M/S LAXMINARAYAN ASSOCIATESBHOPAL,BHOPAL vs. THE ITO 3(2), BHOPAL

These two appeals by the Assessee are directed against two separate order of Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC) Delhi dated 16.02.2023 & 24.03.2023 arising from assessment order passed u/s 143(3) and penalty order passed u/s 271AAC(1) of the Act respectively for A.Y. 2017-18. In the quantum appeal the assessee has raised following grounds:

ITANo.83 & 215/Ind/2023 Laxminarayan Associates “1. For that Ld. National Faceless Appeal Centre (NFAC) failed to appreciate that the order of the Assessing officer is without jurisdiction.

2. That the Ld. National Faceless Appeal Centre (NFAC) has erred in upholding the disallowance of unsecured loan of Rs 10,90,000/- from Megha Goyal, Tanum Goyal and Mithilesh Agrawal. 2.1 That the Ld. National Faceless Appeal Centre (NFAC) failed to Appreciate that the unsecured loans are genuine and the Disallowance of the same is not warranted in the facts and circumstances of the case. 2.2 That the Ld. National Faceless Appeal Centre (NFAC) failed to appreciate that the Provisions of Section 68 are not invocable in the facts and circumstances of the case. 2.3 That the Impugned Addition is made without Considering the Documents and Evidences submitted before the Lower Authorities which clearly Proves all the three ingredients of Section 68 of the Act.

3. Ground no.2 is regarding the addition made by the AO on account of unsecured loan which was sustained by the CIT(A) to the extent of Rs.10,90,000/- out of the total addition of Rs.10,96,036/-.

3.1 Ld. AR of the assessee has submitted that the assesse is a partnership firm and received unsecured loan of Rs.10,96,036/- from five persons out of which the CIT(A) has deleted addition made in respect of loan creditor Shree Ji Enterprises of Rs.6,036/-. Ld. AR has submitted that remaining three loan creditors are related persons of the partners of the assessee firm and there is no dispute about the identity of these creditors. The assessee has furnished the confirmations from the loan creditors before the AO but the AO has made an addition on the ground that except the confirmation no documentary evidences regarding the genuineness of transactions and creditworthiness of the lenders have been furnished by the assessee. He has further submitted that the addition was made by the AO for want of other supporting evidence to show creditworthiness and genuineness of the transactions and therefore, the assessee furnished all other details/documents which include copy of ITR acknowledgment, copy of ledger account of the loan creditors in the books of the assessee, copy of profit and loss account of the loan creditors, copy of the bank account statement of the loan creditors etc. Thus, the assessee produced all the relevant

ITANo.83 & 215/Ind/2023 Laxminarayan Associates supporting evidence to prove the identity and creditworthiness of the creditors as well as genuineness of the transactions. The CIT(A) has confirmed the addition made by the AO in respect of the remaining three loan creditors by giving reasons that the assessee has not filed the bank account statements of the loan creditors whereas bank account statements of the loan creditors were duly filed before the CIT(A). He has referred to the bank account of statement of the assessee as well as the loan creditors and submitted that all the transactions of loan creditors are through banking channel and creditors were having sufficient fund in their account for advancing the loan to the assessee. He has also referred to the ledger account of the loan creditors for the preceding assessment year to show that the assessee has paid interest to the same creditors on the earlier loan which was not disputed by the department. Thus, Ld. AR has submitted that once the assessee has discharged its onus by producing all the supporting documentary evidences to prove identity and creditworthiness of the loan creditors as well as genuineness of the transactions then in absence of any contrary material to controvert the evidence produced by the assesse the addition sustained by the CIT(A) is not justified. Hence, the addition made by the AO and sustained by the CIT(A) in respect of three loan creditors namely Megha Goyal of Rs.1,95,000/-, Tanum Goyal of Rs.7,35,000/- and Mithilesh Agrawal of Rs.1,60,000/- total amounting to Rs.10,90,000/- is liable to be deleted.

ITANo.83 & 215/Ind/2023 Laxminarayan Associates 4. On the other hand Ld. DR has submitted that the AO has made disallowance when the assessee failed to discharge its onus by producing supporting evidence to prove creditworthiness of the creditor and genuineness of the transactions. Though the assessee has claimed to have filed the supporting evidence before the CIT(A) however, the CIT(A) has stated in the order that the assessee has submitted only some details but could not produce crucial documents i.e. bank statement. He has relied upon the order of the CIT(A).

Sl.N Name of the lender Amount of Document furnished o. USL 1 Megha Goal 1,95,000 Only confirmation submitted 2 Tanum Goyal 7,35,000 Only confirmation submitted 3 Mithilesh Agrawal 1,60,000 Only confirmation submitted 4 Shee Ji Enterprises 6,036 No information submitted Total 10,96,036

ITANo.83 & 215/Ind/2023 Laxminarayan Associates On perusal of the above mentioned table, it is pertinent to mention here that the assessee has failed to furnish the identity, genuineness and creditworthiness of the above mentioned transactions. Merely confirmation of the loans have been provided by the assessee in three cases whereas no documentary evidence regarding the genuineness and creditworthiness of the lenders have been furnished by the assessee in above mentioned four cases. Hence, the unsecured loan of Rs. 10,96,036/- reflected in the books of account of the firm stands unexplained and accordingly it is treated as unexplained cash credit within the meaning of section 68 of the Income Tax Act, 1961 and added to the total income of the assessee. Since, in this case the income determined includes an amount of Rs. 10,96,036/- referred to in section 68 of the Income Tax Act, 1961 penalty proceedings u/s 271AAC of the Income Tax Act, 1961 are initiated. Further, since in this case the income determined includes addition u / s 68 of the Income Tax Act, 1961 is chargeable at the rates prescribed u/s 115BBE of the Income Tax Act, 1961.Addition: Rs. 10,96,036/-.”

5.1. Thus, the AO has observed that the assessee has produced only confirmation of the three loan creditors and no documentary evidence regarding genuineness and creditworthiness of the lenders have been furnished by the assessee. On appeal the CIT(A) has confirmed the addition in para 5.5 & 5.8 as under: “5.5 During the assessment proceedings, the appellant was also afforded sufficient opportunity to file details, evidence and documents in support of the claim of unsecured loan from these parties. The assessee submitted some details but could not produce crucial documents i.e. bank statement. In the absence of necessary evidence, the AO came to the conclusion that appellant failed to satisfy of the ingredient i.e. identity, creditworthiness and genuineness of transactions comprehensively as envisaged u/s 68 of the Act. Accordingly, the unsecured loan amounting to Rs. 10,96,036/- was treated

ITANo.83 & 215/Ind/2023 Laxminarayan Associates as unexplained cash credit of the appellant company and penalty proceedings u/s 271AAC was initiated thereon. 5.6 xxxxx 5.7 xxxxxx 5.8 I have carefully considered the facts of the case. I am of the view that the unsecured loan of Rs. 6,036/- in the name of Shree Ji Enterprises has been wrongly added by the AO. The same pertains to the interest paid and hence is deleted. Therefore, the remaining addition of Rs. 10,90,000/- is hereby confirmed.”

5.2. Thus, the CIT(A) has deleted the addition of Rs.6,036/- in respect of the loan from Shree Ji Enterprises after considering the fact that this has been wrongly added by the AO as the same pertains to the interest paid and not loan taken by the assesse. For the remaining addition in respect of three loan creditors the CIT(A) has given the reason that the assessee has submitted some details but could not produce crucial documents i.e. bank statement. It is pertinent to note that in para 4 of the impugned order the CIT(A) has given the details of the documents produced by the assessee as under: “2. Learned AO asked to furnish the Identity of lenders, genuineness of transaction and creditworthiness of the lenders without stating any specific documentation. In support of the same assessee has produced copy of income tax return of lenders, Loan confirmation from whom loan received, Ledger of lenders in the books of assessee which was duly audited and also the bank statements of assessee which dearly indicates that loan was taken from proper banking channel learned AO ignoring the above submissions and stating that only confirmation is provided which is not correct and made an addition. a) Copy of IT Returns of Lenders (Enclosed in annexure 3).

ITANo.83 & 215/Ind/2023 Laxminarayan Associates b) Loan Confirmation of Megha Goyal, Mithlesh Goyal, Tanum Agrawal (Enclosed in annex 4). c) Ledger of lenders (Enclosed in annexure 5). d) Extract of Bank Statement of assessee highlighting payment made to Megha Goyal, Mithlesh Goyal, Tanum Agrawal (Enclosed in annexure 6). And in respect of shreeji raisen addition of Rs 6,036/ is made this balance is due to interest paid to shreeji raisen voucher of which is enclosed in annexure 7). In addition to above information we would also like to highlight the fact that learned AO made an addition of Rs 7,35,000/ in case of Tanum Agrawal out of total amount of Rs 735000 (Rs 5,55,000 is loan amount and Rs 1,80,000 is in respect of salary payable @ of Rs 15,000 per month copy of computation is enclosed in annexure 8) Respected sir we would also highlight the point that assessee case was selected for scrutiny for other assessment years as well some of these loans were there at that time as well and no addition was made by learned AO (Copy of Assessment Order for assessment For A.y. 14-15 enclosed in annexure 9 and for A.Y. 2018-19 in annexure 10). Assessee is a genuine taxpayer has paid his all taxes and also submits all submission as required by learned AO during assessment proceedings we humbly request to kindly consider our submission and delete the addition and do justice".

5.3 Thus, the documents filed by the assessee in support of unsecured loan are duly mentioned in the reply of the assessee as reproduced above and the copy of all these documents are furnished by the assessee in the paper book. We further note that the assessee has furnished the following documents in respect of these three loan creditors: (i) Copy of ITR acknowledgment for A.Y.2017-18

ITANo.83 & 215/Ind/2023 Laxminarayan Associates (ii) Copy of ledger account of the loan creditors in the books of the assesse for the current years as well as for the preceding years (iii) Copy of profit and loss account of the loan creditors and balance sheet of the creditors (iv) Copy of the bank account statement of the loan creditors.

5.4 Once the assessee has produced all the supporting documents which includes the profit and loss account, balance sheet and copy of ITR of the creditors then the identity and creditworthiness is established. The CIT(A) has ignored all these relevant documents showing the capacity of the loan creditors to advance to the loan to the assessee. Further the assessee has also demonstrated from the ledger account that in the preceding years the assessee has paid interest to the loan creditors on the earlier loan which was not disputed by the department. Further the assessee has also filed bank account statement of the loan creditors which are placed at page no.29 to 30, 38 to 39 and 44 & 45 of the paper book respectively. The transactions of advancing loan to the assessee are duly reflected of bank account statement of the loan creditor as well as assessee and further when the capacity of the loan creditor is shown from the profit and loss account and the balance sheet then in our considered view the assessee has discharged its onus to prove the identity, creditworthiness of the loan creditor as well as genuineness of the transactions. Accordingly in the facts and circumstances of the case as discussed above the addition

ITANo.83 & 215/Ind/2023 Laxminarayan Associates sustained by the CIT(A) of Rs.10,90,000/- on account of unsecured loan is deleted.

6.1 Ld. AR of the assessee has submitted that the AO has disallowed a part of salary paid to the partner on the ground that Shri Om Prakash Goyal was appointed as partner vide partnership deed executed on 11.01.2017 and therefore, he has allowed the salary only for the months of January to March and disallowed the salary paid to the partner from April 2016 to December 2016. Ld. AR has referred to the amended partnership deed dated 11.01.2017 and submitted that it has specifically stated in the partnership deed that the induction of third partner Shri Om Prakash Goyal was mutually agreed w.e.f 1st April 2016 and hence, the salary paid to the partner for F.Y.2016-17 is allowable as per the provisions of section 40(b) of the Act. He has further submitted that the partner has offered salary income to tax and therefore, in view of section 28(v) the same cannot be disallowed in the hand of the partnership firm as it would amount to double taxation of the said income. In support of his contention he has relied upon the decision of Bangalore Benches of the Tribunal dated 10.03.2023 in case of Century sheltors vs. ACIT in ITANo.1073/Bang/2022.

ITANo.83 & 215/Ind/2023 Laxminarayan Associates 7. On the other hand, Ld. DR has relied upon the orders of the authorities below and submitted that the AO has made proportionate disallowance of salary paid to the new partner by considering the date of amended partnership deed executed on 11.01.2017.

ITANo.83 & 215/Ind/2023 Laxminarayan Associates On perusal of the above, it is pertinent to mention here that the monthly salary of Shri Ankit Goyal and Shri Rahul Goyal comes at Rs. 34,415/-. On this basis, the total salary of Shri Om Prakash Goyal for three months @ Rs. 34,415/- comes at Rs. 1,03,245/-. This fact was confronted with the assessee and response it has been submitted that "...1. Mr Omprakash Goyal is admitted as partner with effect from 01.04.2016 which it is written in writing on Jan 17, which is clearly mentioned in partnership deed. Hence he is allowable for the year full salary further remuneration is paid in accordance with and in compliance with section 40(b) therefore should not be added back in the income of the firm..." Whereas, on perusal of the partnership deed, it is pertinent to mention here that he partnership deed was executed on 11.01.2017 wherein it has been mentioned that Shri Om Prakash Goyal has been one of the parent of the firm since 01.04.2016 whereas the deed has been executed after the lapse of almost ten months, which is not logical. Therefore, the difference amount of Rs. 4 ,47,402/ (Rs. 5 ,50,647- 1,03,245) paid to Shri Om Prakash Goyal as salary is disallowed and added to the total income of the assessee firm. Addition: Rs. 4,47,402/- 8.1 Thus, the Ld. AO has given reasons for disallowance that Shri Om Prakash Goyal has been appointed as a partner from 11.01.2017 but has drawn more salary in comparison to the other partners for the entire year and accordingly he has allowed the salary for three months at the rate of salary paid to the other partners. It is pertinent to note that the AO cannot tinker with the salary payment to the partners except in accordance with the provisions of section 40(b) of the Act. Therefore, taking monthly salary equivalent to the other partners by the AO is beyond the power and authority of the AO when the salary paid to the partners

ITANo.83 & 215/Ind/2023 Laxminarayan Associates is within the limit and conditions prescribed u/s 40(b) of the Act. So far as, the salary restricted to three months instead of full year it is pertinent to note that the partnership deed was executed on 11.01.2017 and in the recital it is stated as under: “Whereas The partners mentioned in no.1 and no.2 have been carrying on business in partnership with effect from 19th April, 2011. They have admitted Shree Omprakash Goyal as new partner (hereinafter referred as third partner) by mutual consent into partnership with effect from 01 April, 2016, and now this is written on this deed to carry on business of Agency of any product or material be it Telecom. Cosmetics, Pharma, Cloth, Building material, Hardware, Electricals and Electronic machinery, in name and style of M/s Laxminarayan Associates, 7, Malipura, Bhopal, M.P. on the following terms and conditions:- NOW IT IS AGREED BY AND BETWEEN THE PARTIES HERETO AS FOLLOWS:”

8.2 Thus the third partner was admitted in the partnership firm vide partnership deed executed on 11.01.2017. In such a situation sub clause (iii) of section 40(b) is relevant which reads as under: “(b) In the case of any firm assessable as such- (i) Xxxxx (ii) Xxxxxx (iii) Any payment of remuneration of any partner any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the Page 13 of 16

ITANo.83 & 215/Ind/2023 Laxminarayan Associates period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or “ Thus, it is clear that the remuneration to partner relates to any period prior to the date of such partnership deed and such payment was not authorized by or is not in accordance with, any earlier partnership deed is not deductible while computing the income chargeable under head “Profit and gain of business or professions.

8.3 Accordingly in the facts and circumstances of the case as discussed above when the third partner was admitted to the partnership firm vide deed of partnership firm dated 11.01.2017 then the disallowance made by the AO by restricting salary to three months is in accordance with the provisions of section 40(b)(iii). Hence, we uphold the impugned order to that extent.

ITANo.215/Ind/2013

The assessee has raised following grounds of appeal: “1. For that the Ld. National Faceless Appeal Centre (HFAC) failed to appreciate that the penalty order of the Assessing Officer is illegal, perverse and without jurisdiction.

2. That the Ld. National Faceless Appeal Centre(NFAC) has erred in upholding the levy of penalty under section 271AAC of the Act.

3. That the levy of penalty under section 271 AAC of the Act is illegal bad in law and arbitrary.

4. That the Ld. National Faceless Appeal Centre (NFAC) failed to appreciate that against the quantum addition the appeal of assessee is pending before Hon’ble Tribunal.”

ITANo.83 & 215/Ind/2023 Laxminarayan Associates 12. In the result, Quantum appeal is partly allowed and penalty appeal is allowed.

Order pronounced in the open court on 28 .02.2024.