TMI Blog2011 (10) TMI 497X X X X Extracts X X X X X X X X Extracts X X X X ..... 2008 (12) TMI 275 - ITAT PUNE-A) it was held that CBDT had no jurisdiction to substitute the term "authorise" occurring in section 40(b) by the term "quantify". However, this cannot be extended to mean that an authorization which is so vague that no proper quantification could be done would also be sufficient for a claim. Where the authorization is such that the correct quantification of the remuneration payable to a working partner cannot be done it cannot be construed as a type of authorization which would satisfy the requirement of section 40(b) as clause (8) of the deed dated 1st April, 2005 was vague and not susceptible to a meaningful quantification. The later deed dated 1st April, 2005 does not have any clause which would enable the assessee to fall back upon the old deed dated 10th April, 1997, in case of any deficiency therein. CIT(Appeals) fell in error directing the A.O. to delete the disallowance being remuneration paid to working partner considering it as not allowable as correct quantification of the remuneration payable to a working partner cannot be done, it does not satisfy the requirement of section 40(b) - Decided against assessee Dis-allowance of loss on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submission of the assessee was that the firm was originally constituted by deed dated 10.4.1997 wherein remuneration to partners was clearly specified in a table and such table was in accordance with section 40(b) of the Act. Further, according to it, while reconstituting the firm on 1.4.2005, the relevant reconstitution deed specified remuneration to be paid to the sole working partner and amount payable was also clearly indicated. Argument of the assessee was that as per section 40(b) of the Act, remuneration once authorized under the deed of partnership could not be disallowed. As per the assessee, instead of repeating in a tabular format the limits for allowance specified under section 40(b) of the Act, it had stipulated such payment to be made in accordance with section 40(b) of the Act and therefore, according to it, A.O. was not justified in observing that remuneration was not specified in terms of 'money payable'. CIT(Appeals) was appreciative of these contentions. According to him, amount payable to the working partner was clearly specified in the deed and assessee in the reconstitution instead of repeating in verbatim the provisions of section 40(b) of the Act, stipulated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is no dispute on facts. Assessee-firm was constituted through a partnership deed on 10th April, 1997. In the partnership deed, clause (8) authorized remuneration to partners that was payable in the following manner:- " 8. All the partners of the parties have agreed to devote their time and attention to the business of the partnership. It is hereby agreed that in consideration that FIRST part of the parties shall be entitled to draw yearly remuneration as follows: ( i ) The yearly remuneration payable to the FIRST part shall be calculated as under:- Particulars Remuneration ( a ) In case of loss Nil Or ( b ) In case of Income less than or Rs. 50,000/- Actual Income ( c ) In case of income above Rs. 50.000/- but less than Rs. 75.000/- 90% of the income or Rs. 50.000/- whichever is higher. Or ( d ) In case of income above Rs. 75.000/- but less than Rs. 1,50,000/- Rs. 67.500/- plus 60% of the income above Rs. 75,000/- Or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease or decrease the above remuneration. The parties hereto may also agree to revise the above said remuneration and interest on capital as may be agreed to and between the partners from to time." 9. As per the Revenue, the above clause in reconstitution deed was not sufficient for a claim of remuneration under section 40( b ) of the Act. According to it, the remuneration payable to the sole working partner was not specified in terms of money. We find that Partnership Retirement Deed dated 1st April 2005 does not have a clause stating that the provisions of earlier deed dated 10th April, 1997 would apply wherever it had not been varied, altered, substituted, or deleted through the deed dated 1st April, 2005. Therefore, the question boils down to allowability of the claim of assessee on the basis of clause ( 8 ) of the deed of Partnership Retirement Deed dated 1st April, 2005. It does mention that Mr. Rasheed Khan was entitled to receive remuneration. In other words, this reconstituted deed has authorized the firm to give remuneration to Mr. Rasheed Khan. A method of computation is mentioned. It is that remuneration has to be computed as per Explanation 3 to section 40( b ) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le the assessee to fall back upon the old deed dated 10th April, 1997, in case of any deficiency therein. In our opinion, the CIT(Appeals) fell in error when he directed the A.O. to delete the disallowance of Rs. 54,83,571/- being remuneration paid to working partner considering it as not allowable. We, therefore, set aside the order of the CIT(Appeals) in this regard and reinstate the disallowance made by the A.O. 11 . Vide ground No.3, Revenue is aggrieved that the CIT(Appeals) deleted the disallowance of Rs. 16,57,950/- made by the A.O. The said disallowance was on account of a loss on sale of flat at Saligramam claimed by the assessee in its profit and loss account which was not acceptable to the A.O. 12 . Short facts apropos are that assessee in its Schedule No.5 forming part of its audited final accounts, had given a break-up of indirect expenses which included a sum of Rs. 16,57,950/- shown as loss incurred on sale of flat at Saligramam. A.O. was of the opinion that such toss was not proved to have been incurred in the course of assessee's business of civil construction but, on the other hand, incurred due to purchase and sale of land. Further, according to him, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 1st April, 2005, he submitted that the business of the assessee-firm was of promoting commercial and residential flats as also constructing, maintaining, altering, improving, reconstructing and otherwise dealing with buildings or to carry on any other line or lines of business which the partners decide from time to time as beneficial. According to him, land was shown as stock-in-trade in the balance sheet and hence, loss arising on sale thereof could not have been disallowed. 16 . We have perused the orders and heard the rival contentions. Assessing Officer's disallowance was based on two reasons - first, that the assessee was not engaged in the business of purchase and sale of land and second was that there could not have been depreciation in the value of land so as to claim loss on sale. Leaving aside the reasons given by the CIT(Appeals), we are of the opinion that both these assertions of the A.O. were misplaced. Assessee was engaged in the business of promoting commercial and residential flats and also by the partnership deed, authorized to carry on any line or lines of business. Even if we consider the authorization given in the partnership deed 'to carry on any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the CIT(Appeals), submission of the assessee was that it could not effect any construction in the property at T. Nagar, Chennai, on account of certain difficulties in getting the plan approved and therefore, was constrained to sell it out at a loss. According to assessee, there was a recession in real estate business, which resulted in the loss. CIT(Appeals) appreciated this contention of the assessee. According to him, assessee had to abandon the project in the land at T. Nagar, finding it not viable and in order to meet financial commitments, it had effected the sale. He therefore, deleted the disallowance. 21 . Now before us, learned D.R. assailing the order of the CIT(Appeals), made more or less similar submissions as he made in ground No.3. 22 . Per contra, the learned A.R. strongly supported the order of the CIT(Appeals). 23 . We have perused the orders and heard the rival contentions. The A.O. had made the disallowance of claim of loss on sale of T. Nagar property of the assessee, for the same reason as for the disallowance of the loss claimed by the assessee on its Saligramam property. We have vide paras 16 17 above, held that the disallowance of loss on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so tried to explain the circumstances in which it had incurred loss on sale of flat at Saligramam. In as much as the assessee was constructing the commercial flat for one Shri Kalaivanan, who made default in payments of contracted amounts. The contractee had to pay the assessee Rs. 30,00,000/- in lieu of which he had given an old flat towards final settlement of the dues and the assessee submitted that the contractee was an influential man who could damage its business prospects and therefore, it accepted the old flat in lieu of the amount due from him and that flat was sold at loss. As such, the loss was during the course of the business of the assessee and had to be allowed. The assessee also raised an alternative claim before the ld. CIT(A) that the amount was not collected, hence same ought to have been allowed as business loss. The assessee has duly filed explanation before the Assessing Officer and the loss could be allowed and even if it is not allowable as a loss, it has to be allowed as bad debt under section 36(1)( vii ) of the Act. The ld. CIT(A) accepted the appeal of the assessee in this regard. 28 . Before this Bench, in appeal, the Department has challenged the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.2006 placed at pages 1 to 21 of the compilation dated 22.11.2010]. Otherwise, there is no documentary evidence produced by the assessee or is found on record of the appeal papers, which could show that the assessee has purchased any property or any consideration amount has been fixed or adjusted which was due. What is available on record is a copy of sale deed dated 23.06.2006, at pages 1 to 21 of compilation dated 22.11.2010, executed by Shri S.S.R. Kalaivanan, in which Shri K. Rasheed Khan, partner of the assessee firm has been shown to be power of attorney holder and has signed such deed in that capacity only and, as per covenant at page 10, it is mentioned that "THUS the said Mr. S.S.R. Kalaivanan (the vendor herein) is truly seized and in absolute possession and in enjoyment of the property being shop bearing No.1, situated in the Ground Floor of Anubhav S.S.R. Pankajam Enclave at No.24, Arunachalam Road, Saligramam, Chennai - 93 measuring 1050 sq.ft. constructed area (which includes common area) together with 530.18 sq.ft. undivided of share out of total extent of 21600 sq.ft. in the said premises comprised in Survey Nos. 143/1, 143/2, 144/1 and 144/2 of Saligramam Villag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wnership and the date of transfer of absolute ownership giving rise to gain or profit, which is relevant for determining the period of holding of what has been transferred. So in the absence of anything having been established to show that assessee firm has ever acquired any right in the said property against which the assessee is claiming loss on sale, whether it could be further alienated in order to consider the claim of loss. 32 . From the discussion as made above and in view of documentary evidence and material on record, it could be seen that the Assessing Officer has not properly considered and appreciated the issue while deciding the said loss amount as claimed by the assessee and even did not look into the documentary evidence placed before him at assessment stage, which is apparent from the fact that in para 4 of his order, he is discussing about short term loss on sale of land, whereas this is a case of sale of shop giving his logic that land cannot depreciate to such a large extent in prime location of the city while mentioning about direct expenses of the claim of the assessee. The ld. CIT(A), in appeal has also not appropriately dealt with the issue when he is ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estate at that particular point of time. Since the appellant has to meet the financial commitments, they had to compulsorily sell the land to the maximum amount that could be realized. The loss has arisen in the course of the appellant's regular business and therefore, the same has to be allowed. The AO is not doubting the purchase consideration or sale consideration of the land and the loss sustained. Since the land was only the appellant's 'stock in trade' and not 'capital asset',' the loss on sale of such stock in trade is to be treated as business loss and the AO is not justified in treating the same as 'capital loss' and disallowing the same. 68 I have considered the submissions of the appellant's representative and the reasoning of the AO. I am of allowed as business expenditure or in the alternative, the loss could even be allowed as a bad debt u/s 36( vii ) of the Income tax Act, 1961, as the amount has already been written off in his books of account and the amount could not be realized, seems to be acceptable. Since the appellant explained the circumstances under which the loss having been incurred in the course of business, I direct the AO to allow the loss of Rs. 36, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Rs. 8.00 lakhs, which in any case could not be part of loss, if considered to be allowable, so the Assessing Officer has rightly refused to allow such loss and the ld. CIT(A) is not justified in deleting such disallowance made by the Assessing Officer. It was thus, pleaded for setting aside the order of the ld. CIT(A) and restoring that of the Assessing Officer. 35 . The ld. Counsel for the assessee relied upon the order of the ld. CIT(A) in this regard and pleaded that since permission to construct building could not be obtained by the assessee despite having made efforts and the assessee was in need of money, therefore, he had to sell the land purchased even at loss and this way loss was incurred, which is business loss during the course of normal business activity, which had to be allowed and the ld. CIT(A) considering all these facts has deleted the addition made by the Assessing Officer, whose action is proper and justified, which should be upheld. 36 . After having heard both the sides and considering the material on record, it is found that as per the documentary evidence produced and placed from pages 22 to 29 of the compilation filed dated 22.11.2010, by virtue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to what has been transferred by the assessee and when was the same acquired. If a person transfers absolute ownership, then he must first acquire absolute ownership else he cannot transfer absolute ownership without first acquiring it and only then he can further alienate the same. In this case when the assessee firm's partner Shri K. Rasheed Khan is just acting as attorney holder/confirming party, it does not follow that he has acquired any right, which is being alienating further. Moreover, neither copy of the power of attorney executed by the so-called seller of the land to the partner of the assessee's firm has been filed nor any other document to show what was the extent of authority given to the attorney holder and whether any absolute right in property has been conferred upon the assessee at any point of time. Since all these aspects have not been looked into or considered during assessment and the Assessing Officer has disallowed the claim of loss by passing very sketchy order in this regard and the ld. CIT(A) has just given the relief by deleting the disallowance made when major issues are there, which requires proper investigation and probing, therefore, in the interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of flat and loss on sale of land, the learned Accountant Member agreed with the Commissioner of Income-tax(Appeals) and dismissed the corresponding grounds raised by the Revenue. Thus the learned Accountant Member proposed disposing of the appeal filed by the Revenue by deciding one issue in favour of the Revenue and deciding two issues in favour of the assessee. 4. The learned Judicial Member, who dissented, agreed with the order of the learned Accountant Member as far as the first issue of disallowance of partners' remuneration is concerned. As far as the remaining two issues of loss on sale of flat and loss on sale of land are concerned, the learned Judicial Member upheld the order of the assessing authority and set aside the orders of the Commissioner of Income-tax(Appeals) and thus dissented from the view of the learned Accountant Member. 5. It is with reference to the above two disallowances, namely, loss on sale of flat and loss on sale of land that the question is referred to the Third Member. 6. I considered the matter in detail. The assessee has claimed a loss of Rs. 16,57,950/- as loss incurred on sale of flat at Saligramam. The said sum of Rs. 16,57,950 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... flats and in such circumstances the purchase and sale of flat and land are very much part of the business regularly carried on by the assessee. ( v ) The assessee treated the land in its accounts as stock in trade and when stock in trade is sold, the result would be naturally either business profit or business loss. ( vi ) The assessee was forced to sell the properties for loss for its own business reasons which cannot be overlooked by the assessing authority for his own reasons. ( vii ) The purchase and sale deeds have not been doubted by the assessing authority. ( viii ) The books of account have not been rejected by the assessing authority. 10 . In the light of the above findings, the learned Accountant Member held that there is no justification for the disallowance of the losses arising out of the sale of the two properties. He accordingly upheld the orders of the Commissioner of Income-tax(Appeals). 11 . The learned Judicial Member, on the other hand, has set aside the orders of the Commissioner of Income-tax(Appeals) on the above two disallowances and remitted back the issues to the assessing authority to pass fresh orders after conducting necessary enquiri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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