2013 (6) TMI 629 - AT - Income Tax

Interest & salary to partners disallowed - Held that - Assessee made compliance and furnished information required by the A.O. & books of the account was also produced before the A.O. but Revenue has failed to point out that the notices issued u/s 142(1) was with some terms of the notices. Thus, merely non compliance of a notice u/s 142(1) having no terms or requirements is not sufficient reason for making assessment under Section 144 particularly in case partnership firm where the A.O. want to invoke Section 184(5) and Section 185 disallowing the interest and remuneration to partners firm, the assessment made by A.O. u/s 144 is not in accordance with the conditions laid down in Section 144. Thus A.O. has wrongly made assessment u/s 144 though in clause 5 of the assessment order he has taken the status as a firm not as AOP . Thus allow the claim of the assessee. Unsecured loan advanced by the partner - Held that - In the light of the judgments of India Rice Mills 1995 (12) TMI 55 - ALLAHABAD High Court ,Surendra Mahan Seth 1996 (2) TMI 84 - ALLAHABAD High Court) and Metachem Industries (1999 (9) TMI 21 - MADHYA PRADESH High Court)the current capital introduced by partner in firm is established and thus the addition cannot be made in the hands of the firm. Following the above judgment the addition of Rs.11,83,637/- is deleted and balance addition of Rs.4,32,200/- (16,15,837-11,83,637/-) sustained by the CIT(A) is also deleted. Adhoc disallowance out of expenses - Held that - Considering the nature of business of the assessee and fact that the assessee failed to produce complete bills, vouchers, the addition has been sustained by the CIT(A). The CIT(A) has rightly sustained the addition of Rs.2,50,000/-. Since this is a matter of estimation and the assessee and Revenue both have failed to point out any contrary material based on which a different estimation can be made at this stage, in the light of the fact, order of the CIT(A) is confirmed. Appeal of the assessee is partly allowed

Issues Involved:
1. Ex-parte assessment and disallowance of interest and salary to partners.
2. Addition on account of unsecured loan advanced by a partner.
3. Disallowance of depreciation allowance.
4. Adhoc addition out of various expenses.
5. Deletion of addition made on account of refund of commercial tax.
6. Deletion of addition made on account of excess commercial tax debited to P&L account.
7. Deletion of addition made on account of unexplained cash credit.
8. Restriction of addition made on account of disallowance out of various expenses.

Issue-wise Detailed Analysis:

1. Ex-parte Assessment and Disallowance of Interest and Salary to Partners:
The assessee argued that the AO did not provide any opportunity of hearing before making the assessment under Section 144 of the Act and that the notice issued under Section 142(1) was complied with. The AO made the assessment under Section 144 due to non-compliance with a notice under Section 142(1), leading to disallowance of interest and salary to partners under Section 184(5). The Tribunal found that the AO wrongly made the assessment under Section 144 as the assessee had complied with the notice. Therefore, the Tribunal set aside the orders of the Revenue Authorities and allowed the claim of the assessee for interest and salary to partners.

2. Addition on Account of Unsecured Loan Advanced by a Partner:
The assessee challenged the addition of Rs.11,83,637, arguing that it was a current capital account of the partner, not a loan. The Tribunal, referencing judgments from the Hon'ble Allahabad High Court and Madhya Pradesh High Court, concluded that the current capital introduced by the partner was established, and thus, the addition could not be made in the hands of the firm. The Tribunal deleted the addition of Rs.11,83,637.

3. Disallowance of Depreciation Allowance:
The assessee did not press this ground, and hence, the Tribunal dismissed it.

4. Adhoc Addition Out of Various Expenses:
The AO made an addition of Rs.15,00,000, which the CIT(A) reduced to Rs.2,50,000 due to the assessee's failure to produce complete bills and vouchers. The Tribunal upheld the CIT(A)'s decision, considering the nature of the business and the lack of complete documentation.

5. Deletion of Addition Made on Account of Refund of Commercial Tax:
The AO added Rs.5,74,656 under Section 43B, which the CIT(A) deleted after finding no violation of Section 43B. The Tribunal confirmed the CIT(A)'s decision, noting that the Revenue failed to provide contrary evidence.

6. Deletion of Addition Made on Account of Excess Commercial Tax Debited to P&L Account:
This issue was interlinked with the first ground and was rejected by the Tribunal following the rejection of the first ground.

7. Deletion of Addition Made on Account of Unexplained Cash Credit:
The Tribunal confirmed the CIT(A)'s deletion of Rs.97,800, following the detailed discussion in the assessee's appeal.

8. Restriction of Addition Made on Account of Disallowance Out of Various Expenses:
The Tribunal upheld the CIT(A)'s decision to restrict the addition to Rs.2,50,000, noting the lack of complete bills and vouchers and the nature of the business.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed.

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