2019 (10) TMI 341 - AT - Income Tax

Disallowance of Salary paid to the partner - Increase in the salary - Support by the terms of partnership deed - HELD THAT - Contention of the assessee that vide Clause 10 of the partnership deed dt. 01/12/2002 the salary may be increased or decreased from time to time in the interest of partnership business has not been rebutted. It is also noticed that the A.O. himself admitted in the assessment order that the assessee furnished addendum partnership deed which has been reproduced at page no. 6 of the said assessment order. In the said addendum to partnership deed it has been mentioned that the partnership deed was executed on 01/12/2002 and w.e.f from 01/04/2011, the remuneration to the partners had been increased to ₹ 12,000 each per month. A.O. did not accept the said addendum deed for the reasons that the Stamp Papers on which the addendum to partnership deed was written was dt. 01/12/2002. It cannot be a ground to disallow the claim of the assessee particularly when the remuneration claimed by the partners was not in excess of the amount prescribed in Clause (b) to Section 40 - claim of the assessee that in the subsequent years the increased salary had been accepted was not rebutted, therefore by considering the totality of the facts the disallowance made by the A.O. and sustained by the Ld. CIT(A) is deleted. - Decided in favour of assessee Non deduction of tds - Retainership expenses paid on account of Technical and Professional services to two persons - assessee submitted that the tax had not been deducted on retainership fee as the services were covered under section 192B and not under section 194C - contention of the assessee was that the payments were made during the festive season and it was remuneration in respect of sales boys who were not the regular sales employees of the assessee, both those persons filed their Income Tax Return and claimed it - HELD THAT - In the present case the returns of income were furnished by Shri Daljeet Singh on 30/03/2013 wherein the income of ₹ 1,20,000/- has been shown as salary received from the assessee. Similarly Shri Pawan Kumar furnished the return of income on 07/05/2013 and had shown the salary of ₹ 1,80,000/- received from the assessee. In the present case when the income shown by the recipients had been accepted, there was no reason to doubt explanation given by the Assessee. Therefore, by considering the totality of the facts deem it appropriate to delete the addition made by the A.O. and sustained by the Ld.CIT(A). - Decided in favour of assessee

Summary

Issues Involved:

1. Disallowance of salary to partners.
2. Disallowance of retainership expenses.

Detailed Analysis:

1. Disallowance of Salary to Partners:

The primary issue raised by the assessee was the confirmation of disallowance of ?2,52,000/- paid as salary to the partners. The facts revealed that the assessee filed its return of income declaring ?5,45,720/-, which was processed under section 143(1) of the Income Tax Act, 1961. During the assessment, the A.O. noticed that the assessee debited ?4,32,000/- as salary to the partners, whereas the partnership deed specified a salary of ?5,000/- per month per partner. The assessee submitted an addendum to the partnership deed dated 01/04/2011, increasing the salary to ?12,000/- per month, which the A.O. rejected, citing the addendum's preparation date on a stamp paper purchased in 2002. The Ld. CIT(A) upheld the A.O.'s decision, noting inconsistencies in the addendum's date and the assessee's failure to provide a satisfactory explanation.

Upon appeal, it was argued that Clause 10 of the partnership deed allowed for salary adjustments as per mutual agreement, and the addendum was a legitimate document. The A.O. had acknowledged the addendum but rejected it due to the stamp paper's date. The Tribunal found that the remuneration was within the limits prescribed by Section 40(b) of the Act and noted that the increased salary had been accepted in subsequent years. Therefore, the Tribunal deleted the disallowance, concluding that the addendum was valid and the salary paid was justified.

2. Disallowance of Retainership Expenses:

The second issue involved the disallowance of ?3,00,000/- paid as retainership fees to two individuals, Daljeet Singh and Pawan Kumar. The A.O. questioned the nature of services, the absence of TDS deduction, and the failure to produce the individuals for verification. The assessee contended that the payments were for temporary sales services during the festive season, akin to salary, and thus not subject to TDS under Section 194C. The A.O. viewed the payments as an attempt to divert income and disallowed the expenses.

The Ld. CIT(A) upheld the disallowance, citing the assessee's inability to substantiate the nature of services and the non-applicability of TDS provisions. On appeal, the assessee reiterated that the payments were for temporary sales assistance, not technical or professional services, and provided evidence of the recipients' income tax returns showing the amounts as salary. The Tribunal observed that the payments were indeed shown as salary in the recipients' returns, which were accepted by the Department. Consequently, the Tribunal found no reason to doubt the assessee's explanation and deleted the disallowance.

Conclusion:

The appeal was partly allowed, with the Tribunal deleting the disallowances related to the salary paid to partners and the retainership expenses, finding the assessee's explanations and documentation satisfactory and in compliance with the relevant provisions of the Income Tax Act.