2010 (10) TMI 544 - AT - Income Tax

Disallowance - the assessee is engaged in the hotel business, running a bar attached thereto - The question that requires to be answered does not concern the registration of the firm, which is no longer applicable, but whether the provisions of section 185 would become applicable or not for the relevant years - The partnership agreement in the instant case is violative of the provisions of State Abkari Act and is, thus, illegal - in the absence of any change in its constitution, stand to be assessed as such for the current year as well, would also not help as the provision of section 184, as afore-stated, would be applicable only to a partnership firm, i.e., one which is so under the partnership law, and which the assessee is not - the payment of remuneration by it to the partners shall be covered by the provisions of section 37(1) read with section 40(ba) and, resultantly, it shall not be entitled to deduction in its respect The onus to prove its return of income, and the claim/s preferred thereby, including u/s. 37(1) of the Act is on the assessee - It has not explained the circumstances under which it was required to book the expenditure in such a manner, which would normally be only on the basis of bills or vouchers raised by the parties who had rendered the corresponding services for which, and in whose favour, the expenditure is incurred - Appeal is allowed by way of remand

Issues Involved:
1. Assessment of the assessee-firm as an 'Association of Persons' (AOP) rather than as a 'firm'.
2. Disallowance of the assessee's claim towards remuneration allowed to its working partners.
3. Disallowance of Rs. 1 lakh out of the expenditure on traveling, vehicle maintenance, labor charges, transportation, and coolie charges for AY 2004-05.

Detailed Analysis:

Issue 1: Assessment of the Assessee-Firm as an 'Association of Persons' (AOP) Rather Than as a 'Firm'
The principal issue was whether the assessee-firm should be assessed as an 'Association of Persons' (AOP) rather than as a 'firm' under the Income-tax Act, 1961, for the assessment years 2003-04 and 2004-05. The Assessing Officer (AO) considered the partnership agreement unlawful because the bar license was in the name of one partner and was used by the firm without the required permission from the excise commissioner, thus violating the Kerala Abkari Act. Consequently, the AO denied the firm status under the Act.

The Hon'ble Supreme Court in Bihari Lal Jaiswal vs. CIT and the jurisdictional high court in Narayanan & Co. vs. Dy. CIT held that a partnership firm dealing in liquor without all partners holding the necessary license is not entitled to registration under the Act. The assessee argued that the requirement for registration under the Act was discontinued by the Finance Act, 1992, and that the firm met the conditions of section 184 for being assessed as a firm. However, the Tribunal found that the partnership agreement was void under section 23 of the Indian Contract Act, 1872, as it violated the provisions of the State Abkari Act. Therefore, the assessee could not be considered a valid partnership firm under the partnership law, and the AO's assessment of the firm as an AOP was upheld.

Issue 2: Disallowance of the Assessee's Claim Towards Remuneration Allowed to Its Working Partners
Following the assessment of the assessee as an AOP, the AO disallowed the remuneration paid to the partners. The Tribunal noted that section 185 of the Act, which underwent a change effective from 1.4.2004, provided that a firm not complying with section 184 would be assessed without allowing deductions for payments to partners. For AY 2003-04, the firm was assessed as an AOP, and for AY 2004-05, although assessed as a firm, it was not entitled to deductions for payments to partners. The Tribunal found that the AO's action was in line with the law, given the illegality of the partnership agreement, and upheld the disallowance of remuneration to partners.

Issue 3: Disallowance of Rs. 1 Lakh Out of the Expenditure on Traveling, Vehicle Maintenance, Labor Charges, Transportation, and Coolie Charges for AY 2004-05
The AO disallowed Rs. 1 lakh out of the expenditure on traveling, vehicle maintenance, labor charges, transportation, and coolie charges for AY 2004-05, citing the lack of proper bills and reliance on self-vouchers. The CIT(A) deleted the disallowance, stating it was made on an ad hoc basis without factual basis. The Tribunal noted that the onus to prove the claims was on the assessee, who failed to provide adequate documentation. However, the Tribunal agreed with the CIT(A) that the quantum of disallowance was not adequately considered by the AO. The matter was remitted back to the CIT(A) to reassess the quantum of disallowance based on the facts and circumstances, with the possibility of calling for a remand report from the AO.

Conclusion
The Tribunal upheld the AO's assessment of the assessee as an AOP and the disallowance of remuneration to partners for both AY 2003-04 and 2004-05. The disallowance of Rs. 1 lakh for AY 2004-05 was remitted back to the CIT(A) for reassessment. The Revenue's appeal for AY 2003-04 was allowed, and for AY 2004-05, it was partly allowed and partly allowed for statistical purposes.

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