2021 (7) TMI 798 - AT - Income Tax

Disallowance of remuneration paid to the partners of the assessee firm - assessee is a partnership firm and filed its return of income u/s 139 declaring rental income from letting out of Theater to ADLABS Film Ltd. - HELD THAT - AO has not disputed the books of account of assessee and corresponding withdrawal/drawing made by these two partners hence, any discrepancy in the statement of the partners is not going to change the condition prescribed u/s 40(b) (v) for allowing the claim of payment of remuneration to partners. AO has not disputed the fact that the payment has claimed by assessee to the partners on account of remuneration is not exceeding the limit provided u/s 40(b)(v) of the Act. Once the remuneration paid to the partners is in accordance of the provisions of Section 40(b)(v) and the actual payment of the said amount being credited to the capital account of the partners and corresponding withdrawal of the partners is not in disputed then the mere mistake in the statement of the partners would not rendered the claim of the partners firm not disallowed. Once the claim of payment of remuneration to partners is within the celling prescribed under Section 40(b) of the I. T. Act, 1961 the Assessing Officer cannot question the reasonableness of the remuneration when the genuineness of the payment is not in disputed.This issue is decided in favour of the assessee against the revenue. Disallowance of office expenses @ 20% - AO noted that the assessee has produced only ledger account of the expenses but no voucher has been produced - CIT(A) has deleted the said adhoc disallowance as held that the same is not proper - HELD THAT - There is no dispute that the expenditure has been incurred for the purposes of business. It is also clear that the assessee had filed all the details of the expenses under various heads. AO has not pointed out any specific defects in these details filed. The AO has failed to bring any material on record to demonstrate that these expenses have not been incurred and are not verifiable. No disallowance can be made on mere suspicion. This addition is deleted. Since the CIT(A) has deleted the disallowance made by Assessing Officer, therefore, ground does not arise from the impugned order of the CIT(A) and accordingly the same are dismissed. Disallowance of advertisement expenses - AO has disallowed the claim of advertisement expenses on the ground that the assessee is not running the theatre in question but the same was the let out to Reliance Media Works Ltd. - HELD THAT - There is no dispute that the assessee has let out the theatre in question to Reliance Media Works Ltd and not running the said theatre itself. Once the theatre is let out to third part for running then the claim of advertisement expenditure cannot be regarded as expenditure incurred wholly and exclusively for the purpose of the business assessee. Even otherwise, the assessee has not produced any supporting vouchers to prove that the expenditure was incurred for the purpose of the business of the assessee. Identical addition was confirmed by the CIT(A) for and A.Y.2012-13 the assessee has not challenged the said decision for the A.Y.2012-13. Even otherwise, once the assessee has let out the theatre to Reliance Media Works Ltd then the claim of the assessee cannot be accepted being incurred wholly and exclusively for the purpose of business of the assessee

Issues Involved:
1. Validity of assessment framed under Section 147 read with Section 143(3) of the Income Tax Act.
2. Disallowance of part of the remuneration paid to the partners of the assessee firm.
3. Disallowance of office expenses.
4. Disallowance of advertisement expenses.

Detailed Analysis:

1. Validity of Assessment:
- The assessee raised concerns regarding the validity of the assessment framed under Section 147 read with Section 143(3) of the Income Tax Act. However, during the hearing, the assessee's counsel stated that these grounds were not pressed. Consequently, these grounds were dismissed as not pressed.

2. Disallowance of Remuneration to Partners:
- The assessee, a partnership firm, filed its returns declaring rental income from letting out a theater. The Assessing Officer (AO) reopened the assessment and proposed a disallowance of 50% of the remuneration paid to two partners due to discrepancies in their statements.
- The AO disallowed ?1,20,000/- on account of remuneration paid to the partners. The assessee challenged this before the CIT(A), but the challenge was unsuccessful.
- Before the Tribunal, the assessee argued that the remuneration was in compliance with Section 40(b) of the Income Tax Act, which specifies the maximum permissible amount of partners' remuneration. The Tribunal noted that the remuneration was credited to the partners' capital accounts and was within the prescribed limits. The Tribunal cited the judgment in CIT Vs. Great City Manufacturing Co., which held that if the remuneration is within the limits prescribed under Section 40(b)(v), the AO cannot question its reasonableness.
- The Tribunal concluded that the AO could not disallow the remuneration since it was within the prescribed limits and the genuineness of the payment was not disputed. The disallowance made by the AO was deleted.

3. Disallowance of Office Expenses:
- The assessee claimed office expenses of ?69,450/-. The AO disallowed 20% of these expenses due to the absence of vouchers, amounting to ?13,890/-. The CIT(A) deleted the adhoc disallowance, stating that the expenditure was incurred for business purposes and the AO did not point out specific defects.
- The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to provide material evidence that the expenses were not incurred or verifiable. Thus, the disallowance was not justified.

4. Disallowance of Advertisement Expenses (A.Y. 2013-14):
- The AO disallowed advertisement expenses of ?25,298/- on the grounds that the assessee had let out the theater and was not running it, thus the expenses were not incurred for business purposes. The CIT(A) confirmed this disallowance.
- The Tribunal noted that since the theater was let out, the advertisement expenses could not be regarded as incurred wholly and exclusively for the business of the assessee. The assessee also failed to produce supporting vouchers. The Tribunal found no error in the CIT(A)'s order and upheld the disallowance.

Conclusion:
- The appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the issue of remuneration disallowance but upholding the disallowance of advertisement expenses. The Tribunal emphasized compliance with Section 40(b) regarding partners' remuneration and the necessity of supporting evidence for claimed expenses.

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