Income Tax Appellate Tribunal - Bangalore
M/S Sri. Chakravarthy Enterprises , ... vs Department Of Income Tax on 9 July, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
BANGALORE BENCH " B "
BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND
SHRI JASON P. BOAZ, ACCOUNTANT MEMBER
I.T.A. No.1051/Bang/2012
(Assessment Year : 2006-07)
Dy. Commissioner of Income Tax, Vs. Sri Chakravarthy Enterprises,
Circle-1, Bellary. No.117, Ward No.VI,
Ananthapur Raod, Bellary.
PAN AADFS 8980J
Appellant Respondent.
Appellant By : Dr. P.V. Pradeep Kumar.
Respondent By : Shri K.G.Acharya.
Date of Hearing : 9.7.2013.
Date of Pronouncement : 6.9.2013.
O R D E R
Per Shri Jason P. Boaz, A.M. :
This appeal by revenue is directed against the order of the Commissioner of Income Tax (Appeals), Hubli dt.30.5.2012 for Assessment Year 2009-10.
2. The facts of the case, in brief, are as under :
2.1 The assessee, engaged in the business of retail trade in India Made Foreign Liquor (IMFL) filed its return of income for Assessment Year 2009-10 on 16.9.2009 declaring income of Rs.99,74,110. The return was processed under section 143(1) of the Income Tax Act, 1961 (herein after referred to as 'the Act') and the case was subsequently taken up for scrutiny. In the course of assessment proceedings, the Assessing Officer observed that the excise licenses used by the assessee for selling IMFL were in the names of the 2 ITA No. 1051/Bang/12 partners and not in the name of the assessee. It was also found that the assessee did not possess any permission granted by the Excise Department for carrying on the trade in IMFL in the name of the partnership firm. In terms of the Karnataka State Excise Act, no person is allowed to sell IMFL without obtaining license and permit from the State Excise Department. Since the assessee did not possess the license or permit in its name and was carrying out its business of dealing in IMFL on the basis of licenses issued in the names of the partners, the Assessing Officer treated the assessee as an AOP and assessed it as such. In this view of the matter, the Assessing Officer completed the assessment by an order under section 143(3) of the Act on 23.12.2011 determining the income of the assessee at Rs.1,33,68,262 as against Rs.99,74,110 declared in the nature of income due to the following additions / disallowances :
i) Disallowance of interest and remuneration paid to partners : Rs.17,05,883.
ii) Disallowance on account of bottle breakages : Rs.15,93,348.
iii) Disallowance of Audit Fee under section 40(a)(ia) : Rs.95,225.
2.2.1 Aggrieved by the order of assessment for Assessment Year 2009-10, the assessee preferred an appeal before the CIT, Hubli raising various grounds. The contentions raised by the assessee before the CIT(Appeals) were as under :
i) The assessee was formed as a partnership firm and it commenced its business activities of dealing in IMFL after obtaining retail vending licenses in the names of its partners. The licenses were exploited as they belonged to the firm and the profit earned / loss suffered has been reflected in the hands of the firm.
ii) This position has been accepted by the Department for more than 20 years. 3 ITA No. 1051/Bang/12
iii) In terms of the provisions of section 184 of the Act, once a firm is assessed as such for any assessment year, it shall be assessed in the same capacity for every subsequent year if there is no change in the constitution of the firm or in the share of partners.
iv) In terms of the provisions of section 184(5) of the Act, the firm can be assessed as an AOP and the remuneration and interest to partners can be disallowed only if there is a failure on the part of the firm, of the nature mentioned in section 144 of the Act.
v) There are judicial decisions wherein it is held that a firm operating on permits of its partners should be assessed as a firm and not as an AOP.
vi) The decision of the Hon'ble jurisdictional High Court of Karnataka in the case of S.B. Pannalkar & Co., Jamakhandi (ITA No.24/2007 dt.2.11.2010) reported in 344 ITR 232 (Kar) squarely applies to the assessee's case.
2.2.2 The learned CIT(Appeals) on consideration of the facts of the case and the judicial decisions cited held that the status of the assessee has to be considered and assessed as a firm and not an AOP as held by the Assessing Officer. The operative portion of the learned CIT(Appeals)'s order dt.30.5.2012 at page 8 is as under :
" I have gone through the facts of the case, contents of the assessment order and assessee's written submissions. The Hon'ble jurisdiction High Court of Karnataka in the case of CIT (Appeals) & Another Vs. S.V. Pannalkar & Co. (344 ITR 232), it is mentioned "legality of firm - liquor business -license obtained in name of a partner with intent specified in partnership deed that it would be a partnership asset - business and firm legal - remuneration to partners and interest on capital - deductible income tax act 1961. In the judgment the Hon'ble High Court "dismissing the appeal, that it was clear that there was no statutory provision prohibiting the formation of a partnership by a license holder. The licensee did not contribute the license as a capital contribution to the partnership assets. On the contrary, the license, from the inception was treated as a partnership asset by express words in the partnership deed. The business was legal and the firm was entitled to the deduction. 4 ITA No. 1051/Bang/12 In view of the facts discussed above the status of the assessee has considered as a Firm and not AOP. Assessee's ground appeal is allowed."
On the other two issues raised; the disallowance of Rs.95,225 under section 40(a)(ia) of the Act was sustained in toto by the learned CIT(Appeals) and the assessee was allowed partial relief of 50% of the disallowance made by the Assessing Officer in respect of expenses claimed on account of the breakage of bottles.
3. Aggrieved by the order of the CIT(Appeals), Hubli dt.30.5.2012 for Assessment Year 2009-10, revenue is in appeal before us raising the following grounds :
" 1. The order of the CIT (Appeals) is opposed to law and facts of the case.
2. The learned CIT (Appeals) erred in deleting the additions of Rs.17,05,583 added in the assessment being disallowance Interest & Remuneration paid the partners.
3. The learned CIT (Appeals) ought to have appreciated the facts narrated by the Assessing Officer in the assessment order that the partnership cannot be assessed as Firm as such under section 184 of Income Tax Act.
4. The learned CIT (Appeals) ought to have appreciated the fact that the decision of the Hon'ble High Court of Karnataka, Gulbarga Circuit Bench relied upon by the CIT (Appeals) in the case of M/s. S.B. Pannalkar & Co., Jamakhandi was not accepted by the Department and further appeal is not preferred due to lower monetary limit as narrated by the Assessing Officer in the assessment order.
5. The learned CIT (Appeals) erred in deleting the additions of Rs.15,93,347 added in the assessment being disallowance of bottle breakages.
6. The learned CIT (Appeals) ought to have dismissed the assessee claim of bottle breakage expenditure as the assessee has not produced any evidence for breakages of bottles neither before A.O. nor CIT (Appeals).
7. For these and other grounds that maybe urged at the time of hearing it is prayed that the order of the Commissioner of Income Tax may be vacated and that of the Assessing Officer be restored.
8. The appellate craves, leaves to add, to alter, to amend or delete any of the ground on or before hearing of appeal."
4. The grounds raised at S.Nos.1, 7 & 8 are general in nature and not being urged before us, no adjudication is called for thereon.
5ITA No. 1051/Bang/12 5.1 In the grounds raised at S.Nos.2 to 4, revenue challenges the action of the learned CIT(Appeals) in following the decision of the Hon'ble jurisdictional High Court in the case of S.B. Pannalkar & Co. (supra) and holding that, in the facts of the case, the assessee partnership firm cannot be assessed as an AOP and thereby deleting the disallowance of interest and remuneration to partners made by the Assessing Officer in the order of assessment. It is submitted by the learned Departmental Representative that the decision of the Hon'ble High Court in the case of M/s. Pannelkar & Co. (supra) ought not to have been followed by the learned CIT(Appeals) as this decision has not been accepted by the Department and that further appeal in the matter to the Hon'ble Apex Court was not filed only due to the monetary limit involved. The learned Departmental Representative prayed for the reversal of the order of the learned CIT(Appeals) on this issue and restoration of the Assessing Officer's finding in the matter.
5.2 Per contra, the learned Authorised Representative strongly supported the order of the learned CIT(Appeals) on this issue. It was further submitted that since this issue is covered in favour of the assessee by the decision of the Hon'ble High Court in the case of M/s. Pannalkar & Co. (supra), revenue's appeal on this issue was liable to be dismissed. 5.3.1 We have heard both parties and perused and carefully considered the material on record. On appreciation thereof, we find substantial merit in the contentions of the assessee, both on facts and in law, as has been held by the learned CIT(Appeals). Admittedly, the assessee was formed as a firm and thereafter the business activities of dealing in IMFL were commenced after obtaining licenses and permits in the names of its partners. It is not the case that the licenses were obtained and exploited by the partners 6 ITA No. 1051/Bang/12 before the formation of the assessee firm. Nor do the facts on record indicate that some persons holding licenses and permits were brought in as partners. It is also not in dispute that since inception itself, the license was treated as a partnership asset by express provisions of the partnership deed.
5.3.2 The only ground on which the Assessing Officer has treated the assessee as an AOP was that the licenses were not in the name of the assessee but were in the names of the partners. On the same set of facts, the Hon'ble jurisdictional High Court of Karnataka in the case of M/s. S.B. Pannalkar & Co. (supra) has held that there was no statutory provisions prohibiting the formation of a partnership firm by a license holder. That the Department does not accept the aforesaid decision of the Hon'ble High Court decision in the case of M/s. S.B. Pannalkar & Co. (supra) cannot be a reason for not following the said decision. It is a well settled principle that the decision of the Hon'ble High Court, particularly of the jurisdictional High Court, is binding on all judicial authorities below. In this view of the matter, the action of the learned CIT(Appeals) in placing reliance on and following the aforesaid decision in the case of M/s. S.B. Pannalkar & Co. (supra) is in order and we have no hesitation in upholding the decision of the learned CIT(Appeals) on this issue. We, therefore, dismiss ground No.4 raised by revenue. 5.3.3 It is not in dispute that the assessee has been assessed in the status of a firm for several years. Therefore, in accordance with the provisions of section 184 of the Act, the assessee shall be assessed in the same capacity, unless there is a change in the constitution of the firm. The Assessing Officer in the order of assessment has observed that there has been a change in the partnership deed of the firm in the period under 7 ITA No. 1051/Bang/12 consideration. This observation of the Assessing Officer was disputed by the assessee before us. It was submitted by the learned Authorised Representative that there was neither a change in the constitution of the firm nor in the shares of the partners and therefore the assessee is liable to be assessed as a firm only in the period under consideration. It was also submitted by the learned Authorised Representative that there has been no defaults as mentioned in section 144 of the Act for the Assessing Officer to invoke the provisions of section 184(5) of the Act. In the above factual view of the matter, we are of the considered opinion that there is no basis for the Assessing Officer to invoke the provisions of section 184 of the Act to disallow the remuneration and interest paid to the partners by the assessee firm. Further, as held by the Hon'ble High Court of Karnataka in the case of M/s. S.B. Pannalkar & Co. (supra), the business of the assessee is legal and hence the assessee firm is entitled to deduction on account of remuneration and interest paid to partners. We, therefore, uphold the decision of the learned CIT(Appeals) in deleting the disallowance of Rs.17,05,583 made by the Assessing Officer on account of interest and remuneration paid to the partners by the assessee firm. We, therefore, dismiss ground Nos.2 and 3 raised by revenue. 6.1 In the grounds raised at S.Nos.5 & 6, revenue challenges the action of the learned CIT(Appeals) in deleting 50% of the disallowance of Rs.15,93,347 made by the Assessing Officer in respect of bottle breakages. It is the contention of revenue that this action of the learned CIT(Appeals) in deleting the disallowance was erroneous since the assessee had not brought on record any evidence for the occurrence of the said breakages. 8 ITA No. 1051/Bang/12 6.2 In the order of assessment, the Assessing Officer disallowed the entire claim of expenditure on account of bottle breakages amounting to Rs.15,93,347 for the reason that since no details were furnished in this regard and the Stock Registers and copies of reports submitted to the Excise Department were not furnished for verification; there was no evidence on record to support the assessee's claim for allowing this expenditure. On appeal, the learned CIT(Appeals) on appraisal of the facts of the case and the business of the assessee observed that such bottle breakages is quite common in liquor trade and allowed 50% of the expenses claimed.
6.3 We have heard both the learned Departmental Representative and the learned Authorised Representative and carefully perused and considered the material on record. Admittedly, the assessee has not produced the evidence called for by the Assessing Officer to support its claim of expenditure towards bottle breakages. As rightly observed by the learned CIT(Appeals) bottle breakages is a normal occurrence in the liquor business of which the assessee is a part. It has also been observed by the learned CIT(Appeals) that the assessee maintains 12 IMFL retail outlets at different places in Bellary District and has been claiming such expenditure on bottle breakages in the earlier assessment periods also. For Assessment Year 2008-09, the assessee claimed bottle breakage expenses of Rs.8,43,534 on a turnover of Rs.23.17 Crores, while in the year under consideration the assessee claimed bottle breakage expenditure of Rs.15,93,342 on a total turnover of Rs.33.83 Crores. On an appreciation of the total facts and circumstances of the case on this issue, we are of the view that the decision of the learned CIT(Appeals) to allow 50% of the total claim of bottle breakage of Rs.15,93,342 9 ITA No. 1051/Bang/12 and disallowing 50% thereof, appears to be a fair estimation and we, therefore, uphold this decision of the learned CIT(Appeals). Grounds raised by revenue at S.No.5 are accordingly dismissed.
7. In the result, revenue's appeal is dismissed.
Order pronounced in the open court on 6th Sept., 2013.
Sd/- Sd/-
(N.V. VASUDEVAN) (JASON P BOAZ)
Judicial Member Accountant Member
*Reddy gp
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