M/s MS Drug Agencies, Cuttack V. ITO, Cuttack

ITA 323/CTK/2011

• Counselvise Citation: 32322114 RSA 2011
• Duration Of Justice: 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Assessee
• Bench Allotted: SMC
• Assessment Year: 2006-2007
• Appeal Filed On: 14-06-2011
• Court: TRIBUNAL
• Department Lawyers: S C MOHANTY
• Assessee Lawyers: R S CHIMANKA
• Keywords: Gift

Judgement Text

IN THE INCME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER, AND HONBLE SHRI K.S.S.PRASAD RAO, JUDICIAL MEMBER. ITA NO. 323/CTK/2011 (ASSESSMENT YEAR 2006 - 07) M/S.M.S.DRUG AGENCIES, MANIK GHOSHBAZA R, TOWN HALL ROAD, CUTTACK. PAN: AAJFM 1097 Q VERSUS INCOME - TAX OFFICER, WARD NO.2(3), CUTTACK. (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI R.S.CHIMANKA, AR FOR THE RESPONDENT SHRI S.C.MOHANTY, DR ORDER SHRI K.K.GUPTA, ACCOUNTANT MEMBER : THIS APPEAL BY THE ASSESSEE AGITATES THE PART SUSTENANCE OF DISALLOWANCE OF EXPENDITURE CONSIDERED BY THE ASSESSING OFFICER IN HIS ORDER U/S.143(3) OF THE INCOME - TAX ACT,1961. 2. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE ARE NARRATIVE AND THE ISSUES INVOLVED I N THIS APPEAL ARE AS REGARDS AN ADDITION OF 1,28.959 MADE ON ACCOUNT OF DIFFERENCE IN LEDGER BALANCE OF FOUR SUNDRY CREDITOR S, 25.669 MADE ON ACCOUNT OF E XCESS CLAIM OF INTEREST PAID TO PARTNERS, AND 1,80,000 MADE ON ACCOUNT OF DISALLOWANCE OF SALARY TO PARTNERS. 3. A S REGARDS AD DITION OF 1,28, 959 ON ACCOUNT OF DIFFERENCE IN ACCOUNT OF BALANCE OF SUNDRY CREDITORS VIS - - VIS THEIR CONFIRMATIONS, THE SAME RELATE TO THE FOLLOWING SUNDRY CREDITORS. 1. M/S.ALEMBIC LIMITED .. 5,906 2. M/S.WOCKHARTD LTD., .. 1,676 3. M/S.NICHOLAS PIRAMA L LTD. .. 47,937 4. M/S.ELDER PHARMACEUTICALS LTD .. 73,440 AT THE TIME OF HEARING, THE LEARNED AR OF THE ASSESSEE DID NOT PRESS THE CONFIRMATION OF ADDITION OF 5,906 AND 1,676 IN RESPECT OF M/S.ALEMBIC LIMITED AND M/S.WOCKHARTD LTD RESPEC TIVELY. IN RESPECT OF OTHER TWO ADDITIONS, ITA NO.323/CTK/2011 2 NAMELY 47,937 AND 73,440 IN RESPECT OF M/S.NICHOLAS PIRAMAL LTD., AND M/S.ELDER PHARMACEUTICALS LTD., RESPECTIVELY, THE LEARNED AR OF THE ASSESSEE CONTENDED THAT THE EXPLANATION OF THE ASSESSEE IN THIS REGARD WA S THAT THE SAME HAS BEEN ADJUSTED IN THE NEXT YEAR. HE FURTHER EXPLAINED THAT THE ASSESSEE DEALS IN MEDICINE AND THE TURNOVER IS IN CRORES AND THE TURNOVER WITH M/S.PIRAMAL INDIA LTD AND ELDER PHARMA LTD ., IS ALSO IN CRORES AND THE GIFT ITEM S , DISCOUNT, RE BATE CLAIM FOR DAMAGE GOODS, REBATE CLAIM FOR EXPIRY GOODS AND OTHER ITEM CREDITED IN THE ASSESSEES ACCOUNT WHICH IT CAN KNOW ONLY AFTER THE CLOSING OF ACCOUNTING YEAR AND BY THAT TIME, THE ASSESSEES ACCOUNTS ARE CLOSED, SO THE ASSESSEE ADJUST THE DISCOU NT, REBATE, CLAIM FOR DAMAGE GOODS AND EXPIRY GOODS IN THE NEXT YEAR, IS NO MISTAKE IN THE ACCOUNT OF T HE ASSESSEE AND AS SUCH ADDI TION MADE BY THE LEARNED ASSESSING OFFICER AND AS CONFIRM ED BY THE LEARNED CIT(A) WAS NOT JUST IFIED. AS REGARDS THE ADDITION OF 25,669 ON ACCOUNT OF EXCESS CLAIM OF INTEREST PAID TO PARTNERS, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT AS PER THE PARTNERSHIP DEED INTEREST @12% PER ANNUM WAS TO BE PAID ON CAPITAL STANDING ON THE OPENING OF THE FINANCIAL YEAR. THEREFORE, THE ACTION OF THE AUTHORITIES BELOW IN CALCULATING THE INTEREST ON CAPITAL AFTER CONSIDERING THE WITHDRAWALS AMOUNT MADE BY THE PARTNERS WAS NOT JUSTIFIED. AS REGARDS, THE ADDITION OF 1,80,000 ON ACCOUNT OF DISALLOWANCE OF SALARY TO PARTNERS, THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT ORIG INALLY THE ASSESSING OFFICER HAD RESTRICTED THE ADMISSIBLE SALARY TO PARTNERS 50 ,000 AGAINST WHICH LEARNED ASSESSING OFFICER IN HIS REMAND REPORT RESTRICTED THE ADMISSIBLE SALARY AT 54,606 AND WAS ACCEPTED BY THE LEA RNED CIT(A) WAS NOT JUST AND PROPER ON THE FACTS IN THE CIRCUMSTANCES OF THE CASE. HE SUBMITTED THAT THE SALARY HAS BEEN PAID AS PER THE RESOLUTION REGARDING DISTRIBUTION OF INTEREST AND REMUNERATION WHICH COMPLIES TO THE PROVISIONS OF INCOME TAX ACT AND H ENCE ITA NO.323/CTK/2011 3 NON - ADMISS ON OF 1,25,394 WAS NOT JUST AND PROPER . THE DISAL LOWANCE OF SALARY HAS BEEN MADE BY THE ASSESSING OFFICER AS WELL, AS CONFIRMED BY THE LEARNED CIT(A) ON THE SOLE GROUND THAT INTEREST INCOME OF 10,27,240 IS INCOME FROM OTHER SOURCES FOR WHICH NECESSARY PETI TION HAD BEEN FILED BEFORE THE ASSESSING OFFICER AS WELL AS LEARNED CIT(A). HE SUBMITTED A COPY OF THE SAME BEFORE THE TRIBUNAL WHICH IS PLACED IN THE PAPER BOOK . THE LEARNED AR OF THE ASSESSEE FURTHER SUBMITTED THAT DURING THE ASSESSMENT YEAR, THE ASSESSE E RECEIVED 10,27,240 AS INTEREST INCOME FROM VARIOUS PARTIES AND T.D.S. HAS BEEN DEDUCTED BY THE SAID PARTIES. THE SAID INTEREST INCOME HAS BEEN RECEIVED OUT OF THE FUND AVAILABLE IN THE BUSINESS FIRM AS WELL AS LOAN TAKEN FROM THE FAMILY MEMBERS. THE LOAN AMOUNT O F THE FAMILY MEMBERS ARE VERY OLD AND INTEREST IS PAID REGULARLY OR CREDITED IN THEIR ACCOUNT AND T.D.S .HAS BEEN DEDUCTED AND THE SAME HAS BEEN DEPOSITED WITH THE INCOME TAX DEPARTMENT. T HE ASSESSEE HAS AVAILED, LOAN AS ON 01.04.2005 82,16,900 FROM THE FAMILY MEMBERS AND AS AND WHEN THE SURPLUS FUND IS AVAILABLE, THE ASSESSEE GIVE THE LOAN TO THE PARTIES AND AS ON 31.03.2006, THE TOTAL LOAN OUTSTANDING IS 99,74,988 . THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE FIRM HAS BEEN CONSTITUTED UNDER A PAR TNERSHIP DEED DATED 01.04.2003 AND THE OBJECT OF THE PARTNERSHIP FIRM WAS TO DEAL WITH DRUGS, MEDICINE AND COSMETICS ON WHOLESALE BASIS AND/OR COMMISSION AGENCY BASIS AND TO DO SUCH OTHER BUSINESS AS MAY BE DECIDED BY THE PARTNERS FROM TIME TO TIME. T HE PA RTNERSHIP DEED ALSO SPECIFICALLY MENTION IN CLAUSE 14(V) THAT THE PARTNERSHIP FIRM CAN TAKE LOAN FROM BANKS AND FINANCIAL INSTITUTION, PRIVATE BODIES, AUTONOMOUS INSTITUTION FOR PROCU REMENT AND BORROWING OF LOAN REQ UIRED FOR THE FIRM S BUSINESS AND FOR THI S PURPOSE SHALL BE EMPOWER ED/ ENTITLED TO HAV E A RIGHT TO EXECUTE ALL DOCUMENTS ON BEHALF OF THE FIRM. FROM THE BEGINNING OF THE PARTNERSHIP FIRM DATED 01.04.2003, THE FIRM AVAIL ED LOAN ITA NO.323/CTK/2011 4 FROM THE RELATIVES AND PA ID INTEREST AND GIVEN THE SURPLUS AMOUNT AS L OAN TO VARIOUS PARTIES AND SHOWN AS INTEREST INCOME. THE INTEREST INCOME AND INTEREST PAYMENT IS A PART OF THE BUSINESS ACTIVITIES. M OREOVER THE ASSESSEE HAS GIVEN LOAN TO THOSE PARTIES WHICH ARE RELATED TO MEDICINE BUSINESS, AND THEY ARE SO SOUND THAT THE Y CAN REFUND THE AMOUNT WITHIN 24 HOURS AND ALSO BY GIVING LOAN TO THOSE PARTIES IT WILL HELP THE FIRM IN BUSINESS SINCE SOME HOW THEY ARE RELATED TO MEDICINE BUSINESS. ANOTHER PURPOSE OF KEEPING MONEY WITH THE ABOVE PARTIES IS THAT IN CASE OF ANY EMERGENCY SUCH AS APPLICATION FOR C & F AGENCIES THE ABOVE PARTIES MAY ALS O HELP IN GETTING THE C & F SUP ER STOCKIST AGENCIES. THE MONEY HAS BEEN GIVEN TO THE MEDICINE DEALER OR THEIR RELATIVES SO THAT THE ASSESSEE FIRM CAN AVAIL TEMPORARY CASH CREDIT OR CREDIT FAC ILITIES ON ACCOUNT OF PURCHASE OF MEDICINE. LASTLY HE SUBMITTED THAT IF THE INTEREST PAYMENT OF 10,86,487 AND INTEREST INCOME OF 10,27,240 IS NEARLY THE SAME, THE NET PROFIT FROM THE MEDICINES BUSINESS COMES TO 7,23,184 BEFORE DEDUCTION OF SALARY TO PA RTNERS AND INTEREST ON CAPITAL. 4. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW BY POINT ING OU T THAT THE ASSESSING OFFICER HAD CARRIED OUT THE DETAIL SCRUTINY OF THE ASSESSEES RETURN WHEN THIRD PARTIES CONFIRMATIONS LED TO THE FINDING THAT THE ONUS WAS TO BE DISCHARGED BY THE ASSESSEE TO RECONCILE THE SAME WITH THE BALANCE SHOWN IN HIS BOOKS OF ACCOUNT. AS THE LEARNED COUNSEL FOR THE ASSESSEE HAS CONCEDED THAT THE ADDITION ON ACCOUNT OF M/S. ALEMBIC LIMITED AND M/S.WOCKHARTD LTD., THE RECON CILIATION THEREFORE OUGHT NOT TO HAVE BEEN CONSIDERED WHEN THE LEARNED CIT(A) CATEGORICALLY NOTED THAT THE SAID INCOME WAS TO BE SHOWN IN THE HANDS OF THE ASSESSEE IN THE IMPUGNED ASSESSMENT YEAR. FOR THE INTEREST PAID TO THE PARTNERS, THE LEARNED CIT(A) H AS RIGHTLY NOTED THAT THE AMOUNT STOOD WITHDRAWN AND THEREFORE SHOULD BE CONSIDERED FOR PAYMENT OF INTEREST AS THE VERY CONCEPT INTEREST EXPENSE IS ON THE ITA NO.323/CTK/2011 5 AMOUNT UTILISED BY THE ASSESSEE FIRM. WHEN THE PARTNERS HAVE WITHDRAWN THE AMOUNT THEY ARE NOT ENTITLED FOR CLAIMING INTEREST FROM THE FIRM AS PERMISSIBLE UNDER THE PROVISIONS OF I.T.ACT. INSOFAR AS THE SALARY HAS BEEN CONSIDERED DISALLOWABLE, TH E LEARNED COUNSELS CONTENTION THAT ONLY TWO PARTNERS HAVE BEEN PAID OUT OF FOUR PARTNERS, TWO BEING LADIES, THE WORKING W AS TO BE ESTABLISHED. THE RESTRICTION PROVIDED U/S.40(B) WAS TO BE ADHERED TO AS CONSIDERED BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A). 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON CONSIDERATION OF THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO HOLD THAT THIRD PARTYS CONFIRMATION REQUIRES RECONCILIATION INSOFAR A S THE BOOKS OF ACCOUNT OF THE ASSESSEE DID NOT INDICATE THE CREDIT WHICH THE ASSESSING OFFICER CONSIDERED FOR TAXATION UNDER THE PROVISIONS OF SECTION 68. IN OTHER WORDS, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE RECONCILIATION IN RESPECT OF THE PARTIES NAMELY, M/S.NICHOLAS PIRAMAL LTD., - 47,937 AND M/S.ELDER PHARMACEUTICALS LTD - 73,440 STOOD RECONCILED WHEN THE CREDIT NOTES AND THE SUBSEQUENT PURCHASE RETURNS HAVE BEEN ACCOUNTED FOR AND ACCEPTED IN THE RETURN FILED BY THE ASSESSEE AS PER THE SUBSEQUENT ORDER OF THE ASSESSING OFFICER FILED IN THE PAPER BOOK. THE AMOUNT OF SUCH CREDITS NAMELY 47,937 AND 73,440 ARE DIRECTED TO BE DELETED AS THEY WERE NOT PERTAINING TO THIS YEAR. INSOFAR AS REDUCTION OF SALARY AND INTEREST TO THE PARTNERS IS CONCERNED , WE ARE OF THE CONSIDERED VIEW THAT THE SAME CANNOT BE DISTURBED WHEN THE PROVISIONS OF SECTION 184(5) HAVE NOT BEEN CHALLENGED. THE INTEREST PAID TO THE PARTNERS WAS ON CAPITAL INVESTED ON THE FIRST DAY OF THE FINANCIAL YEAR RELEVANT FOR THE IMPUGNED ASSESSMENT YEAR. IT IS NOBODYS CASE THAT THE AMOUNT HAS BEEN WITHDRAWN AS THE CONCEPT OF INTEREST TO BE PAID IS THE PARTNERS AS INSCRIBED IN ITA NO.323/CTK/2011 6 THE PARTNERSHIP DEED . SIMILARLY, THE SALARY TO BE PAID TO THE PARTNERS FOR CONDUCTING BUSINESS HAS TO BE PAID TO THE WORKING PARTNERS WHEN IT IS NOBODYS CASE THAT THE INTEREST HAS BEEN EARNED BY THE FIRM AS PART OF ITS BUSINESS WHEN THE MAIN BUSINESS WAS DEALING IN PHARMACEUTICALS. THE PARTNERS MUTUALLY AGREED TO CARRY ON THE BUSINESS OF UTILIZING THE MONEY O N INTEREST BY ADVANCING TO THE NEEDY WHEN THE AMOUNT LYING WITH THEM HAS NOT BEEN UTILISED FOR HOARDING OF MEDICINES. MEDICINES HAVE SHE LF LIFE AND THEREFORE HAVE TO BE DISPOSED OF BEFORE THE EXPIRY DATE WHICH THE CUSTOMERS ONLY WOULD BUY. THE EARNING OF INTEREST THEREFORE HELD AS INCOME FROM OTHER SOURCES , WAS NOT FOR THE PURPOSE OF DISALLOWING SALARY TO THE PARTNERS. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF SALARY TO THE PARTNERS BY HOLDING A VIEW THAT IT WAS THE SURPLUS FUND THAT WAS INVESTED FOR THE BUSINESS FOR EARNING INTEREST. THE ASSESSING AUTHORITIES STEPPED INTO THE SHOES OF THE BUSINESSMAN TO DISALLOW SALARY TO THE WORKING PARTNERS WHICH THEY ONLY HAD WORKED FOR. THE EARNING OF INTEREST WAS PART OF THE BUSINESS OF THE FIRM WHIC H REQUIRE D MAN - POWER WAS ENTITLED FOR REIMBURSEMENT. THE INTEREST AND SALARY SO DISALLOWED IS DIRECTED TO BE ALLOWED AS CLAIMED BY THE ASSESSEE IN ITS RETURN. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN OPEN COURT ON DT. 5 TH AUGUST, 2011 SD/ - SD/ - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT MEMBER DATE: 5 TH AUGUST, 2011 H.K.PADHEE, SENIOR PRIVATE SECRETARY. ITA NO.323/CTK/2011 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT : M/S.M.S.DRUG AGENCIES, MANIK GHOSHBAZAR, TOWN HALL ROAD, CUTTACK. 2. THE RESPONDENT: INCOME - TAX OFFICER, WARD NO.2(3), CUTTACK. 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, SENIOR PRIVATE SECRETARY.