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Income Tax Appellate Tribunal, “RAJKOT” BENCH, RAJKOT
Before: SMT.ANNAPURNA GUPTA&
O R D E R
PER Ms. MADHUMITA ROY - JM:
The instant appeal at the instance of the assessee is directed against the order dated 21.01.2022 passed by the Principal Commissioner of Income Tax-3, Rajkot (in short ‘the PCIT’) holding the assessment order dated 10.12.2019 passed by the DC/ACIT, CIR-3(1), RKT under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to ‘the Act’) erroneous and prejudicial to the interest of Revenue and setting aside the issue to the file of the Ld. AO with a direction upon him to pass a fresh assessment only to the extent of the issues in respect of the provision of Section 40A(3) of the Act with proper enquiry and verification of the claim and its genuineness for A.Y. 2017-18.
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 2- 2. The short fact leading to the case is this that the assessee by paying huge cash in excess of Rs.20,000/- alleged to have violated the provision of Section 40A(3) of the Act. The details whereof has been reproduced in the order passed by the Ld. CIT(A) in the following manner:
Sr. Voucher Date Name of the Party Amount paid in Remarks No. No. excess of Rs.20,000/- 1 110 30-04-2016 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 2 470 30-06-2016 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 3 827 30-08-2016 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 4 839 31-08-2016 Rajesh N. Talaviya 50,000.00 Withdrawal by Partner 5 922 15-09-2016 Rashmiben A. Jha 50,000.00 Withdrawal by Partner 6 1247 31-10-2016 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 7 1248 31-10-2016 Rajesh N. Talaviya 50,000.00 Withdrawal by Partner 8 1249 31-10-2016 Rashmiben A. Jha 50,000.00 Withdrawal by Partner 9 1250 31-10-2016 Varshaben R. Talaviya 50,000.00 Withdrawal by Partner 10 1500 31-12-2016 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 11 1501 31-12-2016 Rajesh N. Talaviya 50,000.00 Withdrawal by Partner 12 1502 31-12-2016 Varshaben R. Talaviya 50,000.00 Withdrawal by Partner 13 1503 31-12-2016 Site Expenses 15,000.00 Salary Exp. 14 1693 31-01-2017 Rashmiben A. Jha 50,000.00 Withdrawal by Partner 15 1877 28-02-2017 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 16 1878 28-02-2017 Rajesh N. Talaviya 50,000.00 Withdrawal by Partner 17 1989 15-03-2017 Animeshkumar D. Jha 25,000.00 Withdrawal by Partner 18 1990 15-03-2017 Rashmiben A. Jha 50,000.00 Withdrawal by Partner 19 1991 1991 15-03-2017 Varshaben R. 50,000.00 Talaviya 20 1992 15-03-2017 Site Supervisor & Engi. 20,000.00 Salary Exp. Salary 7,60,000.00 (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 3- 3. The Ld. PCIT is of the opinion that the Ld. AO failed to enquire the above aspect in the books of accounts including the cash book and vouchers while completing the assessment in the case of the assessee. A show cause notice, therefore, dated 20.07.2021 was issued proposing to subject the assessment order of the Ld. AO to revision under Section 263 of the Act. The same annexed to the paper book filed by the assessee appearing at Page No.3 to 5 therein is also reproduced hereinbelow:
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 4- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 5- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 6- 4. Followed by further notice dated 11.12.2021, which are reproduced hereinbelow:
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 7- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 8-
On 3rd August, 2021, the assessee duly replied to the issue involved in the proceeding initiated under Section 263 of the Act by the Ld. PCIT, (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 9- appearing at Page Nos. 10 to 14 of the paper book filed before us which is reproduced hereinbelow:
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 10- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 11- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 12- (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 13-
The case of the assessee is this that the cash payment made is nothing but the withdrawal of the partners of the firm and the partners’ capital account has also been produced before the Ld. PCIT.
The Ld. Counsel Mr. Rindani appearing for the appellant submitted before us that this is nothing but a transaction between the partner and firm.
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 14- Unlike companies, partnership firms are not considered to have separate legal entities as it is formed by two or more persons who decides to carry on business and share the resultant profits/losses is some agreed ratio. The partners are the contributors of capital and provide their own money to the firm. There is no common seal of a partnership firm. The status of the partners qua the firm has been summed up by the Supreme Court in the case of CIT vs. R.M. Chidambaram Pillai & Ors. (1977) 1 SCC 431 wherein the Hon'ble Court was of the view that a firm is not legal person even though it has some attributes of the personality. According to the Hon’ble Court, partnership is a relation between certain persons who agree to share the profits of the business. In Income Tax Law, a firm is a unit of assessment by special provisions but is not a full person. Thus, the partners cannot be considered as separate and Distinct from their firm and any money provided by them to the firm cannot be taken as an independent transaction of loan under the purview of Section 269SS of the Act. Despite the position as laid down by the Supreme Court, the legal status of a partnership firm vis-à- vis its partners have always been under debate and so is the applicability of Section 269SS or 269T to money advanced by partner to his firm relying upon this decision, the High Court of Delhi in the case of CIT vs. Muthoot Financiers 338, 341 and 345 of 2002 dated 03.02.2015 has held that Section 269SS of the Act would not be violated when money is exchanged inter-se between the partners and the partnership firm. Similar position applies to the receipt and payment of partner's capital by partnership firm as held in the case of ITO vs. Universal Associates ITA No. 1349/Ahd/2010 date 17.06.2011 as partner's capital neither constitutes loan nor deposit. Finally in terms of provision of Section 40A(3) of the Act for F.Y. 2016-17, the limit for cash payment made to a single person in a single day against another expenses is Rs.20,000/- and in (M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 15- that view of the matter, the payment is allowable as per Section 40A(3) of the Act. The firm had made payment in cash in a single voucher aggregating to Rs.7,60,000/- during A.Y. 2017-18 and the same should not be disallowed and not be added to the total income of the firm as also the main argument advanced by the Ld. Senior Counsel Shri D. M. Rindani appearing for the assessee before us. In fact, he has drawn our attention to the ledger account of each of the partners of the firm. The payment voucher made to those partners annexed to the paper book appearing from Page Nos. 21 to 44 of the same. He has further drawn our attention to the query made by the Ld. ACIT, Circle- 3(1), Rajkot to the assessee dated 26.07.2019 i.e. during the course of assessment proceeding, wherein all the financial details, particularly, the details of partners of the firm including the remuneration paid to them for A.Y. 2017-18, the rate of interest and interest paid for A.Y. 2017-18 were directed to be provided. Needless to mention, the assessee provided the entire details to the Ld. AO during the course of assessment proceeding including the ledger of cash book alongwith narration for the period 01.04.2016 to 31.03.2017. The same has also been annexed to the paper book. It, therefore, appears that the impugned payment being the withdrawal by the partner from the firm has duly been considered by the Ld. AO during the course of assessment proceeding and only upon due application of mind, the same has been not disputed.
On the other hand, Ld. DR relied upon the order passed by the Ld. PCIT holding the order passed by the Ld. AO dated 10.12.2019 under Section 142(3) of the Act erroneous and prejudicial to the interest of the Revenue.
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 16- 9. Upon considering the documents annexed to the paper book as indicated in the foregoing paragraph, we find substance in such arguments made by the Ld. DR. Furthermore, it is a settled principle that the capital cannot be attributable as expenses and in the instant case part of the old capital had been withdrawn by the partners of the firm, which is not liable to be subjected to the provisions of Section 40A(3) of the Act. Moreso, when the entire materials were placed before the Ld. AO during the course of assessment proceeding and only upon verification of the same, the return of income was accepted, which is also reflecting from the order passed by the Ld. AO mentioned in paragraph 2 therein, in our considered opinion, assessment cannot be reopened by exercising power conferred under Section 263 of the Act by the Ld. PCIT in the manner it has been done.
We find that the issue raised by the Ld. PCIT was already adjudicated upon due application of mind by the Ld. AO in the assessment proceedings under Section 143(3) of the act and return was accepted. The copy of the partners’ capital account, payment vouchers made to the partners, the ledger of cash book alongwith narration for the period 01/04/2016 to 31/03/2017 were duly placed before the Ld. AO during the original assessment proceeding and only upon verification of the same, the assessment was finalized. It is relevant to mention that the Ld. PCIT referred Explanation (2) to Section 263(1) of the Act while holding the order of assessment erroneous and prejudicial to the interest of the Revenue and exercising power in passing direction for re-assessment by the Ld. AO which in our considered opinion is not having any manner of application as the examination and/or verification of the issue involved in the PCIT’s order were duly been made by the Ld. AO which is also reflected in the order so passed by the Ld. AO at Paragraph Nos.
(M/s. Dharti. Engineers vs. PCIT) A. Y. 2017-18 - 17- 2 & 3 therein. Thus, after considering the entire gamut of the matter, the prima facie finding made by the Ld. PCIT holding the order passed by the ld. AO dated 10.12.2019 is erroneous and prejudicial to the interest of the Revenue, in our considered opinion, is found to be wrong and direction for re- assessment by the Ld. AO is, thus, found to be not sustainable. The entire proceeding is, thus, void ab initio and quashed.
In the result, assessee’s appeal is allowed.
This Order pronounced on 29/08/2023
Sd/- Sd/- (ANNAPURNA GUPTA) (MADHUMITA ROY) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 29/08/2023 S. K. SINHA True Copy आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)- 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 6. गाड� फाईल / Guard file. By order/आदेश से,