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TMI Blog1984 (3) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... Mrs. Chandravati D. Ghorpade and Mrs. Shivamala Urs were parties of the first and the second part and Sapulchre Bros. (India) Ltd. was the party of the third part to the partnership deed dated 21-6-1965. Prior to the commencement of the business by the firm, the business was carried on by the parties of the first and second parts in partnership with one Mr. Christopher George Beard under the name and style of the Mysore Company (1961). The Mysore Company (1961) had certain arrangements with Indian Oxygen Ltd., the terms of which were recorded by an agreement dated 20-3-1962. Under that arrangement, Mysore Company (1961) had appointed Sapulchre Bros. (India) Ltd., the party of the third part, as agent for the operation of the agreement that Mysore Company (1961) had with Indian Oxygen Ltd. The earlier referred Mr. Beard retired from Mysore Company (1961) from 1-4-1964 and the business of Mysore Company (1961) was then decided to be carried on by the two ladies and the limited company in partnership. According to clause 10 of the partnership deed dated 21-6-1965, it was provided that--- " (10) The management of the business of the firm shall be vested in the party of the third par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursed that of necessity has to be considered in the nature of remuneration to that partner and as such that amount has to be disallowed under the provisions of section 40(b). In terms of a letter dated 14-4-1982 the assessee raised objections against the ITO's proposed action to disallow the amount of Rs. 5,42,871. It was pointed out that this was the addition which was considered in details by the department in the earlier years and that as such the ITO was not justified in re-agitating the same issue. The ITO's attention was specifically drawn to the assessment for the years 1976-77 and 1977-78. Vide para 1(c) of that letter it was represented that--- " 1(c) The amount of Rs. 5,42,871 in question is an expense reimbursed to the managing partners, Sapulchre Bros. (India) Ltd., for employees' costs incurred by them in loaning the services of their staff for the work of Indian Lime Corporation. As is evident from the operations of the firm its turnover is in the region of Rs. 57,80,000 and we have operations (inter alia, consisting of depots, transportations, sales, etc.) all over India which necessitated the use of the services of the persons without which the operations wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyment of staff and nothing more. There is no extra charge paid to the partner which can be termed as remuneration or benefits to the partners. There was no such payment made by the assessee to any of the partners which is prohibited by section 40(b). The partner incurred initially the expenses on the staff loaned by it to the firm, paid postal charges, etc., and got the actual expenditure reimbursed to it. This arrangement was only for the efficient and smooth conduct of the assessee's business. Clearly, this did not extend any benefit or pay any remuneration to the partner." It is against this decision of the Commissioner (Appeals) that the ITO has come up in appeal urging that the AAC erred in deleting the addition of Rs. 5,42,871 made under section 40(b). 7. Shri Roy Alphonso for the department strongly relies on the order of the ITO and the direction of the IAC. Since Shri Alphonso had not received the full records, Shri Pooran, the assessee's advocate, filed copies of the various documents as filed before the lower authorities. On examination of these numerous documents and in particular the profit and loss account for the year under consideration and the details thereof, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner. At that time Mr. Shivram was appointed as the manager to look after the lime operation in Bombay. He was already a manager of Glass Export Division. He continued to be in the employment of Sapulchre Bros. (India) Ltd., he received commission of 5 per cent from Indian Lime Corporation in respect of Bombay operations and in later years on Ahmedabad and Delhi operations ; the commission on Delhi operations being restricted to 2 1/2 per cent. He also received commission at 3 per cent on Glass indenting business from Sapulchre Bros. (India) Ltd. which was Rs. 483 in accounting year 1978-79. The ITO's computation under section 40A(5) is marked as Annexure ' A '. 2. From the very first year of Indian Lime Corporation, he received commission as aforesaid till he retired on 30-11-1982. 3. From 1-4-1973, his terms of remuneration were revised as per the letter dated 21-9-1973 as per copy enclosed and marked Annexure ' B '. This letter, no doubt refers to the commission being paid by Indian Lime Corporation to Mr. Shivram apparently through mistake. This mistake occurred because Sapulchre Bros. (India) Ltd. was the managing partners and combined two letters, one regarding salar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under the control of the appellant-firm. Since Mr. Shivram is in receipt of salary from Sapulchre Bros. (India) Ltd., when the question of applying provisions of section 40A(5) cannot arise ". 10. On the above facts, Shri Alphonso submits that technically it may be a fact that Shri Shivram is an employee, not of the assessee but of Sapulchre Bros. (India) Ltd. However, Shri Alphonso urges that on the basis of facts stated by the assessee almost 90 per cent of the work which Shri Shivram does, he does it for the assessee. Shri Alphonso supports this statement on the basis of Annexure ' A ' as given by Shri Pooran. The Annexure ' A ' is as under : Payments to Mr. P.S. Shivram---Income-tax Department's ground Paid by Sapulchre Bros. Reimbursement from (India) Ltd. Indian Lime Corporation Rs. Rs. Salary 31,980 28,080 Special allowance 6,000 5,275 Commission on glass business 483 ---- Leave travel assistance 3,600 3,160 -------------- ------------- 42,063 36,515 -------------- ------------- For section 40A(5), if reimbursement to Sapulchre Bros. (India) Ltd. is also considered : Rs. Reimbursement Rs. 36,515-3,160 =33,355 Commission paid direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to which we have made a reference earlier that in the manner in which Shri Shivram is remunerated, neither in the case of the assessee-firm nor in the case of Sapulchre Bros. (India) Ltd. of which Shri Shivram is officially an employee, the provision of section 40A(5) would be ignored if one were to accept Shri Pooran's submission. Considering from that angle, we find that in the present case, the form must be overlooked and substance must be considered. We find merit in the IAC's observation that the firm has been adopting the particular mode of operations to reduce taxation. In the circumstances, we do not find justification in the Commissioner (Appeals)'s decision to accept the assessee's submission that Rs. 89,606 cannot be disallowed under section 40A(5). Since up to the stage of appeal before the Commissioner (Appeals), the figure mentioned in dispute is Rs. 89,606 and it was only before us that it was clarified that the correct figure is not Rs. 89,606 but Rs. 79,606, we will restore the ITO's order on this part, subject to the arithmetical examination of the amount to be disallowed. 13. In the result, the appeal is partly allowed. - - TaxTMI - TMITax - Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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