ITO, WD-30(3), KOLKATA, KOLKATA vs. M/S VARDANT PROJECTS, KOLKATA

In Ground No. 1 of its appeal, the Revenue has challenged the action of the ld. CIT(Appeals) in deleting the addition of Rs.36,39,053/- made by the Assessing Officer by way of disallowance of charges paid by the assessee for regularisation of unauthorized construction.

The assessee in the present case is a partnership firm (treated as Association of Person by the Assessing Officer), which is engaged in the business of Builders and Promoters of Real Estate. The return of income for the year under consideration was filed by it on 28.09.2012 declaring total income of Rs.9,55,472/-. In the Profit & Loss Account filed along with the said return, a sum of Rs.36,39,053/- was debited by the assessee on account of charges paid for regularisation of unauthorized construction to the Municipal Corporation. Since the said amount was paid by the assessee for deviation of normal Rules, the Assessing Officer treated the same to be penal in nature and made the disallowance.

The matter was carried before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) deleted the disallowance made by the Assessing Officer on account of charges paid to Kolkata Municipal Corporation for unauthorized construction for the following reasons given in paragraph no. 4.5 of his impugned order:- “4.5. I find merit in the submissions of the appellant. I note that the reliance placed by the AO in Section 400(1) of KMC Act and Rule 25 is misplaced. Section 400(1) only provides for demolition of unauthorized construction which is not present in the appellant's case. Instead Rule 25 provides that if the deviation in the sanctioned plan is within the prescribed limits then the person may get it regularized by payment of prescribed fees. I therefore note that the KMC Act does not provide for payment of any "penalty". On perusal of the KMC Act, 1980, I also came across Schedule-VI which lays down penalties for violation of the provisions of the KMC Act. On going through the said Schedule, I find that no penalty has been prescribed for deviation in sanctioned plan of building. Section 400(1) or Rule 25 does not find any mention in the said Schedule of penalties. I

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. Though the ld. D.R. has relied on the order of the Assessing Officer in support of the revenue’s case that the amount in question paid by the assessee for regularizing unauthorized construction is not allowable as deduction being penal in nature, it is observed that the amount in question was paid by the assessee to KMC not for regularisation of the unauthorized construction but for deviation in Sanctioned Plan, as rightly held by the ld. CIT(Appeals) after taking into consideration the relevant Rules of KMC Act, 1980. The said amount thus was not paid as penalty by the assessee for infraction of any law so as to attract the disallowance as per the Explanation to Section 37 of the Act and the ld. CIT(Appeals), in my opinion, was fully justified in deleting the disallowance made by the Assessing Officer on this issue. I, therefore, uphold his impugned order on this issue and dismiss Ground No. 1 of the Revenue’s appeal.

In Ground No. 2, the Revenue has challenged the action of the ld. CIT(Appeals) in deleting the addition of Rs.20,000/- made by the Assessing Officer on account of Architect fees.

The claim of the assessee of having paid the Architect fees of Rs.1,00,000/- to M/s. Archison Work, was examined by the Assessing Officer during the course of assessment proceedings. In this regard, he issued a notice under section 133(6) to M/s. Archison Work, who in their reply confirmed of having received a sum of Rs.80,000/- from the assessee during the year under consideration. The difference of Rs.20,000/-, therefore, was disallowed by the Assessing Officer. On appeal, the ld. CIT(Appeals) deleted the said disallowance for the following reasons given in paragraph no. 5.3 of his impugned order:- “5.3. I have gone through the facts of the case, submissions of the appellant and findings of the AO. I find that the amount of Rs.1,00,000/- debited in the P&L A/c comprised of advance of Rs.20,000/- paid to the architect in earlier FY 2010-11 and further payment of Rs.80,000/- made in the relevant year in question. The architect in his reply his reply u/s 133(6) had only confirmed the transaction of the relevant year wherein the appellant had paid Rs.80,000/- and deducted TDS of Rs.8,000/- The AO never confronted the appellant to explain its case and the alleged difference of Rs.20,000/-. I, however, find that the sum mentioned in the reply of architect u/s 133(6) fully reconciled with the amount debited in the appellant’s P&L A/c. The difference was on account of the advance of Rs.20,000/- paid by the appellant in the immediate preceding year which did not find mention in the architect’s reply. I, therefore, hold that the addition of Rs.20,000/- u/s. 69C was uncalled for and the AO accordingly directed to delete the same. Ground No. 2 is therefore allowed”.

I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As rightly held by the ld. CIT(Appeals), the disallowance of Rs.20,000/- on account of Architect Fees was made by the Assessing Officer mainly relying on the confirmation issued by the concerned party without giving any I.T.A. No. 1136/KOL./2015 Assessment year: 2012-2013 & C.O. No. 51/KOL/2015 (in Assessment Tear: 2012-2013 Page 5 of 7 opportunity to the assessee to offer his explanation in this matter. As clarified by the assessee before the ld. CIT(Appeals), a sum of Rs.20,000/- was paid to the concerned party on account of architect fees in the earlier year as advance and the same, therefore, was not reflected in the confirmation received from the said party. The total payment made to the said party on account of architect fees thus was Rs.1,00,000/- and the same was rightly claimed by the assessee as deduction in the year under consideration. I, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) giving relief to the assessee on this issue and dismiss Ground No. 2 of the Revenue’s appeal.

In the solitary ground raised in its Cross Objection, the assessee has challenged the action of the ld. CIT(Appeals) in upholding the order of the Assessing Officer taking its status as Association of Person instead of partnership firm.

During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee-firm was constituted by two partners who are Hindu Undivided Family. He held that although HUF is a person for the purpose of Income Tax Act, it is not a juristic person for other purposes including the Partnership Act. He held that the HUF, therefore, cannot enter into a valid partnership and accordingly the status of the assessee-firm was taken by him as Association of Person for the purpose of completing the assessment for the year under consideration. On appeal, the ld. CIT(Appeals) upheld the order of the Assessing Officer on this issue by relying, inter alia, on the decision of the Hon’ble Supreme Court in the case of Agarwal & Company –vs.- CIT reported in 77 ITR 10, wherein it was held that HUF cannot be a partner in a firm under the Indian Partnership Act, 1932.

I have heard the arguments of both the sides and also perused the relevant material available on record. The ld. counsel for the assessee has raised a new contention in support of the assessee’s case on this issue that the partners in the assesese-firm are not HUF, but Kartas of HUF in their individual capacities. He has contended that no HUF thus is a partner in the assessee-firm and since the Kartas of HUF are partners in their individual capacities, it is a valid partnership firm under the Partnership Law. Since this stand is taken by the assessee for the first time before the Tribunal, I consider it fair and proper and in the interest of justice to give an opportunity to the Assessing Officer to verify the same. I, accordingly, set aside the impugned order of the ld. CIT(Appeals) on this issue and restore the matter to the file of the Assessing Officer for deciding the same afresh in accordance with law after taking into consideration the new plea taken by the assessee for the first time before the Tribunal. The Cross Objection of the assessee is accordingly treated as allowed for statistical purposes.

In the result, the appeal of the Revenue is dismissed, while the Cross Objection of the assessee is treated as allowed for statistical purposes. Order pronounced in the open Court on October 04, 2016.