M/S ABDUL GAFFAR HAZI HASSAN,BILASPUR vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1), BILASPUR

आयकर अऩीऱीय अधधकरण, रायऩुर न्यायऩीठ, रायऩुर IN THE INCOME TAX APPELLATE TRIBUNAL RAIPUR BENCH, RAIPUR श्री रविश सूद, न्याययक सदस्य एवं श्री अरुण खोड़वऩया, ऱेखा सदस्य के समक्ष । BEFORE SHRI RAVISH SOOD, JM & SHRI ARUN KHODPIA, AM आयकर अऩीऱ सं./ITA No.289/RPR/2017 (ननधाारण वषा / Assessment Year :2013-2014) M/s Abdul Gaffar Hazi Hassan, Vs DCIT, Circle-1(1), Bilaspur Bukhari Service Station, Link Road Bilaspur(C.G.)-495001 PAN No. : AAJFA 2350 G (अऩीऱाथी /Appellant) (प्रत्यथी / Respondent) ..

ननधााररती की ओर से /Assessee by : None राजस्व की ओर से /Revenue by : Shri G.N.Singh, Sr. DR सुनिाई की तारीख / Date of Hearing : 25/07/2022 घोषणा की तारीख/Date of Pronouncement : 21/09/2022 आदेश / O R D E R Per Arun Khodpia, AM :

This appeal is filed by the assessee against the order passed by the CIT(A), Bilaspur, dated 18.09.2017 for the assessment year 2013-2014. 2. None appeared on behalf of the assessee even the case was called for second round of hearing. Therefore, the Bench proceeded to dispose off the appeal after considering the submissions of the ld. Sr. DR and the material evidence available on the record. 3. The assessee has raised the following grounds:- 1. On the facts and in the circumstances of the case, the order appealed against is opposed to facts and in law on several grounds and hence the ultimate conclusions drawn against the appellant, being unsustainable on facts and in law, may very kindly be struck down and justice rendered. 2. The Ld. CIT(A) has erred in confirming addition of Rs. 1,50,000/- made by the Assessing Officer on account of excess remuneration in violation of Sec. 40(b) of the Income tax Act.

2 ITA No.289/RPR/2017 3. The Ld. CIT erred on facts and in law in holding that the remuneration paid by assessee to partners was not quantified. He has not at all mentioned for the same in his order. 4. The Ld. CIT erred on facts and in law that circular 739 dated 25/03/1996 will be applicable but not beyond the statute, as already decided in various judgments of high court. 5. The impugned order having been solely based on the recommendations of the AO, there was no independent satisfaction and application of mind by the respondent and since the order impugned was not a speaking order, the same is in violation of the fundamental rules of justice and hence the same, being unsustainable on facts and in law, may very kindly be quashed. 6. In the light of all the above, the order under consideration, be quashed and Addition for remuneration paid to partners U/s 40(b)(v) - Rs.1,50,000/ may be allowed to the assessee. 7. The appellant craves leave to add, urge, alter, modify or withdraw any ground/(s) before or at the time of hearing of the appeal. 4. Brief facts of the case are that the assessee is a partnership firm running dealership of BPCL and is involved in trading and retailing of petroleum products. The assessee filed its return of income on 25.09.2013 declaring total income of Rs.1,83,760/-. The case of the assessee was selected for scrutiny through CASS and on issuance of statutory notices by the AO, the assessee appeared and filed his books of accounts, bills and vouchers along with other relevant documents, which were test checked by the AO. During the course of assessment proceedings, on verification of books of accounts of the assessee, the AO found that the assessee has derived gross profit of Rs.36,07,983/- on a total receipt of Rs.17,92,86,596/-, which in terms of percentage of percentage was 2.01% and net profit of Rs.1,83,763/- which in terms of percentage of total income comes to 0.10%. On examination of books of

3 ITA No.289/RPR/2017 accounts, the AO further found that the assessee has claimed a deduction towards remuneration paid to the partners. In this regard, the AO asked the assessee to supply the copy of partnership deed for examination and the assessee submitted the same before the AO, however, the AO found that there was no clause in the partnership deed which has specified about amount of remuneration payable to the partners. Therefore, the AO being not satisfied with the explanation of the assessee, relying on the CBDT Circular 739 dated 25-03-1996, disallowed the claim of the assessee towards remuneration expenses. Against the said order of AO, the assessee preferred appeal before the CIT(A) and the CIT(A) dismissed the appeal of the assessee. Now, the assessee is in further appeal before the Tribunal. 5. Ld. Sr. DR vehemently supported the orders of the authorities below and submitted that circular 739 dated 25-03-1996 by the CBDT about admissibility of remuneration payable to each individual working partner is very clear that no deduction u/s 40(b)(v) will be admissible unless partnership deed either specifies the amount of remuneration payable to each individual partner working or lays down the manner of quantifying such remuneration. Reliance on decision of Hon’ble Delhi High Court in ITA 1154 of 2011 by the Ld AO in the case of M/s Sood Brij & Association Vs. CIT was absolutely correct and squarely applicable to the facts of the present case. Thus the order of the CIT(A) where in the addition made by the AO was confirmed needs to be upheld.

4 ITA No.289/RPR/2017 6. In absence of any representation on behalf of the assessee we have examined the submissions of the assessee available on records and orders of the authorities below. As extracted from the said records, it is eminent that remuneration of Rs. 1,50,000/- was paid to the partners by the assessee partnership firm. Ld AO has questioned the assessee firm to submit a copy of the Partnership Deed of the firm. Assessee has submitted original deed of partnership as well as modified deed of partnership, however the AO was not satisfied with respect to the clause of remuneration to the partners in the said deeds, have asked the assessee to explain the same, in response the assessee had duly replied to but the same was not appreciated by the Ld AO and an addition of Rs.1.50.000/- was made. Subsequently, Ld CIT(A) had also approved the addition made by the AO. 7. Challenging the order of Ld CIT(A), the Assesse has filed this appeal and made detailed written submission before us in support of its contentions. To decide the issue judiciously and in the interest of natural justice, the submissions of the assessee are reproduced as under:- 1. In respect of decision for Ground No. 1 of the Ld. CIT(A) [Para 3 and 4 of grounds of appeal] The Ld. CIT(A) has erred in confirming addition of Rs. 1,50,000/- made by the Assessing Officer on account of excess remuneration in violation of Sec. 40(b) of the Income tax Act relying on five member judgment of Hon,ble supreme court in the case of UCO Bank and CBDT circular 739 dated 25/03/1996. Para 4 CBDT circular 739 dated 25/03/1996 reproduced below It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. It is clear from above clause that the,

5 ITA No.289/RPR/2017 (i) Either amount of remuneration payable should be specified in partnership deed OR (ii) Partnership deed lays down the manner of quantifying such remuneration. Both the conditions are exclusive, the word either, or is used. In our case the Partnership deed lays down the manner of quantifying such remuneration i.e. one condition of circular is satisfied as required. For better understanding of the matter i.e. condition of Circular 739 dtd 25/03/1996 is satisfied or not, Clause 7 of Partnership Deed dated 01.04.2002 reproduced below: "That so also partners have agreed for to pay remuneration to partner or partner actively engaged in the working and affairs of the partnership business. Presently both the partners have proclaimed to keep themselves engaged in firm's affairs, hence it has been decided to pay remuneration as decided in consideration of their service rendered in ratio detailed below: H.A. Karim......60% Roshan Ara......40% That no doubt the remuneration shall be according to provision of the I.T Act, Partners have right to change the above ratio, if required, subject to mutual consent and as permissible in I.T. Act, for this supplementary deed in support can be executed." it is clear from above clause that the, (i) Total remuneration shall be calculated According to the provision of the I.T. Act and (\X) \N\\\ toe paid to partners in ratio of 60:40. Both the conditions are not exclusive, the word AND is used which clearly states that both has to be complied together. The Quantum of remuneration shall be determined as per Income tax Act and remuneration as quantified by the act is to be distributed in ratio of 60:40. Example Let the Total remuneration calculated According to the provision of the I.T. Act is Rs. 100/- than same is paid to both partners in ration 60:40 i.e. Rs. 60/- and Rs. 40/-. Para 1 CBDT circular 739 dated 25/03/1996 reproduced below The Board have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided under section 40(b)(v) of the Income-tax Act. In particular, the representations have referred to two types of clauses which are generally incorporated in the partnership deeds. These are : (i) The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)(v) of the Income-tax Act; and (ii) The amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.

6 ITA No.289/RPR/2017 It has been represented that the Assessing Officers are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration. It is clear from above clause that the, (i) Total remuneration shall be calculated According to the provision of the I.T. Act and (ii) Will be paid to partners as may be mutually agreed upon between partners at the end of the year. The second condition gives rise to reason for disallowing remuneration i.e. neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration. In such cases it is not possible to quantify as quantification depends on future condition. Example Let the Total remuneration calculated .According to the provision of the I.T. Act is Rs. 100/- than same is paid to partners as mutually agreed no quantification only maximum remuneration is quantified but remuneration payable to each partner is not quantified as same depends on mutual agreement. Further, last line of Clause 7 says, partners have right to change the above ratio, if required, subject to mutual consent and as permissible in I.T.Act for this supplementary deed in support can be executed. The condition nowhere states about distribution of remuneration to partners. It only states the rights of partner to change the ratio after satisfying 3 conditions: (i) Mutual Consent, it is essential content of any agreement that party to the agreement must agree mutually. (ii) As per income Tax Act, 1961, and (iii) Execution of supplementary deed. Hence to change ratio of remuneration it is necessary to execute a supplementary partnership deed. But, it is not possible to distribute remuneration as per mutual consent of partner at end of year as restricted by CBDT circular 739. The Ld. CIT(A) has not considered the above fact that remuneration is in accordance with CBDT circular 739 dtd 25/03/1996, as same is nowhere mentioned in the order. CBDT Circular The Ld. CIT(A) has only considered the fact that; CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute. A delegate or person authorized to issue delegated legislation cannot virtually set at naught the provisions of the main statute, i.e. CBDT circular is not binding on assessee. And decided by placing reliance on five member judgment of Hon,ble supreme court in the case of UCO Bank, that I do not find any infirmity in the applications of CBDT circular 739 dtd

7 ITA No.289/RPR/2017 25/03/1996 which is the highest authority. Looking to the gap of more than 17 years between issuance of the circular by the Board and the claim made by the partnership firm for the F.Y.2012-13. I do not want that such latitude may be allowed to prevail any more. The addition made by the AO is hereby confirmed. The ground of appeal is dismissed. But, in our case the remuneration paid to partners as per discussed above is allowable as per CBDT circular. Also, The Income-Tax law through its Section 119, enables the Central Board of Direct Taxes to issue instructions and directions to other l-T authorities from time to time for the proper administration of the Act. Such instructions shall be observed and followed by all such authorities. The Board has, thus, got the power to tone down the rigour of the law and ensure a fair enforcement of its provisions by issuing circulars in exercise of its statutory powers under Section 119 which are binding on the authorities. The Supreme Court pointed point on UCO Bank versus CIT, 237 ITR 889, that such circulars cannot be adverse to the assessee. The authority which wields the power for its own advantage under the Act is given the right to forego the advantage, when required to wield it in a manner it considers just by relaxing the rigour of the law. It is a beneficial power for proper administration of fiscal law to avoid undue hardship. Thus, when the Board sought to apply its own interpretation of the Court's ruling in Associated Cement Companies Case, 201 ITR 435, SC, and chose to enforce tax deduction at source under Section 194 C to transport contracts through Circular No. 681 dated March 8 1994, a Full Bench of the Supreme Court pronounced the law on the subject and declared the Circular invalid pointing out that the Court's ruling in Associated Cements case was not correctly understood by the CBDT. Hence, If circular is rigour or not beneficial for assessee, same is invalid as per hon'able Apex Court. 2. In respect of Para No. 3.4 of the Assessing Officer's Order:- The learned A.O. has referred case Law of Sood Brij & Associates vs The Commissioner DELHI (HC), Income Tax Appeal No. 1154 of 2011, on going through case law as referred. The clauses of partnership deed of Sood Brij and Associates are different from clause 7 of partnership deed of M/s Abdul Gaffar Hazi Hasan. The same case not at all relates to our case. For better understanding of fact clauses supplementary partnership deed of Sood Brij & Associates is produced below: Clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992 read:

8 ITA No.289/RPR/2017 "1. That subject to mutual consent of the partners, and subject to the provisions of the Income Tax Act, 1961, the working partner or partners shall be paid such remuneration as may be mutually agreed between themselves, from time to time, and such remuneration shall be deductible expense before arriving at the share of the partners as allocable from the net profits. 2. That both the partners (hereinafter referred as working partners), shall devote their time and attention in the conduct of the affairs of the partnership firm, as the circumstances and need of the firms business may require. The total remuneration payable to the working partners shall be an amount permissible as remuneration to the working partners under the Income Tax Act, 1961 and as applicable from time to time." It is clear from above clause that the, Total remuneration shall be subject to (i) mutual consent of partners and (ii) the provision of the I.T. Act, 1961. The first condition here gives rise to reason for disallowing remuneration i.e. neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration. In such cases it is not possible to quantify as quantification depends on future condition. Example Let the Total remuneration calculated According to the provision of the I.T. Act is Rs. 100/- than same is paid to partners as mutually agreed no quantification only maximum remuneration is quantified but remuneration payable to each partner is not quantified as same depends on mutual agreement. That the Learned A.O. has not justified in adding the remuneration paid to partner by Assessee. He has failed to appreciate the fact that Assessee's has paid the same within the provisions of Income tax Act, 1961. Here in our case remuneration is quantified and is allowable within the prescribed limits of Income Tax Act, 1961. The same view is also taken in case CIT Jaipur Vs M/s Asian Marketing on 11 April, 2012 (Rajasthan High Court) Income Tax Appeal No. 275/2010. It is also submitted to your honor that if two reasonable constructions of a taxing provision are possible that construction which favours the assessee must be adopted. The view as taken by honorable Supreme court in The Commissioner Of Income-Tax, ... vs M/S. Vegetables Products Ltd on 29 January, 1973 [1973 AIR 927] and M/s Rakesh Kumar Jain v/s ITO I.T.A. NO.26/RPR/2015 (ITAT- Bilaspur) Appellant humbly prays to your honor as under:-

9 ITA No.289/RPR/2017 1. That the order of the Ld CIT(A) is bad in law and facts of the case, hence following act of the Ld CIT(A) be quashed:- (i) Addition for remuneration paid to partners U/s 40(b)(v) - Rs. 1,50,000/- 2. That the Assessing Officer further erred in initiating penalty proceedings u/s 271(l)(c), which is unjustified. - 3. That the appellant craves leave to add/or alter, amend the Grounds of Appeal taken hereinbefore, if necessary at the time of hearing of the Appeal. The additional ground of Appeal shall be taken at the time of hearing. 8. We have heard the contentions of the revenue on this issue, perused the submissions of the assesee, orders of the revenue authorities and have gone through the judicial pronouncement relied upon by the rival parties. 9. The Assessee has placed its reliance on the following cases:- A. CIT Jaipur V/s M/s Asian Marketing in appeal no 275/2010 wherein Hon’ble Rajasthan Highcourt has held that :- 2. The remuneration, payable to partners, was disallowed by Assessing Officer, however, on an appeal, the Appellate Authority set aside the order of Assessing Officer. The order of Appellate Authority i.e. Commissioner of Income Tax (Appeals)-II, Jaipur, has been affirmed by the Income Tax Appellate Tribunal, Jaipur Bench 'B', Jaipur. The finding of Tribunal reads as under :- “4. We have heard the ld. DR and considered the written submission filed by the ld. AR . Section 40(b) (v) specifies that remuneration is to be authorized by partnership deed to a working parter. The working partner has been defined in explanation 4 opportunity Section 40(b). It is not disputed that remuneration paid is to the working partners. Clause 8 of the partnership deed relates to the entitlement of remuneration to the the partners. The relevant clause is reproduced as under:- “8. That both the parties, that is, the party of the First Part and the party of the Second Part will be actively engaged in the business of the psf and wil be the working partners and as working partners will be entitled for remuneration / salary which will be paid to them according to the standards and norms fixed by the relevant provisions of the Income Tax Act, 1961. The remuneration/ salary so admissible will be paid / credited to their account provided that such remuneration / salary can be increased / decreased as per mutual

10 ITA No.289/RPR/2017 agreement as the partners mutually decide to be adjusted at the end of the year as per the relevant of the Income-tax Act, 1961. The excess amount so paid/credited, if any, would be debited / credited to their capital account.'' This partnership deed has authorized the remuneration to be payable to the partner. The only dispute by the Revenue is that the amount of remuneration has not been quantified in the partnership deed. It is mentioned in clause 8 of the partnership deed that remuneration will be payable as per norms fixed by the relevant provisions of the Income-tax Act. Thus the quantification of the remuneration is apparent from the clause 8 of the partnership deed. The requirement in law is that remuneration should have been authorized and the amount of remuneration shall not exceed the amount as mentioned in sub-clause (v) of Section 40 (b) of the Act. The relevant provisions has used the word 'authorised' and not the word used 'quantify'. The ITAT Pune Bench in the case of ACIT Vs. Suman Construction 43 SOT 495 held that remuneration is to be deducted in case partnership deed authorizes the payment of salary. We have also considered the decisions which have been mentioned by the ld. CIT (A) in his order. We, therefore, feel that the ld. CIT (A) was justified in allowing the remuneration payable to the partners. Before parting with this appeal, we would like to state that the remuneration receivable by the partners is taxable in their hands and it is not the case of the Revenue that the assessee has claimed remuneration to the working partners to avoid tax. It is true that tax payable in the hands of the individual may be 30% while interest in the hands of the firm may be 35%. Thus tax effect is not substantial. Hence, Ground No.1 and 2 of the Revenue are dismissed.” 3. The question of payment of remuneration is a question of fact and finding in this regard is based on clause 8 of the partnership deed. Clause 8 was also quoted and considered in the order of Tribunal. Therefore finding in this regard is a finding of fact. There is a concurrent finding of fact recorded by Appellate Authority as well as Appellate Tribunal, which cannot be interfered with by this Court. 4. After considering submissions of learned counsel for appellant and the finding of the learned Tribunal, we are of the view that no substantial question of law is involved in the present appeal. There is a concurrent finding of fact by both the Courts below based on relevant clause of partnership deed itself. Since, no substantial question of law is involved, hence, appeal is dismissed in limine.

11 ITA No.289/RPR/2017 Circular : No. 739, dated 25-3-1996. 377. Whether for assessment years subsequent to assessment year 1996-97, no deduction under section 40(b)(v) will be admissible unless partnership deed either specifies amount of remuneration payable to each individual working partner or lays down manner of quantifying such remuneration

(i) The partners have agreed that the remuneration to a working partner will be the amount of remuneration allowable under the provisions of section 40(b)( v) of the Income-tax Act; and

(ii) The amount of remuneration to working partner will be as may be mutually agreed upon between partners at the end of the year.

It has been represented that the Assessing Officers are not allowing deduction on the basis of these and similar clauses in the course of scrutiny assessments for the reason that they neither specify the amount of remuneration to each individual nor lay down the manner of quantifying such remuneration.

12 ITA No.289/RPR/2017 11. Apropos, the issue that The Ld. CIT(A) has erred in confirming addition of Rs.1,50,000/- made by the Assessing Officer on account of excess remuneration in violation of Sec. 40(b) of the Income tax Act. 12. In view of the facts of the present case, CBDT Circular and judicial rulings. On factual matrix it is an undisputed fact that there is a clause in the deed of partnership of the assessee with respect to payment of remuneration to partners. A ratio of distribution of remuneration is also provided in the deed of partnership. However, This issue under reference has been decided inversely by Hon’ble High Courts referred to in the case of M/s Sood Brij & Association Vs. CIT(Del HC)(supra) agaist the assessee and CIT Jaipur V/s M/s Asian Marketing (Rajasthan HC)(Supra) in favour of the assessee. No decision of the Apex court or jurisdictional High Court was placed before us for taking directions from the same on this issue. In sight of the fact that two possible views in the present case one in favour of the assessee and one against the assesee the decision of Apex Court in the case of CIT Vs Vegetable Products Ltd. Reported in 88 ITR 192 will be applicable and the decision in favour of the assessee shall prevail. 13. In light of the above observations, we are of the considered view that view taken by the Hon’ble Rajasthan high Court in the case of CIT Jaipur V/s M/s Asian Marketing (Supra) will lead this case and accordingly, the addition made by AO for Rs 150000/- is hereby deleted. Thus, order of Ld CIT(A) is set aside. 14. Since main ground of the appeal regarding addition of Rs. 1,50,000/- on account of excess remuneration in violation of section 40(b)has already been decided in favour of the assessee, all other grounds which are either

13 ITA No.289/RPR/2017 supporting, general or academic in nature, needs no separate adjudication, stands disposed off. 15. In the result, the appeal of assessee is allowed. Order pronounced in pursuance to Rule 34(4) of ITAT Rules, 1963 on 21/09/2022. Sd/- Sd/- (RAVISH SOOD) (ARUN KHODPIA) न्यानयक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER रायऩुर/Raipur; ददनाांक Dated 21/09/2022 Prakash Kumar Mishra, Sr.P.S. आदेश की प्रनतलऱपऩ अग्रेपषत/Copy of the Order forwarded to : 1. अऩीऱाथी / The Appellant- प्रत्यथी / The Respondent- 2. आयकर आयुक्त(अऩीऱ) / The CIT(A), 3. आयकर आयुक्त / CIT 4. विभागीय प्रयतयनधध, आयकर अऩीऱीय अधधकरण, रायऩुर/ DR, ITAT, 5. Raipur गार्ड पाईऱ / Guard file. 6. आदेशानुसार/ BY ORDER, सत्यावऩत प्रयत //True Copy// (Assistant Registrar) आयकर अऩीऱीय अधधकरण, रायऩुर/ITAT, Raipur