DCIT 17(2), MUMBAI V. K.Z. TRADING, MUMBAI

ITA 3350/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49249 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 27-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 29-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI H BENCH BEFORE SHRI N.VASUDEVAN, JUDICIAL MEMBER & SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NO.3350/MUM/2010 A.Y 2007-08 DY. COMMISSIONER OF I.T. 17(2), MUMBAI. VS. M/S K.Z.TRADING, 762, AHURA NO.1, GROUND FLOOR, M. JOSHI MARG, PARSEE COLONY, DADAR, MUMBAI 400 014. PAN AAEFK 1023 B (APPELLANT) (RESPONDENT) APPELLANT BY : MR. A.K.NAYAK. RESPONDENT BY : MR. PARESH SHAPARIA. O R D E R PER T.R.SOOD, AM: IN THIS APPEAL, REVENUE HAS RAISED THE FOLLOWING G ROUND: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE MADE BY T HE AO AMOUNTING TO RS.35,84,220/- AND IN HOLDING THAT COMMISSION PA ID TO M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS AN ALLOWABLE BUSINE SS EXPENDITURE AND M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS NOT A PA RTNER OF THE APPELLANT FIRM DURING THE RELEVANT PERIOD. 2. AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG THE ASSESSMENT PROCEEDINGS AO NOTICED THAT AS PER SCHED ULE TO THE ACCOUNTS FOLLOWING PARTNERS WERE SHOWN: A) MR. MEHERVAN R. DARUWALA. B) MR. EDUL D. SETHNA. C) M/S SETHCO OFFSHORE SERVICES PVT. LTD. HE OBSERVED THAT AS PER SEC.40[B][I] OF THE I.T.ACT PAYMENT OF SALARY, COMMISSION ETC., WAS ALLOWABLE WHEN THE SAME WAS PA ID TO THE WORKING PARTNER. ON ENQUIRY, THE ASSESSEE GAVE JUST IFICATION FOR ITA NO.3350/MUM/10 2 PAYMENT OF SALARY VIDE LETTER DATED 30-11-09. A REV ISED COPY OF THE PARTNERSHIP DEED WAS ALSO FILED SHOWING THAT M/S SE THCO OFFSHORE SERVICES PVT. LTD. IS NO MORE A PARTNER W.E.F. 1-4- 05. HOWEVER, AO DID NOT TAKE COGNIZANCE OF THIS REVISED PARTNERSHIP DEE D BECAUSE, ACCORDING TO HIM, A CERTIFIED COPY OF THE PARTNERSH IP DEED IS REQUIRED TO BE FILED ALONG WITH THE RETURN. ACCORDINGLY, HE DIS ALLOWED THE PAYMENT OF COMMISSION. 3. BEFORE THE LD. CIT(A) IT WAS MAINLY CONTENDED TH AT RIGHT FROM 1- 4-05 M/S SETHCO OFFSHORE SERVICES PVT. LTD. HAS RET IRED AND ONLY TWO PARTNERS REMAINED I.E. SHRI EDUL DHAJISHA SETHANA A ND SHRI MEHERWAN RUSSI DARUVALA SHARING PROFIT & LOSS IN THE RATIO O F 10:90. IT WAS SUBMITTED THAT THE RE-CONSTITUTED PARTNERSHIP DEED W.E.F. 1-4-05 WAS SUBMITTED DURING THE ASSESSMENT PROCEEDINGS AS DUE TO OVER SIGHT SAME COULD NOT BE FILED ALONG WITH THE RETURN. IT W AS ALSO POINTED OUT THAT INADVERTENTLY IN THE TAX AUDIT REPORT M/S SETH CO OFFSHORE SERVICES PVT. LTD. WAS SHOWN AS PARTNER, BUT AGAINST ITS SHA RE PERCENTAGE IT WAS MENTIONED AS ZERO. THIS CLEARLY SHOWS THAT M/S SETH CO OFFSHORE SERVICES PVT. LTD. WAS NOT A PARTNER. RELIANCE WAS ALSO PLACED ON THE DECISION OF NEW UNITED MOTORS VS. ACIT [45 ITD 302] (DEL), WHEREIN IT WAS HELD THAT MERE OMISSION TO FILE THE REQUIRED EV IDENCE ALONG WITH THE RETURN CANNOT LEAD TO A CONCLUSION THAT IT IS C ONTRARY TO THE FACT. RELIANCE WAS ALSO PLACED ON SOME OTHER CASE LAWS. T HE LD. CIT(A) AFTER EXAMINING THE SUBMISSIONS OBSERVED THAT, NO D OUBT, SALARY, COMMISSION ETC. CAN BE PAID ONLY TO A WORKING PARTN ER AND M/S SETHCO ITA NO.3350/MUM/10 3 OFFSHORE SERVICES PVT. LTD. BEING A COMPANY CANNOT BE A WORKING PARTNER. HOWEVER, SINCE M/S SETHCO OFFSHORE SERVICE S PVT. LTD. HAS ALREADY RETIRED AND THEIR NAMED APPEARED IN THE AUD IT REPORT BY MISTAKE BUT EVEN IN THAT REPORT THE SHARE OF M/S SE THCO OFFSHORE SERVICES PVT. LTD. WAS SHOWN AS NIL. THEREFORE, A CCORDING TO HIM, M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS NO MORE A PA RTNER IN THE FIRM. HE WAS ALSO OF THE VIEW THAT MERELY RECONSTITUTED P ARTNERSHIP DEED COULD NOT BE FILED ALONG WITH THE RETURN IS NOT FAT AL AS THE SAME WAS FILED DURING THE ASSESSMENT PROCEEDINGS. IN THIS BA CKGROUND, LD. CIT(A) DELETED THE ADDITION. 4. BEFORE US, LD. DR STRONGLY SUPPORTED THE ORDER O F THE AO. 5. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE S UBMITTED THAT EVEN IN THE EARLIER YEAR THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN I.T.A.NO.2976/M/09 FOR THE A.Y 2006-07. THEREFORE, THE ISSUE IS SQUARELY COVERED AGAINST TH E REVENUE. 6. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIND THAT AN IDENTICAL ISSUE CAME UP FOR CONSIDERATION OF THE TRIBUNAL IN I.T.A.NO.2976/M/09 AND THE SAME WAS DECIDED VIDE PARAS 3, 4 & 5 WHICH ARE AS UNDER: 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PER USING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE PRIMA RY ISSUE WHICH REQUIRES OUR DECISION IS WHETHER M/S SETHCO OFFSHOR E SERVICES PVT. LTD. WAS PARTNER IN THE ASSESSEE FIRM IN THE YEAR I N QUESTION OR NOT. THE AO INVOKED THE PROVISIONS OF SEC. 40[B] FOR MAK ING DISALLOWANCE OF COMMISSION PAYMENT OF RS.25.29 LAKHS TO M/S SETH CO OFFSHORE SERVICES PVT. LTD. ON THE GROUND THAT THE SAID COMP ANY WAS A PARTNER IN THE ASSESSEE FIRM. ON THE OTHER HAND, THE ASSESS EE HAS PLEADED OTHERWISE, WHICH CAME TO BE ACCEPTED BY THE LD. CIT (A), THAT M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS NOT A PARTNE R IN THE ASSESSEE FIRM. COPY OF TAX AUDIT REPORT ISSUED BY THE AUDITO RS IN FORM NOS.3CB AND 3CD IS AVAILABLE AT PAGE 19 ONWARDS OF THE PAPE R BOOK. IN ITA NO.3350/MUM/10 4 COLUMN 7[2], THREE PARTNERS HAVE BEEN SHOWN INCLUDI NG M/S SETHCO OFFSHORE SERVICES PVT. LTD. BUT THE PROFIT SHARING RATIO INDICATES NIL % TO M/S SETHCO OFFSHORE SERVICES PVT. LTD. IN THE FI RM. COLUMN 7[B] REQUIRES THE AUDITORS TO MENTION IF THERE IS ANY CH ANGE IN PARTNERS OR THEIR PROFIT SHARING RATIO, IN RESPONSE TO WHICH IT HAS BEEN MENTIONED AS YES. FROM HERE, IT CAN BE SEEN THAT THE AUDITO RS HAVE INCLUDED THE NAME OF M/S SETHCO OFFSHORE SERVICES PVT. LTD. IN THE LIST OF PARTNERS AND AT THE SAME TIME HAVE ALSO MENTIONED T HAT THIS COMPANY HAS NO SHARE IN THE PROFITS OF THE FIRM. FROM THE C OPY OF P & L A/C. AND BALANCE SHEET OF THE ASSESSEE FIRM, IT IS SEEN THAT TOTAL PROFIT AFTER TAX HAS BEEN TRANSFERRED TO THE CAPITAL ACCOUNT OF TWO PARTNERS OTHER THAN M/S SETHCO OFFSHORE SERVICES PVT. LTD. IN THE RATIO OF 10% AND 90%. COPY OF ACCOUNT OF TWO PARTNERS AND M/S SETHCO OFFSHORE SERVICES PVT. LTD. IS AVAILABLE IN THE PAPER BOOK. IT CAN BE SEEN THAT M/S SETHCO OFFSHORE SERVICES PVT. LTD.S ACCOUNT HA S BEEN CREDITED WITH COMMISSION PAYABLE TO THEM NET OF TDS. THESE D ETAILS INDICATE THAT M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS NOT GIVEN ANY SHARE IN THE PROFITS OF THE FIRM. FURTHER, COPY OF RETIREMEN T DEED, WHICH WAS PLACED BEFORE THE AO DURING THE COURSE OF ASSESSMEN T PROCEEDINGS, IS ALSO AVAILABLE ON RECORD WHICH INDICATES THAT M/S S ETHCO OFFSHORE SERVICES PVT. LTD. RETIRED FROM THE FIRM ON 01-04-2 005. THE LD. DR STRONGLY SUPPORTED THE VIEW TAKEN BY THE AO BY RELY ING ON SEC.6 OF THE INDIAN PARTNERSHIP ACT, 1932, WHOSE EXPLANATION 1 STATES THAT THE SHARE OF PROFITS OR OF GROSS RETURNS ARISING FROM P ROPERTY BY PERSONS HOLDING A JOINT OR COMMON INTEREST IN THAT PROPERTY DOES NOT BY ITSELF MAKE SUCH PERSON PARTNER. WE ARE UNABLE TO APPRECIA TE THE VIEW POINT OF THE LD. DR INASMUCH AS IT NO WHERE EMERGES FROM EXPLANATION 1 TO SEC.6 OF THE INDIAN PARTNERSHIP AC T THAT IF A PERSON DOES NOT SHARE PROFITS OR LOSSES OF THE FIRM, STILL HE CAN BE A PARTNER. AT THIS JUNCTURE, IT WOULD BE RELEVANT TO CONSIDER THE DEFINITION OF PARTNERSHIP AS PER SEC.4 OF THE INDIAN PARTNERSHI P ACT, AS PER WHICH, PARTNERSHIP IS A RELATION BETWEEN THE PERSONS WHO H AVE AGREED TO SHARE THE PROFITS OF A BUSINESS CARRIED ON BY ALL O R ANY OF THEM ACTING FOR ALL. THUS, IT CAN BE SEEN THAT SHARING OF PROFI TS OF BUSINESS IS SINE QUA NON FOR TREATING ANY PERSON AS A PARTNER IN THE FIRM. 4. ADVERTING TO THE FACTS OF THE INSTANCE CASE, WE FIND THAT M/S SETHCO OFFSHORE SERVICES PVT. LTD. DID NOT SHARE AN Y PROFIT IN THE FIRM AS IS EVIDENT FROM THE COPY OF THEIR ACCOUNT IN THE ASSESSEES BOOKS. FURTHER, THE AO HAD NOT ADVERSELY COMMENTED UPON TH E COPY OF RETIREMENT DEED FILED BY THE ASSESSEE BEFORE HIM DU RING THE COURSE OF ASSESSMENT PROCEEDINGS. IN THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THE LD. CIT(A) WAS JUSTIFIE D IN HOLDING THAT M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS NOT A PARTNE R IN THE ASSESSEE FIRM AND RESULTANTLY THE PROVISIONS OF SEC.49)B) WE RE NOT ATTRACTED. 5. THE LD. DR, ARGUED THAT PAYMENT OF COMMISSION @ 12% TO M/S SETHCO OFFSHORE SERVICES PVT. LTD. WAS EXCESSIV E. WE ARE UNABLE TO ACCEPT THIS CONTENTION FOR THE REASON THAT THERE IS NO DISCUSSION IN THE ASSESSMENT ORDER OF THE IMPUGNED ORDER AS TO TH E REASONABLENESS OF THE COMMISSION PAID BY THE ASSESSEE FIRM TO M/S SETHCO OFFSHORE SERVICES PVT. LTD. NO WHERE THE PROVISIONS OF SECTI ON 40A(2) HAVE BEEN INVOKED BY THE AUTHORITIES. FURTHER THERE IS N O SUCH GROUND ITA NO.3350/MUM/10 5 RAISED BY THE REVENUE ON THE REASONABLENESS OR OTHE RWISE OF COMMISSION. WE, THEREFORE, DESIST FROM COMMENTING U PON THE REASONABLENESS OR OTHERWISE OF THE RATE OF COMMISSI ON. SINCE NO OTHER CONTRARY FACT HAS BEEN BROUGHT TO OU R NOTICE, FOLLOWING THE ABOVE ORDER, WE DECIDE THIS ISSUE AGAINST THE R EVENUE. 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30/6/2011. SD/- SD/- (N.VASUDEVAN) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30/6/2011. P/-*