Ganpati & Company, V. ACIT Muzaffarnagar,

ITA 404/DEL/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3437 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 24-06-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 24-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MONA MOHANTHY
• Assessee Lawyers: V K TULSIAN; A K MATHU R
• Section: 40(b); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C NEW DELHI BEFORE SHRI R.P. TOLANI AND SHRI K.G. BANSAL ITA NOS. 404/DEL/07 A.YR. 2003-04 M/S GANPATI & CO. VS. ASSTT. COMMISSIONER OF 842 SOUTH CIVIL LINES, MUZAFFARNAGAR. INCOME-TAX , CIR. 2, MUZAFFARNAGAR PAN/ GIR NO. G-26 C-2. & ITA NOS. 2868/DEL/08 & 1933/DEL/09 A.YRS. 2005-06 & 2006-07 M/S GANPATI ENTERPRISES VS. ASSTT. COMMISSIONE R OF 842 SOUTH CIVIL LINES, MUZAFFARNAGAR. INCOME-TAX , CIR. 2, MUZAFFARNAGAR PAN/ GIR NO. AAFFG3043C ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : S/SHRI V.K. TULSIAN & A.K. MATHU R CA RESPONDENT BY : SMT. MONA MOHANTHY SR.DR O R D E R PER R.P. TOLANI , J.M : THESE ARE THREE APPEALS, FILED BY THE ASSESSEE AGAI NST SEPARATE ORDERS OF CIT(A) FOR A.Y. 2003-04, 2005-06 AND 2006-07. SOME OF THE ISSUES RAISED IN THESE APPEALS ARE COMMON. FOR BREVITY THE SAME ARE MENTIONED HEREUNDER: (I) THE FIRST COMMON GROUND IN RESPECT OF ALL THESE APP EALS CHALLENGES THE ACTION OF AUTHORITIES BELOW IN HOLDING THE ASSESSEE S STATUS AS THAT OF AOP AND NOT THAT OF A FIRM AND ASSESSEE AS SUCH AND THEREAFTER DISALLOWING THE SALARY AND INTEREST PAID TO PARTNER S IN ALL THESE YEARS. (II) SUSTAINING FOLLOWING DISALLOWANCES A.Y. 2003-04: - SHOP EXPENSES RS. 25,000/- - OUT OF MISC./ CONVEYANCE EXPENSES = RS. 25,000/- A.Y. 2005-06 : AD HOC DISALLOWANCE OUT OF SHOP/MISC./TRAVELING/ TE LEPHONE EXPENSES RESTRICTED TO RS. 90,000/- FROM RS. 1,45,000/- A.Y. 2006-07 : AD HOC DISALLOWANCE OUT OF LICENSE FEE, RENT, SHOP EXPENSES, VEHICLE RUNNING, VEHICLE REPAIR, TELEPHONE EXPENSES AND TRA VELING EXPENSES RESTRICTED TO RS. 1,00,000/- FROM RS. 2,00,000/-. (III) CHARGING OF INTEREST U/S 234B & 234C. ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 2 2. BRIEF FACTS ARE THAT ASSESSEE FIRM WAS CONSTITUT ED W.E.F. 1-4-2000 BY PARTNERSHIP DEED OF THE SAME DATE, CONTAINING CLAUS E 11 OF THE PARTNERSHIP DEED AS UNDER: THAT THE PARTNERS OF THE FIRM HAVE MUTUALLY AGREED THAT FOR THE BUSINESS, THE APPLICATION BEFORE THE EXCISE DEPARTM ENT MAY BE FILED IN THE INDIVIDUAL NAMES FOR GETTING THE LICENSE OF LIQUOR SHOPS AND IRRESPECTIVE OF THE FACT, THAT THE SHOPS ALLOTTED T O THE PARTNERS IN THEIR INDIVIDUAL NAME OR IN THE NAME OF THE FIRM WILL BE CONSIDERED AS THE BUSINESS LICENSE OF THE FIRM ONLY ACCORDINGLY BUSIN ESS UNDER THOSE LICENSE WILL BE CONSIDERED BUSINESS OF THE FIRM ONL Y. 2.1. IN PURSUANCE OF THIS CLAUSE, ASSESSEE FIRM USE D TO APPLY FOR LIQUOR LICENSE IN THE NAME OF PARTNERS. ON ALLOTMENT, THE SHOPS WERE HELD TO BE PARTNERSHIP ASSET, THOUGH THE RESPECTIVE ACCOUNT BOOKS OF THE SHOP WER E MAINTAINED IN THE NAMES OF RESPECTIVE PARTNERS AND THE PROFITS FROM ALL THE SH OPS WAS CONSOLIDATED IN FINAL P&L A/C OF THE FIRM. 2.2. ASSESSEE IN A.Y. 2003-04 APPLIED FOR GRANT OF STATUS OF THE FIRM AND ASSESS AS SUCH U/S 184 OF THE I.T. ACT BY FILING THE CERTI FIED COPY OF PARTNERSHIP DEED, AS PRESCRIBED BY THE ACT AND CLAIMED SALARY AND INTERE ST PAYABLE TO PARTNERS AS DEDUCTION AS PROVIDED BY SECTION 40(B). AO, HOWEVER , WAS OF THE VIEW THAT THE FIRM WAS NOT GENUINE INASMUCH AS THE LIQUOR LICENSE S WERE IN THE NAME OF THE PARTNERS AND NOT THE FIRM. RELIANCE WAS PLACED ON F OLLOWING JUDGMENTS: BIHARI LAL JAISWAL VS. CIT 217 ITR 746(SC) MOTI LAL CHUNNILAL VS. CIT 234 ITR 472 (SC) 2.3. AGGRIEVED, ASSESSEE PREFERRED FIRST APPEAL, WH ERE IT WAS PLEADED THAT: ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 3 (I) HONBLE SUPREME COURT IN THE CASE OF RANGILA RAM & OTHERS 254 ITR 230 HAS UPHELD THE PROPOSITION THAT FIRM CAN BE FOR MED BY JOINING OTHER PERSONS AS FINANCING PARTNERS. (II) THERE WAS A CHANGE IN LAW VIS A VIS REGISTRATION OF THE FIRM IN TERMS OF SEC. 184/185 W.E.F. 1-4-1994. EARLIER AO HAD POWER TO DECIDE THE GENUINENESS OF THE FIR, WHEREAS AFTER 1-4-1994, AME NDED LAW PROVIDES THAT THE FIRM SHALL BE GRANTED REGISTRATION IF A CE RTIFIED COPY OF DULY EXECUTED PARTNERSHIP DEED, BEARING SIGNATURES OF AL L THE PARTNERS IS FILED. THE SUPREME COURT JUDGMENTS BEING ON INTERPRETATION OF EARLIER LAW, WERE NOT APPLICABLE IN VIEW OF AMENDED LAW. 2.4. RELIANCE WAS PLACED ON ALLAHABAD HIGH COURT JU DGMENT IN THE CASE OF P.C. KAPOOR VS. CIT 90 ITR 172, HOLDING AS UNDER: WE ARE ACCORDINGLY OF OPINION THAT WHILE PENALIZIN G AN ACT WHICH RESULTS IN BREACH OF CONDITION NO. 4 OF THE LICENSE GRANTED UNDER THE ACT THE LEGISLATURE DID NOT INTEND TO PROHIBIT THAT ACT AND AS SUCH THE AGREEMENT ENTERED INTO BY THE PARTIES IN THIS CASE CANNOT BE SAID TO BE AN AGREEMENT FORBIDDEN BY ANYTHING CONTAINED IN THE U.P. EXCISE ACT, AND IT IS NOBODYS CASE THAT THE AGREEMENT WAS OBTAINED BY FRAUD OR IS OF SUCH A NATURE THAT, IF PERMITTED, IT WOULD DEFEAT THE PROVISIONS OF ANY LA W. WE ARE OF OPINION THAT THE PARTNERSHIP ENTERED INTO IN THIS CASE IS NOT I LLEGAL UNDER SECTION 23 OF THE CONTRACT ACT. THE VIEW WHICH WE HAVE TAKEN ABOVE IS FULLY SUPPORT ED BY A FULL BENCH DECISION OF THE MADHYA PRADESH HIGH COURT IN THE CASE OF SMT. JANKI BAI CHUNNI LAL VS. RATAN MALU. 2.5. IT WAS FURTHER PLEADED THAT IN THE ASSESSEES CASE THE FIRM WAS FIRST CONSTITUTED WITH A CLEAR CLAUSE THAT THE PARTNERS W ERE ELIGIBLE TO APPLY FOR LIQUOR LICENSES IN THEIR INDIVIDUAL NAMES AND THEY WILL BE TREATED AS FIRMS BUSINESS OF ASSESSEE. IN THEIR CASES, LICENSES WERE FIRST OBTAI NED AND SUBSEQUENTLY CONVERTED ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 4 INTO PARTNERSHIP FIRM. THE CIT(A), HOWEVER, UPHELD THE ORDER OF AO REFUSING THE REGISTRATION OF THE FIRM AND DIRECTED TO TAX THE A SSESSEE AS AOP. AGGRIEVED, THE ASSESSEE IS BEFORE US. 2.6. LEARNED COUNSEL FOR THE ASSESSEE REITERATED TH E ARGUMENTS AND CASE LAWS REFERRED TO BEFORE CIT(A) AND CONTENDS THAT ABOVE S UPREME COURT CASES IN THE CASES OF BIHARI LAL JAISWAL AND MOTI LAL CHUNNILAL (SUPRA), WERE NOT APPLICABLE IN VIEW OF THE SPECIFIC AMENDMENT IN SECTION 184 FOR R EGISTRATION OF THE FIRM I.E. FROM 1-4-1994. THE AMENDED PROCEDURE FOR REGISTRATION P RESCRIBES ONLY FURNISHING OF CERTIFIED COPY OF THE PARTNERSHIP DEED DULY SIGNED BY ALL THE PARTNERS DECLARING THE SHARES OF THE PARTNERS IN THE FIRM, WHICH HAS BEEN DULY COMPLIED WITH BY THE ASSESSEE. DUE TO AMENDMENT IN THE LAW, IN THE GIVEN CIRCUMSTANCES, ASSESSEE FIRM CANNOT BE HELD TO BE VOID, ILLEGAL OR NON-GENUINE. FURTHER, U.P. EXCISE LAWS VIDE GOVERNMENT ORDER NO. 647E-2/13-2003 DATED 28-2-2003 HAS DECLARED NEW EXCISE POLICY INCLUDING THE FORMATION OF PARTNERSHIP FIRM WHICH IS IN HINDI. THE TRANSLATION OF THE RELEVANT CLAUSE IN ENGLISH IS PR OVIDED, WHICH READS AS UNDER: IF ANY PERSON WHO IS A LICENSEE AND IS RUNNING A C OUNTRY LIQUOR SHOP WANTS ANY PERSON OR PERSONS TO BE HIS PARTNER OR PA RTNERS THEN SUCH PARTNER(S) WILL FULFILL THE BASIC CONDITIONS AS MEN TIONED IN SUB- CLAUSES (A), (B) AND (C) AND SUB-DIVISION (II), (II I), (IV), (VI) AND (VII) WITH DOCUMENTARY EVIDENCE SUPPORTED BY SWORN AFFIDA VIT DULY NOTARIZED PROVIDED THE PURPORTED PARTNERS DEPOSITED 1% OF THE BASIC LICENSE FEE OF THE SHOP INTO THE GOVERNMENT TREASUR Y. THEREAFTER, THE COLLECTOR MAY GRANT PERMISSION TO SUCH PERSON(S) TO ACT AS PARTNERS OF THE LICENSEE. 2.7. ON THE BASIS OF THIS EXCISE POLICY, LEARNED COUNSEL PLEADS THAT THE CONSTITUTION OF PARTNERSHIP FIRM IN RESPECT OF LIQU OR IS ALLOWED BY THE EXCISE ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 5 DEPARTMENT SUBJECT TO FULFILLMENT OF SOME PROCEDURA L REQUIREMENTS AND PAYMENT OF 1% OF THE BASIC LICENSE FEE. THEREFORE, AS PER U.P. EXCISE LAW POLICY, THE FIRM AS AN ENTITY TO CARRY OUT LIQUOR L ICENSES ISSUED IN INDIVIDUAL NAMES VALID. THE PAYMENT OF 1% OF BASIC LICENSE FEE IS THE INTERNAL PROCEDURE IN THE EXCISE LAW. IN VIEW OF THE ABOVE, IT CANNOT BE HELD THAT BECAUSE THE FIRM WAS CONSTITUTED FOR LIQUOR BUSINES S, IT WAS VOID. WITH SPECIFIC CLAUSE, AUTHORIZING INDIVIDUAL PARTNERS TO APPLY FOR LIQUOR LICENSES IN THEIR NAMES FOR AND ON BEHALF OF FIRM, IT CANNOT BE HELD TO BE ILLEGAL AND REFUSED REGISTRATION. AS PER SECTION 4 OF THE PARTN ERSHIP ACT, A PARTNERSHIP FIRM IS A CONTRACT BETWEEN THE PARTNERS TO CARRY O N THE BUSINESS IN THE NAME OF FIRM FOR AND ON ITS BEHALF. IN VIEW OF SECTION 4 OF THE PARTNERSHIP AND DECLARED LIQUOR POLICY IN U.P., AMENDMENT IN SECTI ON 184, THE ASSESSEE HAVING COMPLIED WITH THE REQUIREMENT OF REGISTRATIO N OF FIRM AS PER THE AMENDED SECTIONS 184/185, THE FIRM SHALL BE GRANTED REGISTRATION. 2.8. LEARNED COUNSEL RELIED ON THE ORDER OF ITAT BA NGALORE BENCH IN THE CASE OF DCIT VS. H.E.D. BROS. & CO. (2005) 1 SOT 881, W HICH IN SIMILAR CIRCUMSTANCES HAS HELD AS UNDER: THE PROVISION RELATING TO ASSESSMENT OF FIRM HAS U NDERGONE A SUBSTANTIAL CHANGE WITH EFFECT FROM 1-4-1993. THE C ONCEPT OF REGISTERED FIRM AND UNREGISTERED FIRM IS DONE AWAY WITH. AS PER THE EARLIER PROVISION OF SECTION 184, THE ASSESSEE WAS TO MAKE NECESSARY APPLICATION FOR REGISTRATION OF THE FIRM AND TO CLA IM THE STATUS AS REGISTERED FIRM. AS PER SECTION 185, THE ASSESSING OFFICER, ON AN APPLICATION RECEIVED FOR REGISTRATION, WAS TO ENQUI RE INTO GENUINENESS OF THE FIRM AND ITS CONSTITUTION. HE WAS FURTHER EM POWERED TO REFUSE ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 6 REGISTRATION IN CASE HE WAS NOT SATISFIED WITH THE EXISTENCE OF A GENUINE FIRM. IN THE CURRENT SCHEME OF THE ACT, WIT H EFFECT FROM THE ASSESSMENT YEAR 1993-94 ONWARDS, NO POWER IS AVAILA BLE TO THE ASSESSING OFFICER TO VERIFY THE GENUINENESS OF THE FIRM. ALL WHAT IS REQUIRED UNDER SECTION 184, TO CLAIM THE STATUS OF FIRM AS SUCH, IS TO FILE A COPY OF PARTNERSHIP DEED SPECIFYING THE INDI VIDUAL SHARE OF PARTNERS THEREIN. ONCE THE CERTIFIED COPY OF PARTNE RSHIP DEED IS FILED ALONG WITH RETURN OF INCOME IN RESPECT OF WHICH THE ASSESSMENT AS A FIRM IS FIRST SOUGHT THE FIRM IS BE ASSESSED AS SUC H AND NOT AS AN AOP, UNLESS IN THE CIRCUMSTANCES MENTIONED IN SECTI ON 1859(SIC). THE POWER TO VERIFY THE GENUINENESS OF THE FIRM IS NOWHERE AVAILABLE TO THE ASSESSING OFFICER. 3. LEARNED DR SUPPORTED THE ORDER OF LOWER AUTHORIT IES. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND HAVE GONE TH ROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE FIND MERIT IN THE ARGUMENT OF THE LEARNED COUNSEL. FROM 1-4-1994 SECTIONS 184/185 HAVE BEEN AMENDED AN D THE EARLIER PROCEDURE OF EXAMINING GENUINENESS OF FIRM HAS BEEN DISPENSED WI TH. AS PER THE AMENDED LAW, THE FIRM SHALL BE ALLOWED REGISTRATION IF A CERTIFI ED COPY OF A DEED, DULY SIGNED BY ALL THE PARTNERS SHOWING THE SHARES OF THE PARTNERS IS FILED, THE FIRM IS ALLOWED TO BE REGISTERED. U.P. EXCISE POLICY DOES NOT PROHIBIT CO NSTITUTION OF PARTNERSHIP FIRM FOR CARRYING LIQUOR BUSINESS, SO ALSO LICENSES OBTAINED BY INDIVIDUALS CAN BE CONVERTED INTO PARTNERSHIP FIRM ON COMPLIANCE OF CERTAIN REQU IREMENTS. IN VIE OF THESE FACTS AND LEGAL PROPOSITIONS, THE ASSESSEE FIRM HAVING CO NSTITUTED SPECIFIC CLAUSE 11 AS MENTIONED ABOVE, IT CANNOT BE HELD THAT IT IS A NON -GENUINE OR ILLEGAL FIRM. EARLIER SUPREME COURT CASES ARE NOT APPLICABLE TO ASSESSEE S CASE IN VIEW OF THE AMENDMENT IN SECTIONS 184/185 W.E.F. 1-4-1994, AS M ENTIONED ABOVE. IN VIEW THEREOF WE HOLD THAT THE ASSESSEE FIRM IS ELIGIBLE FOR REGISTRATION U/S 184/185 AND ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 7 CONSEQUENTLY ELIGIBLE FOR DEDUCTION U/S 40(B) IN RE SPECT OF SALARY, INTEREST AS PER LAW. IN ARRIVING THIS VIEW WE ALSO FIND SUPPORT BY THE ORDER OF ITAT BANGALORE BENCH IN THE CASE OF DCIT VS. H.E.D. BROS.CO. (SUPR A), WHICH IS TO BE FOLLOWED BY US. THIS GROUND OF ASSESSEE FOR ALL THE ASSESSME NT YEARS IN QUESTION IS ALLOWED. 5. COMING TO REMAINING ISSUES, LEARNED COUNSEL FOR THE ASSESSEE CONTENDS THAT ASSESSEE MAINTAINS BOOKS OF ACCOUNT, WHICH AS PER A O WERE PRODUCED BEFORE HIM. ADVERSE INFERENCE WAS DRAWN THAT SOME OF THE VOUCHE RS WERE SELF MADE AND WITHOUT ASSIGNING ANY FURTHER REASON, AD HOC DISALL OWANCES IN RESPECT OF SHOP EXPENSES, MISC. EXPENSES, TRAVELING EXPENSES, LICEN SE FEE, RENT, VEHICLE RUNNING, VEHICLE REPAIRS ETC. HAVE BEEN DISALLOWED IN RESPEC TIVE YEARS. NO COGENT REASONS OR DETAILS OF SUCH DEFECTIVE VOUCHERS HAS BEEN GIVEN. 5.1. FOR A.Y. 2003-04 DISALLOWANCES HAVE BEEN CONFI RMED BY CIT(A) AND FOR REMAINING TWO YEARS PART RELIEF HAS BEEN GIVEN. CIT (A) HAS FAILED TO NOTICE THAT ALL THE EXPENSES WERE DULY ACCOUNTED FOR. NO QUESTION H AS BEEN RAISED IN RESPECT OF PARTICULAR EXPENDITURE. THE ISSUE OF AD HOC DISALLO WANCE WITHOUT PROPER JUSTIFICATION HAS NOT BEEN CONSIDERED. CIT(A) AGAIN RECOURSED TO AD HOC TREATMENT BY GIVING PART RELIEF. 6. LEARNED DR SUPPORTED THE ORDERS OF AO. 7. WE HAVE HEARD RIVAL SUBMISSIONS AND HAVE GONE TH ROUGH THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS THE FACTS EMERGE, AO IN HIS ORDER HAS MERELY REFERRED TO EXCESSIVENESS OF EXPENDITURE; SELF MADE VOUCHERS AND WITHOUT ASSIGNING ANY REASONS AD HOC DISALLOWANCES HAVE BE EN MADE, WHICH IN A.Y. 2003- ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 8 04 HAVE BEEN UPHELD BY CIT(A) AND IN A.Y. 2005-06 & 2006-07 HAVE BEEN PARTLY CONFIRMED. IN OUR VIEW, IF THE BOOKS OF ASSESSEE AR E PROPERLY MAINTAINED AND PRODUCED BEFORE AO, THE DISALLOWANCE SHALL PROCEED ON ITEMS OF EXPENDITURE, WHICH ARE NOT PROVED BY THE ASSESSEE. AD HOC DISALL OWANCE IN EVERY YEAR WITHOUT ASSIGNING ANY REASONS IS NOT JUSTIFIABLE. IN VIEW T HEREOF, WE ARE INCLINED TO DELETE THE AD HOC DISALLOWANCE AS UPHELD BY CIT(A). ASSESS EES GROUNDS IN THIS BEHALF ARE ALLOWED. 8. CHARGING OF INTEREST U/S 234(B) & (C) IS CONSEQ UENTIAL IN NATURE. 9. IN THE RESULT, ASSESSEES APPEALS ARE ALLOWED ON ABOVE TERMS. ORDER PRONOUNCED IN OPEN COURT ON 30-7-2010. SD/- SD/- (K.G. BANSAL ) ( R.P. TOLA NI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 30-7- 2010. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 9 ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 10 ITA 404/D/07,2868/D/08 & 1933/D/09 A.Y. 2003-04, 05-06 & 06-07 11