2015 (8) TMI 1536 - AT - Income Tax

Enhancement by Ld. CIT(A) - no notice required u/s 251(2) was given by the Ld. CIT(A) to the assessee for enhancement - HELD THAT - We find force in the submission of Ld. DR of the Revenue that in the present case, there is no enhancement by Ld. CIT(A) in respect of disallowance of interest and salaries paid to partners because the same was not allowed by the AO also and therefore, there was no requirement to issue notice u/s 251(2) of the Act by Ld. CIT(A). Therefore, Ground No.1 (a) of the assessee. Allowability of deduction in respect of interest and salary paid by the assessee firm to its partners - HELD THAT - As in the assessment order, it is observed by the AO that no bills/vouchers and books of account or any other supporting vouchers have been produced before him and therefore, he had no option but to estimate the income to the best of his judgment. He has invoked the provision of Section 144 of the Act although not specifically stated in the assessment order. As per sub section (5) of section 184, where there is on the part of firm any such failure as mentioned in section 144, the firm shall be assessed without allowing deduction of any payment of interest and salary etc. to any partner of the firm in computing the income chargeable under the head business income. Hence, in the facts of the present case, Section 184(5) of the Act is applicable and as a consequence, deduction on account of interest and salary payment to partners is not allowable. Hence, on this issue, we do not find any reason to interfere in the order of the Ld. CIT(A). Accordingly, Ground No. 1 and 2 are rejected. Fresh capital introduced by the new partners who have joined the firm in the present case - HELD THAT - CIT(A) also confirmed these additions on this basis that during the assessment proceedings or appellate proceedings, the assessee did not furnish their addresses PAN or their confirmation. In view of these facts that acknowledgement of filing income tax return/intimation in respect of four new partners out of six new partners is available in paper book, we feel it proper that this matter should go back to the file of the AO for fresh decision. Credit of TDS - HELD THAT - There is no mention in the assessment order for allowing lesser amount of credit for TDS. Hence, we feel that on this issue also, the matter should go back to the file of the AO for fresh decision.

Summary

Issues:
1. Disallowance of interest and salaries paid to partners without notice under section 251(2).
2. Disallowance of deduction for interest and salary paid to partners.
3. Addition of fresh capital introduced by new partners.
4. Credit of TDS allowed at a lesser amount.

Analysis:

Issue 1: Disallowance of interest and salaries paid to partners without notice under section 251(2)
The assessee appealed against the order of the CIT (A) for the assessment year 2010-11, claiming that no notice was issued under section 251(2) regarding the disallowance of interest and salaries paid to partners. The Revenue supported the CIT (A) order, stating that as the AO had also disallowed these payments, there was no requirement for a notice under section 251(2). The Tribunal found that since the AO had not allowed these payments, there was no enhancement by the CIT (A), thus no notice under section 251(2) was necessary. Consequently, the Tribunal rejected the appeal on this ground.

Issue 2: Disallowance of deduction for interest and salary paid to partners
The Tribunal examined the allowability of deduction for interest and salary paid by the assessee firm to its partners. The AO had not allowed these deductions due to the absence of bills, vouchers, or supporting documents. The Tribunal noted that as per Section 184(5) of the Income Tax Act, if there is a failure to produce necessary documents, deductions for interest and salary payments to partners are not allowable. Therefore, the Tribunal upheld the CIT (A) order on this issue, rejecting the appeal against the disallowance of these deductions.

Issue 3: Addition of fresh capital introduced by new partners
The AO had made an addition for fresh capital introduced by new partners, citing a lack of information about these partners. However, the Tribunal observed that details for four out of six new partners were available in the acknowledgment/intimation of filing income tax returns. As the AO did not specify when the information was requested and not provided, the Tribunal remanded the matter back to the AO for a fresh decision.

Issue 4: Credit of TDS allowed at a lesser amount
The assessee claimed that the credit of TDS was allowed at a lower amount than actual. The Tribunal noted that the assessment order did not provide a reason for the discrepancy in TDS credit. Therefore, the Tribunal directed the matter to be reconsidered by the AO for a fresh decision. Consequently, the Tribunal set aside the CIT (A) order on these two issues and remanded them back to the AO for a speaking order after providing a reasonable opportunity to the assessee. The appeal was partly allowed for statistical purposes.