2017 (11) TMI 68 - AT - Income Tax

Addition towards salary paid to the partners - AO made the addition relying on the statement of the partners who state that they have no active role in chit fund company and the Managing Partner Shri A. Venkateswarlu only looks after the chit funds - Held that - Similar disallowance was made in AY 2004- 05 by the revenue authorities and the Tribunal had deleted the disallowance by observing that the disallowance is not warranted. First of all, the statement recorded u/s. 131 clearly indicates that Shri Mohan Reddy is aware about his partnership in the firm and admits that he is responsible as a partner for all affairs of the firm. In fact, Question No.3 itself asks him about the active role in the day-to-day affairs of the chit fund for which he replied that he has no active role as it was looked after by Shri A. Venkatesh. This answer given to a specific question does not mean that he is not a working partner. Managing Partner and Working Partner have different roles. As seen from the P&L A/ c an amount of ₹ 54,000/- was paid as salaries to partners and three of the five partners are getting ₹ 18,000/- each. Only the salary paid to Shri Mohan Reddy was disallowed on the basis of so called statement. We do not agree with the observation of the AO as the disallowance has no basis. AO is directed to allow the amount as claimed. Addition towards partners sitting fee - AO justification in making the said addition of excess payment of interest of ₹ 2,47,600/- being in excess in interest @12% - Held that - Similar issue arose in AY 2004-05 , thus following it we sustain the disallowance of ₹ 65,040/-, which is bribe and in personal nature. With regard to interest, we direct the AO to allow 12% of interest on capital employed by the partners during the year, as per the provision, the excess can be disallowed. Accordingly, ground raised by the assessee is partly allowed.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Unexplained credit in opening balances.
3. Unexplained credit in the accounts of partners.
4. Disallowance of salary paid to partners.
5. Unexplained credit towards excess of liabilities in books.
6. Addition for suppression of income.
7. Addition for inflation of expenditure.
8. Disallowance of part of expenses of partner's sitting fees.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The appeal by the assessee for AY 2005-06 was filed with a delay of 19 days. The assessee provided reasons such as court cases and the managing partner's preoccupation with his daughter's marriage. Considering the submissions and objections, the delay was condoned as the assessee was prevented by reasonable cause.

2. Unexplained Credit in Opening Balances:
The AO noted discrepancies between the closing balance as on 31/03/2004 and the opening balance as on 01/04/2005, leading to an addition of ?33,38,971/-. The CIT(A) provided partial relief, sustaining an addition of ?3,25,349/-. The Tribunal referred to a similar issue in the assessee's own case for AY 2004-05, where such additions were deleted due to incomplete books of account and reconciliations. Following this precedent, the Tribunal directed the AO to delete the addition of ?3,25,349/- and dismissed the revenue's appeal against the relief of ?30,13,622/-.

3. Unexplained Credit in the Accounts of Partners:
The AO added ?4,00,000/- as unexplained credit in the partners' accounts. The CIT(A) deleted this addition. The Tribunal did not further address this issue explicitly, implying agreement with the CIT(A)'s deletion.

4. Disallowance of Salary Paid to Partners:
The AO disallowed ?45,000/- paid as salary to a partner, citing a statement that the partner had no active role. The CIT(A) confirmed this addition. The Tribunal, referring to a similar issue in AY 2004-05, where the disallowance was deleted, directed the AO to delete the addition of ?45,000/-.

5. Unexplained Credit Towards Excess of Liabilities in Books:
The AO added ?5,18,009/- due to excess liabilities. The CIT(A) confirmed this after adjustments. The Tribunal, referencing a similar issue in AY 2004-05, directed the AO to delete the addition of ?5,18,009/-.

6. Addition for Suppression of Income:
The AO added ?1,31,455/- for suppression of income, primarily due to penalties received from the chit business, which the assessee did not explain. The CIT(A) confirmed this. The Tribunal, following its decision in AY 2004-05, directed the AO to delete this addition.

7. Addition for Inflation of Expenditure:
The AO added ?3,72,300/- for inflation of expenditure, noting inadmissible and inflated expenses. The CIT(A) confirmed this due to lack of further explanation or reconciliation from the assessee. The Tribunal, referencing AY 2004-05, directed the AO to delete this addition.

8. Disallowance of Part of Expenses of Partner's Sitting Fees:
The AO added ?3,12,640/- for expenses related to partners' sitting fees, including personal expenses and excess interest. The CIT(A) confirmed this. The Tribunal, following its decision in AY 2004-05, sustained the disallowance of ?65,040/- for bribes/personal expenses but directed the AO to allow 12% interest on capital employed by partners, disallowing any excess.

Conclusion:
The appeals of the assessee were partly allowed, and the appeals of the revenue were dismissed. The Tribunal followed precedents from AY 2004-05, leading to deletions of several additions made by the AO.