2025 (5) TMI 1697 - AT - Income Tax

Addition u/s 40(b) - disallowance of partners salary on the ground that the assessee could not prove whether all the 7 partners were working partners - HELD THAT - The salary paid to the partners was in consonance with the deed of partnership. CIT(A) affirmed the order of the AO without giving any reasonings thereon. In our considered opinion the salary to partners has to be decided by the partners and has to be authorized by the deed of partnership subject to the overall limit as prescribed by section 40(b). Accordingly order of ld. CIT(A) is set aside and the AO is directed to delete the disallowance. Assessee ground is accordingly allowed. Disallowance on account of salary bonus and staff welfare expenses - According to the ld. AO the assessee has not produced any details of salary staff welfare expenses and accordingly 25% of the total of both the expenses were disallowed - HELD THAT - Either the total salary and bonus staff welfare expenses could have been disallowed for treating the same as not genuine or otherwise no partial disallowance is sustainable. Accordingly are inclined to hold that the order passed by the CIT(A) on this issue is incorrect and is accordingly set aside the same and the ld. AO is directed to delete the addition. Assessee ground is accordingly allowed. Disallowance on account of accounting charges paid to the accountant - HELD THAT - This is mainly the remuneration given by assessee to the part time accountant who was writing the books of accounts of the assessee and therefore no TDS is attracted on the said payment. Accordingly set aside the order of the ld. CIT(A) and directed the ld. AO to delete the addition. Assessee ground is accordingly allowed. Disallowance of donation expenses - HELD THAT - As the assessee is running a liquor shop in the city and such type of donation are essential in order to smoothly run the business. In our opinion the said expenses were incurred by the assessee to be wholly and exclusively to run the shop and it is supported by series of decisions wherein it have been held that the puja expenses paid to pedals on various occasions are allowable expenses. Assessee ground is accordingly allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the addition of Rs.3,81,115/- disallowed under section 40(b) of the Income Tax Act on account of partners' salary is justified, given the partnership deed and the nature of partners' involvement in the business;

(b) Whether the disallowance of Rs.1,33,239/- on account of salary, bonus, and staff welfare expenses, made on an estimation basis by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)), is sustainable;

(c) Whether the disallowance of Rs.35,000/- on account of accounting charges paid without deduction of tax at source (TDS) is valid;

(d) Whether the disallowance of donation expenses of Rs.10,000/- given to puja pandals, confirmed by the CIT(A), is justified as business expenditure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Disallowance of Partners' Salary under Section 40(b) of the Act

Relevant Legal Framework and Precedents: Section 40(b) of the Income Tax Act restricts deduction of remuneration paid to partners unless it is authorized by the partnership deed and within prescribed limits. The salary must be paid to working partners actively engaged in the business.

Court's Interpretation and Reasoning: The AO disallowed salary paid to five out of seven partners on the ground that the assessee failed to prove that all partners were actively working partners. An inspection conducted by an officer was inconclusive. The AO allowed salary only to two partners and added the rest to income. The CIT(A) confirmed this addition without detailed reasoning.

Upon review, the Tribunal examined the partnership deed and found that the salary payments were in consonance with the deed. The Tribunal emphasized that the determination of partners' salary is primarily a matter for the partners themselves, subject to compliance with section 40(b). The Tribunal disagreed with the CIT(A)'s confirmation, noting the absence of reasoned justification.

Key Evidence and Findings: The partnership deed authorizes the salary payments. No conclusive evidence was found by the AO to rebut the claim that partners were working partners.

Application of Law to Facts: Since the salary payments were authorized by the deed and no evidence disproved the working status of partners, the disallowance was not sustainable.

Treatment of Competing Arguments: The AO and CIT(A) relied on the lack of proof regarding partners' active involvement. The Tribunal gave primacy to the partnership deed and the statutory framework, rejecting the AO's and CIT(A)'s approach.

Conclusion: The Tribunal set aside the disallowance of Rs.3,81,115/- and directed deletion of the addition.

Issue (b): Disallowance of Salary, Bonus, and Staff Welfare Expenses on Estimation Basis

Relevant Legal Framework and Precedents: Expenses claimed must be supported by evidence. However, disallowance on an arbitrary or partial estimation basis without complete disallowance or full allowance is generally impermissible.

Court's Interpretation and Reasoning: The AO disallowed 25% of salary, bonus, and staff welfare expenses for lack of supporting details, confirmed by CIT(A). The Tribunal held that such partial disallowance on estimation basis is not sustainable. Either the entire expense is disallowed for lack of genuineness or the entire expense is allowed if genuine.

Key Evidence and Findings: The assessee produced some details of expenses, though the AO found them insufficient. No conclusive proof was presented to justify partial disallowance.

Application of Law to Facts: The Tribunal opined that partial disallowance without full disallowance or allowance is arbitrary. The AO's and CIT(A)'s orders were therefore incorrect.

Treatment of Competing Arguments: The AO and CIT(A) justified partial disallowance on lack of evidence, but the Tribunal rejected this approach as inconsistent with principles of fair assessment.

Conclusion: The Tribunal set aside the disallowance of Rs.1,33,239/- and directed deletion of the addition.

Issue (c): Disallowance of Accounting Charges for Non-deduction of TDS

Relevant Legal Framework and Precedents: Tax deduction at source (TDS) provisions apply to certain payments. However, remuneration paid to a part-time accountant for bookkeeping may not attract TDS under relevant provisions.

Court's Interpretation and Reasoning: The AO disallowed Rs.35,000/- paid as accounting charges on the ground that TDS was not deducted. The CIT(A) confirmed this disallowance. The Tribunal found that the payment was remuneration to a part-time accountant maintaining books of accounts, which does not attract TDS.

Key Evidence and Findings: The payment was for accounting services by a part-time accountant. No evidence suggested the applicability of TDS provisions.

Application of Law to Facts: Since TDS was not applicable, disallowance was not justified.

Treatment of Competing Arguments: The AO and CIT(A) took a strict view on TDS non-compliance. The Tribunal adopted a more nuanced approach, considering the nature of payment.

Conclusion: The Tribunal set aside the disallowance of Rs.35,000/- and directed deletion of the addition.

Issue (d): Disallowance of Donation Expenses to Puja Pandals

Relevant Legal Framework and Precedents: Expenses must be wholly and exclusively for business to be deductible. Donations or expenses incurred to maintain goodwill or smooth business operations may be allowed if supported by precedent.

Court's Interpretation and Reasoning: The AO disallowed Rs.10,000/- given as donations to puja pandals, confirmed by CIT(A). The assessee argued these were essential for smooth business operations, given the nature of the liquor trade. The Tribunal referred to a series of decisions allowing such expenses as business expenditure.

Key Evidence and Findings: The donations were made to puja pandals in the locality where the business operates. The nature of business and local customs supported the claim of business expediency.

Application of Law to Facts: The Tribunal held that such expenses were incurred wholly and exclusively for business purposes and thus allowable.

Treatment of Competing Arguments: The AO and CIT(A) treated the donations as non-business expenses. The Tribunal rejected this narrow interpretation in light of relevant precedents.

Conclusion: The Tribunal set aside the disallowance and directed deletion of the addition of Rs.10,000/-.

3. SIGNIFICANT HOLDINGS

The Tribunal established the following core principles and determinations:

"The salary to partners has to be decided by the partners and has to be authorized by the deed of partnership subject to the overall limit as prescribed by section 40(b) of the Act."

"The disallowance made by the Assessing Officer on estimation basis cannot be sustained. Either the total salary and bonus, staff welfare expenses could have been disallowed for treating the same as not genuine or otherwise, no partial disallowance is sustainable."

"The remuneration given by assessee to the part time accountant, who was writing the books of accounts of the assessee, does not attract TDS and hence disallowance on this ground is not justified."

"The puja expenses paid to pandals on various occasions are allowable expenses as they are incurred wholly and exclusively for the purpose of running the business."

Final determinations on each issue were in favor of the assessee, with all disallowances set aside and directed to be deleted by the AO.