2025 (1) TMI 496 - AT - Income Tax

Assessment u/s 153A - validity of additions made in absence of incriminating material found as a result of search and seizure operation - addition/disallowance made are remuneration paid to the partner as remuneration paid does not qualify as business expense u/s. 37 - HELD THAT - Though, the A.O. has referred to a statement recorded u/s. 132(4) however, that cannot be considered as an incriminating material for enabling the A.O. to vest with himself the jurisdiction to make the disputed disallowances in assessments completed u/s. 153A of the Act. Thus, in view of the ratio laid down in the case of Abhisar Buildwell (P.) Ltd. 2023 (4) TMI 1056 - SUPREME COURT the additions made in A.Ys. 2014-15 to 2018-19 are unsustainable. Accordingly, we delete such disallowances. Remuneration paid to partner - AO initially was of the view that remuneration is not allowable in terms of section 40(b) but ultimately made the disallowance u/s. 37 which, in other words, means that the expenditure incurred is not for the purpose of business. As in the statement recorded u/s. 132(4) in response to a specific query raised, one of the partners of the assessee firm has specifically stated that Ms. Chhaya D. Vora helps in accounts maintenance of the firm and for that purpose she comes to the office once or twice a week. Partner comes to office and helps in maintenance of accounts is proved on record. Merely because she does not come to office on daily basis, cannot be a ground to hold that she is only a sleeping partner and, hence, not entitled to remuneration. In any case of the matter, the remuneration paid to partner is taxable at the hands of the partner u/s.28(v) of the Act. Undisputedly, the remuneration received has been offered to tax at the hands of the concerned partner. That being the factual position emerging on record, expenditure towards remuneration paid to the partner is certainly allowable at the hands of the assessee firm. Decided in favour of assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issues considered in this judgment are:

• Whether the Assessing Officer (A.O.) erred in making additions under section 153A of the Income Tax Act in the absence of incriminating material found during the search and seizure operation.
• Whether the disallowance of remuneration paid to a partner of the assessee firm as a business expense under section 37 of the Income Tax Act was justified.
• Whether the assessment order was passed in a mechanical manner under section 153D without incriminating material.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Validity of Additions in Absence of Incriminating Material

• Relevant legal framework and precedents: The proceedings were initiated under section 153A of the Income Tax Act following a search operation. The legal precedent set by the Supreme Court in the case of Abhisar Buildwell (P.) Ltd. establishes that additions under section 153A must be based on incriminating material found during such operations.
• Court's interpretation and reasoning: The court noted that for the assessment years 2014-15 to 2018-19, no incriminating material was found during the search that could justify the additions made by the A.O.
• Key evidence and findings: The only basis for the additions was a statement recorded under section 132(4), which the court did not consider as incriminating material.
• Application of law to facts: The court applied the precedent from Abhisar Buildwell (P.) Ltd., concluding that the absence of incriminating material invalidates the additions made for the specified years.
• Treatment of competing arguments: The assessee argued the lack of incriminating material, while the Department relied on the A.O.'s observations. The court favored the assessee's argument based on the legal precedent.
• Conclusions: The court concluded that the additions for the assessment years 2014-15 to 2018-19 were unsustainable and deleted them.

Issue 2: Disallowance of Remuneration as Business Expense

• Relevant legal framework and precedents: The disallowance was made under section 37, which pertains to business expenses, and section 40(b), which relates to remuneration to partners.
• Court's interpretation and reasoning: The court observed that the remuneration was indeed a business expense as the partner contributed to the firm's operations, albeit not on a daily basis.
• Key evidence and findings: The partner's statement confirmed her role in maintaining accounts, and the remuneration was taxed in her hands, supporting the claim as a business expense.
• Application of law to facts: The court found that the remuneration qualified as a business expense under section 37 and was allowable.
• Treatment of competing arguments: The assessee argued the legitimacy of the expense, while the Department challenged its necessity. The court sided with the assessee based on factual evidence.
• Conclusions: The court deleted the disallowance of remuneration for all assessment years under dispute.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "The A.O. can have jurisdiction to assess or reassess any income purely based on incriminating material found as a result of search and seizure operation."
• Core principles established: Additions under section 153A require incriminating material; remuneration to partners can be a legitimate business expense if it is for services rendered.
• Final determinations on each issue: The court allowed the appeals, deleting all disallowances and additions made by the A.O. for the assessment years in question.