2012 (9) TMI 578 - AT - Income Tax

Disallowance of salary paid to working partner u/s 40(b)(i) Working partner is an agent of two insurance companies despite being a partner As per partnership deed, partner without consent of other partners cannot engage in other business either directly or indirectly No chamber provided to partner in office of assessee Held that - Since partners was working as a working partner since inception and regularly attended the work of the assessee s firm. Assessee submits copy of many bank cheques, having signature of partner as Managing Partner and supporting bank statements. Assessee also provides NOC given by another partner for carrying on her own insurance agency business. On remand, the AO examined those documents and found correct. Decision in favour of assessee Addition of Service Tax being debit in P&L Assessee receive insurance commission from insurance companies Assessee passes accounting entry by gross commission & debit the Service Tax in P&L Held that - As per agreement insurance company will pay net amount after deduction of Service Tax. As per Rule 2 (d)(iii) of Service Tax Rules, this service comes under reverse charge mechanism. Therefore, insurance company liable to pay Service Tax. As far as assessee concern, credited the entire gross commission and debited the service tax in its books. The net result would be the same. Appeal decides in favour of assessee

Summary

Issues:
1. Addition of remuneration to working partner.
2. Addition of service tax amount.

Analysis:

Issue 1: Addition of remuneration to working partner
The appellant, Revenue, challenged the deletion of an addition of Rs.24,00,000 claimed to have been paid as remuneration to a working partner. The AO disallowed this amount citing that the partner was engaged in competitive businesses without consent. The AO's contention was that the partner should have obtained a no objection paper from the other partner as per the partnership deed. However, the CIT(A) deleted the addition after verifying documents proving the partner's involvement and consent from the other partner. The CIT(A) found that the partner had indeed worked as a managing partner and attended to the firm's work, thus justifying the deletion of the addition.

Issue 2: Addition of service tax amount
The Revenue also contested the deletion of an addition of service tax amounting to Rs.1,42,62,100. The AO disallowed this amount as he believed the reimbursement of service tax by the assessee was not valid in law. However, the CIT(A) found a valid contract between the appellant and the company from which the service tax was deducted. The CIT(A) noted that the appellant credited the entire gross commission and debited the service tax in its books, following the Service Tax Rules. The CIT(A) directed the AO to delete the addition as no discrepancies were found. The Revenue's appeal was dismissed as the partnership deed, Service Tax rules, and relevant accounts supported the CIT(A)'s decision.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision to delete both additions, emphasizing the legitimacy of the partner's remuneration and the compliance with Service Tax Rules regarding the service tax amount. The Revenue's appeal was dismissed, confirming the CIT(A)'s order.