TMI Blog2010 (4) TMI 864X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case, which are common for both the years, are that while examining the assessee s return filed in response to the notice under section 153A, it was observed by the Assessing Officer (A.O.) to have claimed salary to its two working partners at Rs. 2.50 lakhs and Rs. 5 lakhs for the two consecutive years respectively, as against the total limit of Rs. 48,000 as prescribed by the partnership deed dated 1-2-2000, subject to the maximum allowable in terms of section 40( b )( v ) of the Act read with Explanation 3 thereto; there being no document to suggest any change in the remuneration to the partners, and at the relevant time, so that the balance was considered by him as in excess in terms thereof read with the said section, and thus not entitled to deduction. Reference was also made by him to the Circular No. 739/25-3-1996 issued by the CBDT which clarifies that any deduction qua remuneration payable to the working partners would, with effect from assessment year 1997-98, be eligible where the amount of remuneration payable to each individual partner is specified in the partnership deed or the manner in which the same is to be quantified is specified therein. 4. In ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assuming the satisfaction of the other conditions of section 40( b )( v ) of the Act, and thus of it being eligible thereunder. This is all the more relevant as the entire income for the first year stands assessed as undisclosed income, only implying its non-recording in the regular books of account, with reference to which alone the book profit is to be determined. Besides, a recording would itself be of no consequence in view of the conclusive finding of it representing the assessee s undisclosed income, so that it has not been, or was not intended to be, disclosed to the revenue. We leave this matter at this stage, which would only warrant, in the event of satisfaction of the other requirements of the qualifying provision, a remission back to the file of the authorities below for the necessary findings in the matter. 6.2 Coming next to the satisfaction of the condition of section 40( b )( v ) which is the non obstante clause governing the impugned claim, read with any Circular issued by the CBDT in the matter. This is as if per the same the rigour of the section stands relaxed, the same would be binding on the revenue. The section mandates allowance of remuneration by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be allowed as deduction in the computation of the firm s income. 4. 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." 6.3 The Board has thus firstly clarified the scope of the words authorized by and in accordance with appearing in the section to mean that the instrument of partnership should specify the remuneration payable to each partner or the manner in which the same is to be quantified. However, for the initial years, being assessment years 1993-94 to 1996-97, even if the salary to a partner is stated to be as allowable under section 40( b )( v ) of the Act, the same would merit deduction, in view of the controversy attending the interpretation of the newly inserted clause so as to eschew litigation in the matter. We, firstly, find the understanding of the section, as explained, to be in complete harmony with the terms of the provision and, secondly, of its insistence on the compliance of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng its allowance. When were the increases agreed upon, as the same would be on at least two separate dates, given that the salary stands allowed to the working partners for the two years at different aggregate amounts? What is the share of each of the two partners in the increase for each of the dates? How are the increases documented? All these, being matters of fact, are of vital import, given the terms of the section [section 40( b )( v )], as discussed hereinbefore, answers to which we find are conspicuous by their absence, so that the assessee s whole case rests on a bald statement of the increase(s) having the consent of all the partners, which we find as even otherwise of little merit inasmuch no claim would qualify to be considered as of the firm if it does not have the approval of its partners. Here it may be pertinent to mention that the salary stands allowed to the working partners at various total amounts for the various years following 1-2-2000, the date of the deed of partnership, and again, not necessarily in equal ratio, so that there have been not one but several changes thereto. The increase(s) have to be at the defined dates, in definite share, and per a defin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact, there is complete silence on the assessee s part on each of them. The said decision, thus, is rendered on its facts, which are clearly distinguishable, so that it can in no way be pressed into service in support of the claim under reference. Similarly, reliance on the CBDT Circular 739 dated 25-3-1996 is clearly misplaced. The same is only on the interpretation of the language of section 40( b )( v ), and for its application for the initial years, and has nothing to do with how a fact for the purpose of a claim thereunder is to evidenced or proved, or what could under the circumstances be construed as a partnership deed, which will always remain a matter of fact, to be decided in the facts and circumstances of the case. 6.6 Finally, we consider the assessee s argument of the salary at the claimed amounts having been assessed in the personal assessment of the respective partners. Firstly, the same can have its basis in equity and not in law, as a claim, as observed earlier, could only be allowed on its merits. Secondly, the law takes care of such variances, providing therefor, per section 28( v ), whereby only the salary etc., to the extent allowed in the assessment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s contention of it being covered under rule 6DD( k ), i.e. , where the payments stand made through an Agent, would have no application. In fact, there is nothing on record to show so, but neither was the assessee, to be fair, required to exhibit the same; the Assessing Officer having not show caused it with reference to section 40A(3). The observations by the ld. CIT(A), who though competent to invoke the said provision did not do so, in relation thereto are of no moment. As regards the disallowance effected, the Assessing Officer has not made any specific observation with regard to any defect in the booking of its purchases by the assessee, or of it being inflated. As such, making such a disallowance, though otherwise not outside his competence, i.e. , per se, is not warranted in the facts and circumstances of the case, and we are in agreement with the ld. CIT(A) on this score. This issue, thus, gets decided favour of the assessee. 10. In the result, the revenue s appeals are partly allowed. 11. The seven appeals by the assessee contests the two consolidated orders by the ld. CIT (Central), Kochi dated 11-9-2009, i.e. , for assessment years 2000-01 to 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case(s), and which would depend upon whether the Assessing Officer has been able to establish the non-genuineness of the expenditure, or inflation therein, the purported basis of the disallowance(s). to that or whatever extent, or not. So however, it is a fact that he did not examine the transactions from the stand point of the applicability of section 40A(3), which is prima facie attracted in the facts and circumstances of the case, and which he, as the assessing authority, ought to have considered or examined. As also noted earlier, while dealing with the revenue s appeals, vide para 9 of this order, there is no mention or even a whisper of section 40A(3) in the assessment orders, and which had led us to conclude that there has been under the circumstances no invocation of section 40A(3) by the Assessing Officer. Clearly, therefore, the assessments as framed are, to that extent, prejudicial and erroneous to the interest of the revenue, liable for revision. The ld. CIT(A) examined the issue both from the stand-point of the invocation of section 40A(3) by the Assessing Officer or otherwise, finding it unsustainable on both counts. His powers being co-terminus with that o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 194C of the Act. Its non-consideration, as apparent from the assessment orders, implies it having been passed without application of mind in the matter, so as to be per se erroneous and prejudicial to the interests of the revenue, entitling revision under section 263. 14. Before us, the ld. AR placed reliance on the decision by the Tribunal in the case of R.R. Carrying Corpn. v. Asstt. CIT [2009] 126 TTJ (Ctk.) 240, where a similar disallowance stood struck down by the Tribunal on the finding of no contractual relationship having been brought forth by the revenue, so as to impinge the assessee with the liability toward TDS under section 194C of the Act and, consequently, justify the application of section 40( a )( ia ). The ld. DR, on the other hand, relied on the impugned order. 15. We have heard the parties, and perused the material on record. As would be apparent from the Order relied upon by the ld. AR, the matter is factual, which has not been examined by the Assessing Officer for the application or otherwise of the said provision. The ld. CIT has not made any specific observation in this regard for us to consider the modification of his Order in any manne ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
