2016 (9) TMI 1381 - AT - Income Tax

Addition of un-explained credit in opening balance - Held that - Since the partners have contributed the amount in the earlier year which was already accepted, an amount of ₹ 5 Lakhs cannot be considered as discrepancy in this year. With reference to the amount of ₹ 79,312/- collected from various subscribers, this has come in for adjustment in various chit subscriptions account, therefore, as per the Books, the chits subscription amount was at ₹ 25,93,234/-. But in the final statements it was ₹ 25,93,234/-. Since these amounts have been reconciled/reconcilable, addition is not warranted. After considering the explanation of assessee and examining the record, we are of the opinion that the addition cannot be sustained. The explanation is proper as per the final accounts submitted to the department not only this year but also in earlier year. In view of this, ground of assessee is allowed. Un-explained credit in the accounts of partners - Held that - We are unable to understand how the AO could make addition of ₹ 10 Lakhs, when he himself gives a finding that there is neither cash introduction in Cash Book nor there is a ledger account in the Books of Account, so relied upon by him. The addition u/s. 68 is not warranted as there is no such credit in books of account . Be that as it may, assessee in the final accounts has shown ₹ 2 Lakhs credit in the name of each of the partners and has filed the returns in their individual capacities admitting the cash credits. The AO could have verified these in the individual hands but not in the firm s hands. Therefore, CIT(A) s order is correct not only on facts but also on law. There is no merit in Revenue s ground, accordingly the same is dismissed. Disallowance of salary paid to one of the partners Shri K. Mohan Reddy - Held that - The disallowance is not warranted. First of all, the statement recorded u/s. 131 clearly indicates that Shri Mohan Reddy is aware about his partnership in the firm and admits that he is responsible as a partner for all affairs of the firm. In fact, Question No. 3 itself asks him about the active role in the day-to-day affairs of the chit fund for which he replied that he has no active role as it was looked after by Shri A. Venkatesh. This answer given to a specific question does not mean that he is not a working partner. Managing Partner and Working Partner have different roles. As seen from the P&L A/c an amount of ₹ 54,000/- was paid as salaries to partners and three of the five partners are getting ₹ 18,000/- each. Only the salary paid to Shri Mohan Reddy was disallowed on the basis of so called statement. We do not agree with the observation of the AO as the disallowance has no basis. AO is directed to allow the amount as claimed. Ground is allowed. Unexplained credit towards excess liabilities in the Books - Held that - After considering the rival contentions, considering that Books of Account are not complete even though they are impounded after three years of closure of the accounting year, the reconciliation given by assessee was not correctly appreciated by the AO or CIT(A). Since the final accounts are tallying, the so called discrepancies on the basis of incomplete Books cannot lead to an addition that too, when assessee was explaining that both the assets and liabilities are to be reconciled. Considering the reconciliation filed by assessee before the CIT(A), we are of the opinion that there is no need for any addition on this account. Addition of suppression of income - Held that - The so called discrepancies between Books and entries in the final statements on the Liabilities side, there was a difference of ₹ 450/- in the dividend payable account. On the Assets side, there is no discrepancy on this account but in the income on chits, there is a discrepancy of ₹ 1203.99, as per the AO in the table provided. Instead of reconciling dividend payable and dividend on chit accounts and further without verifying the final statements, the AO has arrived at the so called discrepancy. It is not an addition of short computation of dividend income but net of dividend, miscellaneous income and penalties. As far as miscellaneous income is concerned, in the final accounts, assessee offered ₹ 57,123/- as income, whereas in the Books, it was only ₹ 33,510/-, thereby a negative figure of ₹ 23,613/- was arrived at in the table. In fact, assessee has offered higher income in the final statements. Since AO has not verified the final statements and his so called discrepancies are based on incomplete Books of Account, we do not see any reason to confirm the net discrepancy so arrived at by the AO. Inflation of expenditure - disallowance as as suppression/inflation of expenditure by listing out in the table under the head expenditure - Held that - We are surprised that AO even after reconciling the amount as noted down the last column of the table thought it fit to disallow the amount. Considering the very same explanation, we are of the opinion that no disallowance is called for as the so called discrepancies arose because of comparisons under taken on the basis of incomplete Books of Account and final statements. There cannot be any inflation of expenditure, when all the expenditures were correctly claimed by assessee in the final statements. Ground of assessee is allowed. Disallowance of part of expenses of partners sitting fees - excess payment of interest to partners of ₹ 13,300/- and sitting fee - Held that - We are unable to understand how the interest at 12% of ₹ 1,59,600/- can be disallowed. As seen from the final statements, the entire interest on partner s capital claimed was only ₹ 51,800/- and the amount claimed in the P&L A/c was ₹ 51,800/- only. How an amount of ₹ 1,59,600/- could be disallowed is not explainable. Therefore, we do not find any reason to confirm the addition so made, based on the so called entries in the partners sitting fee account in cash imprest maintained by Managing Partner. However, with reference to the disallowance of ₹ 15,791/- considered to be miscellaneous expenditure, we confirm the disallowance as the interest for business purposes is not explained. Therefore, while confirming the amount of ₹ 15,791/-, assessee gets relief of ₹ 1,59,600/-. Ground is partly allowed. Discrepancy in depreciation claim and donation - Held that - As far as claim of depreciation is concerned, same was disallowed on the basis of incomplete Books of Account without considering the final statements. Therefore, we are of the opinion that there cannot be any disallowance, so long as the final statements have not been examined properly by the AO. As far as donation is concerned, considering the nature of the amount, we uphold the disallowance.

Summary

Issues Involved:
1. Condonation of Delay
2. Addition of Unexplained Credit in Opening Balance
3. Addition of Unexplained Credit in the Accounts of Partners
4. Disallowance of Salary to Partner
5. Addition of Unexplained Credit towards Excess Liabilities
6. Addition for Suppression of Income
7. Addition for Inflation of Expenditure
8. Disallowance of Part of Expenses of Partner's Sitting Fees
9. Disallowance of Depreciation and Donations

Condonation of Delay:
The assessee's appeal was filed with a delay of 44 days due to the closure of business and other operational difficulties, including the ill-health of the Managing Partner. The delay was condoned considering the reasonable cause provided.

Addition of Unexplained Credit in Opening Balance:
The AO added ?5,74,132 due to discrepancies between the closing balance of the previous year and the opening balance of the current year. The assessee explained that the discrepancies arose due to adjustments made in the final accounts, particularly a partner's capital contribution of ?5 Lakhs and subscription collections of ?79,312. The Tribunal found the explanation reasonable and allowed the assessee's ground, deleting the addition.

Addition of Unexplained Credit in the Accounts of Partners:
The AO added ?10 Lakhs under Section 68, suspecting unexplained cash credits in partners' accounts. The CIT(A) deleted the addition, accepting that the partners had introduced ?2 Lakhs each, which was reflected in their individual returns. The Tribunal upheld the CIT(A)'s decision, noting that the AO's addition was unwarranted as there was no such credit in the firm’s books.

Disallowance of Salary to Partner:
The AO disallowed ?18,000 paid as salary to a partner, K. Mohan Reddy, claiming he was not a working partner. The CIT(A) confirmed this disallowance. However, the Tribunal found that the partner was aware of his responsibilities and the disallowance had no basis, thus allowing the ground in favor of the assessee.

Addition of Unexplained Credit towards Excess Liabilities:
The AO added ?25,11,297 due to discrepancies in liabilities found during the survey. The CIT(A) gave partial relief of ?20,28,000. The Tribunal, considering the incomplete nature of the books and the reconciliation provided by the assessee, directed the deletion of the entire addition.

Addition for Suppression of Income:
The AO added ?1,082 for short computation in the dividend account. The Tribunal found the AO's addition unclear and based on incomplete books, thus allowing the ground in favor of the assessee.

Addition for Inflation of Expenditure:
The AO disallowed ?6,01,860 for inflated expenditure based on discrepancies between final accounts and incomplete books. The Tribunal found the disallowance unwarranted as the AO himself had reconciled the amounts, thus allowing the ground in favor of the assessee.

Disallowance of Part of Expenses of Partner's Sitting Fees:
The AO disallowed ?1,72,900, including interest and sitting fees. The CIT(A) gave partial relief of ?1,20,000. The Tribunal found the disallowance of ?1,59,600 baseless but confirmed the disallowance of ?15,791 as miscellaneous expenditure, thus partly allowing the ground.

Disallowance of Depreciation and Donations:
The AO disallowed depreciation based on incomplete books and donations. The Tribunal found the disallowance of depreciation unwarranted but upheld the disallowance of donations.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, providing relief on several grounds based on the explanations and reconciliations provided by the assessee.