UNITECH MARKETING SERVICES, MUMBAI V. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 17(3), MUMBAI

ITA 822/MUM/2018

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5815 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Assessment Year: 2014-2015
• Appeal Filed On: 09-02-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SACCHIDANAND DUBEY
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Business expenditure; Set aside
• Section: 40(b)

Judgement Text

IN THE INC OME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE HONBLE SH. SANDEEP GOSAIN, JM & HONBLE SH. N. K. PRADHAN, A M ./ I.T.A. NO . 822/MUM/2018 ( / ASSESSMENT YEAR: 2014 - 15 ) UNITEC MARKETING SERVICES 511, PLOT NO. 15, RAHEJA PLAZA CHS, VEERA DESAI ROAD, SHAH INDUSTRIAL ESTATE, MUMBAI - 400 053 / VS. ASST. COMMISSIONER OF INCOME TAX CIRCLE 17(3 ) , ROOM NO. 137, AAYAKARBHAVAN , MUMBAI - 400 020 ./ ./ PAN NO. AAAFU7279F ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI M. SUBRAMANIAN, AR / RESPONDENTBY : SHRI SACCHIDANAND DUBEY, DR / DATE OF HEARING : 07/09 /201 8 / DATE OF PRONOUNCEMENT : 05/12/2018 / O R D E R PER SANDEEP GOSAIN, J UDICIAL MEMBER : THE P RESENT APPE AL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF LD. CIT (APPEAL) 17, MUMBAI DATED 15.12.17 F OR AY 2014 - 15 . 2 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES 2 . THE BRIEF FACTS OF THE CASE ARE THAT T HE RETURN OF INCOME WAS FILED ON 12.9.2014 SHOWING AN INCOME OF RS. 79,60,170/ - . THE CASE WAS SELECTED FOR SCRUTINY AND DURING THE COURSE OF SCRUTINY PROCEEDING, THE AO NOTED THAT THE ASSESSEE FIRM HAS CLAIMED REMUNERATION TO PARTNERS AMOUNTING TO RS.99,46,818/ - . FROM THE PARTNERSHIP DEED FILED IN SUPPORT OF THE SAIDCLAIM, IT WAS NOTED THAT THERE WAS NO REMUNERATION CLAUSE IN THE PARTNERSHIP DEED.UPON SHOW CAUSE, THE ASSESSEE FIRM SUBMITTED A DEED OF RECTIFICATION OF PARTNERSHIP DEED. IT WAS SUBMITTED THAT DUE TO OVERSIGHT, THE PROVISION OF SALARY A ND REMUNERATION TO PARTNERS WERE EXCLUDED IN THE ORIGINAL PARTNERSHIP DEED AND THE SAME WAS INSERTED INTHE DEED OF RECTIFICATION OF PARTNERSHIP DEED. THE AO EXAMINED THE DEED OF RECTIFICATIONOF PARTNERSHIP DEED AND OBSERVED THAT STILL THE RELEVAN T CLAUSE D ID NOT SPECIFY THE AMOUNT OF REMUNERATION PAYABLE TO EACH INDIVIDUAL WORKING PARTNER OR LAYS DOWN MANNER OF QUANTIFYING SUCH REMUNERATION, WHICH IS AN IMPORTANT CRITERIA FOR ALLOWANCE OF DEDUCTION U/S40(B)(V). THE AO R EFERRED THE CBDT CIRCULAR NO. 7 39 DT.2 5.03,1996. THE AO CLEARLY MENTIONED THAT THE CASE OF THE 3 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES ASSESSEE FIRM FALLS UNDER PARA 3 OF THE CIRCULAR WHICH CLEARLY BARRED THE ALLOWANCE OF DEDUCTION IF THE SAME HAS NOT BEEN QUANTIFIED NOR EVEN THE LIMIT OF TOTAL REMUNERATION IS SPECIFIED. THE AO FURT HER EXAMINED THE DEED OF RECTIFICATION OF PARTNERSHIP DEED IN THE BACKGROUND OF JUDGMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF SOOD BHANDARI & CO 246 CTR 89. WITH DETAILED DISCUSSION AND EXAMINATION OF PARTNERSHIP DEED, THE AO FINALLY DISALLOWE D THE CLAIM OF REMUNERATION AND ADDED TO THE TOTAL INCOME. AGGRIEVED BY THE ORDER OF AO, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) AND LD. CIT(A) AFTER CONSIDERING THE CASE OF BOTH THE PARTIES, DISMISSED THE APPEAL OF THE ASSESSEE. NOW BEFORE US, THE A SSESSEE H AS PREFERRED THE PRESENT APPEAL. 3. THE SOLITARY GROUND RAISED BY THE ASSESSEE IS CHALLENGING THE ORDER OF LD. CIT(A) IN CONFIRMING THE ORDER OF AO IN DISALLOWING AND ADDING BACK A SUM OF RS. 99,46,818 U/S 40(B) TO THE TOTAL INCOME OF THE ASSESSEE BEING PARTNERS REMUNERATION. 4 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES 4 . WE HAVE HEARD THE COUNSELS FOR BOTH THE PARTIES AND WE HAVE ALSO PERUSED THE MATERIAL PLACED ON RECORD , JUDGMENT CITED BY BOTH THE PARTIES AS WELL AS THE ORDERS PASSED BY REVENUE AUTHORITIES. BEFORE WE DECIDE THE MERITS OF THE CASE, IT IS NECESSARY TO EVALUATE THE ORDERS PASSED BY LD. CIT(A). THE LD. CIT(A) HAS DEALT WITH THE ABOVE GROUNDS RAISED BY THE REVENUE IN PARA NO. 2 TO 4 OF ITS ORDER. THE OPERATI VE PORTION OF THE ORDER OF LD. CIT(A) IS CONTAINED IN PARA NO. 4 OF ITS ORDER AND THE SAME IS REPRODUCED BELOW: - 4. DECISION: I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS AND ARGUMENTS OF THE AR OF THE APPELLANT FIRM. I HAVE ALSO CAREFULLY GONE THROUGH THE BASIS OF DISALLOWANCE OF REMUNERATION ULS.40(B)(V) IN THE ASSESSMENT ORDER. THE RELEVANT FACTS ARE AS UNDER: - I. ) THERE WAS NO CLAUSE OF REMUNERATION IN THE ORIGINAL PARTNERSHIP DEED DT.175.2005 IN WHICH 'DEED OF RECTIFICATION TO PARTNERSHIP DEED DATED 5 TH OCTOBER 2005 WAS INSERTED. IT WAS C LAIMED THAT UNDER C LAUSE 6 , 5 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES THE BASIS OF PAYMENT OF REMUNERATION HAS BEENINCLUDED. II) THE CLAUSE 6 O RECTIFICATION DEED WHICH IS QUOTED IN THE APPELLANTS SUBMISSION DOESNOT PROVIDE A SPECIFIC AMOUNT OR THE BASIS OF CO MPUTATION OF SUCH AMOUNT. III) THE INFIRMITIES IN DEED OF RECTIFICATION OF PARTNERSHIP DEED DATED 5STH OCTOBER 2005 HAS BEEN POINTED OI BY THE AO IN THE ASSESSMENT ORDER. IV. THE APPELLANT HAS PLACED RELIANCE ON THE JUDGMENT OF ANIL HARDWARE STORES 323 ITR 368 (HP) WHEREAS, THE AO HAS PLACED RELIANCE ON JUDGMENT OF HON'BLE PUNJAB & HARYANA HIGH COURT IN CASE OF SOOD BHANDARI & CO (2012) 17 TAXMANNCOM 99. FIRST OF ALL, THE RELEVANT CIRCULAR OF CBDT NO.739 DT.25.3.1996 IS A LIBERAL CIRCULAR, WHICH HAS DIRECTED FOR ALLOWANCE OF REMUNERATION U/S.40(B)(V) OF THE ACT, EVEN IF IT HAS NOT BEEN QUANTIFIED OR MANNER HAS NOT BEEN SPECIFIED IN THE PARTNERSHIP DEED, FOR ALL THE CASES RELATED TO A.Y.1993 - 94 TO 1996 - 97. HOWEVER, FOR CASES POST ASSESSMENT YEAR 96 - 97, THE CIR CULAR MANDATES THAT PROVISION OF SECTION 40(B)(V) OF THE 6 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES ACTSTRICTLY ADHERE TO. THE PROVISION REQUIRES THAT PARTNERSHIP DEED SHOULDCONTAIN A SPECIFIC PROVISION SPECIFYING THE REMUNERATION TO BE PAID TO WORKING PARTNERS OR MANNER THROUGH WHICH THE SAME CAN BE CALCULATED. THEREFORE, THE CIRCULAR HAS NO WAY DILUTED PROVISION AGAINST THE ASSESSEE RATHER IT HAS DILUTED CONSIDERING TO THE HARDSHIP OF THE TAX PAYER OF CASES RELATED TO ASSESSMENT YEAR PRIOR TO A.Y.96 - 97. THE HONBLE HIGH COURT IN CASE OF SOODBRIJ& A SSOCIATES (2011) 15 TAXMANN.COM 76 (DELHI) HAS CONSIDERE D THE ANIL HARDWARE STORES(SUPRA) WHICH HAS BEEN RELIED BY THE APPELLANT FIRM AND HELD THAT .. SECTION 40(B) RELATES TO FIRMS AND THE SUB - CLAUSE S (I) TO (V) ARE INTERCONNECTED AND HAVE TO BE READ HARMONIOUSLY. THE AFORESAID CLAUSES PRESCRIBE THE CONDITION WHEN AND IN WHAT CIRCUMSTANCES REMUNERATION PAID TO A PARTNER IS DEDUCTIBLE AS AN EXPENSE FROM INCOME OF THE PARTNERSHIP FIRM. ONE OF THE PRESCRIBED REQUI REMENTS IS THAT PAYMENT OF REMUNERATION SH OULD BE MADE TO A WORKING PARTNER AND AUTHORIZED BY AND IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED. THE REMUNERATION PAID TO THE SAID PARTNERS MUST RELATE TO THE PERIOD FALLING AFTER THE DATE OF SUCH 7 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES PARTNERSHIP DEED. SUB CLAUSE - (III) TO SECTION 40(B) SPECIFICALLY STIPULATES THAT REMUNERATION PAID IN THE PERIOD PRE AND POST THE PARTNERSHIP DEED, ARE TREATED DIFFERENTLY. FORMER CANNOT B E DEDUCTED FROM THE INCOME OF THE FIRM BUT PAYMENT OF REMUNERATION TO WORKING PARTNERS POST THE PARTNERSHIP DEED A UTHORIZED BY AND IN ACCORDANCE WITH THE TERMS OF THE DEED CAN BE ALLOWED AS A DEDUCTION. THE REQUIREMENT FOR ALLOWING DEDUCTION IS THAT THE REMUNERATION PAID SHOULD BE AUTHORIZED AND IN TERMS OF THE EXISTING PARTNERSHIP DEED. BOTH CONDITIONS MUST BE SATISF IED. SECTION 40(B)(V) ALSO FIXES THE UPPER LIMIT OF THE DEDUCTION, WHICH CAN BE CLAIMED AS A DEDUCTION BY THE PARTNERSHIP FIRM. SUB - CLAUSE(III) AND OTHER SUB CLAUSES IN SECTION 40(B) SPECIFICALLY USE THE EXPRESSION IN ACCORDANCE WITH THE TERMS OF THE PART NERSHIP DEED. THIS CLEARLY INDICATES AND MANIFESTS THE LEGISLATIVE MANDATE THAT THE QUANTUM OF REMUNERATION OR THE MANNER OF COMPUTING THE QUANTUM OF REMUNERATION SHOULD BE STIPULATED IN THE PARTNERSHIP DEED. THE EXPRESSION IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED READ WITH SUB CLAUSE(III) OF SECTION 40(B) REQUIRES AND MANDATES THAT THE QUANTUM OF REMUNERATION 8 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES OR THE MANNER OF COMPUTATION OF QUANTUM OF REMUNERATION SHOULD BE STATED IN THE PARTNERSHIP DEED AND SHOULD NOT BE LEFT UNDETERMINED UNDECIDED OR TO BE DETERMINED OR DECIDED ON A FUTURE DATE. ON READING THE CLAUSE 6 (WHICH THE APPELLANT FIRM HAS RELIED UPON) OF RECTIFIED PARTNERSHIP DEED IT IS CLEAR THAT EVEN IN THIS D EED REMUNERATION IS NOT SPECIFIED. THE MANNER OF COMPUTING THE REMUNERATION IS ALSO NOT SPECIFIED IT IS NOT SUFFICIENT TO MENTION THAT PROVISION FOR SALARY AND REMUNERATION IS COMPUTED AS PROVIDED IN SECTION 40(B)(V) OF THE ACT. THE RECTIFIED PARTNERSHIP DEED HAS TO BE READ ALONGWITH ORIGINAL DEED AND FROM THE RELEVANT CLAUSE - 6. IT IS CLEAR THAT THE REQUIREMENT OF SECTION 40(B)(V) ARE NOT SATISFIED. THUS CONSIDERING FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, THE BOARD'S CIRCULARNO.739 DT.25.3.1996 AND CASE LAWS REFERRED ABOVE PARTICULARLY DELHI HIGH COURT IN CASE OF SOODBRIJ& ASSOCIATES (SUPRA), I AM OF THE OPINION THAT THE DISALLOWANCE MADE BY THE AO IS JUSTIFIED AND THUS UPHELD. HENCE THE GROUNDS FILED BY THE APPELLANT FIRM ON THIS ISSUE IS THEREFORE DISMISSED. 9 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES 5. LD. AR REITERATED THE SAME ARGUMENTS AS WERE RAISED BEFORE LD. CIT(A) , WHICH IS AT PARA NO. 3 OF THE ORDER OF LD. CIT(A). LD. AR RELIED UPON THE JUDGMENTS IN THE CASE OF ACIT VRS. MODERN MOTORS (2016) 48 ITR (TRIB) 579 (JAIPUR), DURGA DASS DEVKI NANDAN VRS. ITO (2012) 342 ITR 17(HP), CIT VRS. VAISH ASSOCIATES (2015) 280 CTR (DEL) 605 AND CIT VRS. ANIL HARDWARE STORE (2010) 323 ITR 368 (HP). 6. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDERS PASSED BY REV ENUE AUTHORITIES AND CIRCULAR NO. 739 DATED 25.03.96. 7. AFTER HAVING GONE THROUGH THE JUDGMENTS AS WELL AS SUBMISSIONS MADE BY BOTH THE PARTIES, WE FIND THAT THE REVENUE AUTHORITIES HAVE REJECTED THE CLAIM OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE HAS NOT SATISFIED WITH THE REQUIREMENT OF SECTION 40(B)(V) AND THE CONDITIONS LAID DOWN IN CBDT CIRCULAR NO. 25.03.96. IT WAS ALSO HELD THAT SINCE THE QUANTUM OF REMUNERATION OR THE QUANTUM OF REMUNERATION HAS NOT BEEN STATED IN THE PARTNERSHIP DEED, WHICH IS MANDATORY CONDITION. THEREFORE, THE DISALLOWANCE WAS RIGHTLY MADE BY THE AO. 10 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES 8. SINCE THE INTERPRETATION OF THE RELEVANT PROVISION CONTAINED IN THE PARTNERSHIP DEED OF THE ASSESSEE IS AN IMPORTANT FACTOR, THEREFORE WE REPRODUCE THE RELEVANT CLAUSE - 6 OF TH E RECTIFICATION OF PARTNERSHIP DEED DATED 17.05.05 AND THE SAME IS REPRODUCED BELOW: - CLAUSE NO. 6. A) THE INITIAL CAPITAL OF THE FIRM SHALL BE RS. 50,000/ - . FURTHER CAPITAL REQUIRED MAY BE BROUGHT ON AS MUTUALLY AGREED UPON BY THE PARTNERS FROM TIME TO TIME AND THE PARTIES HERETO BY MUTUAL CONSENT HAVE AGREED TO MAKE PROVISIONS FOR THE PAYMENT OF INTEREST ON CAPITAL INVESTED BY THE PARTNERS AT THE RATE OF 12% PER ANNUM OR ANY OTHER RATE AS PRESCRIBED UNDER I.T. ACT. B) IT HAS ALSO BEEN MUTUALLY AGREED BETWEEN THE PARTIES TO THESE PRESENTS TO MAKE PROVISIONS FOR THE PAYMENT OF REMUNERATION HITHERTO GIVEN TO BOTH THE WORKING PARTNERS HERETO WITH EFFECT FROM 16 TH APRIL 2005. THE PROVISION FOR SALARY /REMUNERATION IS COMPUTED AS PROVIDED IN SECTION 40(B)(V) OF THE I.T ACT 1961 OR ANY 11 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES STATUTORY ENACTMENT THERETO AND THE SAME SHALL BE DISTRIBUTED IN THEIR PROFIT SHARING RATIO. THE PROFIT AND LOSS OF THE BUSINESS OF THE FIRM SHALL BE ARRIVED AT AFTER ACCOUNTING FOR THE SAID REMUNERATION AND INTEREST SO PAYABLE TO THE PARTNERS AS A BUSINESS EXPENDITURE OF THE FIRM. 9. WE HAVE ALSO CONSIDERED THE PROVISIONS OF SECTI ON 40(B)(V) AND CIRCULAR NO. 739 DATED 25.03.96. AFTER TAKING CUMULATIVE EFFECT OF THE FACTS OF THE PRESENT CASE, RELEVANT CLAUSE OF PARTNERSHIP DEED AND JUDGMENTS CITED BY BOTH THE PARTIES, WE ARE OF THE CONSIDERED VIEW THAT A READING OF SECTION 40(B)(V) CLEARLY SHOWS THAT AMOUNT OF REMUNERATION WHICH DOES NOT EXCEED THE AMOUNT SPECIFIED IN THE ACT IS DEDUCTIBLE. THE BOARD HAS PROVIDED THAT EITHER THE AMOUNT OF REMUNERATION PAYABLE TO EACH INDIVIDUAL SHOULD BE FIXED IN THE AGREEMENT OR THE PARTNERSHIP AGRE EMENT DEED SHOULD LAY DOWN THE MANNER OF QUALIFYING SUCH REMUNERATION. THE CIRCULAR 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 THE 12 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES REMUNERATION OR THE ME THOD OF REMUNERATION IN THE PARTNERSHIP DEED. ALL THAT THE SECTION PROVIDES IS THAT IN CASE THE PAYMENT OF REMUNERATION MADE TO ANY WORKING PARTNER IS IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND DOES NOT EXCEED THE AGGREGATE AMOUNT AS LAID DOW N IN THE SUBSEQUENT PORTION OF THE SECTION THE DEDUCTION IS PERMISSIBLE. 10. EVEN OTHERWISE, THE REMUNERATION HAD TO BE WORKED OUT BASED ON CERTAIN PERCENTAGE OF THE BOOK PR OFIT. WE ARE OF THE CONSIDERED THAT THAT THE PROVISIONS OF SECTION 40(B)(V) OF THE I.T. ACT AS WELL AS CLAUSE OF THE PARTNERSHIP DEED ARE TO BE INTERPRETED HARMONIOUSLY. WHILE RELYING UPON THE JUDGMENTS CITED ABOVE, WE ARE OF THE VIEW THAT CLAUSE - 6 OF PARTNERSHIP DEED OF THE ASSESSEE SPECIFICALLY CONTAINS THAT THE SALARY /REMUNERATION I S TO BE COMPUTED AS PROVIDED IN SECTION 40(B)(V) OR ANY STATUTORY ENACTMENT THERETO. IT HAS ALSO BEEN QUANTIFIED THAT THE PROFIT AND LOSS IN THE BUSINESS OF THE FIRM SHALL BE ARRIVED AT AFTER ACCOUNTING FOR THE SAID REMUNERATION AND INTEREST SO DOUBLE TO THE PARTNERS AS THE BUSINESS EXPENDITURE OF THE FIRM. 13 I.T.A. NO. 822 /MUM/201 8 UNITEC MARKETING SERVICES 11. THEREFORE, KEEPING IN VIEW OF OUR ABOVE FINDINGS, WE SET ASIDE THE ORD ER OF REVENUE AUTHORITIES AND ALLOW THE CLAIM OF REMUNERATION PAID TO THE PARTNERS. WITH THESE OBSERVATIONS, WE ALLOW THIS GROUND OF APPEAL RAISED BY THE ASSESS. 12 . IN THE NET RESU LT, THE APPEAL FILED BY THE ASSESSEE STANDS ALLOWED WITH NO ORDER AS TO COST. ORDER PRONOUNCED IN THE OPEN COURT ON 5 TH DEC . 2018 SD/ - SD/ - ( N. K. PRADHAN ) (SANDEEP GOSAIN) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI ; DATED : 05 . 12 .201 8 SR.PS . DHANANJAY / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F I LE / BY ORDER, . / (DY./ASSTT.REGISTRAR) , / ITAT, MUMBAI