2009 (3) TMI 519 - HC - Income Tax

Business Expenditure- The assessee is a partnership firm consisting of nine partners of which five are ladies. The Assessing Officer noticed that the assessee had paid salary to the partners treating them as working partner, although some of them resided in far away places and therefore he disallowed the salary paid by the assessee to these partners under section 40(b) of the Act. Commissioner (Appeals) held that the partner were working partners and allowed the claim. Held that- court did not interfere with the order in appeal in view of the finality of the assessments of the partner. The Assessing officer also disallowed 25 percent of payments under section 40A(2) but the Commissioner (Appeals) and Tribunal allowed it. Held that- that the entire payment had been made to various partners and relatives. The disallowance of 25 percent made by the Assessing Officer under section 40A(2)(a) of the Act was justified.

Summary

Issues:
1. Disallowance of salary paid to non-working partners under sections 40(b) and 40A(2) of the Income-tax Act, 1961.
2. Disallowance of expenditure paid to partners or their relatives under section 40A(2)(a) of the Act.

Issue 1: Disallowance of salary paid to non-working partners under sections 40(b) and 40A(2) of the Income-tax Act, 1961:

The Revenue appealed against the Tribunal's decision canceling disallowances made by the Assessing Officer under sections 40(b) and 40A(2) of the Income-tax Act. The firm, a partnership consisting of nine partners, paid salaries to partners, treating all as working partners. However, four partners residing far from the firm's business location were found not to be working partners. The Assessing Officer proposed disallowing the salary paid to these partners under section 40(b). The Commissioner of Income-tax (Appeals) allowed the claim based on minutes and partnership deed, defining partners as working partners. The High Court found the partners not engaged in business activities and disapproved the Commissioner's decision but chose not to interfere due to finality of assessments. The High Court declared the orders not binding for future cases.

Issue 2: Disallowance of expenditure paid to partners or their relatives under section 40A(2)(a) of the Act:

The Assessing Officer disallowed around Rs. 54 lakhs out of total expenditure of Rs. 63,23,282 paid to partners or their relatives under various heads, citing exorbitant bills. The Commissioner of Income-tax (Appeals) and the Tribunal allowed the claim, stating the expenditure was necessary for business. The High Court disagreed, noting the lack of examination of reasonableness compared to similar cases. The High Court found no justification for allowing the claim and suggested a remand to assess each bill and voucher for excess payments. However, due to time constraints and potential further excess payments, the High Court confirmed the disallowance of 25 per cent made by the Assessing Officer under section 40A(2)(a) of the Act. The High Court allowed the appeal, reversing the Tribunal's decision and restoring the disallowance in assessment for this issue.

This detailed analysis of the judgment highlights the key issues, arguments, and decisions made by the High Court in the case.