Sri Sri Estates, Hyderabad, Hyderabad V. ITO, Ward-9(1), Hyd, Hyderabad

ITA 1391/HYD/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6143 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2017
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 17-10-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Difference of opinion; Change of opinion; Set aside
• Section: 32; 147; 131; 68; 246; 69; 145; 27; 148; 54; 37; 6; 56; 263; 63; 132; 12; 28; 144; 10; 90; 154; 2; 11; 15; 271(1)(b); 139; 92; 40(b)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A (SMC), HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 1391/HYD/2016 ASSESSMENT YEAR: 2009-10 M/S. SRI SRI ESTATES, HYDERABAD [PAN: ABEFS1693N] VS THE INCOME TAX OFFICER, WARD-9(1), HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.A. SAI PRASAD, AR FOR REVENUE : SMT SUMAN MALIK, DR DATE OF HEARING : 31-01-2017 DATE OF PRONOUNCEMENT : 17-02-2017 O R D E R THIS APPEAL ARISES OUT OF THE ORDER OF THE COMMISSIONE R OF INCOME TAX (APPEALS)-7, HYDERABAD, DATED 18-03-2016 FOR THE AY. 2009-10, ON THE ISSUE OF DISALLOWANCE MADE BY THE ASS ESSING OFFICER (AO) INVOKING THE PROVISIONS OF SECTION 40(B) OF THE INCOME TAX ACT [ACT] IN RE-ASSESSMENT PROCEEDINGS U/S. 147. 2. ASSESSEE DECLARED AN INCOME OF RS. 12,33,490/- F OR THE AY. 2009-10 AND AO COMPLETED ASSESSMENT DETERMINING THE I NCOME AT RS. 21,20,780/- VIDE THE ORDER DT. 31-12-2011, INTER ALIA, DISALLOWING AN AMOUNT OF RS. 1,51,637/- REMUNERATION PAID TO SMT. SAMA SANGITHA REDDY, WHO IS NOT A WORKING PARTN ER. LATER, INVOKING THE BOARD CIRCULAR NO. 739 DT. 25-03-1996, A O WAS OF THE OPINION THAT ENTIRE REMUNERATION CLAIMED TO WORKING PAR TNERS AT RS. 9,09,822/- SHOULD HAVE BEEN DISALLOWED, ON THE R EASON THAT I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 2 - : PARTNERSHIP DEED DOES NOT SPECIFY THE MANNER OF QUANTIF YING SUCH REMUNERATION. REJECTING THE ASSESSEE OBJECTIONS, AO DISALLOWED THE BALANCE OF RS. 7,58,185/- IN THE ORDER DT. 26-08 -2013. 3. BEFORE THE LD.CIT(A), IT WAS SUBMITTED THAT THE REMUN ERATION WAS PAID TO PARTNERS ACCORDING TO THE PARTNERSHIP ACT R EAD WITH PROVISIONS OF IT ACT AND NO EXCESS CLAIM WAS MADE. L D.CIT(A) WITHOUT REFERRING TO ANY CASE LAW AND RELYING ON THE BOARD CIRCULAR HAS CONFIRMED THE DISALLOWANCE. THE ORDER OF LD.CIT( A) IS AS UNDER: 6. THE ASSESSMENT ORDER AND THE SUBMISSIONS ALONGW ITH THE DOCUMENTS PLACED BEFORE ME ARE CONSIDERED. IN THIS CONTEXT THE CLAUSE 12 OF THE PARTNERSHIP DEED IS RELEVANT, WHICH READS AS UNDER:- 12 REMUNERATION TO PARTNERS: ALL THE PARTNERS EXCEPT PARTNER NO.5 SMT SAMA SANGE ETHA REDDY ARE WORKING PARTNERS AND SHALL DEVOTE THEIR TIME TO THE PARTNERSHIP BUSI NESS AND THEY SHALL BE ENTITLED TO REMUNERATION AS DECIDED MUTUALLY BY THE PARTNERS, S UBJECT TO THE PROVISIONS OF INCOME TAX LAW OR ANY OTHER LAW FOR THE TIME BEING IN FORC E. 6.1 THE CBDT UPON RECEIVING REPRESENTATIONS SEEKING CLARIFICATION IN THE MATTER OF ALLOWABILITY OF REMUNERATION TO PARTNERS IN TERMS OF SEC.40(B)(V) ISSUED CIRCULAR NO.739 DATED 25.07.1996 WHICH IS AS UNDER: 'WHETHER FOR ASSESSMENT YEARS SUBSEQUENT TO ASSESSM ENT YEAR 1996-97, NO DEDUCTION UNDER SECTION 40(B)(V) WILL BE ADMISSIBLE UNLESS PA RTNERSHIP DEED EITHER SPECIFICS AMOUNT OF REMUNERATION PAYABLE TO EACH INDIVIDUAL WORKING PARTNER OR LAYS DOWN MANNER OF QUANTIFYING SUCH REMUNERATION. 1 THE BOARD HAVE RECEIVED REPRESENTATIONS SEEKING C LARIFICATION REGARDING DISALLOWANCE OF REMUNERATION PAID TO THE WORKING PARTNERS AS PROVID ED UNDER SECTION 40(B)(V) OF THE INCOME-TAX ACT. IN PARTICULAR, THE REPRESENTATIONS 'HAVE REFERRED TO TWO TYPES OF CLAUSES WHICH ARE GENERALLY INCORPORATED IN THE PARTNERSHIP DEEDS. THESE ARE: (I) TIRE PARTNERS HAVE AGREED THAT THE REMUNERATION TO A WORKING PARTNER WILL BE THE AMOUNT OF REMUNERATION ALLOWABLE UNDER THE PROVISIO NS OF SECTION 40(B)( V) OF THE INCOME-TAX ACT; AND (II) THE AMOUNT OF REMUNERATION TO WORKING PARTNER WILL BE AS MAY BE MUTUALLY AGREED UPON BETWEEN PARTNERS AT THE END OF THE YEAR. I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 3 - : IT HAS BEEN REPRESENTED THAT THE ASSESSING OFFICERS ARE NOT ALLOWING DEDUCTION ON THE BASIS OF THESE AND SIMILAR CLAUSES IN THE COURSE OF SCRUTINY ASSESSMENTS FOR THE REASON THAT THEY NEITHER SPECIFY THE AMOUNT OF REMUNERATIO N TO EACH INDIVIDUAL NOR LAY DOWN THE MANNER OF QUANTIFYING SUCH REMUNERATION. 2 THE BOARD HAVE CONSIDERED THE REPRESENTATIONS. SI NCE THE AMENDED PROVISIONS OF SECTION 40(B) HAVE BEEN INTRODUCED ONLY WITH EFFECT FROM TIRE ASSESSMENT YEAR 1993-94 AND THESE MAY NOT HAVE BEEN UNDERSTOOD CORRECTLY TI RE BOARD ARE OF THE VIEW THAT LIBERAL APPROACH MAY BE TAKEN FOR THE INITIAL YEARS. IT HAS BEEN DECIDED THAT FOR THE ASSESSMENT YEARS 1993-94 TO 1996-97 DEDUCTION FOR REMUNERATION TO A WORKING PARTNER MAY BE ALLOWED ON THE BASIS OF THE CLAUSES OF THE TYPE MEN TIONED AT I(I) ABOVE. 3 IN CASES WHERE NEITHER THE AMOUNT HAS BEEN QUANTI FIED NOR EVEN THE LIMIT OF TOTAL REMUNERATION HAS BEEN SPECIFIED BUT THE SAME HAS BE EN LEFT TO BE DETERMINED BY THE PARTNERS AT THE END OF THE ACCOUNTING PERIOD, IN SU CH CASES PAYMENT OF REMUNERATION TO PARTNERS CANNOT BE ALLOWED AS DEDUCTION IN THE COMP UTATION OF THE FIRM'S INCOME. 4 IT IS CLARIFIED THAT FOR THE ASSESSMENT YEARS SUB SEQUENT TO THE ASSESSMENT YEAR 1996-97, NO DEDUCTION UNDER SECTION 40(B)(V) WILL BE ADMISSI BLE UNLESS THE PARTNERSHIP DEED EITHER SPECIFIES THE AMOUNT OF REMUNERATION PAYABLE TO EAC H INDIVIDUAL WORKING PARTNER OR LAYS DOWN THE MANNER OF QUANTIFYING SUCH REMUNERATION.' 6.2 THE ISSUE TO BE DECIDED IS WHETHER REMUNERATION CLAIMED IS ALLOWABLE IN VIEW OF THE CLAUSE 12 IN PARTNERSHIP DEED READ W ITH SECTION 40(B)(V) AND THE CIRCULAR ISSUED BY THE CBDT. THE APPELLANT CLAI M IS THAT THE REMUNERATION IS ALLOWABLE IN TERMS OF PARA 4 OF CIR CULAR. THE COMPLETE READING OF THE CIRCULARS SHOWS THAT THE SAME IS NOT ALLOWABLE. THE CASE OF THE ASSESSEE FALLS UNDER PARA 1(I) AND PARTLY UNDER PARA (II) OF THE CIRCULAR, WHICH IS CLEARLY MADE NOT BE ALLOWABLE AT PARA 2. T HE SAME IS MADE ALLOWABLE AS A MEASURE OF LIBERAL APPROACH UPTO ASS ESSMENT YEARS 1996- 97 ONLY. IN VIEW OF THE ABOVE, IT IS HELD THAT THE REMUNERATION CLAIMED IS ALLOWABLE AS THE SAME IS NOT QUANTIFIED. ACCORDINGL Y, THE ACTION OF ASSESSING OFFICER IS CONFIRMED. THE GROUNDS RAISED BY THE APPELLANT ARE REJECTED. 4. DURING THE PRESENT PROCEEDINGS ASSESSEE HAS RAISED AN ADDITIONAL GROUND AS UNDER: THE INITIATION OF PROCEEDINGS U/S. 147, IN THE FAC TS AND CIRCUMSTANCES OF THE CASE, IS NOT VALID. I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 4 - : 5. AFTER CONSIDERING THE RIVAL CONTENTIONS AND PERUSING THE RECORD, I AM OF THE OPINION THAT THE FURTHER DISALLOWAN CE MADE BY THE AO IS NOT SUSTAINABLE. FIRST OF ALL, THE PARTNERSHIP DEED SPECIFIES THE MANNER IN WHICH THE REMUNERATION HAS TO BE PAID TO WORKING PARTNERS. AO IN THE ASSESSMENT ORDER U/S. 143 (3) HAS EXAMINED THE CLAIM AND DISALLOWED THE AMOUNT PAID TO N ON- WORKING PARTNER. THUS, THE ISSUE PRESENTLY CONSIDERED IS CHANGE OF OPINION BY THE SAME OFFICER. IN FACT, THE CIRCULAR RE LIED ON BY THE AO WAS ISSUED WAY BACK ON 25-03-1996 AND HAS TO BE VERY MUCH IN THE KNOWLEDGE OF THE AO WHEN ASSESSMENT WAS COMPLET ED IN DECEMBER 2011. THUS, THE REOPENING AND DISALLOWANC E OF THE AMOUNT IS NOT PERMISSIBLE ON THESE FACTS. 6. MOREOVER, SIMILAR ISSUE WAS CONSIDERED BY THE CO- ORDINATE BENCH IN THE CASE OF ACIT VS. LAXMI SAILAJA TRADERS [1 SOT 608] (HYD)(SMC), DT. SEPTEMBER, 8, 2004, WHEREIN IT WAS HE LD THAT: ..EVEN ON MERITS, THE DISALLOWANCE OF THE CLAIM OF DEDUCTION WAS NOT IN ACCORDANCE WITH LAW. THE PARTNERSHIP DEED HAVING MENTIONED THAT 'E' WAS WORKING PARTNER, SALARY PAID TO SUCH WORKING PA RTNER WAS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40(B) SUB JECT TO THE OUTER LIMITS PRESCRIBED UNDER SUB-CLAUSE (V) THEREOF. 'E' WAS AC TUALLY ENGAGED IN CONDUCTING THE AFFAIRS OF THE FIRM EVEN AS PER EXPL ANATION 4, 'E' WAS TO BE TREATED AS WORKING PARTNER. [PARA 8] AS PER SECTION 40(B), SALARY OR REMUNERATION PAID T O A PARTNER IS NOT ALLOWABLE. HOWEVER, EXCEPTIONS ARE PROVIDE IN THE S AID CLAUSE WHEREBY REMUNERATION PAID TO A 'WORKING PARTNER' IS ALLOWAB LE AS DEDUCTION, SUBJECT TO SUB-CLAUSE (V), IF SUCH PAYMENT IS AUTHO RIZED BY AND IS IN ACCORDANCE WITH THE PARTNERSHIP DEED. NOWHERE IN SU B- CLAUSE (B) OF SECTION 40 THE MODE OF AUTHORIZATION IS PRESCRIBED. HOWEVER, THE CBDT ISSUED A CIRCULAR STATING THAT IF THE DEED DOES NOT SPECIFY THE AMOUNT OF REMUNERATION TO EACH INDIVIDUAL, IT CANNOT QUALIFY FOR DEDUCTION UNDER SECTION 40(B). NO DOUBT THE CIRCULAR ISSUED BY THE CBDT IS BINDING ON THE OFFICERS, BUT IT DOES NOT BIND THE COURTS OR TRIBUN ALS, PARTICULARLY WHEN IT IS CONTRARY TO THE PROVISIONS OF THE ACT. AN ASSESS EE IS ALWAYS ENTITLED TO I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 5 - : CLAIM THAT THE CIRCULAR ISSUED BY THE CBDT IS NOT I N CONSONANCE WITH THE PLAIN LANGUAGE OF THE SECTION. IN THE INSTANT CASE, THE PARTNERSHIP DEED AUTHORIZED THE PARTNERS TO RECEIVE THE REMUNERATION AND ALSO AUTHORIZED THE PARTNERS TO DETERMINE THE QUANTUM OF REMUNERATI ON AT THE END OF THE PREVIOUS YEAR, SUBJECT TO THE MAXIMUM ALLOWABLE UND ER SECTION 40(B)(V). THUS, IT COULD NOT BE SAID THAT THE REMUNERATION PA YABLE TO THE PARTNER WAS NOT AUTHORIZED BY THE PARTNERSHIP DEED OR THE A CTUAL AMOUNT PAID TO THE PARTNER WAS NOT IN ACCORDANCE WITH PARTNERSHIP DEED. THEREFORE, THE REMUNERATION PAID TO THE PARTNERS WAS IN CONSONANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND, ACCORDINGLY, ALLOWABLE AS DED UCTION. UNDER THE CIRCUMSTANCES, THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER WAS TO BE SET ASIDE AND THE APPEAL FILED BY THE REVENUE WAS T O BE DISMISSED. 6.1. THERE IS NO CONTRARY DECISION, SO THE SAME IS B INDING ON AO/CIT(A). 7. FURTHER, HON'BLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF DURGA DASS DEVKI NANDAN VS. ITO [342 ITR 17] (HIMAC HAL PRADESH) HAS CONSIDERED THE CBDT CIRCULAR AND HELD TH AT THE SAME CANNOT OVERRIDE THE PROVISIONS OF THE ACT. THE JUDGME NT OF THE HON'BLE HIGH COURT IS AS UNDER: 7. IT IS SETTLED LAW THAT THE CBDT CANNOT ISSUE A C IRCULAR WHICH GOES AGAINST THE PROVISIONS OF THE ACT. THE CBDT CAN ONL Y CLARIFY ISSUES BUT CANNOT INSERT TERMS AND CONDITIONS WHICH ARE NOT PA RT OF THE MAIN STATUTE. A DELEGATE OR PERSON AUTHORIZED TO ISSUE DELEGATED LEGISLATION CANNOT VIRTUALLY SET AT NAUGHT THE PROVISIONS OF THE MAIN STATUTE. A READING OF S. 40(B)(V) CLEARLY SHOWS THAT AMOUNT OF REMUNERATION WHICH DOES NOT EXCEED THE AMOUNT GIVEN IN THE IT ACT IS DEDUCTABLE. THE C BDT HAS PROVIDED THAT EITHER THE AMOUNT OF REMUNERATION PAYABLE TO EACH I NDIVIDUAL SHOULD BE FIXED IN THE AGREEMENT OR THE PARTNERSHIP AGREEMENT DEED SHOULD LAY DOWN THE MANNER OF QUANTIFYING SUCH REMUNERATION. I N THE PRESENT CASE WHEN THE PARTNERSHIP DEED PROVIDES THAT THE REMUNER ATION WILL BE AS PER THE PROVISIONS OF THE IT ACT, IT CLEARLY MEANS THAT THE REMUNERATION PAYABLE TO THE PARTNERS SHALL BE QUANTIFIED AS PER THE PROV ISIONS OF THE ACT AND SHALL NOT EXCEED THE MAXIMUM REMUNERATION PROVIDED. IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE PARTNERS WERE PAID REMU NERATION WHICH WAS LESS THAN THE MAXIMUM PROVIDED BY THE IT ACT. NONE OF THE AUTHORITIES I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 6 - : HAVE DOUBTED THE PAYMENT OF REMUNERATION AND IN FAC T ACCOUNT BOOKS OF THE ASSESSEE FIRM HAVE BEEN ACCEPTED TO BE CORRECT. THEREFORE, NOBODY HAS DOUBTED THE PAYMENT OF REMUNERATION TO THE PARTNERS . 8. IT HAS BEEN URGED BY SHRI VINAY KUTHIALA, LEARNE D COUNSEL FOR THE RESPONDENT THAT AS PER THE CBDT CIRCULAR THE PARTNE RSHIP DEED SHOULD SPECIFY THE AMOUNT OF REMUNERATION OR SHOULD GIVE A SPECIFIC METHOD OF QUANTIFYING SUCH REMUNERATION, OTHERWISE DEDUCTION CANNOT BE ALLOWED. WE ARE UNABLE TO ACCEPT SUCH CONTENTION. THE CIRCUL AR HAS TO BE READ ALONG WITH SECTION 40(B)(V) AND HAS TO BE MADE SUBJECT TO SECTION 40(B)(V). THIS SECTION DOES NOT LAY DOWN ANY CONDITION OF FIXING T HE REMUNERATION OR THE METHOD OF REMUNERATION IN THE PARTNERSHIP DEED. ALL THAT THE SECTION PROVIDES IS THAT IN CASE THE PAYMENT OF REMUNERATIO N MADE TO ANY WORKING PARTNER IS IN ACCORDANCE WITH THE TERMS OF THE PART NERSHIP DEED AND DOES NOT EXCEED THE AGGREGATE AMOUNT AS LAID DOWN IN THE SUBSEQUENT PORTION OF THE SECTION THE DEDUCTION IS PERMISSIBLE. THEREF ORE, IF IN THE PARTNERSHIP DEED IT WAS CLEARLY MENTIONED THAT THE PARTNERS WOU LD GET REMUNERATION CALCULATED AS PER THE PROVISIONS OF THE INCOME-TAX ACT WHICH MEANS THAT THIS WOULD NOT EXCEED THE MAXIMUM AMOUNT PROVIDED U NDER THE ACT. 9. IN CIT V. ANIL HARDWARE STORE [2010] 323 ITR 368 THIS COURT WAS DEALING WITH A PARTNERSHIP DEED WHERE THE PROVISION S OF THE INCOME-TAX ACT ITSELF HAD BEEN INCORPORATED IN THE PARTNERSHIP DEED. THIS COURT HELD THAT THIS ITSELF PROVIDES A METHOD OF COMPUTATION. IN THAT CASE WE HAD NOT GONE INTO THE VALIDITY OF THE CBDT CIRCULAR. THE CB DT CIRCULAR CAN ONLY BE HELD TO BE VALID IF IT IS IN TERMS OF THE MAIN SECT ION. AS HELD ABOVE, THE SECTION 40(B)(V) ONLY LAYS DOWN THAT EITHER THE WOR KING PARTNER SHOULD BE PAID AN AMOUNT SPECIFIED IN THE PARTNERSHIP DEED OR IT SHOULD NOT EXCEED THE AMOUNT LAID DOWN IN THE SECTION. IN THE PRESENT CASE THE PARTNERS HAVE BEEN PAID THEIR REMUNERATION/SALARY STRICTLY IN ACC ORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND THIS AMOUNT PAID TO THE PARTNERS DOES NOT EXCEED THE MAXIMUM PERMISSIBLE AMOUNT AND THEREFORE , THE ASSESSEE IS ENTITLED TO THE DEDUCTION. 10. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL IS ALLOWED AND THE SUBSTANTIAL QUESTIONS OF LAW ARE DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. NO COSTS. 8. IN VIEW OF THE PRINCIPLES LAID DOWN ON THE SUBJECT, THE ORDER OF AO AND CIT(A) IS NOT SUSTAINABLE. THE GROUNDS RAISED BY ASSESSEE ON THIS ISSUE ARE ACCORDINGLY ALLOWED. I.T.A. NO. 1391/HYD/2016 M/S. SRI SRI ESTATES :- 7 - : 9. SINCE THE ISSUE IS CONSIDERED IN FAVOUR OF ASSESS EE ON MERITS, THE ADDITIONAL GROUND RAISED BECOMES ACADEMIC. EVEN O THERWISE THERE IS MERIT IN THE CONTENTION THAT REOPENING IS ON CHAN GE OF OPINION AS DISCUSSED ABOVE, BUT THIS ISSUE IS NOT BEIN G ADJUDICATED AS THE PRIMARY RECORD OF SATISFACTION RECORDED IS NOT O N RECORD. IN THE ABSENCE OF SUCH THE ADDITIONAL GROUND CANNOT BE ADM ITTED. 10. IN THE RESULT, APPEAL OF ASSESSEE IS PARTLY ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 17 TH FEBRUARY, 2017 SD/- (B. RAMAKOTAIAH) ACCOUNTANT MEMBER HYDERABAD, DATED 17 TH FEBRUARY, 2017 TNMM COPY TO : 1. M/S. SRI SRI ESTATES, HYDERABAD. C/O. CH. PARTHASARATHY & CO., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST.NO.1, ASHOKNAGAR, HYDERABAD. 2. THE INCOME TAX OFFICER, WARD-9(1), HYDERABAD. 3. COMMISSIONER OF INCOME TAX(APPEALS)-7, HYDERABAD . 4. THE PR. COMMISSIONER OF INCOME TAX-7, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.