2016 (1) TMI 772 - AT - Income Tax

Admission of additional evidence - Held that - The written submission supported by documentary evidence was forwarded to the AO for his examination and comments and the AO furnished remand report dated 26.06.2012 on the same. The copy of the remand report of the AO was also provided to the Assessee who also filed rejoinder before the ld.CIT(A). After considering the contentions of both the parties, the ld. CIT(A) observed that the additional evidences filed are relevant and vital that would go to root of the matter while deciding the issues to which they relate. He, therefore, admitted the same on record. We do not find any incongruity in this conclusion of the ld. CIT(A). The ld. DR failed to point out as to which of the conditions of Rule 46A was not fulfilled by the assessee - Decided against revenue Brought forward losses of firm - covered under section 187 OR u/s. 78 - change in the terms and conditions of the partnership - Held that - CIT(A) has rightly allowed the appeal of the assessee on this issue because mere change in the profit sharing ratio would not amount to reconstitution of the partnership for the purpose of section 78 of the Act. It is not in dispute that all the partners after reconstitution of firm remained same and there is no instance of any incoming or outgoing partner. It is also borne out on record that the firm was incurring continuous losses and filing returns of income as such. if there is change in the constitution of a firm by way of a retirement or death of any partner, then the firm is not entitled to have carried forward and set off so much of the loss proportionate to the share of a retired or deceased partner which exceeds his share of profits. In the instant case, the reconstitution of the firm is not made as a result of retirement of any partner or death of any partner. As a matter of fact, the reconstitution of the partnership was made only as a result of changes in the profit sharing ratio amongst the partners. Therefore, in our considered opinion, the ld. CIT(A) has rightly allowed carry forward losses to be set off, as claimed by the assessee - Decided in favour of assessee Disallowance u/s. 37(1) - CIT(A) deleted the addition - Held that - The narration made on bill No. SRK/4/(08-09)/154 dated 30.07.2008 is To fee for representation in Block assessment proceedings before various Income-tax authorities (In response to notices) . We have perused the block assessment order, which stood completed on 27.02.2004. Even the appeals against the block assessment proceedings stood disposed of on 20.12.2004. This shows that the work assigned to the consulting firm was completed in F.Y. 2004-05. But the liability was not created due to non issuing of bill by the Consulting Firm . We are agree with the arguments made done by Ld. AR. . The assessee has maintained the books of account in mercantile system and he did not make any provision in this regard in his books of account in earlier years. There is no agreement on record to indicate that the assessee may make such payments whenever he thinks fit. We, therefore, find that the ld. CIT(A) has rightly deleting the disallowance made by the AO - Decided in favour of assessee Addition of expenses towards repair of the building - CIT(A) allowed partial relief - Held that - There is no good reason to interfere with the conclusion reached by the ld. CIT(A). The ld. CIT(A) while deciding this issue has taken into consideration the statement of repairs and maintenance as also the bills of repairs & maintenance submitted by the assessee, which could not be rebutted by the ld. DR before us. We therefore, find no error in the conclusion reached by the ld. CIT(A) - Decided in favour of assessee Addition account of expenses pertaining to rates and taxes u/s. 37(1) - CIT(A) allowed claim - Held that -CIT(A) has rightly allowed these expenditure. We do not find any error in the finding of CIT(A) that the impugned expenditure were incurred by the assessee irrespective of the fact the same were paid by his sister concern. The bills raised were in the name of assessee and in the ledger account of assessee, the sister concern is shown as creditor. The expenditures were in the nature of annual commercial use charges, registration charges and regularization charges etc. The documentary evidences furnished by the assessee nowhere depict the nature of payment to be that of penalty in contravention of any law. In fact these payments were made in compensation to protect the asset which was being used for assessee s business for so many years. No good ground is made out on behalf of the Revenue to hold that the impugned payments were in the nature of penalty. - Decided in favour of assessee Disallowance of interest and bank charges - CIT(A) allowed claim - Held that - A perusal of the impugned order reveals that the ld. CIT(A) has deleted the addition only on the ground that such expenses were allowed in the preceding assessment years 2002-03 to 2006-07 on the identical facts. The record nowhere reveals whether the loan taken by the assessee was a term loan for construction/renovation etc. of building, or it was working capital loan taken for the purpose of business. No documentary evidences of the bank are available before us to ascertain this fact. Secondly, the ld. CIT(A) has failed to consider the new fact emerged only in the year under consideration, inasmuch as three floors of the building are let out by the assessee and remaining two floors were used for business purposes. Therefore, in case, it was a term loan taken for construction/renovation of building, then the expenses incurred by the assessee on such loan, shall be apportioned in the ratio of 60 40 as done in the case of other expenses dealt by the ld. CIT(A) itself. If it was a working capital loan, then it has to be thrashed out as to under what circumstances and for what purpose, the capital accounts of the partners were showing continuous debit balances. All these facts need verification at the stage of Assessing Officer before finally deciding the issue. We, therefore, think it appropriate to remand the issue to the file of Assessing Officer to decide the same afresh - Decided in favour of revenue by way of remand. Addition made u/s. 68 - CIT(A) allowed claim - Held that - we find no justification to interfere with the order of the ld. CIT(A). It is notable that the lender is an old creditor, as he had an opening balance and his PAN was already available on record. During the enquiry made by AO in the remand proceedings, the creditor had satisfied the requirements of the AO. The copy of IT return of the creditor filed showing total income at ₹ 93,02,056/- in our opinion, goes to prove the creditworthiness of the creditor as also observed by ld. CIT(A). Considering all these facts, we are of the considered opinion that the ld. CIT(A) has rightly deleted this addition u/s. 68 - Decided in favour of assessee

Summary

Issues Involved:
1. Admission of additional evidence under Rule 46A.
2. Carry forward and set off of brought forward losses/unabsorbed depreciation.
3. Disallowance of expenses claimed for representing the case in block assessment proceedings.
4. Relief out of the addition made for repair expenses.
5. Deletion of addition made on account of expenses towards rates and taxes.
6. Deletion of addition made under Section 36(1)(iii).
7. Deletion of addition of bank charges.
8. Deletion of addition made under Section 68.

Issue-wise Detailed Analysis:

1. Admission of Additional Evidence under Rule 46A:
The assessee submitted additional evidence before the CIT(A), which was admitted. The Revenue contested this, arguing the conditions of Rule 46A were not met. However, the CIT(A) found the evidence relevant and vital, forwarding it to the AO for examination and comments. The AO's remand report did not specify any unfulfilled conditions of Rule 46A. Therefore, the Tribunal upheld the CIT(A)'s decision to admit the evidence, dismissing this ground of the Revenue's appeal.

2. Carry Forward and Set Off of Brought Forward Losses/Unabsorbed Depreciation:
The AO disallowed the carry forward and set off of losses, arguing the firm had been reconstituted with a new profit-sharing ratio, thus constituting a new firm under Section 78. The CIT(A) allowed the set-off, stating the changes were only in profit-sharing ratios among the same partners, falling under Section 187, not Section 78. The Tribunal agreed, noting no retirement or death of partners, thus dismissing this ground of the Revenue's appeal.

3. Disallowance of Expenses Claimed for Representing the Case in Block Assessment Proceedings:
The AO disallowed Rs. 3,00,000 paid for representation in block assessment proceedings, arguing the block assessment was completed years earlier. The CIT(A) allowed the expense, noting the bill was for ongoing appeals. The Tribunal upheld this, agreeing the expense was for business purposes, dismissing this ground of the Revenue's appeal.

4. Relief Out of the Addition Made for Repair Expenses:
The AO apportioned repair expenses between business and property income, disallowing Rs. 57,212. The CIT(A) adjusted this, allowing Rs. 24,379 more towards business income based on detailed examination of repair bills. The Tribunal found no error in the CIT(A)'s conclusion, dismissing this ground of the Revenue's appeal.

5. Deletion of Addition Made on Account of Expenses Towards Rates and Taxes:
The AO disallowed Rs. 16,04,832 paid to MCD, considering it a penalty. The CIT(A) found these payments were regular charges and not penalties, allowing the expenses. The Tribunal agreed, noting the payments were for business purposes and not penalties, dismissing this ground of the Revenue's appeal.

6. Deletion of Addition Made Under Section 36(1)(iii):
The AO disallowed Rs. 60,79,928 of interest paid to the bank, arguing the borrowed funds were not used for business purposes. The CIT(A) allowed the expense based on consistency with previous years. The Tribunal remanded the issue back to the AO for fresh verification, noting the need to ascertain the nature of the loan and its usage, thus allowing this ground for statistical purposes.

7. Deletion of Addition of Bank Charges:
Similar to the interest disallowance, the AO disallowed Rs. 53,374 as bank charges. The CIT(A) allowed it based on consistency. The Tribunal remanded this issue back to the AO for fresh verification along with the interest disallowance, thus allowing this ground for statistical purposes.

8. Deletion of Addition Made Under Section 68:
The AO added Rs. 26,00,000 as unexplained cash credit, questioning the creditor's creditworthiness. The CIT(A) deleted the addition, noting the creditor's PAN, IT returns, and remand report satisfied the AO's requirements. The Tribunal upheld the CIT(A)'s decision, finding no reason to support the AO's addition, thus dismissing this ground of the Revenue's appeal.

Conclusion:
The Tribunal dismissed most of the Revenue's grounds, upholding the CIT(A)'s decisions except for the issues related to interest and bank charges under Section 36(1)(iii), which were remanded back to the AO for fresh verification. The appeal was partly allowed for statistical purposes.