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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
Per M.Balaganesh, AM
This appeal by the Assessee arises out of the order of the Learned Commissioner of Income Tax(Appeals)-7, Kolkata [in short the ld CIT(A)] in Appeal No. 383/CIT(A)- 7/Kol/Cir-26/16-17 dated 13.10.2016 against the order passed by DCIT, Circle-53, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 26.11.2012 for the Assessment Year 2010-11.
The only issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of partner’s remuneration in the sum of Rs 34,41,474/- in the facts and circumstances of the case.
2 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 3. The brief facts of this issue are that the assessee is a partnership firm engaged in the business of dealing in electricals and electronics goods and gadgets on cash and credit. The assessee firm comprises of the following partners:- a) Smt Jatan Jain , Wife of Hans Raj Jain, aged about 62 years b) Smt Vimala Jain , Wife of Shri Poonam Chand Jain , aged about 60 years c) Shri Manoj Kumar Jain, Son of Shri Poonam Chand Jain, aged about 43 years d) Shri Narendra Kumar Jain, Son of Shri Hans Raj Jain, aged about 45 years.
Their profit sharing ratio is 25% each. The return of income for the Asst Year 2010-11 was filed by the assessee firm on 29.9.2010 declaring total income of Rs 41,18,748/-. The ld AO observed that assessee had debited partners’ remuneration distributed to only two partners namely (i) Smt Jatan Jain and (ii) Smt Vimala Jain equally at Rs 17,20,737/- each totaling to Rs 34,41,474/-. The ld AO observed that the assessee firm comprises of 4 partners who are 2 mothers and their respective sons. Both the young partners (ie the sons) were not drawing any remuneration from the partnership firm. The Inspector of Income Tax (ITI) attached to the office of the ld AO enquired about the affairs of the assessee firm and gather information that only the sons were looking after the entire affairs of the business. The ITI further stated that he had met Mr Kumar, Manager of the Shop on 21.12.2012 at noon and on query, the manager stated that both the partners namely Narendra Kumar Jain and Manoj Jain manage the affairs of the shop and their office is at Lansdowne Road. The ITI further stated that the manager did not utter a single word regarding other partners’ namely Smt Jatan Jain and Smt Vimala Jain contribution to the firm. The ld AO issued summons u/s 131 of the Act to both the partners who were drawing remuneration from the firm. The ld AO examined the son of Smt Jatan Jain (i.e Shri Narendra Kumar Jain) on oath u/s 131 of the Act that her mother does not understand income tax matter, moreover she is at her old age. He further said that he deals all these matter. The ld AO observed that the other partner to whom remuneration was paid was Smt Vimala Jain is reportedly under prolonged 2
3 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 treatment and could not comply with the summons issued u/s 131 of the Act. The ld AO accordingly observed that both the partners to whom remuneration was paid were not working partners and that there is no quantification of remuneration approved by the deed of partnership. He observed that since quantification of remuneration is not mentioned in the partnership deed, the remuneration paid to partners shall not be allowed as deduction u/s 40(b) of the Act. The assessee was accordingly show caused to this effect.
The ld AO observed that the remuneration has been paid to non-working partners. The working partner in general terms means the partner who is actively engaged in the business of the partnership firm and is not a partner for merely enjoying the profits / benefits of the partnership business. If a partner is not a working partner then remuneration to such partner will not be eligible for deduction as per section 40(b) of the Act. Moreover, he observed that the quantification of partners’ remuneration is not made in the partnership deed and accordingly by placing reliance on the decision of the Hon’ble Himachal Pradesh High Court in the case of CIT vs Anil Hardware Store reported in 323 ITR 368 (HP), he held that the remuneration is not allowable in any case. With regard to other claim made by the assessee, that the partners’ remuneration has been allowed in the past by the revenue in the scrutiny assessments, the ld AO observed that there is no RES JUDICATA in income tax proceedings and accordingly the decision taken in earlier years would not bind him in the year under consideration. On these observations, the ld AO disallowed the partners remuneration in the sum of Rs 34,41,474/-.
The assessee pleaded before the ld CITA as under:- “Smt. Jatan Jain and Smt. Vimala Jain are the founder members/partners of the firm. All along in the past, their remuneration have been allowed. In AY. 2003-04, while completing the assessment under scrutiny, the Ld. A O. summoned all the partners and took their depositions. After satisfying, the remuneration to the working partners were allowed and the assessment was completed u/s. 143(3) of the I. T.Act,1961. It is alleged 3
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by the Ld. A O. that partnership deeds does not provide for the remuneration tn the working partners. If, your honour will look to the clause 6 & 7 of the partnership Deeds, (See Annexure 10), provides for the payment of interest on capital and remuneration to the working partners. The computation 0/ remuneration is as per the I.T.Act, on the formula laid down by the I. T. Act, and it is shared equally. The partnership Deed also laid down the manner of quantification of the remuneration. All along in the past, the remuneration paid to the Working Partners have been allowed. Even in the subsequent Asstt. Years i.e. 2011-12 and 2012-13 the remuneration paid Smt. Jatan Jain and Smt. Vimala Jain have been allowed.
The Ld. AO in para 4.43, of his order have mentioned above the report by his Inspector. The appellant has obtained a certified true copy of the alleged report of the Inspector.
Further, alleged report submitted by the inspector does not contain signature of Mr. Kumar or any partners of the appellant with Rubber Stamp. It seems that this is fabricated report and Ld. AO. got it prepared in his office from his Inspector to suit his own interest. The inspector ought to have written his report by his own hand and not on computer and would have got it signed from any partner of the firm with the Rubber Stamp of the appellant firm.
That there is also a contradiction in the date mentioned by the Inspector and the date mentioned by the Ld. AO in the Asstt. Order. The Inspector given date of his report as 21.12.2012. Whereas the AO in his Asstt. Order has mentioned date as 22.12.2012. This also leads to the inference being drawn that the Report by the Inspector and issue of the report to the ld. AO are not correct. The Report appears to be false, and could nor be relied upon as genuine.
Enclose herewith also find an Affidavit (see Annexure 12) by Shri Manoj Kumar Jain partner of the firm stating therein the no such Inspector has ever visited the shop. There is no employee in the name of Mr. Kumar Manager. If your honour will have a look to the order sheet, there is no mention of Inspector's Report. This leads to the inference being drawn that the Ld. A. O. got the report prepare4 In hi: office and is an afterthought. The alleged Inspector's Report is concocted and fabricated to use against the appellant. Therefore no cognizance of the said Report is required to be taken which is fabricated.
Further, the partners have also shown the remuneration received by them in their personal Income Tax Returns and have paid the tax thereon on the said remuneration. It may bee noted char the same amount cannot be taxed twice over - once in hands of the partners and again in the hands of the firm.”
5 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 6. The ld CITA upheld the action of the ld AO on the same reasoning given by the ld AO. Aggrieved, the assessee is in appeal before us.
We have heard the rival submissions. The partnership came into existence vide deed of partnership dated 20.8.2001 under the name and style of M./s Sales Emporium (South) having Smt Jatan Jain and Smt Vimala Jain as working partners, among other partners. It appears from the details submitted in the paper book of the assessee, the remuneration was paid to other working partner Shri Laxmipat Bengani from Asst Year 1995-96 onwards. Vide Reconstituted Partnership Deed dated 9.8.2008, Shri Manoj Jain and Shri Narendra Kumar Jain got admitted as partners pursuant to retirement of Shri Laxmipat Bengani and Shri Sanjay Kumar Bengani from the partnership. In the said partnership deed dated 9.8.2008, we find that Smt Jatan Jain and Smt Vimala Jain were mentioned as working partners. The said partnership deed vide clause 7 of the deed also specifies that the working partner is one who is actively engaged in conducting and looking after the day –to – day affairs of the business of the partnership firm. Hence for the time and energy devoted by these partners, the firm would compensate them by way of remuneration subject to maximum of limits prescribed u/s 40(b) of the Act. In this regard, we find that the ld AO had also relied on the report of Inspector of Income Tax, being the report prepared pursuant to his visit to the shop of the assessee and meeting the manager by name Mr Kumar. The assessee had categorically denied the fact of even the visit of ITI to its shop and had also stated that there is no manager by name Mr Kumar employed in the said firm. To these averments, the partner of the assessee on behalf of the firm had even filed affidavit before the ld CITA. We find that there is absolutely no finding given by the ld CITA with regard to these objections of the assessee. Hence we hold that the reliance placed by the ld AO on the report of ITI is to be ignored in the facts and circumstances of the case and the dispute that is before us is being addressed and adjudicated by us on merits and settled legal principles. We find that the ld AO had recorded statement on oath u/s 131 of the 5
6 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 Act from Smt Jatan Jain who endorsed the statement given by her son that the business affairs were dealt with by the sons of the partners and that the other partner Smt Vimala Jain was under prolonged treatment. These statements (i.e by Smt Jatana Jain and Shri Narendra Kumar Jain) were never retracted by the assessee even at the later stage of proceedings. Hence this goes clearly to prove that during the year under consideration, both Smt Jatan Jain and Smt Vimala Jain did not render services to the firm and according to be treated as non-working partners in the assessee firm and thereby the remuneration paid to them deserves to be disallowed u/s 40(b) of the Act.
7.1. With regard to partners’ remuneration not quantified in the partnership deed with specific monetary figures thereon, we find that the issue is already settled in favour of the assessee by the decision of Hon’ble Rajasthan High Court (at Jaipur) in the case of CIT vs The Asian Marketing in ITA No. 275/2010 dated 11.4.2012 wherein it was held that the partners remuneration should be authorized in the partnership deed and the same should be paid / payable to working partners only and the same shall be allowable subject to limits prescribed u/s 40(b) of the Act. We find that these are the only requirements of law. If the said deed contains a clause that the payment of remuneration shall be subject to the limits prescribed u/s 40(b) of the Act and the manner of quantifying the same, it tantamounts to sufficient compliance of the provisions of the Act. Hence the partners remuneration cannot be disallowed on this count.
7.2. With regard to the other argument advanced by the assessee that the partners remuneration has been allowed by the ld AO in the past as well as in subsequent assessment years even in scrutiny assessments, we hold that the allowability of the same depends on services rendered by the partners in each of the years separately. During the year under consideration, there is a clear cut finding that no services were rendered by these two partners Smt Jatan Jain and Smt Vimala Jain and hence the partners 6
7 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 remuneration thereon deserves to be disallowed in the year under consideration. But the same may not be the case in other assessment years. Hence the principle of consistency and the case law relied upon thereon would not come to the rescue of the assessee herein.
7.3. The next aspect to be decided is whether the disallowance of partners remuneration in the hands of the firm for whatever reason, would automatically result in removal of the same from the hands of the partners in their individual assessments. We find that this is specifically provided in section 155(1A) of the Act as under:- Section 155- Other Amendments
(1A) Where in respect of any completed assessment of a firm it is found— (a) on the assessment or reassessment of the firm, or (b) on any reduction or enhancement made in the income of the firm under this section, section 154, section 250, section 254, section 260, section 262, section 263 or section 264, or (c) on any order passed under sub-section (4) of section 245D on the application made by the firm, that any remuneration to any partner is not deductible under clause (b) of section 40, the Assessing Officer may amend the order of assessment of the partner with a view to adjusting the income of the partner to the extent of the amount not so deductible ; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the financial year in which the final order was passed in the case of the firm.]
7.3.1. We also find that there is a Circular issued by CBDT in this regard vide Circular No. 636 dated 31.8.1992 wherein it was stated as under:- 48.2 The share of the partner in the income of the firm will not be included in computing his total income [section 10(2A)]. However, interest, salary, bonus, commission or any other remuneration allowed by the firm to a partner will be liable to be taxed as business income in the partner’s hand, [section 2(24)( ve) and section 28(v )]. An Explanation has been added to the newly inserted clause (2A) of section 10 to make it clear that the remuneration or interest which is disallowed in the hands of the firm will not suffer taxation in the hands of the partner. In case any remuneration paid to a partner is disallowed in the hands of the firm or the amount is varied in subsequent proceedings, the partner’s assessment can be rectified [section 155(1A)]. 7
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7.3.2. There is no dispute that the partners i.e Smt Jatan Jain and Smt Vimala Jain had duly reported their respective partners remuneration totaling to Rs 34,41,474/- in their individual income tax returns. The evidences for the same are enclosed in pages 42 to 51 of the Paper Book. The ld AR made an alternative plea that the partners remuneration having disallowed in the hands of the firm should be correspondingly reduced from the assessments of the partners in order to avoid double taxation.
7.3.3. In view of the specific provisions in section 155(1A) of the Act and by respectfully following the provisions of the Act and the CBDT Circular No. 636 dated 31.8.1992, we hold that the ld AO on disallowing the partners remuneration in the hands of the firm, ought to have removed the corresponding income in the hands of the partners in order to avoid double taxation of the same sums.
In the result, the appeal of the assessee is allowed for statistical purposes subject to directions contained hereinabove.
Order pronounced in the Court on 11.07.2018
Sd/- Sd/- [A.T. Varkey] [ M.Balaganesh ] Judicial Member Accountant Member Dated : 11.07.2018 SB, Sr. PS
9 ITA No.2262/Kol/2016 Sales Emporium (South) A.Yr.2010-11 Copy of the order forwarded to: 1. Sales Emporium (South), 226, Diamond Harbour Road, Kolkata-700060 2. DCIT, Circle-26, Kolkata, Aayakar Bhawan, Dakshin 2, Gariahat Road(South), Kolkata-700068. 3. C.I.T(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.