R.P. APPARELS,MUMBAI vs. ASST CIR 16(2), MUMBAI

The grounds of appeal raised by the assessee-firm in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-

The brief facts of the case are that the assessee is a partnership firm and the main source of income of the assessee-firm is business profit from trading of garments and intending commission. During the year under consideration, the assessee has paid Rs. 68,47,498/- towards remuneration to partners out of which Rs.41,08,499/- was paid to partner Shri Rajnish R. Puri and Rs. 27,38,999/- was paid to partner Smt. Kavita R. Puri. The assessee was asked by the AO vide letter dated 20th October, 2010 to produce the copy of partnership authorizing payment of remuneration to the partners. The learned counsel for the assessee filed copy of partnership deed dated 27th March, 1995 vide letter dated 2nd November, 2010. It was submitted by the learned Counsel for the assessee that there was no change in the partnership deed, hence, copy of partnership deed dated 27-03-1995 filed vide letter dated 2nd November, 2010 be treated as last deed of partnership and there are no other partnership deed. The A.O. observed that the partnership deed dated 27-03-1995 authorizes payment of remuneration to the partners to the tune of Rs. 24,000/- per annum , whereas the remuneration allowed and paid to the partners during the year was Rs. 68,47,498/-. When the learned counsel for the assessee was confronted with the above fact, it was submitted by the learned counsel of the assessee that the deed of partnership dated 27-03- 1995 filed earlier was not a final deed and there is one more supplementary partnership deed. The assessee-firm submitted the Xerox copy of fax of the supplementary partnership deed dated 2nd April, 2003 which was not certified by the partners and was also not legible. The A.O. observed that u/s 184(4) of the Act, the assessee was to file new deed of partnership whenever there were change in the partnership deed. The A.O. asked the assessee to produce ITA 7188/Mum/2013 4 evidence of filing of new supplementary partnership deed dated 02-04-2003 with the Revenue in the year when there was change in partnership deed and to file certified true copy of partnership deed. Show cause notice was also issued dated 16th December, 2010 asking the assessee to file the partner’s capital account w.e.f. financial year 2002-03, to ascertain the authenticity of the partnership deed. The assessee did not submit any detail with the AO and the A.O. rejected the Xerox copy of the partnership deed filed by the ld. Counsel for the assessee and accordingly the partners remuneration to the tune of Rs. 24,000/- was allowed, as against 68,47,498/- claimed by the assessee, vide assessment orders dated 24.12.2010 passed by the AO u/s 143(3) of the Act.

With respect to the remuneration paid to partner Smt. Kavita R. Puri, the assessee was asked to justify the expenses as remuneration to the partners. Details of experience, educational qualification in the line of business was enquired by the AO to enquire about reasonableness of the expenses, however, no justification was filed by the assessee. The A.O. observed that only reasonable expense was eligible for deduction and the same is applicable to remuneration to the partners also. Section 40(b) of the Act provides the method of calculation of maximum remuneration to the partners and only if the partners are providing that much value of services. Nothing was brought on record to prove that partner is capable and further whether the partner had provided services to the assessee firm to justify the expenses claimed . The A.O. observed that there is only a general statement that the partner Mrs. Kavita R. Puri looks after the work of administration and day to day affairs of the firm in Mumbai. Thus, the A.O. held that the remuneration of Rs.27,38,999/- paid to Mrs. Kavita R. Puri was also excessive u/s 40 of the Act and the AO disallowed the remuneration of Rs.27,38,999/- paid to partner Mrs. Kavita Puri on account of the reasons as ITA 7188/Mum/2013 5 stated above vide assessment orders dated 24.12.2010 passed by the AO u/s 143(3) of the Act.

With respect to the non-deduction of tax at source u/s 40(a)(ia) read with Section 194J of the Act, the A.O. observed that the assessee has not deducted tax at source from the professional fees payment of Rs. 63,650/- and accordingly the AO disallowed the professional fee of Rs.63,650/- u/s 40(a)(ia) of the Act with the remarks that the same shall be allowed in the year of payment of the tax deducted at source as provided u/s 40(a)(ia) of the Act , vide assessment orders dated 24.12.2010 passed by the AO u/s 143(3) of the Act.

Further , it was observed by the AO that the assessee-firm has incurred motor car expenses of Rs. 5,96,004/-. It was further observed by the AO that the car is purchased in the name of the partner and not in the name of assessee firm. The assessee was asked to produce the log book or other record for verification, however, no log book or other record was produced by the assessee. The AO observed that the assessee-firm should have disallowed reasonable expenses on its own and in the absence of this suo-motu disallowance , the AO disallowed motor car expenses of Rs.1,19,201/- being 20% expenses of Rs.5,96,004/- i.e. Rs. 1,19,201/-were estimated as personal expenses and were disallowed , vide assessment orders dated 24.12.2010 passed by the AO u/s 143(3) of the Act.

Similarly, the A.O. disallowed an amount of Rs. 95,680/- being 20% of expenses of Rs.4,78,401/- towards personal use of telephone by partners which is not ruled out in the absence of suo motu disallowance by the assessee on its own, vide assessment orders dated 24.12.2010 passed by the AO u/s 143(3) of the Act.

Aggrieved by the assessment orders dated 24.12.2010 passed by the A.O. u/s 143(3) of the Act, the assessee-firm filed its first appeal before the learned CIT(A).

Before the learned CIT(A), the assessee submitted that the assessee is partnership firm carrying on the business of trading in garments and indenting commission since 1992 having two partners viz. Shri Rajnish R. Puri and Smt. Kiran R. Puri. The partners are mother and son and both are actively involved in the business. The assessee submitted that during the last few years, lot of travelling to China and other far eastern countries was required for the business of the assessee to procure material or the sellers has their offices and places where the end user is located. The entire travelling aspect was looked after by the younger partner i.e. Mr. Rajnish R. Puri , whereas the other partners Mrs. Kiran R. Puri was looking after the India operations and handling the office. The assessee submitted that the first partnership deed is dated 2nd November, 1991 and the second partnership deed is dated 1st April, 1995 (in this deed stamp papers date is 27-03-1995 while date of partnership is 01-04-1995- filed with the Tribunal in paper book page 7-10) with supplementary deeds dated 1st October, 2001 and 2nd April, 2003. The supplementary partnership deed dated 2-4-2003 was executed for the specific purpose of payment of remuneration to the partners. It was submitted that when the A.O. asked during course of assessment proceedings to submit the partnership deed authorizing payment of remuneration, in fact, there was no deed on record at that time available with the AR of the assessee. The learned counsel submitted that the AR was not aware of the full details. Further, both the partners at that time were out of India , traveling in the interiors of China and thus it was not possible to contact them. When the contact of the AR was established with the partners, it was stated by the partners that there is a supplementary partnership deed dated 2nd April, 2003 and the said deed was in safe deposit locker in Mumbai ITA 7188/Mum/2013 7 but the partner had scanned copy of the said supplementary partnership deed dated 02-04-2003 in their laptop which was e-mailed to the AR which was submitted by the AR before the A.O. on 7th December, 2010. Since both the partners were out of India, it was not possible to furnish certified copy of the partnership deed and accordingly the A.O. was informed that the partners were returning on or around 22nd December, 2010 and the AO was promised that the partner would appear and meet the A.O. personally. Accordingly, Mr. Rajnish R. Puri appeared before the A.O. on 27th December, 2010 i.e. Monday but by that time the assessment order dated 24-12-2010 u/s 143(3) of the Act was already passed. A letter was also submitted to the A.O. by Mr. Rajnish R. Puri during his meeting with AO on 27-12-2010 explaining the facts and copy of the said letter was also furnished before the learned CIT(A). It was also submitted before the learned CIT(A) that the younger partner Mr. Rajnish R. Puri was shifting his base from India to China to take up employment in China to further the business that was being done, and w.e.f. August, 2010 the entire family including the children were in China who have also taken up schooling in China, thus, it was possible to return to India only in Christmas vacation after 22nd December, 2010. The Revenue has completed the assessment u/s 143(3) of the Act in the meantime on 24-12- 2010 and only certified partnership deed was to be submitted and all other submissions were made. The A.O. had rejected the contentions of the assessee as the supplementary deed of partnership dated 02-4-2003 is not valid as per the AO and the AO disallowed the remuneration to partners to the tune of Rs. 68,23,498/- after allowing only Rs.24,000/- as salary to Mr. Rajnish R. Puri vide partnership deed 01-04-1995. The assessee prayed that the remuneration may be allowed in full. The assessee submitted the copy of the Balance Sheet, P&L account and tax audit report along with copy of return of income and also the relevant partnership deeds before the learned CIT(A).

With respect to the disallowance of remuneration of Rs. 27,38,999/- to Mrs. Kiran R. Puri, the A.O. disallowed the same on the ground that the partner’s experience, educational qualification etc. are inadequate for such remuneration and there is no justification for the remuneration payable to the partner. The assessee submitted before the learned CIT(A) that the A.O. only asked information regarding the job profiles of all the partner’s and no questions were asked about specific details about Mrs. Kiran R Puri and her working in the assessee firm. The assessee submitted that Mrs. Kiran Puri is partner since inception of the firm and is looking after the finance and administration aspects of the business and all other aspects whenever the other partner is out of Mumbai for business. It was submitted that Mr. Kiran R. Puri was involved in the business since day one and has been handling the business which was started by her late husband and she ran the entire business on the death of her husband till her son was capable of running the business with her. It was submitted that the remuneration was allowed in the past years and the same has been shown as part of her taxable income. This is the first year when the remuneration was disallowed by Revenue. It was submitted that for doing business in India, nowhere any stipulated degree of education is prescribed which is required to run the business and the AO has mindset that lady cannot manage business and can only do household job and hence it was submitted that the AO erred in disallowing the remuneration paid to Mrs Kiran R. Puri without any justification or basis. Mrs. Kiran R. Puri, by education is Bachelor in Arts with honours. It was submitted that the AO disallowed remuneration paid to Mrs. Kiran R. Puri without any discussions and arrived at conclusion without any basis or justifications. With these submissions, the assessee prayed before the learned CIT(A) to allow the remuneration in full to the partner including remuneration paid to partner Mrs. Kiran R. Puri of Rs. 27,38,999/- , aggregating amounting to Rs. 68,23,498/-.

With respect to the disallowance for non-payment of tax deducted at source on professional fees amounting to Rs. 63,650/-, it was submitted by the assessee before learned CIT(A) that in the tax audit report in Annexure-6 it has been stated that tax deducted at source of Rs. 4,629/- on professional fees had not been paid. The assessee submitted that out of the total tax deducted at source amount for the month of March of Rs. 5659/- , out of which an amount of Rs. 1,030/- had been paid on 15th May, 2011 and thus the remaining was only Rs. 4629/- which had been missed out to be paid. On the TDS of Rs. 4629/-, it amounts to a fee of Rs. 44,944/- as per prescribed rates of tax deducted at source u/s 194J of the Act by making reverse calculation which needs to be disallowed. It was submitted that in the computation of income filed along with the return of income with the Revenue, the said amount had been paid without deduction of tax at source, hence, the assessee disallowed the same of his own in the computation of income filed with return of income filed with the Revenue of its own and thus there is now double disallowance of the amount which is not permissible under the Act. The amount has already been disallowed, the same cannot be disallowed again. It was also submitted that is not known how the A.O. arrived at the figure of Rs. 63,650/- as no details were given by the AO in the assessment orders dated 24-12-2010 u/s 143(3) of the Act nor it was explained to the assessee during the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act.

With regard to the motor car expenses and telephone expenses of Rs. 1,19,201/- and Rs. 95,680/- respectively being 20% of the expenses, it was submitted before the learned CIT(A) that these expenses were incurred for the purposes of business. The assessee further submitted that fringe benefit tax had already been paid @ 20% on motor car expenses and telephone expenses and since the assessee is liable to pay Fringe Benefit Tax(FBT) and has in-fact paid FBT on the above expenditure, disallowance of 20% by the AO is like ITA 7188/Mum/2013 10 taxing the same income twice once as FBT and also as an income under the provisions of the Act and hence it was prayed before the learned CIT(A) to delete the disallowance.

The learned CIT(A) considered the contentions of the assessee and the factual matrix of the case and observed that with regard to remuneration paid to Shri Rajnish R. Puri and Smt. Kiran R. Puri, that as per the final confirmed partnership deed dated 27-03-1995( the correct date 01-04-1995) , payment of remuneration of only Rs. 24,000/- per annum was authorized as against remuneration to partners of Rs. 68,47,498/- paid by the assessee-firm. The fact of partnership deed dated 27-03-1995(the correct date 01-04-1995) being the last partnership deed was admitted by learned counsel for the assessee before the AO. It was observed that when it was confronted to the assessee, the assessee changed the track and stated that there could be another supplementary partnership deed dated 02-04-2003 of which Xerox copy was produced but the same was not certified by the partners . Show cause notice was also issued to the assessee dated 15th December, 2010 asking for the partners capital account from financial year 2002-03 to ascertain the authenticity of the partnership deed, however, no submission was made by the assessee. The AO also required the assessee to submit proof of filing the supplementary deed of partnership deed dated 02-04-2003 before the Revenue with the return of income for assessment year 2004-05 as provided u/s 184(4) of the Act. However, no submissions were made before the AO and he did not took cognizance of the Xerox copy of the partnership filed by the assessee and made the additions as per assessment orders dated 24.12.2010 passed u/s 143(3) of the Act.

Similarly, it was observed by the learned CIT(A) that no evidence has been filed regarding the justification of the remuneration paid to Mrs. Kiran R. Puri. The ld. CIT(A) held that merely because she is a partner who handled administration could not give rise to justification for such an excessive payment and dismissed the claim of the assessee.

With respect to the disallowance on motor car expenses and telephone expense being 20% of the actual expenditure incurred by the assessee, it was observed that the assessee has not produced the log book. The onus is on the assessee to prove the claim of expenses. Since the assessee failed to do so, the action of the A.O. was confirmed by learned CIT(A).

Aggrieved by the order of the ld. CIT(A), the assessee is in second appeal before the Tribunal. With regard to the remuneration to the partners, the ld. Counsel submitted that the A.O. has disallowed the remuneration to the partners to the tune of Rs. 68,23,498/-. The ld. Counsel drew our attention to the assessment orders dated 24-12-2010 passed u/s 143(3) of the Act by the A.O. . It was submitted that the supplementary partnership deed dated 02-04-2003 was duly produced. The initial partnership deed was dated 27th March, 1995(correct dated 01-04-1995) and thereafter supplementary deed dated 2nd April, 2003 was executed which was also produced. The fax copy of supplementary partnership deed dated 02-04-2003 was produced before the AO as the partners were travelling to China and soon after their arrival in India, on 27-12-2010 the partner Mr. Rajnish R. Puri duly appeared before the AO with the original supplementary deed of partnership deed dated 02- 04-2003 and also certified copy of partnership deed but by that time the AO had passed the assessment orders u/s 143(3) of the Act on 24-12-2010. The said supplementary deed of partnership dated 02-04-2003 was produced before the learned CIT(A) during the first appellate proceedings. It was submitted that the revenue has accepted the supplementary partnership deed dated 2nd April, 2003 in preceding assessment years whereby the higher Remuneration paid to the partners has been allowed since the assessment year 2004-05 based upon the supplementary partnership deed dated 02-04- 2003 till the assessment year 2007-08 and this is the first year the disallowance has been made by the Revenue. The Revenue has also not disturbed the remuneration allowed to partners in the earlier years. There is ITA 7188/Mum/2013 13 no change in the partnership deed during the impugned assessment year. The ld. Counsel drew our attention to the order of the ld. CIT(A) and submitted that there is no change in the constitution of the firm. Tax audit report and audited Balance Sheet , Profit and Loss Account were duly submitted and the details of partnership deed are incorporated in the tax- audit report. The copies of income tax returns for assessment year 2005-06 and 2006-07 along with computation of income were also filed before the Tribunal which are placed in the file to establish that the higher remuneration was claimed by the assessee as per supplementary partnership deed dated 02-04-2003 which it was contended that the same has been accepted by the Revenue and no additions have been made. It was submitted that in each year, through tax audit report the contents of partnership deed are notified to the Revenue. The ld. Counsel drew our attention to the paper book page 21 whereby the tax audit report is placed particularly to serial No. 7 (a) & &(b) , whereby it is reflected that there is no change in partnership deed during the year under consideration. It was submitted that partnership deed was duly submitted during the assessment proceedings. In assessment year 2008-09 there is no change in the constitution of the firm. The remuneration paid in the earlier years was allowed. It was submitted that Mrs. Kiran R. Puri is a working partner of the firm. She is looking after the day to day affairs of the firm, hence, prayed that the remuneration paid should be allowed.

The ld. D.R., on the other hand, submitted that section 184(4) of the Act has not been complied with and hence disallowance of the Remuneration paid to the partners were rightly made by the AO as contemplated u/s 185 of the Act. The assessee has not submitted the supplementary partnership deed dated 2nd April, 2003 in the year of change as well during the assessment proceedings before the AO and only un-authenticated copy was submitted before the AO during assessment proceedings u/s 143(3) of the Act read with Section 143(2) of the Act. No evidence has been brought on record regarding submission of the partnership deed during the year of change i.e. assessment year 2004-05 along with the return of income filed with the Revenue. The onus is on the assessee to submit the partnership deed to the Revenue in the year of change which has not been submitted. The learned DR relied upon the orders of the learned CIT(A)

We have considered the rival contentions and also perused the material placed on record. We have observed that the assessee is a partnership firm which was established in the year 1992 having two partners i.e. Shri Rajnish R. Puri and Smt. Kiran R. Puri. The firm is dealing in trading in garments and indenting commission. It is observed that during the course of assessment proceedings u/s 143(2) read with Section 143(3) of the Act, the assessee submitted before the AO the partnership deed dated 27th March, 1995 ( correct date 01-04-1995) and has contended that this is the last partnership deed. During the period when assessment proceedings were going on, both partners were stated to be out of India to China to promote the business of the firm . It was also submitted that the younger partner Shri Rajnish R. Puri was contemplating to settle in China along with the children and his children had also taken up schooling in China. It was submitted that he was planning to come down in India only in the Christmas vacation starting 22nd of December, 2010 as he has also taken up employment in China in furtherance of his busines. Fax copy of the Xerox of the supplementary partnership deed dated 2.4.2003 was duly submitted by the counsel of the assessee before the AO during the assessment proceedings u/s 143(3) read with Section 143(2) of the Act, as scanned copy of the said supplementary partnership deed dated 02-04-2003 was sent by the partners via email , while original copy was stated to be in locker in Mumbai while partners were in China when assessment proceedings u/s 143(3) read with ITA 7188/Mum/2013 16 Section 143(2) of the Act, were going on before the AO but the same copy was not certified and was also not legible. When the partner Mr Rajnish R Puri returned to India and appeared before the Revenue authorities on 27-12-2010 and produced the duly signed and certified copy of the partnership deed along with the letter before the AO , but by that time the assessment order dated 24-12-2010 u/s 143(3) of the Act was already passed and the revenue has disallowed the remuneration paid to the partners of Rs. 68,23,498/- for the reasons as set out above. The assessee also produced the certified copy of the supplementary partnership deed dated 02-04-2003 before the learned CIT(A) and also in the remand proceedings. From the averments made by the assessee which has remained uncontroverted by the Revenue as well income tax returns placed on record for the assessment year 2005-06 and 2006-07 which are placed in file, we have observed from the appreciation of the facts as emerging from the records that the assessee had claimed the deduction of higher remuneration of partnership based on supplementary partnership deed dated 02-04-2003 in the assessment years 2005-06 and 2006-07, it is averred by the assessee and not controverted by the revenue that now the revenue has disallowed the remuneration paid to partners as set out above for the first time on the grounds that the certified partnership deed dated 2-4- 2003 was not produced before the AO during the assessment proceedings u/s 143(3) read with Section 143(2) of the Act and also in the year of change in partnership deed on 02-04-2003 in the assessment year 2004-05, while the assessee has submitted that the changed partnership deed was duly furnished to the Revenue in the year of change as well in the assessment proceedings as well in appellate proceedings before the learned CIT(A) as well before the Tribunal. It is the say of the assessee which is not controverted by the Revenue that all these years, the remuneration so claimed per supplementary partnership deed dated 02-04-2003 stood allowed by the Revenue and no disallowance has been made by the Revenue authorities. In our considered view keeping in view the facts and circumstance of the case, ITA 7188/Mum/2013 17 there is no reason to disallow the remuneration paid to the partners in the impugned assessment year on the grounds that the partnership deed dated 02-04-2003 was not filed by the assessee as contemplated by the Revenue on the facts as are emerging from the records and the disallowance made by the revenue authorities is not sustainable based on the facts and circumstances of the case and is ordered to be deleted subject to verification that the said remuneration paid to both the partners aggregating to Rs. 68,47,498/- have been offered to tax by the respective partners in their individual return of income filed with the Revenue and due taxes were paid by them to the Revenue in the impugned assessment year. The assessee is directed to appear before the AO and produce proof of filing of return of income by the both the partners in their individual capacity whereby the remuneration paid to them as the partners of the assessee firm was duly included and due taxes paid to the Revenue. The AO shall provide proper and adequate opportunity of being heard to the assessee in accordance with the principles of natural justice. Our view is consistent with decisions of the Hon’ble Allahabad High Court in the case of CIT v. Great City Manufacturing Company (2013) 33 taxmann.com 258(All.) and decision of Hon’ble Rajasthan High Court in the case of CIT v.Asian Marketing (2013) 31 taxmann.com 136(Raj.).We order accordingly.

In the result, the appeal filed by the assessee firm in ITA N0. 7188/Mum/2013 for the assessment year 2008-09 is partly allowed .