2018 (8) TMI 1716 - AT - Income Tax

Addition as unexplained cash credit, which was capital introduced by the partner - Held that - It is well settled that if there are cash credit entries in the books of a firm, in which the accounts of the individual partners exist, and it is found as a fact that cash was received by the firm from its partners, then, in the absence of any material to indicate that they were the profits of the firm, it could not be assessed in the hands of the firm. No material has been brought on record by the Revenue to show that the amount of ₹ 11 lakhs shown as capital introduced by the partner Smt. Lalita Jain was the profits of the firm. Therefore, in view of the decision of Hon ble Allahabad High Court in the case of Jaiswal Motor Finance (1983 (2) TMI 47 - ALLAHABAD HIGH COURT), no addition in the hands of the firm can be made as unexplained cash credit u/s.68 of the Act. We, therefore, set aside the orders of lower authorities and delete the addition of ₹ 11 lakhs and allow this ground of appeal of the assessee. Not allowing deduction for partner s remuneration u/s.40(b)- Held that - We find that above clause of the partnership deed provides for payment of remuneration to partners which would be as per the provisions of the Act, which meant that the remuneration payable to partners would be quantified as per the provisions of the Act and shall not exceed the maximum remuneration provided. It is not in dispute that the partners were paid remuneration, which was less than the maximum provided by the Act. None of the authorities have disputed the payment of remuneration and has accepted the books of account of the assessee as correct and, therefore, the remuneration was deductible while computing the income of the assessee firm. We, therefore, set aside the orders of lower authorities and delete the disallowance. Adhoc disallowance of 20% out of salary paid to employees by the firm - Held that - No material has been brought on record by the revenue to show that the expenses claimed on account of salary expenses to staff is excessive or inflated. The disallowance made by the AO is only on the ground that in his opinion, the expenses claimed are not corroborated with justifiable facts. Merely on the basis of surmises and conjectures of the AO, no disallowance of expenditure made by him out of genuine business expenditure of the assessee can be sustained in law without any material being brought on record to show that either the expenses are not genuine or they are inflated. Therefore, set aside the orders of lower authorities and vacate the disallowance - decided in favour of assessee

Issues Involved:
1. Addition of ?11 lakhs as unexplained cash credit.
2. Disallowance of partner's remuneration under Section 40(b) of the Act.
3. Adhoc disallowance of 20% out of salary paid to employees.

Detailed Analysis:

1. Addition of ?11 lakhs as Unexplained Cash Credit:
The primary issue concerns the addition of ?11 lakhs as unexplained cash credit introduced by a partner, Smt. Lalita Jain. The Assessing Officer (AO) treated this amount as unexplained cash credit under Section 68 of the Income Tax Act, 1961, citing lack of creditworthiness. The CIT(A) upheld this addition, asserting that Smt. Lalita Jain did not have the financial capacity to introduce such capital.

Before the Tribunal, the assessee argued that Smt. Lalita Jain was an income tax assessee who had filed returns for previous years, showing sufficient cash in hand in her balance sheets for the years ending 31.3.2011 and 31.3.2012. The assessee relied on the Allahabad High Court's decision in CIT vs. Jaiswal Motor Finance, which held that if cash credits are introduced by partners and there is no indication that these are profits of the firm, they cannot be assessed in the hands of the firm.

The Tribunal found that the balance sheets indicated sufficient cash in hand, establishing the genuineness and creditworthiness of the transaction. Consequently, the Tribunal deleted the addition of ?11 lakhs, setting aside the orders of the lower authorities.

2. Disallowance of Partner's Remuneration under Section 40(b):
The second issue involved the disallowance of ?6,64,923/- claimed as partner's remuneration. The AO disallowed this deduction, stating that the partnership deed did not specify the quantification of remuneration as required under Section 40(b). The CIT(A) upheld this disallowance.

The assessee contended that the partnership deed authorized remuneration as per the provisions of Section 40(b), and the law only required authorization, not quantification. The assessee cited the Rajasthan High Court decision in CIT vs. Asian Marketing and the Himachal Pradesh High Court decision in Durga Das Devaki Nandan vs. ITO, which supported this interpretation.

The Tribunal noted that the partnership deed provided for remuneration as per Section 40(b), which meant that the remuneration payable would be quantified according to the Act and would not exceed the maximum limit. Since the remuneration paid was within the permissible limits and the accounts were accepted as correct, the Tribunal allowed the deduction and deleted the disallowance of ?6,64,923/-.

3. Adhoc Disallowance of 20% Out of Salary Paid to Employees:
The third issue was the adhoc disallowance of 20% of the salary expenses claimed by the assessee, amounting to ?35,50,800/-. The AO disallowed 20%, considering the expenses high relative to the gross profit and unsupported by individual ledger accounts or sufficient evidence. The CIT(A) reduced the disallowance to 10%.

The assessee argued that the disallowance was made on an adhoc basis without any material evidence showing that the salary expenses were either bogus or inflated. The Tribunal agreed, finding no material evidence from the revenue to justify the disallowance. The Tribunal held that disallowances based on mere surmises and conjectures without any substantiating evidence could not be sustained. Therefore, the Tribunal vacated the disallowance of ?2,55,080/-.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, deleting the addition of ?11 lakhs as unexplained cash credit, allowing the deduction for partner's remuneration of ?6,64,923/-, and vacating the adhoc disallowance of ?2,55,080/- out of salary expenses. The order was pronounced on 27/08/2018.

← Previous Next →