2012 (12) TMI 242 - AT - Income Tax

Disallowance of salary and interest paid to partners - compliance of furnishing the Partnership Deed during the course of assessment proceedings Held that - Payment of interest and salary to the partners is to be allowed since the certified copy of the partnership deed was made available to the A.O. in the course of assessment proceedings - provisions of Section 184 of the Income tax Act, 1961 are directory and not mandatory defect of not filing copy of partnership deed with return of income is a curable defect. - in favor of assessee Disallowance of expenses of Hire charges of Trucks alleged that these three vehicles were transferred to the name of the respective subcontractors only on 21.03.2005 and prior to such transfer, these vehicles were registered in the name of the assessee Held that - Assessee has already debited all these expense in respect of these vehicles in its books of account, no further deduction is allowable to the assessee on account of hiring of these tankers. But we find force in this contention that all operating expenses of these three tankers should be allowed as deduction to the assessee - assessee has to establish that in addition to Rs.8,08,995.22, any other expenditure was incurred on the vehicles and the same were not debited by the assessee but were debited by the so called contractors, that deduction should be allowed to the assessee for such expenses if the assessee can satisfy the A.O. about allowability of such expenses - ground is allowed for statistical purposes. Disallowance u/s. 40(a)(ia) of the I.T.Act Held that - No tax was deductible by the assessee in view of the certificate issued by the A.O. of these subcontractors u/s 197(1) of the Income tax Act, 1961, no disallowance is justified u/s 40(a)(ia) of the Income tax Act, 1961 but since we have confirmed the disallowance for the reasons stated in the above para, this ground is of academic interest only - appeal of the assessee stands allowed.

Summary

Issues:
1. Disallowance of salary and interest paid to partners
2. Disallowance of expenses of hire charges of trucks
3. Disallowance u/s. 40(a)(ia) of the I.T. Act

Issue 1: Disallowance of salary and interest paid to partners

The Assessing Officer (A.O.) disallowed Rs. 4,08,653/- for partners' interest and salary expenditure due to a change in the firm's constitution and non-submission of a certified copy of the reconstituted partnership deed. The A.O. cited Section 185 of the Income Tax Act, 1961, which disallows deductions if conditions under Section 184(4) are not met. The assessee submitted the partnership deed during assessment proceedings, citing a tribunal decision in favor. The Tribunal held that the failure to file the deed with the return was a curable defect, following the Gujarat High Court's view that Section 184 provisions are directory, not mandatory. Consequently, the disallowance was overturned, allowing the payment of interest and salary to partners.

Issue 2: Disallowance of expenses of hire charges of trucks

The A.O. disallowed Rs. 24,22,085/- of expenses paid to subcontractors for using their tankers, suspecting it to be a tax reduction scheme. The assessee claimed genuine sale and lease-back transactions supported by sale deeds and certificates from subcontractors. The A.O. questioned the genuineness of the transactions based on vehicle transfers and debited expenses. The Tribunal found that while hire charges were not deductible due to already debited expenses, all operating expenses should be allowed. The matter was remanded to the A.O. to verify additional expenses and ensure no double taxation for subcontractors, allowing deductions for genuine expenses.

Issue 3: Disallowance u/s. 40(a)(ia) of the I.T. Act

Although no tax deduction was required due to certificates issued to subcontractors under Section 197(1) of the Income Tax Act, the disallowance under Section 40(a)(ia) was confirmed for other reasons. As the disallowance was upheld for different grounds, this issue was deemed of academic interest only.

In conclusion, the appeal was allowed in favor of the assessee, overturning the disallowances related to partner payments and hire charges while confirming the disallowance under Section 40(a)(ia) for academic reasons. The Tribunal emphasized the importance of fulfilling statutory requirements while also considering the curability of procedural defects in tax matters.