2,40,000/-), electricity expenses (Rs. 4,08,488/-), and ad-hoc disallowance of staff salary (Rs. 1,73,585/-). The Assessing Officer disallowed partner salary for lack of quantification as per CBDT Circular, electricity expenses due to bills not being in the assessee's name, and staff salary due to insufficient documentary evidence for cash payments. The CIT(A) upheld these disallowances.
Held
The Tribunal deleted the disallowance of salary paid to partners, finding that the partnership deed authorized it as per Section 40(b)(v) and the assessee had already added it back to income. For electricity expenses, Rs. 3,32,903/- was allowed based on a rent agreement, but Rs. 75,585/- was sustained due to lack of evidence. The ad-hoc disallowance of staff salary was upheld due to the absence of proper bills, vouchers, or salary slips for cash payments.
Key Issues
1. Whether the disallowance of salary paid to partners was justified under Section 40(b)(v). 2. Admissibility of electricity expenses when bills are not in the assessee's name. 3. Validity of ad-hoc disallowance of staff salary paid in cash without documentary evidence.
Sections Cited
section 40(b)(v), section 40(b)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI ‘E’ BENCH,
Before: SHRI SAKTIJIT DEY, & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
This appealby the assessee is preferred against the orderof the ld. CIT(A)-23, New Delhidated 30.12.2018pertaining to A.Y. 2016-17.
2. Ground Nos. 1, 2 and 4 were not pressed. The same are accordingly, dismissed as not pressed.
3. The only ground which survives for adjudication is Ground No. 3 which relates to:
(1) Disallowance of salary paid to partners Rs. 2,40,000/- (2) Electricity expenses Rs. 4,08,488/- (3) Adhoc disallowance of salary paid to staff Rs. 1,73,585/-
With regards to Ground No. 3.1 relating to disallowance of salary paid to partners, the Assessing Officer noticed that the assessee has claimed salary to the partners amounting to Rs. 2,40,000/-. The assessee was show caused to submit justification of salary payment which the assessee failed to do so.
The Assessing Officer came to the conclusion that neither the assessee quantified the salary nor specified the limit of total remuneration. Therefore, the Assessing Officer relying upon CBDT Circular No. 739 dated 25.03.1996 made addition of Rs. 2,40,000/- which was confirmed by the ld. CIT(A).
Before us, the ld. counsel for the assessee vehemently stated that the law only requires the partnership deed should authorize the payment of salary and the same should be in accordance with the sub- clause (v) of section 40(b) of the Act. The ld AR further submitted that the Assessing Officer has made the addition without verifying the fact that the assessee himself added the remuneration of Rs. 2,40,000/- in its profit and loss account and only claimed Rs. 1,50,000/- as salary paid to partners as allowable under the Act.Therefore, the AO and the CIT(A) were not justified in disallowing the salary paid the partner.
The ld. counsel for the assessee relied upon various orders of the Co-ordinate bench including Shri Shashi Kant Loyalka order dated 13.02.2023, JRA and Associates ITA No. 5571/DEL/2015 order dated 11.07.2018, Luthra and Luthra Law Offices No. 07/CTK/2018 order dated 27.08.2018 to substantiate its claim.
On the other hand, the ld. DR vehemently argued that the Assessing Officer has followed the CBDT Circular [supra] and hence the disallowance be sustained.
9. We have heard the rival submissions, perused the orders of lower authorities and the case records. In the instant case the Assessing Officer disallowed the claim of salary paid to the partners amounting to Rs. 2,40,000/- on the ground that neither the assessee quantified the salary nor specified the limit of total remuneration as mandated in the CBDT Circular No. 739 dated 25.03.1996 and made addition of Rs. 2,40,000/- which was confirmed by the ld. CIT(A).
We find that the provisions of the Income Tax Act in section 40(b)(v) states as under:
(v) any payment of remuneration to any partner who is a working partner, which is authorized 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 the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :- a) on the first Rs. 3,00,000 of Rs 1,50,000 or at therate of 90 per the book-profit or in case of cent of the book- profit, whichever is more; a loss b) on the balance of book- At the rate of 60 per cent: profit The statute, thus, encapsulates that remuneration paid to the partner should be authorized and be in accordance with the term of the partnership deed and is within the limit prescribed under the provision.
We find that the Partnership Deed of the assessee at clause (ix) of the states as under:
Clause (ix) It is decided that the active partner/partners shall be entitled to a salary/commission etc. during the year shall be equivalent to the sum computed according to the method of computation as laid down in sub clause (b) of section 40 of the Act applicable time to time.
The issue of salary paid to partners has cropped up before the ITAT. On an identical issue, the co-ordinate bench of ITAT in the case of Luthra and Luthra Law Officers, as under:
(v) any payment of remuneration to any partner who is a working partner, which is authorized 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 the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :- c) on the first Rs. 3,00,000 of Rs 1,50,000 or at therate of 90 per the book-profit or in case of cent of the book- profit, whichever is more; a loss d) on the balance of book- At the rate of 60 per cent: profit
Provided that is relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the l" day of April, 1993, the terms of the partnership deed may, at any time during the previous year, provide for such payment."
The contention of the Assessing Officer is that the CBDT in circular No. 739 dated 25/03/1996 has clarified the position of the salary/remuneration paid to partners as provided u/s 40(b)(v) of the Act. The Ld. Assessing Officer observed that the remuneration to the partners should either be quantified or manner of the quantification should be specified. Contents of the relevance circular are reproduced as under:
Circular No. 739 dated 25/03/1996 "The Boards have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided u/s. 40(b)(v) of the IT Act. In particulars, the representations have referred to two types of clauses which are generally incorporated in the partnership deeds. These are: i. The partners have agreed that the remuneration to a working partners will be the amount of remuneration allowable under the provision of section 40(b)(v) of the IT Act; and ii. The amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year. It has been represented that the A.Os are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.
The Board have considered the representations. Since, the amended provisions of section 40(b) have been introduced only with effect from the A.Y.1993-94 and these may not have been understood correctly the Board are of the view that a liberal approach may be taken for the initial years. It has been decided that for the A.Y. 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at 1(i) above.
In case where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, in such cases payment of remuneration of the firm's income. 4. It is clarified that for the assessment year subsequent to the A.Y. 1996-97, no deduction u/s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. "
10. According to Assessing Officer in above clause of the partnership which is reproduced in para 7 of this order, the remuneration has neither been quantified nor manner of quantification has been specified. However in our opinion, the finding of the Ld. Assessing Officer as well as Ld. CIT(A) on this issue is not correct. The partnership deed has specified that the amount of remuneration allowable u/s 40(b)(v) would be the amount of remuneration paid to the partners and same would be shared in their profit-sharing ratio in that year. The profit-sharing ratio of the partners has been specified as 2/3rd ( Sh Rajiv K Luthra) and 1/3rd ( Sh Mohit Saraf). The assessee accordingly paid total remuneration of Rs. 45,00,000/-in the profit- sharing ratio to both the partners. In our view, the clause of the partnership deed satisfies the requirement of the CBDT circular (supra) and there is no violation on the part of the assessee in this regard.
In the instant case, considering the facts of the case and the decision as cited above, we are of the opinion that the Partnership Deed has authorized the payment of salary which was computed in accordance with the method of computation as provided in the clause (v) of section 40(b) of the IT Act. The assessee has in accordance with the provision of Act, calculated the salary paid to the partner and has suo moto added the amount of Rs 2,40,000/- paid as salary in its computation of Income and has claimed only Rs. 1,50,000/- as salary paid. We therefore, hold that the assessee satisfies the requirements laid down in the statute and the CBDT’s circular.Further, the AO has not disputed that the partners were not paid remuneration and has accepted the books of account as correct. Therefore, the salaryclaimed to have been paid is deductible while computing the income of the assessee. We, therefore, set aside the orders of the lower authorities and delete the disallowance of Rs 2,40,000/- on account of salary. The Ground No. 3.1 is allowed.
As regards Ground No. 3.2 relating to electricity expenses, the Assessing Officer required the assessee to furnish justification of electricity expenses. In response to which, the assessee furnished ledger account of electricity expenses.
On going through the ledger account of electricity expenses, the Assessing Officer noticed that the same do not pertain to the assessee and the electricity bills were raised in the name of M/s Duggal & Sons Buildwell Pvt Ltd and Smt. Anjali Sood. Finding no documentary evidence or books of account/bills/vouchers, an amount of Rs. 4,08,488/- was added to the income of the assessee on account of electricity expenses which was confirmed by the ld. CIT(A).
Before us, the ld. counsel for the assessee vehemently stated that the property was in the name of Ms. Anjali Sood which was taken on rent and the meter was in the name of the owner itself. Copy of rent deed was furnished which is on record. As the premises was used by the assessee, the electricity bills in the name of Anita Sood was paid by the assessee. With respect to the Electricity bill of Duggal Sons Buildwell Pvt Ltd, it was stated that the same was being paid as a small portion of the building of Duggal Sons Buildwell Pvt Ltd was being used by the firm for its own business purposes and no rent was paid.
On going through the record, we find that the assessee has a rent agreement with Ms. Anjali Sood for the premises occupied by the assessee. Electricity bills amounting to Rs 3,32,903/-, in the name of Anjali Sood are being paid by the assessee for the premises used by the assessee for its own business purposes. Therefore, we consider the same as allowable.
As regards the bills in the name of Duggal and Sons Buildwell Pvt Ltd., the ld. counsel for the assessee fairly submitted that the bills were paid in cash and no contract or agreement exists between Duggal and Sons Buildwell Pvt Ltd. and the assessee.
The ld. DR relied upon the orders of the authorities below.
On going through the record, we find that the assessee has not furnished any documents to evidence the fact of having paid the electricity bills in the name of Duggal and Sons Buildwell Pvt Ltd though they are sister concerns and the assessee, before us, has also not produced any documentary evidence to substantiate its claim.
Accordingly, we find no reason to interfere with findings of the ld. CIT(A). Addition on this count amounting to Rs. 75,585/- is sustained.
Ground No. 3.2 is therefore partly allowed.
As regards adhoc disallowance of salary paid to staff, the Assessing Officer made the addition of Rs. 1,73,585/- out of salary expenses of Rs 6,94,340/- which was paid in cash. The assessee failed to produce books of account, original bills, vouchers, salary register, salary slips etc. and failed to discharge the onus cast upon it to prove that the expenditure was incurred wholly and exclusively for the purpose of its business. Accordingly, the Assessing Officer disallowed 25% of the claimed expenditure for want of verification of such payment. The ld. CIT(A) confirmed the action of the Assessing Officer.
Before us, the ld. counsel for the assessee argued that these are adhoc additions and may be deleted.
The ld. DR relied upon the order of the ld. CIT(A).
We have carefully perused the orders of the authorities below and the documents submitted by the assessee before us, and having heard the rival submissions, we find that the salary was paid in cash for which no documentary evidence in form of bills/vouchers/salary slips etc were brought on record to substantiate the fact of having paid salary to staff. Therefore, we find no reason to interfere with the findings of the Assessing Officer which was confirmed by the ld. CIT(A).
Ground No. 3.3 stands dismissed.
In the result, the appeal of the assessee in is partly allowed.
The order is pronounced in the open court on. 30.04.2024.