1983 (1) TMI 95 - AT - Income Tax

Summary

Issues Involved:
1. Deduction of salaries paid to partners.
2. Disallowance of car expenses for personal use by partners.
3. Setting aside the assessment regarding interest deduction under section 36(1)(iii).
4. Disallowance of traveling expenses.
5. Disallowance of building repair expenses as capital expenditure.

Detailed Analysis:

1. Deduction of Salaries Paid to Partners:

The primary issue was whether the salaries paid to five individuals, who were partners of the assessee firm, could be deducted from the business income. The assessee argued that these individuals were partners representing their respective HUFs and were paid salaries for services rendered in their personal capacities. The IAC (Assessment) and the Commissioner (Appeals) disallowed this deduction under section 40(b) of the Income-tax Act, 1961, which prohibits such payments to partners. The Tribunal upheld this disallowance, citing precedents from the Hon'ble Supreme Court and various High Courts which established that the capacity in which a person becomes a partner (individual or as a karta of HUF) is immaterial, and payments made to partners are hit by section 40(b).

2. Disallowance of Car Expenses for Personal Use by Partners:

The second issue concerned the disallowance of car expenses attributed to the personal use of cars by the partners. The IAC (Assessment) disallowed Rs. 17,500 for the assessment year 1976-77 and an additional Rs. 10,346 for the assessment year 1975-76, considering the past records and the absence of personal use estimates for that year. The Tribunal found the disallowance slightly excessive and revised it to one-fourth of the total car expenses claimed, less the amount already added back by the assessee for the assessment year 1975-76.

3. Setting Aside the Assessment Regarding Interest Deduction under Section 36(1)(iii):

The third issue was the Commissioner (Appeals) setting aside the assessment on the issue of whether the interest claimed as a deduction under section 36(1)(iii) was admissible, considering the debit balances in the partners' accounts. The Tribunal upheld the Commissioner's action, citing Supreme Court rulings that the first appellate authority has the competence to review the entire assessment, not just the matters complained of by the assessee. The Tribunal agreed that the Commissioner (Appeals) was within his jurisdiction to set aside the assessment for fresh consideration on this issue.

4. Disallowance of Traveling Expenses:

The fourth issue was the disallowance of Rs. 7,000 out of the traveling expenses claimed at Rs. 86,868 for the assessment year 1975-76. The IAC (Assessment) raised the disallowance from the Rs. 5,000 added back by the assessee itself. The Tribunal upheld the revenue authorities' decision, noting that the disallowance was based on an estimate, and no interference was warranted.

5. Disallowance of Building Repair Expenses as Capital Expenditure:

The fifth issue was the disallowance of Rs. 2,000 out of building repair expenses, treated as capital expenditure with depreciation allowed. The assessee argued that no specific item of capital nature was identified. The Tribunal agreed with the assessee, deleting the disallowance and directing the withdrawal of depreciation allowed on this amount.

Conclusion:

The appeals were partly allowed, with specific adjustments made to the disallowances and assessments as detailed above.