M/S GOEL JEWELLERS OVERSEAS CORPORATION,NEW DELHI vs. ACIT, NEW DELHI

Vide Ground No.1, grievances of the assessee relates to the confirmation of disallowance of Rs.6 lacs made by the A.O on account of payment of salary to the partners in violation of provisions of Section 40(A) (3) of the Income- tax Act 1961 (hereinafter referred to as the Act).

Facts of the case in brief are that the A. O made the impugned addition by observing that the assessee had debited an amount of Rs.12 lacs under the head salary to partners in his profit and loss account and on examining the ledger account of partner’s salary, filed by the assessee it was found that a sum of Rs.6 lacs was paid in cash on various dates in violation of a provisions of Section 40(A) (3) of the Act. He, therefore, disallowed the said amount and also mentioned that similar disallowance was made in the preceding assessment year. Being aggrieved the assessee carried the matter to the Ld.CIT(A) who confirmed the disallowance by observing that in assessee’s own case on identical facts this issue was adjudicated by his predecessor for the Assessment Year 2010-11. Now, the assessee is in appeal.

The Ld. Counsel for the submitted that the disallowance made by the A.O and confirmed by the Ld.CIT (A) was not justified because none of them considered this vital fact that the amount debited in the salary account were the withdrawals made by the partners on different dates and the salary was credited to their account at the end of the year on 31st March, so there was no violation of the provisions contained in Section 40(A) (3) of the Act.

In his rival submission, the Ld. DR strongly supported the orders of the authorities below.

I have considered the submissions of both the parties and perused the material available on the record in the present case it is not clear as to whether the amount considered by the A.O in violation of the provisions of Section 40(A) (3) of the Act on account of partner’s salary were the withdrawals by the partners or not. In my opinion, this issue requires fresh adjudication at the level of the A.O. Therefore, the impugned order is set aside on this issue and the matter is restored to the file of the A.O to be adjudicated a fresh in accordance with law after providing a due and reasonable opportunity of being heard to the assessee.

The next issue vide Ground No. 2 relates to the disallowance of Rs.53,782/-made by the A.O out of expenses debited under the heads business promotion & entertainment, miscellaneous expenses and staff welfare.

The facts related to this issue in brief of that the assessee debited a sum of Rs.2, 56,200/-, Rs.1, 49,800/-, Rs. 1,31,818/- totaling to Rs.5,37,818/- under the heads business, promotion and entertainment, miscellaneous expenses and staff welfare respectively. The A.O disallowed 1/10th of those expenses by observing that the expenses were neither fully vouched nor verifiable, so in order to protect the interest of Revenue, 1/10th of those expenses was to be disallowed. Being aggrieved the assessee carried the matter to the Ld.CIT(A)who sustained the disallowance by observing that on the basis of self- made vouchers there was possibility to inflate the expenditure. Now the assessee is in appeal.

The Ld. Counsel for the assessee submitted that no specific instance was mentioned by the A.O while disallowing the expenses. Therefore, the ad-hoc disallowance made by the A.O and sustained by the Ld.CIT (A) was not justified.

In his rival submissions, the Ld. DR supported the ordered of the authorities below.

I have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the A.O has not pointed out any specific instance where the expenses incurred were not for the business purposes. At the same time, the expenses were not fully vouched. Therefore, the leakage of revenue and the personal use by the partners cannot be ruled out. In my opinion, the disallowance made by the A.O is on higher side.

In the result, the appeal of the assessee is partly allowed.