2022 (12) TMI 877 - AT - Income Tax

Deduction u/s 40b - disallowance on account of interest paid to partners and on account of salary paid to partners - admissible amount - HELD THAT - The certificate of C.A. is also placed on record at PBP 34 who conducted the Audit u/s 44AB of the Act alongwith computation of total income. Thus from these documents, it becomes clear that no addition could have been made by the AO. Revenue Authorities rejected the rectification application in a mechanical manner without going into the facts of the case. The Bench has also perused the CBDT Circular No. 14 (XL 35) of 1955 dated 11-04-1955 which is relevant in the present case as it has been categorically mentioned in that Circular that taxpayer should be guided by the AO to file the correct return and to allow him to the deductions which he is entitled under the Income Tax Act, 1961. In the instant case, instead of allowing the admissible amount , the AO on the contrary disallowed the amount without any justification and without looking into the reality of the facts of the case as the assesee was legally entitled for deduction. The Bench finds that Hon ble Supreme Court in number of cases has held that real income should be assessed which in the Bench view has not been done in this case. Therefore, considering the totality of the facts and circumstances of the case, the Bench feels that the assessee is entitled to deduction u/s 40b of the Act and thus the AO is directed to delete the addition which has been made while relying upon the amount wrongly mentioned by the assessee in the column of inadmissible . Thus the appeal of the assessee is allowed.

Summary

Issues Involved: Delay in filing appeal, justification of demand under Section 154, addition of salary and interest to partners under Section 40b, and procedural requirements for filing appeals.

Issue-wise Detailed Analysis:

1. Delay in Filing Appeal:
The appeal filed by the assessee was delayed by 15 days. The assessee attributed the delay to continuous ill health, supported by an affidavit. The Revenue opposed the condonation application. After considering both parties and the affidavit, the Tribunal condoned the delay, referencing the Supreme Court decision in Collector, Land Acquisition vs. MSt. Katiji and Others, 167 ITR 471, which allows for leniency in such cases.

2. Justification of Demand Under Section 154:
The assessee contested the demand of Rs. 3,01,650/- raised under Section 154. The Tribunal noted that the grounds of appeal were not related to a mistake apparent from the record under Section 143(1) but were related to the addition of salary and interest to partners. The Tribunal clarified that Section 154 allows rectification of mistakes apparent from the record, which must be obvious and patent, not requiring extensive reasoning or debate. The Tribunal cited case laws such as TS Balram, ITO vs. Volkart Bros. Ors. and CIT vs. Lakshmi Prasad Lahkar to emphasize this point.

3. Addition of Salary and Interest to Partners Under Section 40b:
The assessee argued that the addition of Rs. 3,45,419/- (salary to partners) and Rs. 4,69,198/- (interest to partners) was due to a typing error in the tax audit report. The assessee provided supporting documents, including the capital account of the partners and a certificate from the CA. The Tribunal found that the amounts were wrongly entered in the column of "inadmissible" and should have been considered as "Zero." The Tribunal criticized the Revenue Authorities for rejecting the rectification application mechanically without considering the facts. The Tribunal referenced the CBDT Circular No. 14 (XL 35) of 1955, which mandates guiding taxpayers to file correct returns and allow rightful deductions. The Tribunal concluded that the real income should be assessed, and thus, the assessee was entitled to the deductions under Section 40b. The AO was directed to delete the addition.

4. Procedural Requirements for Filing Appeals:
The Tribunal observed that the assessee should have filed an appeal against the original intimation under Section 143(1) instead of filing a rectification petition under Section 154. However, the Tribunal acknowledged the merit in the assessee's claim and allowed the appeal, emphasizing that procedural lapses should not deny substantive justice.

Conclusion:
The Tribunal allowed the appeal, directing the AO to delete the addition made due to the typing error in the tax audit report, thereby granting the deductions under Section 40b for salary and interest to partners. The decision underscores the importance of assessing real income and ensuring procedural fairness.