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Income Tax Appellate Tribunal, DELHI BENCH ‘D’, NEW DELHI
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 16.09.2011 of ld. CIT(A)-II, Dehradun.
Following grounds have been raised in this appeal:
“1. That the Id. CIT(A) has erred in law and on facts of the case in confirming the disallowance of expenditure claimed by the appellant to the tune of Rs.1,39,709/-incurred during the course of carrying on of the business by the appellant.
2. That the ld. CIT(A) has not correctly appreciated the covenants of the franchise agreement and has failed to appreciate that the expenditure has been incurred in the course of performance of duties casted upon the franchise-assessee pursuant to the agreement and has, therefore, wrongly confirmed the 2 Kwality Restaurant disallowance of Rs.l,39,709/- out of various expenses claimed by the appellant.
That the Id. CIT(A) is not justified in confirming the disallowance of Rs.60,000/- out of remuneration paid to the partners.
That the Id. CIT(A) has failed to appreciate the terms and conditions agreed upon amongst the partners in the partnership deed which enable the partners to revise their remuneration on agreed basis and is wrong in observing that such a decision is unsupported by another document.
That in any view of the matter/ the confirmation of disallowance of expenses made by the Assessing Officer as well as continuation of disallowance of remuneration of Rs.60,000/- is must and uncalled for contrary to the facts on record and is bad in law.
That the order passed by the Id. CIT(A) is against the merits, circumstances and legal aspects of the case.
7. That the appellant craves leave to add, alter, amend or withdraw any or all the grounds of appeal
on or before the date of hearing.”
3. From the above grounds, it is gathered that the grievance of the assessee relates to the confirmation of addition of Rs.1,39,709/- and Rs.60,000/- made by the AO on account of disallowance of expenditure and remuneration to the partners respectively.
4. Facts of the case in brief are that the assessee filed the return of income on 31.03.2009 declaring an income of Rs.1,86,710/- which was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred 3 Kwality Restaurant to as the Act). Later on, the AO observed that the assessee had received a sum of Rs.5,32,666/- as minimum guaranteed commission from M/s Provogue (India) Ltd. and also claimed expenses of Rs.1,65,961/- against the said commission and that in this kind of franchisee agreement the expenses were to be borne by the company. He, therefore, had the reason to believe that the income of the assessee had escaped assessment. Accordingly, notice u/s 148 of the Act was issued and the assessment was reopened. The AO asked the assessee vide notice u/s 142(1) of the Act dated 26.11.2010 to justify its claim of expenses in the light of franchisee agreement more specifically of clauses 5, 16 and 22. In response, the assessee submitted as under: "As per agreement there are various functions and liabilities which we have to do in relation with the agreement and for that we have appointed only one person for this work and his salary is debited in P&L account. Salary is given for the work of franchisee work firm and is also very reasonable according to work then from employee." "As per agreement there are various functions and liabilities which we have to do in relation of the franchisee agreement and for that we have to maintain all sale proceeds, its remittances as per clause 7 of agreement, inspection of material and return of defective material as per clause 10 of the franchisee agreement, maintain stock in safe condition as per clause 12 and various other obligation."
5. The AO did not find merit in the aforesaid submission of the assessee and made the addition of Rs.1,39,709/- by observing as under:
4 Kwality Restaurant “The assessee's reply is very vague, as the assessee failed to describe the various functions and liabilities which it had to discharge on behalf of the company, further the assessee is also paying remuneration to the tune of Rs. 180000/- to its three partners, Moreover, as per clause 22 of the agreement the company i.e. M/s Provogue has to bear all the expenses to the extent of Rs. 40000/- per month. The assesses also failed to point out the expenses related to remittances as per clause 7, inspection and return of material expenses as per clause 10 and maintenance of stock expenses as per clause 12, apparently none of these kind of expense were debited to the P&L account. The assessee also failed to produce the supporting evidences and justify the genuineness of the expenses so claimed, hence, all the expenses except accounting charges Rs. 18300/-. Audit fee of Rs. 7500/- bank charges of Rs. 447/-, as claimed by the assessee has been treated as not incurred for the purpose of business hence disallowed as expenses. Therefore, the following expenses of the assessee arc disallowed: Salary Rs.42000/- Bonus Rs. 3500/- Cleaning charges Rs.6000/- Electricity maintenance Rs.1000/- Interest on trade tax Rs.250/- Legal expenses Rs. 14500/- Misc. Rs. 1136/- Rates & taxes Rs. 1950/- Telephone expenses Rs.6558/- FBT Rs.405/- Electricity expenses Rs.62410/- Total Rs.139709/- Addition of Rs.139709/- 6. The AO also made the addition of Rs.60,000/- out of the remuneration paid to the partners at Rs.1,80,000/- by observing that the 5 Kwality Restaurant remuneration of the partners shall be restricted to the extent as stated in the partnership deed.
Being aggrieved the assessee carried the matter to the ld. CIT(A) who sustained the addition made by the AO on account of expenses by observing in para 4.3 of the impugned order which read as under:
“4.3 The rival contentions have been examined. It is seen that Clause 22 of the Covenant (with M/s Provogue) states as under:- “The Parties agree that all expenses in relation to repaid and maintenance of the store shall be born by the company and all expenses in relation to the Provogue Store and the sale of Products through the Store, including carry bag, Packaging expenses, storage expenses, insurance charges, accounting expenses, salaries/remuneration of persons employed by the franchisee for sale of the Products at the Provogue Store, security expenses, storage expenses, civil maintenance and other operating expenses in respect of the Store shall be borne by the franchisee and the Company shall only reimburse the amount as actual paid by the franchisee by the not exceeding an amount of Rs.40,000/- per month by the 5th day of every month. However, it is agreed that such amounts shall not exceed Rs.40,000/- per month or aggregating Rs. 4.80 lacs (four lacs eighty thousand) per annum during the substances of this agreement. This amount shall increase by 5% per annum. The security guard shall not be removed without the prior written consent of the franchisee.” Furthermore, the copy of balance sheet and profit/loss account filed during the course of appellate proceedings does not show how the reimbursement of expenses (upto Rs.4.80 lacs per year) has been accounted for since the total expenses as per the P & L account is shown at Rs.1,65,961/- (Rs.5,32,666 - 3,66,705) and the "Minimum Guarantee Commission" has been shown at Rs.5,32,666/- (this is on account of sales of products of M/s 6 Kwality Restaurant Provogue as per Clause 5 of the Contract). Thus, it is emphasized that the reimbursement of expenses as per Clause 7 of the contract has not been apparently disclosed in the Profit and loss account. Such reimbursement, in case the same is accounted for, would adequately cover the amounts disallowed by the AO. In view of this, the disallowance of expenses by the Id. AO is justified and calls for no interference.”
As regards to the disallowance of Rs.60,000/- out of remuneration paid to the partners. The assessee submitted to the ld. CIT(A) that Clause 8 of the partnership deed states that the partners could revise their remuneration. The ld. CIT(A) did not accept the said submission by observing that nothing had been given to enable understanding when and how the partners agreed to revise their remuneration upwards and accordingly, the disallowance of Rs.60,000/- was also sustained.
Now the assessee is in appeal. The ld. Counsel for the assessee submitted that there is a provision in Clause 22 of the agreement entered by the assessee with M/s Provogue (India) Ltd. for the payment of commission to the assessee and apart from that all the expenses relating to repair & maintenance etc. shall be borne by the company in relation to the Provouge Store and the sale of products through store, including carry bag packaging expenses, insurance charges, accounting expenses etc. A reference was made to page no. 8 of the assessee’s paper book which is the copy of the agreement containing the said clause. It was further stated that the company M/s Provogue (India) Ltd. informed the assessee that no reimbursement of any kind towards incurring of the expenses was made to the assessee pursuant to the agreement dated 7 Kwality Restaurant 19.04.2007 and only commission had been paid. It was submitted that the said letter was brought to the knowledge of the AO and the ld. CIT(A) but they have not appreciated the same in right perspective. Therefore, the disallowance made by the AO and sustained by the ld. CIT(A) was not justified. As regards to the disallowance on account of remuneration to the partners, it was submitted that the partners agreed orally to enhance the remuneration and that there was specific provision in Clause 8 of the partnership dated 01.04.2000 that the partners may agree the mode of calculating the remuneration. It was further submitted that in accordance with the provision contained in the said Clause 8, the partners of the assessee firm agreed to enhance the remuneration. Therefore, the disallowance made by the AO and sustained by the ld. CIT(A) was not justified.
In his rival submissions the ld. DR strongly supported the orders of the authorities below.
We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that no cognigence has been taken by the ld. CIT(A) or the AO to the letter written by M/s Provogue (India) Ltd. that no reimbursement of any kind towards incurring of expenses was made to the assessee pursuant to the agreement dated 19.04.2007. It is also not clear as to whether the said letter was placed by the assessee before the AO or the ld. CIT(A) (copy of which is placed at page no. 17). We, 8 Kwality Restaurant therefore, deem it appropriate to set aside this issue back to the file of the ld. CIT(A) to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
As regards to the another issue relating to disallowance out of the remuneration paid to the partners. It is noticed that although there is provision in Clause 8 that the partners may agree from time to time to charge the remuneration and claim of the assessee is that there was oral agreement amongst the partners in enhancing the remuneration paid earlier. However, neither the AO nor the ld. CIT(A) asked the assessee to produce the partners who agreed for such an increase. we, therefore, deem it appropriate to set aside this issue also back to the file of the ld. CIT(A) to be adjudicated afresh in accordance with law after providing due and reasonable opportunity of being heard to the assessee.
In the result, the appeal of the assessee is allowed for statistical purposes. (Order Pronounced in the open Court on 30/11/2016)