2013 (3) TMI 466 - AT - Income Tax

Disallowance of proportionate salary to the partners - CIT(A) deleted the addition - as per AO though the assessee had paid FBT yet the disallowance made on the said ground was valid and that the action of the CIT(A) is not valid - Held that - The appellant has five units in which two units are located in exempted area. The disallowance of the salary by AO allocable to exempt units worked out on the basis of turnover is not acceptable as there was no material to conclude that part of salary paid to partners pertains to exempt units and as such the disallowance is based on surmises and conjectures. AD has no power to allocate expenses arbitrarily as held in the case of DCIT Vs Delhi Press Samachar Patra (P) Ltd. (2006 (3) TMI 218 - ITAT DELHI-E). Further, in the case of the appellant itself for the AY 2005-06 the disallowance of salary paid to partners was deleted. Without prejudice to the above, the partners to whom the salary of Rs. 24.00 lacs was paid, are assessed to tax and paying tax at 30% and as such there is no loss to revenue - in favour of assessee. Addition proportionately with regard to various expenses - Held that - CIT(A) disallowed above addition with an observation that the AO has failed to note that the FBT was paid on the major part of the expenses has been paid by the assessee and for the remaining expenses, the AO could not make any claim for disallowance. The CIT(A) further observed that in a case of a firm having a turnover of more than Rs.166 crores and returning an income of Rs.1.42 crores, the issue of making ad hoc disallowance of some expenses without bringing any adverse material on record is not tenable - in favour of assessee.

Summary

Issues:
1. Addition of salary to partners by Assessing Officer.
2. Addition of various expenses by Assessing Officer.

Issue 1: Addition of salary to partners by Assessing Officer

The appeal was filed by the Revenue against the order of Commissioner of Income Tax(A)- Rohtak regarding the addition made by the Assessing Officer on account of salary paid to the partners. The main ground raised in the appeal was the deletion of the addition by the Commissioner of Income Tax(A). The Commissioner of Income Tax(A) had deleted the disallowance of salary paid to the partners based on a judgment of ITAT Delhi 'F' Bench. The Tribunal found no ambiguity or perversity in the Commissioner's order and held that the ground raised by the Revenue lacked merit. The Tribunal upheld the decision of the Commissioner and dismissed ground no. 1 of the Revenue's appeal.

Issue 2: Addition of various expenses by Assessing Officer

The second ground raised in the appeal was the addition of various expenses by the Assessing Officer, despite the assessee having paid Fringe Benefit Tax (FBT) on the claimed expenditure. The Tribunal referred to a judgment of ITAT Mumbai 'H' Bench, which held that expenses on which FBT is levied are treated as fringe benefits provided by the employer to its employees and should be allowed as business expenses. The Tribunal observed that the Assessing Officer's disallowance of expenses was solely based on the absence of complete vouchers. The Commissioner of Income Tax(A) disallowed the addition made by the Assessing Officer, noting that FBT was paid on major expenses and no adverse material was brought on record for disallowance. The Tribunal, following the decision of ITAT Mumbai Bench, held that the Revenue's second ground had no merit and dismissed it. Consequently, the appeal of the Revenue was dismissed.

This judgment addressed two main issues: the addition of salary to partners and the addition of various expenses by the Assessing Officer. In both instances, the Tribunal upheld the decisions of the Commissioner of Income Tax(A) based on relevant judgments and legal principles, ultimately dismissing the appeal of the Revenue.