M/S RAMAVTAR KRISHNAVTAR,KOTA vs. INCOME TAX OFFICER, WARD 1(3), KOTA

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES,”SMC” JAIPUR Jh lanhi xkslkbZ] U;kf;d lnL; ds le{k BEFORE: HON’BLE SHRI SANDEEP GOSAIN, JUDICIAL MEMBER vk;dj vihy la-@ITA No. 25/JP/2023 fu/kZkj.k o"kZ@Assessment Year : 2015-16. cuke M/s. Ramavtar Krishnavtar The Income Tax Officer, Vs. B-29, Bhamashah Mandi, Ward 1(3), Kota. Kota. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AADFR 1857 P vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri Saurav Harash, Advocate. jktLo dh vksj ls@ Revenue by : Smt. Monisha Choudhary (JCIT) lquokbZ dh rkjh[k@ Date of Hearing : 29/08/2023 mn?kks"k.kk dh rkjh[k@Date of Pronouncement: 27/09/2023 vkns'k@ ORDER PER: SANDEEP GOSAIN, J.M.

This appeal by the assessee is directed against the order of ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi dated 22.11.2022 for the assessment year 2015-16. The assessee has raised the following grounds of appeal :-

1. That the ld. Assessing Officer erred in disallowing expenses amounting to Rs. 42,000/- being 20% of the total expenses i.e. Rs. 2,10,006/- comprising of car expenses Rs. 1,03,430/-, staff welfare expenses Rs. 26,345/-, shop expenses Rs. 53,032/-, telephone and mobile expenses Rs. 27,199/- on presumption that expenses are made for personal use and are supported by self made vouchers without going through there records and facts of the case and without there being any basis and the learned CIT (Appeals), Kota also erred in confirming the same without there being any basis.

2. That the ld. Assessing Officer erred in making notional addition on account of non-charging of interest of Rs. 3,85,643/- on Debit balance of partners Capital Account while brushing aside assessee’s reasonable explanations and submissions and the learned CIT (Appeals), Kota also erred in confirming the same without there being any basis.

2. The brief facts of the case are that the assessee derives income from purchase and sale of agricultural products and also from Aadhat. The assessee filed its e-return declaring total income of Rs. 6,66,640/- on 28.09.2015 for the assessment year 2015-16. The case of the assessee was selected for scrutiny under CASS. Accordingly notice under section 143(2) was issued to the assessee on 29.07.2016 which was duly served on the assessee on 01.08.2016. Thereafter, in response to notices issued under section 143(2) and 142(1), authorized representatives of the assessee were attended before the AO and submitted the required documents. During the assessment proceedings, the AO noticed that the assessee has shown in the Profit & Loss account total expenditure of Rs. 2,10,006/- consisting of car expenses of Rs. 1,03,430/-, staff welfare expenses of Rs. 26,345/-, shop expenses of Rs. 53,032/-, telephone and mobile expenses of Rs. 27,199/-. The AO being not satisfied with the explanations provided by the assessee in regard to these expenses, disallowed 20% of the total expenses of Rs. 2,10,006/- amounting to Rs. 42,000/- by contending that the appellant had submitted the self made vouchers in respect to these expenses and the same are not verifiable.

2.1 The AO further noticed that the assessee has not charged interest of Rs. 3,85,673/- on debit balance of Partners Capital account. The explanation given by the assessee in this regard was not found acceptable and the AO made the addition of Rs. 3,85,673/- on account of non charging of interest. Thus the AO completed the assessment at a total income of Rs. 10,94,314/- by making a total addition of Rs. 4,27,673/- to the returned income. Being aggrieved by the order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT (A) upheld the order of the AO.

Now the assessee is in appeal before me.

“ That the assessee has duly discharged its onus cast on it to justify the incurrence of the expenses with regard to business exigency for which it has submitted all the bills and vouchers which is within the four corners of the law and not even a single bill or voucher is pin pointed by the AO which is not incurred for the purpose of the business therefore AO mere on the general assumption that expenditure incurred in cash and personal in nature disallowed 20% of the expenses which is not tenable. Kindly be apprised that if it is so pertinent and obvious then legislature should have consider legality of such expenses related to the vehicle while drafting the law therefore the contention of the ld. AO is illegal. Now it is a settled position of law in all such cases and recently pronounced by Hon’ble Jurisdictional Bench of ITAT, Jaipur in the case of M/s. Seaward Exports Private Limited vs. ACIT, Circle-1, Kota vide dated 30.03.2021 as follows : “There is no finding by either of the authorities that the expenses have not been incurred for the purposes of business or the test of business expediency has not been satisfied. We are therefore of the considered view that the expenses have been disallowed for the sake of making the disallowances without bringing on record any specifics of disallowable expenses as not incurred for the purposes of business and therefore, the disallowances so made are clearly ad-hoc in nature which cannot be sustained in the eyes of law and the same are hereby directed to be deleted.”

Kindly that assessee has no option but to incur these petty and day to day expenses in cash which can’t be paid through cheques or other banking channels and just because of its incurrence in cash and that too without any discrepancies noted by AO these bonafide and genuine business expenditures should not be disallowed on ad hoc basis. It may kindly be appreciated that the assessee has property maintained self- made vouchers of day to day petty expenses for which no third party bills are made available by the third party vendor such as tea & refreshment expenses which are disallowed under the staff welfare expenses. Reliance is also placed on the decision of Hon’ble Jurisdictional ITAT, Jaipur bench dated 31.12.2019 in the case of Dynamic Engineers, Kota. The facts of the case are similar to the present case as in the case of dynamic Engineers also the assessing officer has made adhoc disallowance of 10% from total of Workmen and staff welfare expenses, 20% adhoc disallowance from telephone and mobile expenses, 10% adhoc disallowance from conveyance expenses which include car running expenses of the firm, on the basis that all the expenses have been incurred in cash and vouchers maintained by assessee are self-made, which cannot be stated reliable/genuine. The relevant extract from the ITAT order in respect of the above grounds is reiterated as follows :- (i) In response to Workmen & Staff welfare expenses ITAT bench decided as follows : “ The AO has made an adhoc disallowance of 10% of Workmen and Staff welfare expenses on the ground of self made vouchers. Since the AO has made adhoc disallowance based on suspicion of correctness and genuineness of the claim without pointing out a specific incident of bogus claim, accordingly in view of our finding in Ground No.2 regarding disallowance of Conveyance expenses, adhoc disallowance made by the AO is not sustainable. The same is deleted.”

(ii) In response to telephone and mobile expenses ITAT bench decided as follows:

“We have heard the ld. A/R as well as the ld. D/R and considered the relevant material on record. The reasons given by the AO that no separate land phones/mobile have been maintained by the partners for their personal use is contrary to the reasons for a similar disallowance made by the AO for the assessment year 2010-11. Accordingly, the adhoc disallowance on the ground of personal use without pointing out the specific fact of personal use is not justified. The same is deleted.”

(iii) In response car running expenses ITAT bench decided as follows:

“Before us, the ld. A/R of the assessee has submitted that the assessee’s books of account are duly audited and no defect was pointed out either by the auditor or by the AO. Therefore, the expenditure claimed on account of conveyance charges cannot be disallowed on adhoc basis. In support of his contention he has relied upon the following decisions:- i) Income Tax Officer vs. C.V. Ramnarayanan (2016) 46 CCH 73 (MumTribunal) ii) Sunita Mine Chem Ind. Vs. Income Tax Officer (2008) 114 TTJ 98 (Jodh Trib) iii) Assistant Commissioner of Income Tax vs. Allied Construction (2007) 106 TTJ 616 (Delhi Trib)”

Therefore relying on the above stated decisions of the Hon’ble Jurisdictional ITAT, Jaipur it is hereby requested that it is a settled position of law that no expense should be disallowed on adhoc basis without there being any basis and it is humbly requested to your goodself to kindly direct AO to delete the alleged addition. The copy of order of the case relied upon is enclosed for your goodself’s kind consideration.

Therefore, these expenses are not subject to verification. She accordingly supported the orders and findings of the lower authorities.

5. We have heard the rival contentions and perused the material available on record. The AO made disallowance of Rs. 42,000/- being 20% of the total expenses i.e. Rs. 2,10,006/- comprising of car expenses Rs. 1,03,430/-, staff welfare expenses Rs. 26,345/-, shop expenses Rs. 53,032/-, telephone and mobile expenses Rs. 27,199/- on the presumption that expenses are made for personal use and are supported by self made vouchers. The ld. CIT (A) has confirmed the disallowance made by the AO by observing that -

“ the appellant was asked to furnish documentary evidences/vouchers with respect to miscellaneous expenditure claimed by the appellant; however the appellant failed to furnish any proof, despite the opportunities provided. Even if paid in cash, the bills from the other parties would be available. Further, no evidence of separate cards and telephones in personal name against car and telephone in firm’s name is made available. On perusal of the materials available on record I find that the probability of telephone, car etc being used for personal purposes cannot be ruled out as no evidence of different telephones and cars for business purposes is given. I find no reason to deviate from the finding of the AO. Hence, the disallowance made by the AO of Rs. 42,000/- is upheld.”

While sustaining the addition in respect of the above expenses, the ld. CIT (A) has not analyzed the relevant facts warranting the adhoc disallowance made by the AO.

Therefore, on this account and in absence of the specific finding recorded by either of the authorities that the expenses have not been incurred wholly or expensive for the purpose of business or are bogus in nature merely because expenses incurred in cash and supported by self made vouchers cannot be a basis for making the disallowance in the hands of the assessee. In my view, the issue is not about the percentage of expenses rather the real issue is whether the expenses so disallowed have been incurred for the purposes of business or not. There is no finding by either of the authorities that the expenses have not been incurred for the purposes of business or the test of business expediency has not been satisfied. I am, therefore, of the considered view that the expenses have been disallowed for the sake of making the disallowances without bringing on record any specifics of disallowable expenses as not incurred for the purposes of business and therefore, the disallowances so made are clearly ad-hoc in nature which cannot be sustained in the eyes of law and the same are hereby directed to be delete.

5.1 Regarding the addition on account of non charging of interest of Rs.3,85,673/- on Debit balance of Partners Capital Account, the ld. A/R of the assessee submitted before me as under :-

“ That there is no provision in the deed of partnership subsist between partners for charging interest on debit balance evident from the relevant extract of effective partnership deed dated 01.04.1993 reproduced below for your goodself’s kind reference :

“ 5. That interest @18% per annum or as may be prescribed under section 40(b)(iv) of the Income tax Act, 1961 or any other applicable provision as may be in force in the Income Tax assessment of the partnership firm for the relevant accounting period shall be payable to the partners on the amounts standing to the credit of their respective accounts. Such interest shall be calculated and credited to the account of each partner at the close of the accounting year and shall be treated as business expenditure.

However, in case of loss or lower income rate of interest can be nil or lower than 18% as may be agreed upon amongst the partners from time to time.”

It is worthwhile to mention that there is no provision in the Income Tax Act, 1961 which allows tax on notional income as done by the ld. AO in the case of the appellant.

Further, it is pertinent to mention that partner Mr. Radhey Shyam Sharma has shown total income of Rs.20,51,784/- for the year under assessment (copy of ITR of Radhey Shyam Sharma for the AY 2015-16 is enclosed) and therefore both i.e. Partner & Firm have been under the same tax bracket therefore the allegation of the ld. AO that firm has lessen his income so as to avoid tax is baseless despite the same was categorically informed by the assessee vide letter dated 11.06.2016 during assessment proceedings.

It is pertinent to mention that the capital account of all the partners when seen in totality revealed that it was not a case where the aggregate capital account of the partners was having debit balance but it was only in one case where there is a debit balance.

Further assessee placed its reliance on the judgment given by The Income Tax Appellate Tribunal, “C” Bench Kolkata in the case of DCIT vs M/s. India Housing vide appeal No. dated 11.12.2019 for the AY 2011-12.

“4.3.4. With regard to point (d) on the matter of bringing to tax a notional income, the contention of the Assessee’s AR seems to hold much water in as much as the provision of section 5 of the Act does not provide any room for bringing to tax any income by way of notional income.

We have gone through the order of ld CIT(A) and we note that the conclusions arrived at by the CIT(A) are, correct and admit no interference by us. We, approve and confirm the order of the CIT(A).

Also, reliance is placed on the judgment given by the Hon’ble ITAT, Delhi Bench, New Delhi vide for the AY 2007-08 dated 27.08.2013 in the case of DCIT vs M/s. India Housing.

“ 4. After considering the arguments of learned DR and perusing the material placed before us, we do not find any infirmity in the above finding of learned CIT (A). That in the Income-tax Act, 1961, there is no provision of taxing any income on notional basis. Admittedly, no interest is charged on the debit balance of the partners and in the partnership deed also, there is no provision for charging of such interest. Therefore, charging of interest by the Assessing Officer on the debit balance of the partners was only taxing of notional income.”

In light of above mentioned facts and settled position of law it is amply clear that tax cannot be charged on notional income and no such provision exists in Income Tax Act, 1961 and also there is not clause in partnership deed to charge interest on debit balance of the partners, if any and therefore, it is requested to kindly direct the AO to delete the alleged notional addition.”

7.1 The arguments advanced by the assessee are similar as raised before the ld. CIT (A). The ld. A/R submitted that there is no condition in the partnership deed to charge interest on debit balance of the partners. The relevant clause in the partnership deed reads as under :-

“ 5. That interest @18% per annum or as may be prescribed under section 40(b)(iv) of the Income tax Act, 1961 or any other applicable provision as may be in force in the Income Tax assessment of the partnership firm for the relevant accounting period shall be payable to the partners on the amounts standing to the credit of their respective accounts. Such interest shall be calculated and credited to the account of each partner at the close of the accounting year and shall be treated as business expenditure.

However, in case of loss or lower income rate of interest can be nil or lower than 18% as may be agreed upon amongst the partners from time to time.”

I have gone through the above clause of the partnership deed and found that it does not contain any condition to charge interest on debit balance of partners. But it does not mean that partners for their personal purposes can withdraw amount from the funds of the assessee firm which are interest bearing. As a matter of fact, it cannot be allowed to an assessee to utilize its interest bearing funds for the purposes which are not related to business and withdrawal of such amount by the partners cannot be considered as out of business exigencies. The ld. CIT (A) has done a detailed analysis of the available of funds with the assessee firm and reached his conclusion that the funds of the partnership firm are interest bearing and such interest bearing funds cannot be allowed to be utilized for personal needs of the partners. The ld. CIT (A) has further distinguished the cases relied upon by the ld. A/R in the case of DCIT vs. M/s. India Housing (ITAT Kolkata) and DCIT vs. M/s Ashok Kumar Amit Kumar & Shipra Estates (P) Ltd. ( ITAT Delhi). In the case of DCIT vs. India Housing (supra) decided by the ITAT Kolkata, it was held that no notional income can be assessed particularly in view of contents of partnership deed. It was observed that partnership deed of the appellant contained clause 10 which permitted for non charging of interest from partner on debit balance. The ITAT Kolkata concurred with the view of ld. CIT (A) on account of the fact that in past years also non charging of interest on debit balance of partners was allowed on account of principles of consistency. There is no such fact brought by the ld. A/R in the present case. There is a categorical finding of ld. CIT (A) that the assessee had interest bearing funds only and therefore, withdrawal of such funds by a partner for his personal use shall be deemed as diversion of interest bearing funds for non income yielding avenues. Therefore, the above cited case law is not applicable in the facts of the present case. In the case of DCIT vs. M/s Ashok Kumar Amit Kumar & Shipra Estates (P) Ltd., the ITAT Delhi Benches held that no notional income can be assessed. In the case before ITAT Delhi, the department raised the issue of charging of interest on debit balance of partner by considering the same as perquisite. However, no such claim has been made in the present case and, therefore, the said case is also not applicable on the facts of the present case.

One more argument taken by the ld. A/R is that since the assessee firm and Shri Radhey Shyam Sharma are falling in the same tax bracket and hence there is no loss to the revenue. This argument of the ld. A/R is also not acceptable in view of the fact that it is not known whether the partner will be eligible to claim interest charged by the assessee firm on debit balance and therefore, this argument is also rejected.

In view of the above observations, I concur with the view taken by the ld. CIT (A) and uphold the addition made by the AO.

Order pronounced in the open court on 27/09/2023.