2010 (4) TMI 864 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of disallowance of excess salary paid to working partners under section 40(b) of the Income-tax Act, 1961.
2. Addition in respect of purchases of rice made in cash.
3. Non-consideration of section 40A(3) in respect of cash purchases and carriage freight.
4. Examination of section 40(a)(ia) for freight charges without TDS deduction.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Excess Salary Paid to Working Partners:
The first issue pertains to the deletion of disallowance of Rs. 2.02 lakhs and Rs. 4.52 lakhs for the assessment years 2005-06 and 2006-07, respectively, due to excess salary paid to working partners under section 40(b) of the Income-tax Act, 1961. The Assessing Officer (A.O.) disallowed the excess salary as it exceeded the limit prescribed by the partnership deed and section 40(b)(v) of the Act. The Commissioner of Income-tax (Appeals) [CIT(A)] allowed the claim by interpreting the salary clause liberally, considering a resolution by the partners as an amendment to the partnership deed. However, the Tribunal found that there was no resolution or proper documentation to support the increase in salary, distinguishing it from the case of Pulimoottil Silk House. The Tribunal emphasized the necessity of specific documentation and adherence to section 40(b)(v) and Explanation 3. Consequently, the Tribunal restored the A.O.'s order, disallowing the excess salary claims.

2. Addition in Respect of Purchases of Rice Made in Cash:
The second issue concerns the addition made by the A.O. for cash purchases of rice, which were not fully verifiable. The A.O. made additions to compensate for potential income escapement. The CIT(A) deleted the additions, stating that section 40A(3) was not applied, and the disallowance lacked specific instances of non-verifiable purchases. The Tribunal agreed with the CIT(A), noting the absence of any specific defects or inflated purchases identified by the A.O. Thus, the Tribunal upheld the deletion of the additions, deciding in favor of the assessee.

3. Non-consideration of Section 40A(3) in Respect of Cash Purchases and Carriage Freight:
The third issue involves the non-consideration of section 40A(3) by the A.O. for cash purchases and carriage freight. The CIT observed that the A.O. did not examine the applicability of section 40A(3), which mandates disallowance for cash payments exceeding the prescribed limit. The Tribunal noted that the A.O. did not invoke section 40A(3) in the assessment orders, leading to a lack of proper inquiry. The Tribunal upheld the CIT's revision order, emphasizing the need for the A.O. to consider section 40A(3) and examine the transactions accordingly.

4. Examination of Section 40(a)(ia) for Freight Charges Without TDS Deduction:
The fourth issue pertains to the examination of section 40(a)(ia) for freight charges where no tax was deducted at source (TDS). The CIT observed that the A.O. did not consider the applicability of section 40(a)(ia), which requires TDS deduction for certain payments. The Tribunal noted that the A.O. did not examine the transactions for TDS liability, making the assessment orders erroneous and prejudicial to the revenue. The Tribunal upheld the CIT's direction to the A.O. to re-examine the applicability of section 40(a)(ia) for freight charges.

Conclusion:
The Tribunal's judgment addressed multiple issues, primarily focusing on the disallowance of excess salary to working partners, additions for cash purchases of rice, and the non-consideration of sections 40A(3) and 40(a)(ia) by the A.O. The Tribunal restored the A.O.'s order on the disallowance of excess salary, upheld the CIT(A)'s deletion of additions for cash purchases, and affirmed the CIT's revision orders for non-consideration of sections 40A(3) and 40(a)(ia), directing the A.O. to re-examine these aspects. The revenue's appeals were partly allowed, and the assessee's appeals were dismissed.