M/S. GAGRAT & CO., SUPREME COURT ADVOCATES,NEW DELHI vs. DCIT, NEW DELHI

Appellant by Sh. Vikas Madan, Adv. Respondent by Sh. T. Vasanthan, Sr.DR Date of hearing 16.12.2015 Date of pronouncement 08.02.2016 ORDER PER O.P. KANT, A.M.:

This appeal by the assessee is directed against the order dated 16.08.2013 of learned Commissioner of Income Tax (Appeals)-XXVIII, New Delhi, passed for the assessment year 2010-11. The assessee raised the following grounds of appeal:

1. That the order of learned Commissioner of Income Tax (Appeal)-XVIII, New Delhi is bad in fact and in law.

2. That the learned Commissioner of Income Tax(A) has not been pleased to appreciate the evidence and other material on record propertly.

3. That the learned Commissioner of Income Tax(Appeals) has erred in confirming the addition of Rs. 6 lacs made by the Assessing Officer disallowing the expenses paid to Mr. U.A. Rana (Resident Partner) as reimbursement of Rs. 4,00,000/- per annum for running and maintaining the motor car and Rs. 1,20,000/- per annum given for maintenance of consultation room at his residence and Rs. 80,000/- per annum as entertainment expenses, for entertainment of clients at the consultation room etc., according to the restrictions as per Clause 10.1 of partnership deed dated 1st July 2008. Hence, the addition made is illegal, arbitrary, unjustified and against the facts and bad in law, may kindly be deleted.

4. That the Appellant craves leave to add/amend/withdraw or modify the grounds of appeal at the time of hearing.

2. The facts in brief are that the assessee, a partnership firm of advocates, filed its return of income for the year under consideration declaring income of Rs. 2,87,75,710/- on 13.10.2010. The case was selected for scrutiny and notice under Section 143(2) of the Income-tax Act, 1961 (for short “the Act”). In the course of scrutiny proceedings, the ld. Assessing Officer observed from the Profit and Loss Account that the expenses of Rs. 5,20,000/- on partner conveyance & car maintenance and upkeep of consultation room at the residence of the resident partners, and Rs. 80,000/- towards entertaining the clients at the residents were claimed . The assessee submitted that the expenses of Rs. 4,00,000/- per annum were towards conveyance, including maintenance, upkeep and use of motor car and Rs. 1,20,000/- per annum for establishment, maintenance and upkeep of consultation room and library at the residence of the resident partners. It was further submitted by the assessee that the assessee firm did not own any car and the expenses of conveyance was restricted to Rs. 4,00,000/- as per clause 10.1 of the partnership deed. In respect of Rs. 80,000/- per annum towards entertainment to partners, the assessee submitted that the expenses were towards entertaining the clients at the consultation room maintained at the residence of the resident partners for working late hours and on Sunday and holidays and the amount was restricted to Rs. 80,000/- as per clause 10.1 of the partnership deed. The assessee also claimed to produce vouchers for the said expenses, however, the ld. Assessing Officer noticed that the vouchers were in respect of monthly reimbursement of the expenses and no actual bills/invoices were attached with those vouchers. According to the ld. Assessing Officer, those payments were made to the resident partner, Mr. U.A. Rana, however, there was no actual expenditure made by the assessee firm. He further observed that the payments were made only to one resident partner and only on salary and interest paid to the partner was eligible for deduction subject to the restrictions contained in Section 40B of the Act. In view of the observations, the ld. Assessing Officer disallowed the expenses of Rs. 6,00,000/- and added to the income of the assessee. The other additions were also made by the ld. Assessing Officer which are not in dispute before us in present appeal. Aggrieved by the above additions, the assessee preferred an appeal before the learned Commissioner of Income Tax (Appeals) who confirmed the said additions of Rs. 5,20,000/- towards partners conveyance and office maintenance expenses and Rs. 80,000/- towards entertainment expenses. Aggrieved, the assessee is before us.

3. Ground nos. 1 and 4 are general in nature, hence, not required to adjudicate upon.

4. In ground nos. 2 and 3, the assessee has challenged the addition of Rs. 6,00,000/- towards conveyance expenses to partners, office maintenance and entertainment to clients. 4. The learned Authorized Representative of the assessee addressing the background of the case, submitted that the said amount of Rs. 6,00,000/- was paid to the resident partner, Mr. U.A. Rana in accordance with the partnership deed. The learned Authorized Representative referred to page nos. 19, 35 and 40 of the paper book and submitted that the expenses were actually incurred by Mr. U.A. Rana on behalf of the assessee firm as appearing in the ledger accounts of Mr. U.A. Rana. He further submitted that the firm does not own any car and, therefore, the car owned by the partner was utilized by the firm. He further submitted that the said expenses have been allowed in the earlier years and, therefore, though the res judicata is not applicable to income-tax proceedings , but in view of the consistency principle, the expenses should have been allowed.

5. On the other hand, learned Sr. Departmental Representative relied on the orders of the lower authorities. 6. We have heard the rival submissions and perused the material on record, including the orders of the lower authorities and the paper book filed by the assessee. The assessee has claimed expenses of Rs. 4,00,000/- for the amount reimbursed to the resident partner Sh. U.A. Rana for the use and maintenance of the motor car. It is not in dispute that the vouchers in respect of reimbursement were produced before the ld. Assessing Officer but the actual bills/ invoices of expenses incurred by Sh. U.A. Rana were not produced before the ld. Assessing Officer. The assessee has submitted a copy of ledger account of Sh. U.A. Arana in respect of car maintenance, which is placed at page no. 19 of the paper book. According to the ledger account, total amount of Rs. 4,01,917/- was incurred on car maintenance by Sh. U.A. Rana, out of which, Rs. 4 lacs was transferred towards the assessee firm and Rs. 1,917/- was claimed by him in his return of income. Similarly, according to copy of ledger account placed at page no. 35 of the paper book in respect of office maintenance expenses, Sh. U.A. Rana has debited expenses of Rs. 1,21,720/- , out of which Rs. 1,20,000 were transferred to the assessee firm. Further, according to page no. 40 of the assessee’s paper book, Sh. U.A. Rana debited entertainment expenses of Rs. 8,27,737/-, out of which, Rs. 80,000/- were reimbursed to him by the assessee firm and balance of Rs. 2,737/- were claimed by Sh. U A Rana in his individual return of income. The ld. Assessing Officer disallowed the claim of the assessee of Rs. 6,00,000/- on the ground that the bills of the expenses debited by Sh. U.A. Rana were not produced before him and in the absence of the bills, the said expenses could not be established incurred wholly and exclusively for the purpose of business or profession of the assessee firm. On perusal of the assessment orders of the preceding years, we find that this issue was not examined by the ld. Assessing Officer and thus the rule of consistency will not apply in the present facts. In our opinion, the expenses on car maintenance, office maintenance and entertainment to clients have been debited by Sh. U.A. Rana in his books of accounts and same have been reimbursed to him by the assessee firm claiming to have incurred for the purposes of the business and professions of the assessee firm, however, such bills were not produced before the ld. Assessing Officer for verification whether incurred wholly and exclusively for the purpose of the business or profession of the assessee firm. Therefore, in the interest of justice, we restore the matter to the file of the Assessing Officer to decide the issue afresh, in accordance with law, and also direct the assessee to produce all the said bills for verification and if the same are incurred wholly and exclusive for the purposes of the business/profession carried on by the assessee firm, the same should be allowed. We order accordingly. The ground of the appeal is allowed for statistical purpose.