2020 (2) TMI 648 - AT - Income Tax

Additions as notional interest pertaining to one of the partners - Debit balance in the account of partner while the assessee is paying interest on bank loan - Assessee is a partnership firm and has three partners - HELD THAT - The contention of the assessee's AR seems to hold much water in as much as the provision of section 5 of the Act does not provide any room for bringing to tax any income by way of notional income. On the matter of debit balance of one of the partners, find that the impugned debit balance is not a new finding by the AO, rather it has been carried forward from the past several years and there were no additions made on this count by the AO in those years. No doubt the principle of Res Judicata does not apply to lncome Tax proceedings but however, the principle of Consistency has to be adopted when there is no change in the material facts and circumstances of the assessee's case. On analyzing the entire gamut of the issue with respect to the material facts on record along with the legal aspects involved and my findings as in the foregoing, ultimately, find that bringing to tax an amount which is of notional in nature and which was never earned by the assessee cannot stand the test of jurisprudence in the tax regime. No justification in the action of the AO making addition - Decided in favour of assessee. Disallowance of management charges and supervision charges - there was no basis for charging such basis for charging such charges and were merely book entries - CIT-A deleted the addition - HELD THAT - here is no infirmity in the order of ld CIT(A). We note that for eligibility of an allowance u/s 37(1) of the Act, there should be a nexus between the expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. Once these facts are established, the revenue cannot justifiably claim to put itself in the arm chair of business man or in a position of the Board of Directors and assumed the role of ascertaining how much is reasonable expenditure having regard to the circumstances of the case. We note that the assessee has incurred management supervision charges for the purpose of business and if the expenditure is incurred bona fide in relation to business activity then it would be an allowable expenditure. That being so, we decline to interfere in the order passed by ld CIT(A), his order on this issue is hereby accepted and grounds of appeal raised by the Revenue is dismissed.

Summary

Issues Involved:

1. Disallowance of notional interest pertaining to one of the partners.
2. Disallowance of management and supervision charges.

Detailed Analysis:

Issue 1: Disallowance of Notional Interest

Background:
The Revenue's appeals for the assessment years 2011-12 and 2012-13, along with the assessee's cross-objection for 2011-12, pertain to the disallowance of notional interest of ?3,54,24,205/- related to one of the partners of the firm, Carlton Hotel Private Limited. The firm consists of three partners with specified shares and responsibilities. The assessing officer (AO) noted a significant closing debit balance in the partner's account and added notional interest to the firm's income.

Assessing Officer's Stand:
The AO observed that the partnership deed did not allow partners to create liabilities against the firm or withdraw more than their shares. The AO noted that the firm was paying 12% interest on borrowed capital and questioned the diversion of funds by one partner. Despite the assessee's explanation that the overall capital was not in debit, the AO added back the notional interest to the firm's income.

CIT(A) Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition, stating that it was notional income and the debit balance had been carried forward for several years without previous additions by the AO.

Tribunal's Analysis:
The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and the absence of any material change in facts. It referenced the Supreme Court's decision in Radhasoami Satsang v. CIT, which supports maintaining consistency in factual matters across different assessment years unless a significant change justifies a different stance.

Conclusion:
The Tribunal confirmed the CIT(A)'s order, stating that the addition of notional interest was unjustified, and the cross-objection filed by the assessee was rendered infructuous.

Issue 2: Disallowance of Management and Supervision Charges

Background:
For the assessment year 2012-13, the Revenue challenged the deletion of disallowance of ?6,00,00,000/- paid as management and supervision charges to M/s Sahara Prime City Ltd., a group concern. The AO contended that these charges were merely book entries without actual payment or basis.

Assessing Officer's Stand:
The AO noted inconsistencies in the payment of supervision charges over the years and considered the charges for the current year unreasonable and unsupported by conclusive evidence. The AO disallowed the charges, citing them as superfluous and unrelated to the business.

CIT(A) Decision:
The CIT(A) deleted the disallowance, accepting the assessee's explanation that the charges were for legitimate business needs, supported by an agreement with Sahara Prime City Ltd., and were necessary for the mall's overall supervision and management.

Tribunal's Analysis:
The Tribunal found no infirmity in the CIT(A)'s order, noting that the supervision charges were paid as per an agreement, with tax deducted at source and payment made through banking channels. The Tribunal emphasized that the AO did not demonstrate how the expenditure was excessive or unrelated to the business needs. It reiterated that the Revenue cannot question the reasonableness of business expenditure if it is bona fide and related to business activities.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming the legitimacy of the management and supervision charges, and dismissed the Revenue's appeal.

Final Order:
The appeals filed by the Revenue were dismissed, and the cross-objection filed by the assessee was rendered infructuous. The order was pronounced in the open court on 11/12/2019.