Income Tax Appellate Tribunal - Pune
Balaji Construction,, Pune vs Assessee on 25 November, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
BEFORE: SHRI G. S. PANNU, ACCOUNTANT MEMBER
AND
SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No. 235/PN/2011
Assessment Year : 2007-08
Balaji Constructions, Addl. Commissioner of Income
Balaji Palace, S. No. 8, Tax, Range-2, Pune
Kharadi, Kharadi Road, Vs.
Chandan Nagar, Pune
(Appellant) (Respondent)
PAN No.AABFB0167E
ITA No. 465/PN/2011
Assessment Year : 2007-08
Dy. Commissioner of Income Balaji Constructions,
Tax, Circle-2, Pune Balaji Palace, S. No. 8,
Vs. Kharadi, Kharadi Road,
Chandan Nagar, Pune
(Appellant) (Respondent)
PAN No.AABFB0167E
Assessee By: Shri S.N. Doshi
Revenue By: Shri S.P. Walimbe
Date of hearing : 25-11-2013
Date of pronouncement : 21-02-2014
ORDER
PER R.S. PADVEKAR, JM:-
These two appeals, one by the assessee and another by the Revenue, are filed challenging the impugned order of the Ld. CIT(A)-II, Pune dated 27-01-2011 for the A.Y. 2007-08.
2. We first take the assessee's appeal being ITA No. 235/PN/2011. The assessee has taken the following effective grounds in the appeal:
1. The learned CIT(A) has erred in confirming addition of Rs.4504441/- made by the A.O., without appreciating the facts of the case and submissions of the appellant.2
ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune
2. The learned CIT(A) has erred in confirming the addition of Rs.4504441/- made by the A.O. by disallowing the claim of expenses on the ground that the same belongs to various ongoing projects and therefore to be included in the work in progress, disregarding the submissions of the appellant.
3. The assessee has also filed an application with prayer to admit the following additional ground:
"On the facts and in the circumstances of the case the CIT(A) has erred in not admitting the additional ground raised in respect of allowability of expenditure of Rs.45,04,441/- by invoking provision of section 250(5) of the Income Tax Act 1961.
The above additional ground goes to the root of the issue. Therefore the appellant respectfully prays that this additional ground may kindly be admitted and decided on merit."
4. The briefly stated facts are as under. The assessee is a partnership firm which is engaged in the business of trading in land and also in the construction as a developer and builder. The assessee filed the return of income for the A.Y. 2007-08 declaring total income of Rs.17,24,60,324/- which was selected for scrutiny and assessment has been completed u/s. 143(3) of the Income-tax Act. In respect of the issue arising from the above grounds, it was noticed by the Assessing Officer that the assessee has undertaken various projects which are under different phases of completion namely Balaji Heights, Balaji Palace, Babhulsai etc. The assessee had also land sites at Sone- Sanghvi, Dhok-Sanghvi, Shirur and Kharadi. As required by the Assessing Officer, the assessee filed the break up of major expenses in respect of the purchases attributable to the projects. As observed by the Assessing Officer the assessee has debited an amount of Rs.1,26,86,568/- to the profit and loss account. As per the break up filed by the assessee, the expenditure was allocated are as under: 3
ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune S. No. Site Name Total Expenditure (Rs.) 1 Babhulsai 67,475 2 Balaji Heights 7,23,184 3 Balaji Palace 84,428 4 Sonesangvi 4,88,549 5 Dhoksangvi 5,05,858 6 Shirur 33,24,632 7 Kharadi 74,58,943 Total 1,26,86,568 Out of Rs.1,26,86,568/- the Assessing Officer has allowed the expenditure of Rs.74,58,943/- which was relating to the Kharadi land but disallowed Rs.45,04,441/- which is pertaining to different other projects which were in progress during the year under consideration. In the opinion of the Assessing Officer as the assessee was following project completion method of accounting for recognizing the profit hence, the amount of Rs.45,04,441/- should have been added to WIP of those projects.
5. The assessee resisted the action of the Assessing Officer but without successes. The reasons given by the Assessing Officer for rejecting the assessee's explanation are as under:
"The above reply of the assessee has been considered and is found unacceptable. The assessee is admittedly following project completion method of accounting. Therefore, the expenses which are directly relatable to a particular project has to be considered into while the profits from the particular project are offered for taxation. The details of expenses worked out above, are as per the submissions made by the assessee and they are not in the nature of general administrative expenses which can be treated as period expenditure. These expenses are in the nature of contract payments for leveling and plantation, payments for supervision charges, payments for compound wall, fencing site, development expenses, brokerage, professional fees, electricity charges, payments for labour, steel and other construction material. The nature of above payments clearly shows that they are directly relatable to a 4 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune particular project and cannot be treated as general expenses which is inseparable or which is purely revenue in nature. These expenses have to be allocated to the individual project and would be considered for the purposes of working of closing WIP of individual project."
6. The said disallowance was confirmed by the Ld. CIT(A). The Ld. Counsel submits that out of Rs.45,04,441/-, an amount of Rs.25,76,062/- is in respect of brokerage of land and the same is to be added to the cost of land and Rs.84,428/- is to be added in Balaji Palace for WIP and Rs.23,133/- is Advocate fee so in fact the assessee should be allowed the deduction of Rs.16,12,620/-, the assessee has filed the same in writing. We have also heard the Ld. DR.
7. In this case, it is not in dispute that during the relevant Financial Year pertaining to the Assessment Year 2007-08, the assessee was having 7 to 8 projects at different locations and sites. It is also not in dispute that the assessee's following the project completion method of accounting. It is also seen that the Assessing Officer has allowed the expenditure relating to the Kharadi Project to the extent of Rs.74,58,943/- which project has been completed. In our opinion, now the claim to the extent of Rs.16,12,620/- pertains to different projects and view taken by the Assessing Officer is right that the said is to be added in the WIP. We, accordingly, confirm the order of the Ld. CIT(A).
8. So far as additional ground is concerned it is seen that even though the Ld. CIT(A) has stated in Para No. 6.1 of his impugned order that additional ground is not admitted but he has adjudicated the issue on merit. So the additional ground taken by the assessee only remains the academic. We, therefore, decline to admit the additional ground. In the result, the grounds taken by the assessee are dismissed.
9. Now we take up Revenue's appeal being ITA No. 465/PN/2011. The Revenue has taken the multiple grounds but the solitary issue for 5 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune our consideration before us is whether the Ld. CIT(A) justified in deleting the addition of Rs.2,39,20,000/- made by the Assessing Officer on account of excess remuneration in violation of Sec. 40(b) of the Income- tax Act. The facts which revealed from the record are as under. There are four partners in the assessee's firm. The assessee has claimed the deduction towards partners remuneration to the extent of Rs.2,50,00,000/- which details are as under:
i. Suresh B. Pawar : Rs.40,00,000/-
ii. Keshavbai Sadashiv Pawar : Rs.70,00,000/-
iii. Sadashiv B. Pawar : Rs.70,00,000/-
iv. Prakash B. Pawar : Rs.70,00,000/-
Total Rs.2,50,00,000/-
9.1. The assessee's partnership is reconstituted due to death of one of the partners vide deed of partnership dated 14-01-2005. In the reconstituted deed which is on the duly stamp paper, Clause 6 in respect of remuneration to the working partner as under:
"All the partners have agreed to devote their time for the day-to-day activities of the firm, therefore it is provide for the working partners that they shall be entitled to monthly remuneration as per the following scales.
1. Mr. Sadashiv Babasaheb Pawar Rs.25,000 Per month
2. Mrs. Kesharbai Sadashiv Pawar Rs.25,000 Per month
3. Mr. Suresh Babasaheb Pawar Rs.25,000 Per month
4. Mr. Prakash Babasaheb Pawar Rs.25,000 Per month
5. Mrs. Sundarbai Babasaheb Pawar Rs.25,000 Per month Provided further that the above scales of remuneration may be increased or decreased with the mutual consent of the parties to these presents. However, in no case the above scales shall exceed the limits laid by the provisions of section 40(b) of the Income Tax Act, 1961, as may be in force at the material time, according to which the remuneration shall be calculated on certain percentage of the book profits of the firm."
10. The assessee contended before the Assessing Officer that as per the terms of the partnership deed the partners have entered into MOU at 6 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune the end of the year in respect of the provision of remuneration to the working partners. The assessee filed the copy of MOU which was signed by all the four partners before the Assessing Officer. In the opinion of the Assessing Officer the partners should have executed the supplementary deed of partnership and MOU dated 25-03-2007 signed by all the partners was not in the correct way. The assessee also stated before the Assessing Officer that - (a) The partners have declared the remuneration in the individual returns of income and (b) That the Assessing Officer has no power to go into the question of reasonableness of remuneration. The Assessing Officer placed his reliance on CBDT Circular No. 739 dated 25-03-1996, and has observed that as per the said CBDT Circular for the Financial Year subsequent to the Assessment Year 1996-97, no deduction u/s. 40(b)(v) will be admissible unless the partnership deed specifies the amount of remuneration payable to each individual working partner or lay down the manner of quantifying such remuneration. The Assessing Officer also observed that the MOU should have been executed on the stamp paper and the same should have been filed with the Registrar of Firms. The Assessing Officer finally made the disallowance of Rs.2,39,20,000/- out of Rs.2,50,00,000/- of deduction or remuneration shown by the assessee and restricted the remuneration as shown in the reconstituted deed.
11. The assessee carried the issue before the Ld. CIT(A) and Ld. CIT(A) allowed the claim of the assessee. The operative part of the finding of Ld. CIT(A) is as under:
3.2. I have carefully considered the submission of the appellant and the material available on record. The main objection of the A.O. for disallowance u/s. 40(b) of the IT. Act is that, the remuneration authorized by partnership deed was much lower as against the payment of the actual remuneration, as has been mentioned in para 3 above. The appellant has explained that the remuneration was increased by the mutual consent of the partners by making a MOD towards the end of the year, which provided for the enhanced 7 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune remuneration to the working partners totaling to Rs.2,50,00,000/-
as against the original mention in the partnership deed at Rs.10,80,000/-. However, it was contended by the A.O. that there was no supplementary deed of partnership that authorized enhanced remuneration, and only the MOU dated 25.03.2007 signed by all the partners was produced before the A.O. The appellant pointed out to the partnership deed, clause 6 which provided for the specific remuneration at the initial lesser rates, but there was a specific clause that the remuneration may be increased or decreased with the mutual consent of the partners, subject to overall limit laid down by the provisions of section 40(b) of the I.T. Act. Therefore, the A.O's observation in para 6.7(i), while commenting on the decision of ITAT Kolkata Bench in the case of Eqbal Ahmed and Co. (supra), that there was no reference to the provisions of I.T. Act as such for payable remuneration in the partnership deed, is found to be incorrect.
3.3. The other objection of the A.O. is that the enhanced remuneration was provided by way of a MOU and not by a supplementary deed duly stamped and filed with the registrar of firms. In response to this, vide submissions dated 27.07.2010 and 21.01.2011, it has been explained that in accordance with the Indian Partnership Act 1932, a supplementary deed for change in remuneration or change in profit sharing proportion etc. is not required to be registered. The appellant has also given a list of various sections of the partnership deed which required intimation to the registrar of firms. It was contended that all the partners were jointly and severely liable for liabilities of the firm, and therefore, the profit sharing ratio or remuneration drawn by them was not required to be intimated to the registrar of firms. The appellant also drew attention to the decision of ITAT Amritsar Bench in the case of ACIT vs. Kakkar Cold Storage (supra), according j to which it was not required that whenever there was change in the rate of interest payment to the partners, a new partnership deed was to be executed. According to, a partnership may be evidenced by one or several documents, and the term 'instrument' did not mean only a regular partnership deed. If the terms of the partnership were contained in a number of documents, or even in the correspondence between the partners, such documents/letters constituted 'instrument of partnership'. Therefore, the appellant has vehemently contested the A.O's contention that the supplementary deed will be 8 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune treated as authorized only if it is duly stamped and filed with the registrar of firms. In this regard the appellant has also given a para- wise comment to A.O's observations in paras 6.2, 6.6 and 6.7, vide its submission dated 21.01.2011 which has also been reproduced above.
3.4. It was further submitted by the appellant that as per the Act, the remuneration to the working partners was only to be 'authorized' by the partnership deed, and it was duly authorized as per clause 6 in this case, which has also been reproduced in the assessment order by the A.O. at para 6, page 5. I is, therefore, contended that even if the MOU was ignored, the remuneration paid is duly authorized by this clause 6, and covered by the stipulation therein. This was because after providing initial monthly remuneration, it was clearly mentioned that, it may be increased or decreased with the mutual consent of the; partners subject to overall limit laid down by section 40(b) of the Act. The| appellant, therefore, contended that this stipulation itself allows the increase by mutual consent and since it was well within the limit laid down u/s 40(b), no disallowance was called for.
3.5. A large number of decisions have been cited by the appellant in support of its contention. In the case of Tulsa Ram Kanhiyalal & Sons, decided by Jodhpur Tribunal (supra) it was held that, since the partnership deed authorized the partners to charge interest on their capitals, and remuneration to the working partners could be varied or amended by mutual consent, it could also be done verbally or even by conduct, and it was not necessary for the parties to have reduced such terms in writing. The appellant also cited the decision of the ITAT Pune Bench in the case of ACIT vs. Suman Construction (supra). In this case it was held that salary to partners was allowable as a deduction to the extent mentioned in section 40(b) if it was so authorized by the partnership deed, and there was no need to quantify the amount in the deed itself. This decision was followed in another ITAT Pune decision in the case of M/s Steel Engineers vs. ACIT in ITA No. 1415/PN/2006 for A.Y. 1998-99, order dated 22.01.2009. In both these decisions, the emphasis was the wording of the section 40(b), which showed that the statute had used the term 'authorized' and not the term 'quantify'. However, in the appellant's case it is noticed that not only the payment of remuneration was authorized by the partnership 9 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune deed, but, it was also quantified in the deed itself, with the allowance for its variation in accordance with the mutual consent of the partners. Therefore, the appellant's explanation has got a firm basis when the ratio of these decisions is examined. In another case of ITO vs. Pulimoottil Silk House (supra) similar view was taken by the Cochin bench, as that of the Pune Tribunal decisions mentioned above. It is also noticed that in the case of ACIT vs. Great City Manufacturing Co. cited by the appellant, which is reported in (2009) 122 TTJ 671 (Del); there was a specific clause in the deed allowing payment of remuneration to the working partners, and the quantum of such remuneration was agreed to be in accordance with the provisions of section 40(b)(v). The remuneration paid by the assessee to the working partners was within the ceiling, and it was held that the remuneration could not be disallowed u/s 40(b). For this decision, the Delhi Tribunal relied upon the decision of Ahmedabad Bench in the case of Chhajed Steel Corporation (2000) 69 TTJ 232 (Ahd), in which it was held that the A.O. did not have any power to go into the reasonableness of remuneration payment to the partners and he could only examine whether the remuneration was not exceeding the prescribed limits as per section 40(b). Infact, in this decision of the Ahmedabad Tribunal, there was an observation that there was a clear agreement between the parties to pay remuneration to the partners at the maximum rate permissible under the IT. Act. It was further observed that the stipulation which states, "upon the mutual understanding of the partners, the remuneration paid to the partner can be modified within the scope of the IT. Act" cannot be read as an agreement contrary to the provisions of the IT. Act. The last words "within the scope of the IT. Act" restricts the agreement which can be mutually entered by the partners. It is noticed that the facts of the appellant's case were also somewhat similar to the Delhi Tribunal decision in the case of ACIT vs. Great City Manufacturing Co., since, here also an initial remuneration was provided with the specific stipulation that the same could be varied with the .mutual consent subject to the overall limit of section 40(b). Since the A.O. has not pointed out that the payment was in excess of what has been provided u/s 40(b), there was no case of any disallowance on the basis as stated by the A.O. The ratio of the Ahmedabad Tribunal decision also supports the appellant's case. Infact, in the submission dated 21.01.2011 the appellant has also given the details of the returns of income filed by the four working partners, as was required vide 10 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune order-sheet noting dated 18.01.2011, to show that the remuneration paid well within the prescribed limits u/s 40(b) of the I.T. Act. In view of that above discussion, and the decisions of various tribunal benches cited by the appellant, it is held that the appellant firm had duly authorized the payment of enhanced remuneration by clause 6 of the deed by mutual consent, apart from mentioning the initial remuneration therein; which is in accordance with the provisions of law. This clause allowed increase or decrease in remuneration by mutual consent subject to the overall limit laid down by the provisions of section 40(b) of the IT. Act; which has been acted upon by the appellant firm by mutual consent of the partners. 3.6. In accordance with the above discussed ratios of various decisions, there is no infirmity in such a provision in the partnership deed so as to draw the inference that the payment of remuneration in the appellant's case was unauthorized. The payment is also well within the limits prescribed u/s 40(b) of the Act. The appellant has clarified that there was no need of registration of such an amendment in the amount of the remuneration paid, since it was in accordance with the provisions of clause 6 of the deed. This contention of the appellant is supported by the various provisions of partnership Act which it has explained. In accordance with this, it is held that the disallowance of remuneration made by the A.O. Is not in accordance with law and cannot be sustained. Ground no. 2 of appeal is accordingly held to be allowed.
12. We have heard the rival submissions of the parties and perused the record. We have also perused the Paper Book filed by the Ld. Counsel. Ld. DR placed his heavy reliance on the decision of the Hon'ble High Court of Delhi in the case of Sood Brij & Associates Vs. CIT - 203 Taxman 188 (Del) and submits that the assessee has kept the provision of the remuneration without quantifying the same. He submits that Sec. 40(b) of the Act mandate that the remuneration should be quantified and it should not be vague. Per contra, the Ld. Counsel placed his heavy reliance on the decision of the Hon'ble High Court of Himachal Pradesh in the case of Durga Dass Devki Nandan Vs. Income Tax Officer, 241 CTR (HP) 180. In the present case, we find that as per the 11 ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune reconstituted Deed of Partnership the date 14-01-2005 in Clause 6 the partners have specifically specified the quantum of remuneration payable on the monthly basis. It is also provided that the said remuneration may be increased or decreased with the mutual consent of the partners but in no case the total remuneration should exceed the limit of Sec. 40(b) of the Income-tax Act. The assessee filed the MOU signed by all the partners which has been executed on 25-03-2007. The said MOU in the form of resolution by the partners which is not on the stamp paper but it is on the plain paper or letter head of the assessee firm. Nowhere it is the case of the Assessing Officer that the said MOU or resolution is bogus. Now the short issue before us is whether the remuneration claimed by the assessee is in accordance with the mandate of Sec. 40(b) of the Income-tax Act. Sec. 40(b) mandates to following conditions - (i) The remuneration shall only be payable to the working partners, (ii) It should be authorised by the deed of partnership and (iii) It should be in accordance with the terms of the partnership.
13. In the present case, there is no dispute in respect of the compliance of the first condition i.e. payment is made to the working partners. The Assessing Officer has reservation in respect of the other two conditions that it is not authorised by the deed of partnership and it is not as per the terms of the deed of the partnership. We do not agree with the view taken by the Assessing Officer as admittedly there is a specific clause in the reconstituted deed of partnership more particularly Clause 6 authorising the payment of the remuneration to the partners with proviso that the partners can increase or decrease remuneration as per the mutual agreement. The partners have passed the MOU which is in the form of resolution increasing the remuneration and the reasons are also given.
12
ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune
14. In the case of Sood Brij & Associates (supra) the case is of the CA firm and as per the deed of partnership it was provided as under:
Clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992 read:
"1. That subject to mutual consent of the partners, and subject ot the provisions of the Income Tax Act, 1961, the working partner of partners shall be paid such remuneration as may be mutually agreed between themselves, from time to time, and such remuneration shall be deductible expense before arriving at the share of the partners as allocable from the net profits.
2. That both the partners (hereinafter referred as working partners), shall devote their time and attention in the conduct of the affairs of the partnership firm, as the circumstances and need of the firms business may require. The total remuneration payable to the working partners shall be an amount permissible as remuneration to the working partners under the Income Tax Act, 1961 and as applicable from time to time."
In this background the Hon'ble High Court has held that the quantum on the amount of remuneration or the manner of computing is not specified or stipulated but as facts under Clause 1 has been left to be decided by mutual agreement in future. In our humble opinion the facts in the case of Sood Brij & Associates (supra) are distinguishable.
15. In the present case the partners have specified at the first instance the quantum of remuneration payable to the working partners and has also kept a discretion to increase or decrease the said specified remuneration in Clause 6. As per the mutual agreement, in our opinion the Ld. CIT(A) has rightly held that on the facts of this case, the remuneration claimed by the assessee in pursuance of the resolution/MOU dated 25-03-2007 is as per the terms of Sec. 40(b) of the Act. We do not find any reason to interfere with the order of the Ld. CIT(A) on this issue. Accordingly, the same is confirm. 13
ITA Nos. 235 & 465/PN/2011, Balaji Constructions, Pune
16. In the result, both the assessee's appeal as well as Revenue's appeal is dismissed.
Pronounced in the open Court on 21-02-2014
Sd/- Sd/-
(G.S. PANNU) (R.S. PADVEKAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
RK/PS
Pune, Dated: 21st February, 2014
1 Department
2 Assessee
3 The CIT(A)-II, Pune
4 The CIT-II, Pune
5 The DR, ITAT, "B" Bench, Pune.
6 Guard file.
//True Copy//
By Order
Private Secretary
Income Tax Appellate Tribunal
Pune