2008 (3) TMI 222 - HC - Income Tax

Expenses on interest and salary to partners - Since the assessee is maintaining its books of account under the cash system of accounting, deduction on account of salary and interest to be paid to the partners was allowable as per the partnership deed - regular books of account not having been maintained and a flat rate applied, the extra payment receipt by the assessee deserved the same treatment as other payments revenue appeal is dismissed

Summary

Issues:
1. Appeal against order of Income-tax Appellate Tribunal regarding deduction of interest and salary to partners.
2. Dispute over application of flat rate on contract receipts and deduction of salary and interest to partners.
3. Validity of assessing only 12% of profit in respect of difference in contract receipts.

Analysis:

Issue 1:
The Revenue filed an appeal under section 260A of the Income-tax Act against the ITAT order allowing interest and salary to partners despite maintaining books on a cash basis. The assessment was framed rejecting the books of account, applying 12% of gross receipts as income, and disallowing deduction for interest and salary to partners due to lack of proof of payment under the cash system of accounting.

Issue 2:
The firm, a civil contractor, revised its income computation during assessment proceedings, increasing gross receipts and salary to partners. The CIT(A) partly allowed the appeal, applying a flat rate of 12% on the difference in contract receipts and permitting deduction for salary and interest based on the partnership deed terms. The Revenue contested this, leading to the ITAT dismissing the appeal.

Issue 3:
The Revenue argued that deduction for salary and interest should not be allowed without actual payment during the previous year, and any difference in receipts should be added to the income. However, the court found that since the firm maintained books on a cash basis and the partnership deed allowed crediting remuneration at year-end, deductions were permissible. Referring to a Board Circular, the court upheld the allowance of deductions and rejected the Revenue's contentions.

In conclusion, the court dismissed the Revenue's appeal, upholding the ITAT's decision to allow deductions for salary and interest to partners based on the partnership deed terms and the cash system of accounting followed by the firm.