DCIT, Circle-5, Pune V. M/s. Kirtane & Pandit, Pune

ITA 1732/PUN/2013

• Counselvise Citation: 173224514 RSA 2013
• Duration Of Justice: 1 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 18-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 11-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Keywords: Business expenditure; Revised return
• Section: 37(1); 139(5); 90; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER, AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA.NOS.1731 & 1732/PN/2013 (ASSESSMENT YEARS : 2007-08 & 2008-09) DCIT, CIRCLE-5, PUNE .. APPELLANT VS. M/S, KIRTANE & PANDIT, SANGATI, 73/2/2, BHAKTI MARG OF LAW COLLEGE ROAD, PUNE 411004 .. RESPONDENT PAN NO.AACFK3469M ITA.NO.1646/PN/2013 (ASSESSMENT YEAR : 2008-09) M/S, KIRTANE & PANDIT, SANGATI, 73/2/2, BHAKTI MARG OF LAW COLLEGE ROAD, PUNE 411004 .. APPELLANT PAN NO.AACFK3469M VS. DCIT, CIRCLE-5, PUNE .. RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE REVENUE BY : SHRI B.C. MALAKAR DATE OF HEARING : 16-03-2015 DATE OF PRONOUNCEMENT : 31-03-2015 ORDER PER R.K. PANDA, AM : ITA NO.1731/PN/2013 FILED BY THE REVENUE IS DIRECTE D AGAINST THE ORDER DATED 30-01-2012 OF THE CIT(A)-III, PUNE RELATING TO ASSESSMENT YEAR 2007-08. ITA NO.1732/PN/2013 FILED BY THE REVENUE AND ITA NO.1646/PN/2013 FILED BY THE ASSESS EE ARE CROSS APPEALS AND ARE DIRECTED AGAINST THE ORDER DATED 06 -03-2012 OF THE CIT(A)-III, PUNE RELATING TO ASSESSMENT YEAR 2008-0 9. FOR THE SAKE 2 OF CONVENIENCE, ALL THESE APPEALS WERE HEARD TOGETH ER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO.1731/PN/2013 (BY REVENUE) (A.Y. 2007-08) : 2. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A FIRM OF CHARTERED ACCOUNTANTS ENGAGED IN PROVIDING AUDITING AND ACCOUNTING SERVICES. IT FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 31-10-2007 DECLARING TOTAL INCOM E OF RS.1,41,01,603/- AND COMPUTING THE TAX LIABILITY OF RS.33,03,582/-. THE SAID RETURN WAS PROCESSED BY THE AO ON 15-06-20 09 AND PAYMENT OF TAX ALONG WITH INTEREST AMOUNTING TO RS.24,69,85 2/- WAS DETERMINED IN THE INTIMATION PASSED U/S.143(1). AGAINST THE S AID INTIMATION, THE ASSESSEE FILED A RECTIFICATION PETITION U/S.154 BEF ORE THE AO ON 21-07- 2009 WHICH WAS RE-SUBMITTED ON 26-07-2010 AND AGAIN ON 01-09- 2010. IN THE SAID PETITION, THE ASSESSEE STATED TH AT WHILE FILING THE RETURN OF INCOME, REMUNERATION PAID TO PARTNERS U/S .40(B) AMOUNTING TO RS.44,91,000/- REMAINED TO BE CLAIMED AS DEDUCT ION. HOWEVER, THE TAX LIABILITY OF RS.33,03,582/- WAS CORRECTLY COMPU TED ON THE TOTAL INCOME AFTER CLAIMING THE SAID DEDUCTION. IT WAS S UBMITTED THAT SINCE THE TAX LIABILITY COMPUTED IN THE INTIMATION PASSED U/S.143(1) ON THE INCOME OF RS.1,41,01,603/- WAS INCLUSIVE OF THE REM UNERATION PAID TO PARTNERS, THEREFORE, THE SAME SHOULD BE RECTIFIED A ND THE TOTAL INCOME SHOULD BE COMPUTED AT RS.96,10,604/- AS AGAINST RS. 1,41,01,603/-. 3 2.1 HOWEVER, THE AO TURNED DOWN THE REQUEST OF THE ASSESSEE VIDE HIS LETTER DATED 12-10-2010 STATING THAT THE TAX LI ABILITY WORKED OUT IN THE INTIMATION PASSED U/S.143(1) WAS ON THE BASIS O F THE TOTAL INCOME DECLARED IN THE RETURN OF INCOME AND THERE WAS NO M ISTAKE APPARENT FROM THE RECORDS WARRANTING RECTIFICATION U/S.154. THE AO FURTHER HELD THAT SUCH A REVISION AS SOUGHT BY THE ASSESSEE SHOULD ONLY BE DONE BY WAY OF FILING OF A REVISED RETURN IN TERMS OF SECTION 139(5) OF THE I.T. ACT. 3. BEFORE THE CIT(A), IT WAS SUBMITTED THAT IN THE RETURN FILED FOR THE IMPUGNED ASSESSMENT YEAR, THERE WAS NO SPECIFIC ROW AVAILABLE WHICH ASKED FOR THE PARTNERS REMUNERATION. IT WAS SUBMITTED THAT THE DISCREPANCY WAS NOT INTENTIONAL AND THAT THE ASSESS EE INTENDED TO RETURN THE NET INCOME AFTER CLAIMING THE DEDUCTION U/S.40(B). THE ASSESSEE FURTHER SUBMITTED THAT THE INCOME BEFORE C LAIMING OF DEDUCTION U/S.40(B), NET TAX LIABILITY AND TAXES PA ID FROM TIME TO TIME IN THE COMPUTATION OF INCOME MATCH WITH THE RETURN OF INCOME FILED. THE ASSESSEE ALSO STATED THAT THE VARIOUS EXPENSES DEBITED IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE SHEET SUCH AS CAPI TAL ACCOUNT OF PARTNERS, RESERVES AND SURPLUS, FIXED ASSETS, CURRE NT ASSETS, LOANS ETC. MATCH WITH THE FIGURES AS PER RETURN OF INCOME. SI NCE THE RETURN WAS FILLED UP ON THE BASIS OF AUDITED PROFIT AND LOSS A CCOUNT AND COMPUTATION OF INCOME AND SINCE THE RETURN FORM WAS VERY DESCRIPTIVE, THEREFORE, THE PERSON FILLING UP THE FORM WENT ON F OLLOWING THE SPECIFIC HEADS/REQUIREMENTS. SINCE THERE WAS NO SPECIFIC RO W FOR FILLING THE PARTNERS DEDUCTIBLE FIGURE, THE SAME WAS NOT MENTIO NED AS SUCH. IT 4 WAS FURTHER SUBMITTED THAT THE REMUNERATION IS AUTH ORIZED IN THE PARTNERSHIP DEED WHICH MANDATES THAT THE PARTNERS R EMUNERATION WAS TO BE COMPUTED AS PER THE PROVISIONS OF SECTION 40( B) OF THE I.T. ACT. THE ASSESSEE ALSO SUBMITTED THAT THE DISCREPANCY WA S A MERE TYPOGRAPHICAL ERROR WHICH CAN BE CORRECTED. FURTHE R, THE MISTAKE IS APPARENT FROM THE RECORD AND THE AO SHOULD HAVE CAR RIED OUT THE RECTIFICATION AND GRANTED THE APPROPRIATE RELIEF TO THE ASSESSEE. THE CBDT CIRCULAR NO.1(XC-35) DATED 11-04-1955 AND THE DECISION OF HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF CI T VS. K.N. OIL INDUSTRIES REPORTED IN 142 ITR 12 WERE ALSO BROUGHT TO THE NOTICE OF THE CIT(A). 4. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) ALLOWED THE RECTIFICATION PETITION FILED BY THE ASSESSEE BY OBSERVING AS UNDER : 5. THE ARGUMENTS ADVANCED BY THE LD. COUNSEL FOR THE APPELLANT ARE CAREFULLY EXAMINED WITH REFERENCE TO THE E-RETU RN OF INCOME AND THE COMPUTATION SHEET OF TAX LIABILITY FURNISHED BY T HE APPELLANT FOR THE YEAR UNDER APPEAL. IN THE PRESENT CASE, IT IS NOT IN DISPUTE THAT REMUNERATION OF RS.44,91,000/- WAS PAID TO PARTNERS DU RING THE YEAR. THE ASSESSING OFFICER HAS NOT QUESTIONED THE GENUINENESS O F THE EXPENDITURE NOR DID HE GIVE A FINDING IN THE RECTIF ICATION ORDER THAT THE PAYMENT WAS NOT AUTHORIZED BY OR IN ACCORDANCE WITH THE RELEVANT PARTNERSHIP DEED OR IT WAS IN EXCESS OF THE AMOUNT ADMI SSIBLE UNDER THE PROVISIONS SEC. 40(B). THE ONLY CASE OF THE ASSESSING OFFICER IN REJECTING THE PETITION FILED UNDER SEC. 154 IS THAT THE PARTNERS' REMUNERATION WAS TO BE REFLECTED IN RELEVANT COLUMNS OF T HE RETURN, BUT THE SAME WAS NOT SHOWN SO AND THE COMPUTATION OF INCO ME WHEREIN THE DEDUCTION WAS CLAIMED, CANNOT BE EQUATED WITH THE RETURN OF INCOME. ACCORDING TO THE ASSESSING OFFICER, ALL THE ADMISSIBLE DEDUCTIONS NEEDED TO BE CLAIMED EITHER IN THE ORIGINAL RETURN OF INCOME OR BY FURNISHING THE REVISED RETURN. O N THE OTHER HAND, THE CLAIM OF THE APPELLANT IS THAT IT WAS AN ACTUAL EXP ENDITURE AND NOT CLAIMING IT IN THE RETURN OF INCOME WAS A MERE TYPOGRAPHICAL MISTAKE AND NOT A LAPSE OR A PRINCIPAL MISTAKE. IT IS NOTICED FROM THE MATERIAL PLACED ON RECORD THAT SAID PAYMENT OF REMUNE RATION WAS CLAIMED AS DEDUCTION IN THE COMPUTATION OF TOTAL INCOME WHEREIN THE FINAL TAX LIABILITY WAS WORKED OUT, WHICH IS ENCLOSED HEREWITH AS ANNEXURE A. IT IS FURTHER NOTICED THAT THE TAX LIABIL ITY SO WORKED OUT IS IN SYNC WITH TOTAL TAX LIABILITY OF RS.32,34,929/- SHOW N AT ITEM NO.10 5 OF PART B-TTI OF THE E-RETURN OF INCOME AND FOR REA DY REFERENCE, THE RELEVANT PORTION OF E-RETURN IS SCANNED AND REPRODUC ED HEREUNDER : B-TTI COMPUTATION OF TAX LIABILITY ON TOTAL INCOME 1 TAX PAYABLE ON TOTAL INCOME A TAX AT NORMAL RATES 1A 2883181 B TAX AT SPECIAL RATES (II OF SCHEDULE-SI) 1B 0 C TAX PAYABLE ON TOTAL INCOME (2A+2B) 1C 2883181 2 REBATE UNDER SECTION 88E (4 OF SCHEDULE-STTC) 2 0 3 BALANCE TAX PAYABLE (1-2) 3 2883181 4 SURCHARGE ON 3 4 288318 5 EDUCATION CESS ON (3+4) 5 63430 6 GROSS TAX LIABILITY (3+4+5) 6 3234929 7 TAX RELIEF 0 A SECTION 90 7A B SECTION 91 7B 0 C TOTAL (7A +7B) 7C 0 8 NET TAX LIABILITY (6-7C) 8 3234929 IN SUCH CIRCUMSTANCES, THE MERE NON-MENTION OF ANY ITE M OF EXPENDITURE IN THE E-RETURN OR TYPOGRAPHICAL MISTAKE IN SHOWING THE INCOME FROM BUSINESS OR PROFESSION OR THE TOTAL INCOME IN THE E-RETURN SHOULD NOT BE REGARDED AS FATAL ERROR, DEPRIVING THE APPELLANT OF OTHERWISE LEGITIMATE ADMISSIBLE CLAIM. AS POINTED OUT BY T HE LD. COUNSEL, THERE COULD BE SOME TYPOGRAPHICAL ERRORS IN THE E-RETURN PARTICULARLY IN THE INITIAL YEARS OF INTRODUCTION OF E-RET URNS AND ANY SUCH TYPOGRAPHICAL ERRORS CREPT IN INADVERTENTLY IN FILL ING THE SAME OUGHT NOT TO BE USED FOR MAKING ANY DISALLOWANCE OF G ENUINE AND LEGITIMATE EXPENDITURE. THE DECISION OF THE APEX COURT IN THE CASE OF GOETZ (INDIA) LTD. (SUPRA), WHICH WAS RENDERED IN THE CONTEXT OF NOT CLAIMING DEDUCTION AT ALL IN THE RETURN, CANNOT BE APPL IED IN A CASE WHERE THERE IS A TYPOGRAPHICAL PRIMA FACIE ERROR OF PRE SENT NATURE ESPECIALLY WHEN THE TAX LIABILITY WAS CORRECTLY WORKED OUT IN THE E- RETURN OF INCOME FILED TAKING INTO CONSIDERATION THE SAID DEDUCTION OF REMUNERATION TO PARTNERS. 5.1 IN THE LIGHT OF THE POSITION NARRATED ABOVE, IT IS CLEAR THAT THE APPELLANT HAD TAKEN INTO CONSIDERATION THE REMUNERATION TO PARTNERS OF RS.44,91,000/- WHILE COMPUTING THE TAXABILITY IN THE E-RETURN OF INCOME. THEREFORE, THE ASSESSING OFFICER IS NOT JUSTIFIE D ON FACTS AND IN LAW IN REJECTING THE APPLICATION FILED UNDER SEC. 154 AN D DENYING THE DEDUCTION FOR REMUNERATION TO PARTNERS OF RS.44,91,00 0/- ON THE GROUND THAT THE CLAIM WAS NOT MADE IN THE E-RETURN O F INCOME. HOWEVER, THE ASSESSING OFFICER IS DIRECTED TO VERIFY WHE THER THE PAYMENT OF REMUNERATION TO PARTNERS IS AUTHORIZED BY A ND IS IN ACCORDANCE WITH THE TERMS OF PARTNERSHIP DEED AND IF S O ALLOW THE DEDUCTION SUBJECT TO THE LIMITS SPECIFIED UNDER CLAUSE ( V) OF SEC.40(B). 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US WITH THE FOLLOWING GROUNDS : 6 1. THE ORDER OF THE LD.CIT(A) IS CONTRARY TO THE LA W AND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN DIRECTING THE AO TO VERIFY WHETHER THE PAYMENT OF REMUNERATION TO PARTNER S AS PER PARTNERSHIP DEED AND ALLOW THE DEDUCTION SUBJECT TO T HE LIMITS SPECIFIED UNDER CLAUSE (V) OF SEC. 40(B) OF THE I.T. ACT, 1961 WHERE THE ASSESSEE HAD NOT CLAIMED THE SAID DEDUCTION IN E-RETUR N AND NOT REVISED HIS RETURN OF INCOME WITHIN TIME LIMIT PROVIDED U/S. 139(5) OF THE I.T. ACT, 1961. 3. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN NOT REL YING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF G OETZ (INDIA) LIMITED VS.CIT (284 ITR 323) WHEREIN THE HONBLE APEX COURT HELD THAT WHERE CLAIM FOR DEDUCTION HAS NOT BEEN MADE, THE AO CANNOT ENTERTAIN THE SAID CLAIM. THE REMEDY IS ONLY TO FILE RE VISED RETURN AT ANY TIME BEFORE EXPIRY OF ONE YEAR FROM THE END OF TH E RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION OF THE ASSE SSMENT, WHICHEVER IS EARLIER. 4. FOR THESE AND SUCH ABOVE OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LD.CIT(A)MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 5. THE APPELLANT CRAVES, LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUND OF APPEAL DURING THE COURSE OF THE APPELLATE PROCEEDINGS BEFORE THE ITAT. 6. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH T HE PARTIES AND PERUSED THE ORDERS OF THE AO AND THE CIT(A). THE O NLY DISPUTE TO BE ADJUDICATED IN THIS APPEAL IS THE ALLOWABILITY OF T HE CLAIM OF REMUNERATION TO THE PARTNERS AMOUNTING TO RS.44,91, 000/- IN A PETITION U/S.154 OF THE I.T. ACT WHICH ACCORDING TO THE AO W AS NOT CLAIMED IN THE RETURN OF INCOME. ACCORDING TO THE AO, THE REM UNERATION TO PARTNERS WAS TO BE REFLECTED IN THE RELEVANT COLUMN S OF THE RETURN. SINCE THE SAME WAS NOT SHOWN, THEREFORE, THE SAME C AN BE CLAIMED ONLY BY FILING A REVISED RETURN. IT IS THE CASE OF THE ASSESSEE THAT IT WAS AN ACTUAL EXPENDITURE AND NON CLAIM OF THE AAME IN THE RETURN OF INCOME WAS A MERE TYPOGRAPHICAL MISTAKE AND NOT A L APSE OR A VITAL MISTAKE. WE FIND THE LD.CIT(A) ALLOWED THE CLAIM O F THE ASSESSEE ON THE GROUND THAT THE FINAL TAX LIABILITY WAS WORKED OUT AFTER CLAIMING THE 7 REMUNERATION PAID TO THE PARTNERS. THE TAX LIABILI TY SO WORKED OUT IS IN CONFIRMITY WITH TOTAL TAX LIABILITY OF RS.32,34,929 /- SHOWN AT ITEM NO.10 OF PART-B-TTI OF THE E-RETURN OF INCOME. THE REFORE, WE CONCUR WITH THE OBSERVATION OF THE LD.CIT(A) THAT THE MERE NON-MENTION OF ANY ITEM OF EXPENDITURE IN THE E-RETURN OR TYPOGRAP HICAL MISTAKE IN SHOWING THE INCOME FROM BUSINESS OR PROFESSION OR T HE TOTAL INCOME IN THE E-RETURN SHOULD NOT BE REGARDED AS A FATAL ERRO R DEPRIVING THE ASSESSEE OF OTHERWISE LEGITIMATE ADMISSIBLE CLAIM. SINCE THE ASSESSEE IN THE RETURN OF INCOME FILED HAS COMPUTED THE TOTA L TAX LIABILITY AFTER TAKING INTO CONSIDERATION THE REMUNERATION PAID TO PARTNERS AT RS.44,91,000/-, THEREFORE, THE AO IN OUR OPINION WA S NOT JUSTIFIED IN REJECTING THE 154 PETITION FILED BY THE ASSESSEE. SINCE THE MISTAKE WAS A MERE TYPOGRAPHICAL ERROR IN NOT MENTIONING THE RE MUNERATION, FILING OF A REVISED RETURN IN OUR OPINION IS NOT NECESSARY IN THE INSTANT CASE. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAI LED REASONING GIVEN BY THE LD.CIT(A) WE FIND NO INFIRMITY IN HIS ORDER . ACCORDINGLY, THE SAME IS UPHELD AND THE GROUNDS RAISED BY THE REVENU E ARE DISMISSED. ITA NO.1732/PN/2013 (BY REVENUE) (A.Y. 2008-09) : 7. GROUNDS RAISED BY THE REVENUE ARE AS UNDER : 1. THE ORDER OF THE LD.CIT(A) IS CONTRARY TO THE LA W AND FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN DIRECTING THE AO TO VERIFY WHETHER THE PAYMENT OF REMUNERATION TO PARTNER S AS PER PARTNERSHIP DEED AND ALLOW THE DEDUCTION SUBJECT TO T HE LIMITS SPECIFIED UNDER CLAUSE (V) OF SEC. 40(B) OF THE I.T. ACT, 1961 WHERE THE ASSESSEE HAD NOT CLAIMED THE SAID DEDUCTION IN E-RETUR N AND NOT REVISED HIS RETURN OF INCOME WITHIN TIME LIMIT PROVIDED U/S. 139(5) OF THE I.T. ACT, 1961. 8 3. THE LD.CIT(A) ERRED ON FACTS AND IN LAW IN NOT REL YING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF G OETZ (INDIA) LIMITED VS.CIT (284 ITR 323) WHEREIN THE HONBLE APEX COURT HELD THAT WHERE CLAIM FOR DEDUCTION HAS NOT BEEN MADE, THE AO CANNOT ENTERTAIN THE SAID CLAIM. THE REMEDY IS ONLY TO FILE R EVISED RETURN AT ANY TIME BEFORE EXPIRY OF ONE YEAR FROM THE END OF TH E RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION OF THE ASSE SSMENT, WHICHEVER IS EARLIER. 4. FOR THESE AND SUCH ABOVE OTHER GROUNDS AS MAY BE URGED AT THE TIME OF THE HEARING, THE ORDER OF THE LD.CIT(A)MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 5. THE APPELLANT CRAVES, LEAVE TO ADD, AMEND, ALTER OR DELETE ANY OF THE ABOVE GROUND OF APPEAL DURING THE COURSE OF THE APPELLATE PROCEEDINGS BEFORE THE ITAT. 8. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUNDS RAISED BY THE REVENUE ARE IDENTICAL TO THE GROUNDS RAISED BY THE REVENUE IN ITA NO.1731/PN/2013. WE HAVE ALREADY DECIDED THE A PPEAL AND THE GROUNDS RAISED BY THE REVENUE HAVE BEEN DISMISSED. FOLLOWING THE SAME REASONING, THE GROUNDS RAISED BY THE REVENUE F OR THE IMPUGNED ASSESSMENT YEAR ARE ALSO DISMISSED. ITA NO.1646/PN/2013 (BY ASSESSEE) (A.Y. 2008-09) : 9. GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER : 1. THE LEARNED CIT (APPEALS)-III, PUNE ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF THE LEARNED AO IN NOT ALLOWING THE DEDUCTION OF PROFESSIONAL FEES OF RS. 8,48,318/- PAID TO DIRECTO R (MR. SANDIP WELLING) OF THE APPELLANT FIRM FOR THE REASONS THAT T HE SAME IS DEBITED TO RESERVES (INSTEAD OF P&L A/C) AND THAT THE SAID DIR ECTOR WAS UNDERGOING SOME DISPUTE WITH INSTITUTE OF CHARTERED ACC OUNTANTS OF INDIA. 2. THE LEARNED CIT (APPEALS)-III, PUNE FURTHER ERRE D IN LAW AND ON FACTS IN HOLDING THAT THE DISALLOWANCE OF RS. 8,48,318 /- WAS JUSTIFIED IN THE ABSENCE OF ESTABLISHING THE NATURE OF SERVICES REN DERED. 3. THE APPELLANT CRAVES, LEAVE TO ADD / MODIFY / DEL ETE ALL OR ANY OF THE GROUNDS OF APPEAL. 10. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE FILED ITS RETURN OF INCOME ON 29-09-2008 DECLARING NIL INCOME. DURING THE COURSE OF 9 ASSESSMENT PROCEEDINGS, THE AO NOTED THAT AS AGAINS T PROFESSIONAL RECEIPT OF RS.5,32,80,446/-, THE NET PROFIT HAS BEE N SHOWN BY THE ASSESSEE FIRM AT RS.1,86,81,330/-. THE AO FURTHER N OTED THAT THE ASSESSEE HAS GIVEN A SUM OF RS.8,48,318/- TO ITS EX -PARTNER AND DEDUCTED IT FROM ITS TAXABLE INCOME. THE AO THEREF ORE ISSUED THE FOLLOWING SHOW CAUSE NOTICES TO THE ASSESSEE : COMPUTATION OF INCOME SHOWS AMOUNT OF RS.8,48,318/- PAID TO SHRI SANDEEP WELLING, DIRECTOR. UNDER WHAT AUTHORITY, WHA T IS HI ROLE, NATURE OF PAYMENT AND JUSTIFICATION THEREOF IS TO BE FIL ED. FURTHER, SCHEDULE C REVEALS THAT THE PAYMENTS IS MADE FROM RESERVES, THEN HOW WILL AFFECT PROFIT OF CURRENT YEAR. 10.1 THE ASSESSEE VIDE HIS REPLY DATED 07-12-2010 R EPLIED AS UNDER WHICH HAS BEEN REPRODUCED BY THE AO IN THE BODY OF THE ASSESSMENT ORDER : MR. SANDIP WELLING HAS BEEN PARTNER OF THE ASSESSEE FIRM. HOWEVER, DURING THE A.Y. 2007-08, SOME LITIGATION WAS GOING ON WIT H ICAI IN RESPECT OF HIS CERTIFICATE OF PRACTICE (COP). AS SUC H, FOR A SHORT PERIOD OF TIME, HE HAS TO ACT AS A DIRECTOR OF THE FIRM INSTEA D OF PARTNER. YOUR GOODSELF COULD OBSERVE THAT FINANCIAL STATEMENT FOR T HE A.Y. 2008-09 HAVE BEEN SIGNED BY MR. SANDIP WELLING IN THE CAPACITY O F DIRECTOR. RS.8,48,318/- PAID TO HIM WAS IN THE NATURE OF PROFESS IONAL FEES FOR RENDERING OF SERVICES. THE TDS ON THE SAME WAS DULY DEDUCTED BY THE ASSESSEE FIRM AND THE SAME IS OFFERED TO TAX BY MR. S ANDIP WELLING IN HIS PERSONAL RETURN. 11. HOWEVER, THE AO WAS NOT SATISFIED WITH THE ABOV E EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THAT THE ASSESSE E HAS PAID TO MR. SANDIP WELLING AS COMPENSATION FOR NOT BEING PARTNE R IN THE FIRM FOR SOME PERIOD DUE TO SOME DISPUTE WITH ICAI. AS SUCH THIS IS NON- BUSINESS EXPENDITURE OF THE ASSESSEE AND ATTRACTS T HE PROVISIONS OF SECTION 37(1) OF THE I.T. ACT. SECONDLY, THE PAYME NT TO MR. SANDIP WELLING HAS BEEN MADE FROM THE RESERVES OF THE FIRM . NO WHERE IT AFFECTS THE TAXABILITY OF THE FIRMS INCOME. HE TH EREFORE DISALLOWED 10 THE CLAIM OF THE ASSESSEE AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 12. BEFORE CIT(A) IT WAS ARGUED THAT THE SALARY PAI D TO EX-PARTNER MR. SANDIP WELLING WAS NOT CERTAINLY A NON-BUSINESS EXPENDITURE. IT WAS SUBMITTED THAT MR. WELLING WAS TEMPORARILY CONS IDERED AS DIRECTOR OF THE FIRM DUE TO THE ON-GOING LITIGATION BEFORE THE ICAI AND THAT THE SAID ASPECT WAS NOT AT ALL RELEVANT FOR TH E PRESENT SUBJECT MATTER SINCE FOR A.Y. 2008-09 HE WAS TREATED AS AN EMPLOYEE OF THE ASSESSEE FIRM. IT WAS STATED THAT MR. WELLING HAD WORKED FOR VARIOUS ASSIGNMENTS FOR THE FIRM AND CORRESPONDING REVENUE THERE FROM WAS ALREADY OFFERED TO TAX THROUGH THE PROFIT AND LOSS ACCOUNT. THE REMUNERATION PAID TO HIM BY DEBITING TO RESERVE WAS ONLY FOR A STRATEGIC REASON OF ANY POSSIBILITY OF NON-COMPLIAN CE. HOWEVER, THE EXPENDITURE WAS BONAFIDE AND THEREFORE THE SAME WAS CLAIMED THROUGH COMPUTATION OF INCOME. 13. HOWEVER, THE LD.CIT(A) WAS ALSO NOT SATISFIED W ITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THA T THE ASSESSEE FAILED TO SUBSTANTIATE THE EXACT NATURE OF SERVICES ACTUALLY RENDERED BY THE ASSESSEE BY THE SAID PERSON IN THE NEW CAPACITY AS EMPLOYEE DURING THE YEAR EITHER BEFORE THE AO OR BEFORE HIM. ADMITTEDLY, MR. WELLING WAS FAR FROM FUNCTIONING AS CHARTERED ACCOU NTANT BY THE ICAI. THEREFORE, THE QUESTION ALSO ARISE AS TO HOW HE SHOULD HAVE RENDERED ANY SERVICES TO THE FIRM IN THE CAPACITY A S CHARTERED ACCOUNTANT. ACCORDING TO THE LD.CIT(A) IF THE SERV ICES RENDERED BY MR. WELLING IS OF ANY OTHER NATURE, THE ASSESSEE OU GHT TO HAVE BROUGHT 11 ON RECORD TO ESTABLISH THE EXACT NATURE OF SUCH SER VICES RENDERED BY HIM TO THE ASSESSEE WHICH THE ASSESSEE FAILED TO DO . FURTHER, WHEN MR. SANDIP WELLING COULD NOT BE CONSIDERED AS A PARTNER OF THE ASSESSEE FIRM DUE TO LEGALITY INVOLVED IT IS NOT KNOWN AS TO HOW THE ASSESSEE COULD STILL CLAIM THE REMUNERATION PAID TO HIM AS S ALARY AS AN EMPLOYEE OF THE FIRM AND CLAIM THE SAME IN THE COMP UTATION OF TOTAL INCOME. THE LD.CIT(A) FURTHER OBSERVED THAT THE VE RY FACT THAT THE AMOUNT WAS PAID OUT OF THE RESERVES AND NOT CLAIMED IN THE PROFIT AND LOSS ACCOUNT AMPLY SUGGESTS THAT THE PAYMENT MADE T O MR. SANDIP WELLING CANNOT BE CLAIMED AS LEGITIMATE BUSINESS OR PROFESSIONAL EXPENDITURE. HE ACCORDINGLY UPHELD THE ACTION OF T HE AO. 14. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 15. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. IN THE INSTANT CASE IT IS AN ADMITTED FACT THAT THE ASSESSEE IS FOLLOWING CASH S YSTEM OF ACCOUNTING. THE PAYMENT TO AN EX-PARTNER IN HIS NEW CAPACITY AS AN EMPLOYEE HAS NOT GONE THROUGH THE PROFIT AND LOSS ACCOUNT. THE A SSESSEE HAS PAID HIM OUT OF THE RESERVES THROUGH A JOURNAL ENTRY AND CLAIMED THE SAME IN THE COMPUTATION OF TOTAL INCOME. THEREFORE, IT LEADS TO AMBIGUITY. IF IT IS PAID FROM THE RESERVES, CERTAINLY IT IS AN APPROPRIATION AND CANNOT BE CLAIMED AS AN EXPENDITURE. FURTHER, WHEN DUE TO SOME LITIGATION WITH ICAI THE PERSON WAS NOT ALLOWED TO CONTINUE AS A PARTNER, THE ASSESSEE WAS SUPPOSED TO ESTABLISH THE NATURE OF SERVICE 12 THAT HAS BEEN RENDERED BY HIM. NO SUCH EVIDENCE WA S FILED BEFORE THE AO OR CIT(A) OR EVEN BEFORE US. MERE PAYMENT BY DE DUCTING TDS DOES NOT ABSOLVE THE ASSESSEE FROM THE ONUS CAST ON IT. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED REASONING GI VEN BY THE CIT(A) WE FIND NO INFIRMITY IN HIS ORDER. ACCORDINGLY, TH E SAME IS UPHELD AND THE GROUNDS RAISED BY THE ASSESSEE ARE DISMISSED. 16. IN THE RESULT, BOTH APPEALS FILED BY THE REVENU E AND THE APPEAL FILED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 31-03-2015. SD/- SD/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER SATISH PUNE, DATED 31 ST MARCH, 2015 COPY OF THE ORDER IS FORWARDED TO: 1. THE ASSESSEE 2. THE DEPARTMENT 3. THE CIT(A)-III, PUNE 4. THE CIT-III, PUNE 5. THE DR B BENCH, PUNE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLAT E TRIBUNAL, PUNE