ACIT, TIRUNELVELI vs. DINAMALAR, TIRUNELVELI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

AY 2012-13 - Revenue

1. The order of the CIT (Appeals) is opposed to law on the facts and in the circumstances of the case.

2. The CIT (A) ought to have considered the fact that the arbitration. expenses incurred are not incidental to the business carried on by the firm and hence not allowable as business expenditure.

3. The CIT (A) failed to consider the fact that the arbitration expenses are incurred to resolve the dispute among the partners and are incurred only for the personal benefits of the partners.

4. The CIT(A) failed to consider the fact that the principle of res judicata is not applicable to Income-tax proceedings and hence decision taken in a particular year are not binding in a subsequent year.

5. For these and such other grounds that may be adduced at the time of hearing, it is prayed the order of the CIT (A) may be reversed and that of the A.O restored.

2.0 All the grounds of the appeal are related to the payment of arbitration expenses incurred by the assessee amounting to Rs.52,35,000/- disallowed by the AO holding that the expenditure was personal in nature and not incurred for the purpose of business.

3.0 The assessee went on appeal before the CIT(A) and the Ld.CIT(A) deleted the addition observing that the legal expenses for defending the suit filed by the partners would be revenue expenditure. The relevant part & 200/Mds/2017 :- 3 -: of the Ld.CIT(A) is extracted for the sake of convenience and clarity as Under:

3.3 I have considered the submissions of the representative. Admittedly, the appellant is running a Tamil daily by name Dinamalar and even though there was dispute among the partners, the business continued during this year and the subsequent years. The history of the dispute as explained by the appellant is as below:

“Dinamalar-National Tamildaily started by Sri T.V. Ramasubbier at Trivandrum in 1951. It was shifted to Tirunelveli in 1957. It was HUF Business of Sri TV. Ramasubbier. HUF was partitioned between Father Sri TV. Ramasubbier and sons Dr. R. Venkitapathy, Dr. R. Krishnamurthy, Dr. R. Lakshmipathy, Sri R. Raghavan and Dr. R. Sathiamurthi. From the year 1961, it was run as a Firm with Six partners. In the year 1984, Sri T.V. Ramasubbier expired. After Sri TV. Ramasubbier, his five Sons continued the business as a Firm while the wife of Dr. R. Venkitapathy, Smt. V. Saroja was a partner in the place of Dr. R. Venkitapalhy till her death on 23.03.1997. Dr. R. Venkitapathy became one of the partners in the place his wife and the new partnership deed exists from 23.03.1997.

The business of the partnership as per deed is at will. It started editions at Tirunelveli, Nagercoil, Madurai, Trichy, Chennai, Vellore, Puducherry, Coimbatore, Erode and Salem.

In due course, the partners became two groups as follows:-

Partners Editions Dr. R. Venkitapathy Tirunelveli and Nagercoil 1. Sri R. Raghavan Trichy and Vellore Dr. R. Sathiamurthi Erode and Salem Dr. R. Krishnamurthy Chennai and Puducherry 2. Dr. R. Lakshmipathy Coimbatore and Madurai

The first group though consists of three partners and controlling six editions their revenue is nearly 35% of Dinamalar Total Revenue. Moreover one partner has share of nearly 20% of the revenue and so the other two partners are controlling only 15%.

The Second partners Dr. R. Krishnamurthy and Dr. R. Lakshmipathy controlling four branches have revenue of nearly 65% Dinamalar revenue.

The disputes among the partner arose for equal control of the revenue.

The sons of Dr. R. Krishnamurthy and Dr. R. Lakshmipathy interested in the administrations of the Editions managed by their father. They also started connected business such as manufacture of printing ink, Newsgathering etc., Further they started the competitive Newspaper in the name of Kalaikadir in Salem. These are some reasons for the disputes.

Even though they were disputes among the partners, the accounts of all editions were submitted to Head office at Tirunelveli for consolidation. The profit and loss accounts and balance sheet were prepared at Head Office and the Income tax return was also submitted at Tirunelveli.

Disputes among the partners arose resulting in some of the partners filing suits against other seeking various reliefs, from the year 1999 onwards. In order to resolve their disputes arising in relation to the partnership deed, there is a clause 24 and so the First Bench of the Madras High Court comprising of chief justice by its Judgment dated 23.01.2007 in OSA 282/2006 and OSA 285/2006 referred the disputes to arbitration. On the constitution of the Arbitral Tribunal, Claimants 1 to 5 & 200/Mds/2017 :- 4 -: filed their pleadings before the Arbitral putting forth their respective cases and praying for the reliefs detailed in their claim statements.” Further, the arbitration expenses claimed in the earlier years and subsequent year was not disallowed by the Assessing Officer even while completing the scrutiny assessments u/s.143(3). In fact for assessment year 2013-14, the Assessing Officer completed the assessment u/s.143(3) on 09.03.2006 in which the arbitration expenses of Rs.88,53,002/- was allowed by the Assessing Officer herself. The expenditure was incurred for the purpose of protecting business and it would not amount to capital expenditure. Merely because the firm was deemed to have been dissolved on 27.02.2012 by the reason of Shri R. Sathiyamurthy giving notice of dissolution, it would not mean that the expenditure claimed is capital in nature. In similar circumstances, the Hon’ble Patna High Court in the case of CIT Vs Card Board Products [224 ITR 51] held that the legal expenses for defending the suit filed by the partners would be revenue expenditure. Further, as per clause 24 of the partnership deed of the appellant any dispute arising among the partners shall be referred to the arbitration under the Arbitration Act. In the circumstances, I find that the Assessing Officer was not justified in disallowing the arbitration expenses and the same is deleted.

4.0 During the appeal hearing, the Ld.AR contended that the arbitration expenses claimed in the earlier years and subsequent year were allowed by the AO as business expenditure and no disallowance was made. The arbitration expenses were incurred for the purpose of business of the partnership firm and required to be allowed as business expenditure. For the AY 2013-14, the AO completed assessment u/s.143(3) and allowed the arbitration expenses amounting to Rs.88,53,000/- and in the year under consideration the expenses were only Rs.52,35,000/- but the AO took a different stand and disallowed the expenses. The assessee also relied on the decision of the Hon’ble Patna High Court in the case of CIT v.

Card Board 224 ITR 51.

5.0 We heard the rival submissions and perused the material placed before us.

In this case, the disputes arose among the partners for equal control of the business and Revenue. The partners have filed suits against each & 200/Mds/2017 :- 5 -: other seeking various reliefs from the year 1990 onwards and in order to resolve the dispute the Hon’ble Madras High Court referred the disputes to the arbitration. Since the disputes arose regarding the control of the Revenue among the partners it is no way connected to the running of the business of the Firm. On verification of the details furnished in Ld.CIT(A) order, it is seen that in AYs 2007-08, 2009-10 huge amounts were spent for arbitration but the proceedings continued to be pending. Arbitration normally would be settled in short span of time i.e. six months to one year where as in the instant case arbitration is going on for 7 to 8 years and the assessee is incurring huge expenses on account of arbitration year after year. Neither the AO nor the Ld.CIT(A) has examined the issue whether the arbitration is arose for personal purposes or for running the business among the partners? Whether the same Arbitrator is continuing or different Arbitrators are appointed also require further consideration.

The AO and the Ld.CIT(A) has not gone into the details of actual amount paid to the Arbitrator for all the years and the actual expenditure incurred in connection with arbitration. Further, one of the partners has given notice for dissolution of the firm on 27.02.2012, since the partnership firm is at will, it stands dissolved by any partner giving notice in writing to all the other partners of his intention to dissolve the firm and the expenditure incurred for arbitration no longer be the expenditure of the Firm. Facts regarding the genuineness of expenditure, the reasons for continuation of arbitration for long period and expenditure incurred from 2008-09 to till date, the issue on which the Hon’ble jurisdictional High Court referred the & 200/Mds/2017 :- 6 -: matter to arbitration and any fresh issue has come up in the Arbitration proceedings require further verification at the end of the AO. Therefore, we are of the considered opinion that the issue should go back to the file of the AO for verification and to decide the issue afresh on merits.

Accordingly, the Revenue’s appeal on this issue is allowed for statistical purposes.

6.0 In the result, the appeal of the Revenue is allowed for statistical purpose. AY 2012-13 7.0 Ground Nos.1, 10 & 11 are general in nature and the Ld.AR did not make any argument. Hence these grounds are dismissed as not pressed.

7.1 Ground Nos.2, 3 & 4 are related to the depreciation claimed by the assessee on temporary shed @100%.

7.2 During the assessment proceedings, the AO found that the assessee has claimed the depreciation @100% on temporary sheds of Rs.77,41,599/-. The AO examined the issue in detail and found except a bill for Rs.2,65,500/- all the other capital expenses are in the nature of furniture & fixtures and extension of existing structures. The AO issued show cause notice and the assessee could not substantiate its claim establishing that the amount was incurred for erection of temporary & 200/Mds/2017 :- 7 -: structures. Therefore, the AO treated the entire amount of expenditure as furniture & fixtures and allowed the depreciation @10% and disallowed the excess depreciation amounting to Rs.69,91,462/-.

7.3 On appeal, the Ld.CIT(A) examined the details and confirmed the disallowance of Rs.18,29,189/- pertaining to temporary room for workers and Rs.7,92,380/- related to temporary shed for parking the vehicles and the remaining addition made by the AO was deleted by the Ld.CIT(A).

The Ld.CIT(A) examined the details furnished by the assessee and observed that the assessee has constructed a temporary room for workers at a cost of Rs.18,29,189/- and temporary shed for parking the vehicles at a cost of Rs.7,92,320/- which was not a temporary construction but it is a permanent structure.

7.4 During the appeal, the Ld.AR argued that the CIT(A) has not appreciated the facts, and in fact the temporary room for workers and parking shed also a temporary structure entitled for 100% Depreciation.

Further the AR submitted that the issue may be remitted back to the file of the AO for making further verification and to decide the issue on the merits. On the other hand, the Ld.DR argued that the assessee has not submitted any supporting evidence either before the Ld.CIT(A) or before the AO and even before the Tribunal at the time of hearing to support the construction work carried on in the Press premises of Madurai is a temporary construction. Both the shed for parking vehicles and the & 200/Mds/2017 :- 8 -: temporary room for workers was constructed in the Press premises of Madurai. Since the Ld.CIT(A) has examined the details and given a finding that the constructions relating to the temporary room for workers and parking shed was a permanent structure, there is no need to remit back to the file of the AO and pleaded the Tribunal to confirm the addition.

7.5 We heard the rival submissions and perused the material placed on record.

The assessee has claimed a sum of Rs.77,41,599/- as 100% depreciation relating to temporary structures in the factory premises. The assessee did not furnish any details before the AO. Therefore, the AO disallowed 100% depreciation claimed by the assessee and allowed 10% of depreciation treating the construction as furniture & fixtures. The Ld.CIT(A) called for the details and examined the details elaborately and allowed a sum of Rs.51.20 lakhs and confirmed the remaining amount of Rs.27.21 lakhs after clearly analyzing the facts as discussed in Para No.5.3.2 as under:

5.3.2. Regarding the expenditure claimed in Madurai, it is seen that the appellant has entered into a lease agreement on 01.04.2011 and incurred various expenditures. The nature of expenditure has been listed out in the preceding paragraph. As seen from the same, the appellant has constructed a temporary room for workers at a cost of Rs.18,29,189/- and the same cannot be treated as purely temporary erection which is entitled to 100% depreciation. Similarly, the appellant has constructed temporary shed for parking vehicles at a cost of Rs.7,92,320/- which cannot be treated as purely temporary erection entitled to 100% depreciation. I therefore, confirm the action of the Assessing Officer in respect of the above Rs.18,29,189/- and Rs.7,92,320/-.

& 200/Mds/2017 :- 9 -:

Though, the Ld.AR argued that the assessee has made temporary structure in the Press premises and requested to remit the matter back to the file of the AO, no fresh material has not been placed before us to re- examine the issue or no error was pointed out in the finding given by the Ld.CIT(A). The Ld.CIT(A) has given a clear finding that room for workers and shed for parking for vehicles was not temporary structure. Therefore we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld. The assessee’s appeal on this ground is dismissed.

8.0 Ground No.6 is related to the salary payments to partners amounting to Rs.1,65,515/- and interest payment to partners aggregating to Rs.19,36,411/-

During the assessment proceedings, the AO found that one of the partners Mr.R.Satya Murthy has given notice to the partners for dissolution of the firm on 27.02.2012. This fact has not disputed by the assessee and the firm stands disallowed as on 27.02.2012. Accordingly, the AO held the firm as a AOP and disallowed the payment of salary and interest payment made to partners for the period from 27.02.2012 to 31.03.2012 which worked out to Rs.1,65,515/- in the case of salary and Rs.19,36,411/- in the case of interest. The Ld.AR argued that the AO assessed the status of the assessee as firm, the partners have already filed their returns of income in which the salary and interest received was & 200/Mds/2017 :- 10 -: admitted to tax. The AO did not make assessment of the firm for the period from 27.02.2012 to31.03.2012 separately in the status of the AOP, hence, the Ld.AR contended that the salary and interest is an admissible deduction.

8.1 We heard both the parties and perused the material placed on record.

Mr.R.Satya Murthy one of the partners of the firm has given a notice of dissolution on 27.02.2012 under Partnership Act, 1932. As per Sec.43 of Partnership Act, in the case of partner at will if any of the partners gives a dissolution notice to all the partners, the partnership firm gets dissolved from the date mentioned in the notice or if no date is mentioned, from the date of the communication of the notice. For ready reference, we reproduce Sec.43 of Partnership Act, 1932 which reads as under:

assessee is not entitled for payment of interest and salary to the partners. The Ld. AR argued that the AO has assessed the income in the status of Partnership firm. It is the duty of the assessee to file the return in correct status for the period prior 01.04.2011 to 27.02.2012 i.e. the status of the firm and for the remaining period in the status of AOP. Though the AO assessed the firm as such, in the Assessment Order clearly mentioned that the income of the firm from 27.02.2012 to 31.03.2012 assessed in AOP status. Since there is no firm exists by virtue of notice given by one of the partners, there is no case for payment of salary and interest to the partners since there are no partners in existence. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and confirm the same Accordingly, the appeal of the assessee is dismissed.

9.0 In the result, the appeal of the assessee is dismissed.