2010 (5) TMI 698 - AT - Income Tax

Disallowance of payment to Retired Partners and subscription fees - payments paid to retired partners and to spouses/nominees of deceased partners in terms of clause 22 of the partnership deed - AO noted that the assessee had excluded from the business income a sum being the amount paid to ex-partners and spouses of deceased partners - assessee has explained that the retired partners and the spouses of deceased partners were entitled to certain payments as per Clause 22 of the partnership deed as computed as per Clause 23A and 23B - HELD THAT - Various factors mentioned in clause 22 above, a retiring partner or spouse or nominee of a deceased partner is entitled to certain payments specified in clause 23A 23B. These clauses provide that retiring partners and spouse/nominee of deceased partners are entitled to receive payments @20% of their shares on the date of retirement in future profits of the firm for certain number of years depending upon the length of service rendered. Further the clause 28 provides that the payments mention in clause 22 shall be a prior charge on the receipts of the firm. The case of the assessee is that the payments made as per clause 22 are a prior and overriding charges on the receipts of the firm and, therefore, these are diversion of income by overriding title and thus are required to be excluded from the profit. We respectfully following the decision of assessee own case as relying in the case of Sheetal Das Tirathas 1960 (11) TMI 17 - SUPREME COURT as held that in case, by some obligation, income is diverted before it reaches the assessee the amount is deductible . The Tribunal after considering clause 22, 23 and 28 of the partnership deed held that there was an obligation in this case and income diverted before it reached the assessee and it was not a case of application of income. The Tribunal also observed that the revenue authorities had allowed the said deduction from the year 1990 onwards and, therefore, could not make any deviation in the subsequent year the factual and legal position remaining the same. The Tribunal accordingly held that the deduction was allowable. Interest on borrowed funds advanced to the sister concern - said concern had utilized the loan for taking office premises on lease - A.O observed that though the assessee was a partner in the sister concern but the expenditure relating to the sister concern could not be allowed as deduction - deduction of interest has been claimed under the head business against the other source allowed by CIT(A) - HELD THAT - The assessee had also received interest of Rs.24,68,079/- from the sister concern and the interest paid is only Rs. 23,15,275/-. The CIT(A) has held that interest income received has to be treated as income from other sources and the claim of interest payment of Rs. 23,15,275/- has to be allowed as deduction u/s 57(iii). We see no infirmity in the order of CIT(A), in allowing the deduction as the A.O has not disputed the fact that borrowed funds had been utilized for advancing to sister concern from which the assessee had received interest and, therefore, interest expenditure incurred by the assessee has to be allowed as a deduction. Claim of deduction under the head business as reasonable as the loans had been advanced to the sister concern in which the assessee had deep interest to be used for the business of the sister concern. The loan was therefore on commercial expediency and interest income has therefore to be treated as incidental business income and claim of deduction of interest has to be allowed under the head business . The order of CIT(A) is upheld with modification as mentioned. Allowability of interest expenditure - HELD THAT - As we have already held that loan had been advanced to sister concern on commercial expediency and, therefore, interest income as well as interest expenditure have to be considered under the head business . Accordingly we hold that interest expenditure has to be allowed under the head business Disallowance of various expenditure - bills in the name of sister concern of assessee - items of expenditure disallowed related to publication of quarterly flash, foreign travel, preparation of name plates, reimbursement of part of expenditure relating to an employee sent on deputation - HELD THAT - There is no material produced by revenue to controvert the claim made by the assessee that the publication of quarterly newsletter was by the assessee and there is also no dispute that the expenditure had been incurred by the assessee. Similarly the foreign travel expenditure had been incurred by the assessee.The assessee had also given the name of the client for which the foreign travel had been undertaken by Shri Farid and no material has been produced by the revenue to disprove the claim of the assessee. Therefore, mainly on the ground that the bill was in the name of the sister concern the claim cannot be disallowed. As regards the employee Shri Girish, there is no dispute that the he was an employee of the assessee who had been deputed to the sister concern and the amount not paid by the sister concern had been reimbursed by the assessee. The claim in our view has to be allowed on commercial expediency. In so far as the expenditure on preparation of name plate is concerned, there is common bill in relation to three parties and the assessee had paid its share of expenditure. The CIT(A) has allowed Rs.8000/- on the ground that the assessee paid Rs. 8000/- only. However, we find that the assessee had also made payment of Rs.8840/- as per voucher placed - The entire claim is thus allowable . We therefore, set aside the order of the CIT(A) and delete the additions made in respect of all items. Computation of remuneration to working partner allowable as deduction under section 40(b)(v) - A.O had also excluded the share of profit of the firm in the other firms appearing in the P L Account while computing remuneration allowable on the ground that the said income was exempt in the hands of the assessee under section 10(2A) - HELD THAT - Respectfully following the decisions in the case of S.P. Equipment Services 2009 (9) TMI 637 - ITAT JAIPUR-A we hold that various item of income assessed as income from other sources and excluded from the purview of book profit computation have to be included while computing the remuneration allowable as deduction. The order of CIT(A) is accordingly set aside on this point and the claim of the assessee is allowed. A.O had also excluded the share of profit of the firm in the other firms appearing in the P L Account while computing remuneration allowable on the ground that the said income was exempt in the hands of the assessee under section 10(2A). There is no dispute that such income is exempt in the hands of the assessee u/s. 10(2A). Therefore, remuneration allowable proportionate to such income which is exempt has to be disallowed under section 14A. Such income has either to be excluded from the book, profit or incase it is included in the book profit then remuneration allowable as computed in the section 40(b)(v) in relation to such exempt income has to be disallowed. In this case the A.O has excluded the share of profit from other firm from the book profit which had the effect of disallowing the remuneration allowable proportionate to such exempt income. We therefore, do not find any infirmity in such approach as expenditure relatable to exempt income has to be disallowed. The order of CIT(A) on this point is confirmed. Computation of interest chargeable u/s 234B - whether the interest payable under section 234B has for the purpose of section 140A is to be computed with respect to the tax payable on the returned income or the income determined in the regular assessment? - HELD THAT - We find that the section 140(1B) provides that interest payable under section 234B, has to be computed on the amount by which the advance paid falls short of assessed tax and the assessed tax for the purpose of this sub-section has been defined in the Explanation to mean the tax on total income as declared in the return as reduced by tax deducted/collected at source etc. Therefore, we agree with the submission made by ld. A.R that the interest payable under section 234B for the purpose of adjustment against the tax paid under section 140A has to be computed with respect to assessed tax determined on the basis of total income declared in the return. But this is only for the limited purpose of adjustment of payment made u/s. 140A against interest payable under section 234B while making computation of interest payable by the assessee under section 234B,which has to be computed with respect to the total income determined in regular assessment as per the definition of assessed tax given in section 234B. The assessee has also followed the same procedure with which we agree Both the appeals of the revenue are dismissed, whereas those of the assessee are partly allowed.

Summary

Issues Involved:

1. Deletion of addition made by the AO on account of payment made to ex-partners and their spouses.
2. Deletion of addition of interest on borrowed funds advanced to the sister concern.
3. Addition on account of service tax shown as outstanding liability.
4. Addition in respect of Tax Deducted at Source (TDS) which remained unpaid at the end of the relevant year.
5. Interest expenditure of Rs. 23,15,275/-.
6. Disallowances of various items of expenditure.
7. Exclusion of certain items of income while computing book profit for the purpose of computation of remuneration allowable to partners under section 40(b)(v).
8. Computation of interest chargeable under section 234B.
9. Disallowance of Rs.1,72,836/- being 1/5th of telephone and cell phone expenses.
10. Allowance of payments made to retired persons/spouse of deceased partners under clause - 22 of the partnership deed u/s. 37(1).

Detailed Analysis:

1. Deletion of Addition Made by the AO on Account of Payment Made to Ex-Partners and Their Spouses:

The first dispute in both appeals concerns the deletion of additions made by the AO regarding payments made to ex-partners and their spouses. The AO had disallowed these payments, arguing they were not deductible as business expenses. The assessee contended that these payments were authorized by the partnership deed and represented a diversion of income by overriding title. The CIT(A) agreed with the assessee, citing judgments from the Jurisdictional High Court and the Tribunal's earlier decisions in similar cases. The Tribunal upheld the CIT(A)'s decision, noting that the payments were a prior charge on the firm's receipts, thus constituting a diversion of income by overriding title.

2. Deletion of Addition of Interest on Borrowed Funds Advanced to the Sister Concern:

The second dispute, relevant only for AY 2000-01, involves the deletion of an addition made by the AO on account of interest on borrowed funds advanced to a sister concern. The AO disallowed the interest expenditure, arguing it was not incurred wholly and exclusively for business purposes. The CIT(A) allowed the deduction under section 57(iii), treating the interest income as income from other sources. The Tribunal upheld the CIT(A)'s decision, noting that the borrowed funds were advanced on commercial expediency, and the interest expenditure was allowable under section 36(1)(iii) as well as section 57(iii).

3. Addition on Account of Service Tax Shown as Outstanding Liability:

The first dispute relevant for all three years involves the addition of service tax shown as an outstanding liability. The AO added the unpaid service tax to the total income, treating it as a trading receipt. The CIT(A) upheld this view, but the Tribunal dismissed the ground as not pressed, noting that the claim had already been allowed in subsequent years on a payment basis.

4. Addition in Respect of Tax Deducted at Source (TDS) Which Remained Unpaid at the End of the Relevant Year:

The second dispute relevant for all three years involves the addition of TDS which remained unpaid at the end of the relevant year. The AO added the unpaid TDS to the total income, treating it as part of the trading receipt. The CIT(A) upheld this view, but the Tribunal dismissed the ground as not pressed, noting that the claim had already been allowed in subsequent years.

5. Interest Expenditure of Rs. 23,15,275/-:

The third dispute relevant only for AY 2000-01 involves the interest expenditure of Rs. 23,15,275/-. The assessee argued that the interest expenditure should be allowed under the head "business." The Tribunal upheld this view, noting that the loan had been advanced to the sister concern on commercial expediency and that the interest income and expenditure should be considered under the head "business."

6. Disallowances of Various Items of Expenditure:

The next dispute relevant only for AY 2000-01 involves the disallowance of various items of expenditure. The AO disallowed these expenditures on the ground that the bills were raised in the name of the sister concern. The Tribunal found no material to controvert the assessee's claim that the expenditures were incurred for the benefit of the assessee and allowed the claim.

7. Exclusion of Certain Items of Income While Computing Book Profit for the Purpose of Computation of Remuneration Allowable to Partners Under Section 40(b)(v):

The next dispute relevant to all three years involves the exclusion of certain items of income while computing book profit for the purpose of computation of remuneration allowable to partners under section 40(b)(v). The AO excluded non-business income from the book profit, but the Tribunal held that all income embedded in the net profit as appearing in the P&L Account should be considered while computing the remuneration. However, the Tribunal upheld the exclusion of the share of profit from other firms, as it was exempt under section 10(2A).

8. Computation of Interest Chargeable Under Section 234B:

The next dispute relevant only to AY 2000-01 and 2001-02 involves the computation of interest chargeable under section 234B. The AO calculated the interest based on the total income determined in the regular assessment, while the assessee argued that it should be based on the returned income. The Tribunal agreed with the assessee's view for the limited purpose of adjustment against the tax paid under section 140A but noted that the interest under section 234B should be computed with respect to the total income determined in the regular assessment.

9. Disallowance of Rs.1,72,836/- Being 1/5th of Telephone and Cell Phone Expenses:

The next dispute relevant only for AY 2003-04 involves the disallowance of Rs.1,72,836/- being 1/5th of telephone and cell phone expenses. The Tribunal dismissed this ground as there was no evidence of filing this additional ground before the CIT(A).

10. Allowance of Payments Made to Retired Persons/Spouse of Deceased Partners Under Clause - 22 of the Partnership Deed u/s. 37(1):

The assessee also raised a ground in all the years requesting that payments made to retired persons/spouse of deceased partners under clause - 22 of the partnership deed should be allowed u/s. 37(1) as expenditure incurred wholly and exclusively for the purposes of business. The Tribunal dismissed these grounds as having become infructuous, noting that the claim had already been allowed as diversion of income by overriding title.

Conclusion:

In the result, both the appeals of the revenue are dismissed, whereas those of the assessee are partly allowed.