Income Tax Appellate Tribunal - Chandigarh
Sh. Subhash Chand Sood (Huf), Shimla vs Assessee on 21 January, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE SHR I T.R. SOOD, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No. 123/Chd/2012
(Assessment Year : 2006-07)
Sh.Subhash Chand Sood (HUF), Vs. The Income Tax Officer,
C/o Shimla Roller Flour Mills, Ward 2,
Below Mian Bus Stand, Shimla.
Shimla.
PAN: AABHS6477Q
(Appellant) (Respondent)
Appellant by : Shri Vishal Mohan
Respondent by : Shri N.K. Saini, DR
Date of hearing : 21.01.2013
Date of Pronouncement : 28.01.2013
ORDER
PER SUSHMA CHOWLA, J.M, :
The appeal filed by the assessee is against the order of the Commissioner of Income-tax (Appeals), Shimla dated 19.12.2011 r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 a g a i n s t t h e o r d e r p a s s e d u / s 1 4 3 ( 3 ) of the Income Tax Act, 1961 (in short 'the Act').
2. The assessee has raised the following grounds of appeal:
"1. That in the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals) is not justified in upholding the disallowance of a sum of Rs.67330/- on account of car expenses and depreciation from the income earned out of the salary from M/s Shimla Roller Flour Mills, Shimla. The expenses are very much allowable under the provisions of the Income Tax Act.
2. That in the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals) is not justified in upholding that the salary earned from M/s Shimla Roller Flour Mills was assessable in the individual capacity of the assessee and therefore upholding its assessment in the hands of the assessee on protective basis."2
3. The brief facts of the case are that the assessee is a partner in M/s Shimla Roller Flour Mills. The assessee claimed to have received sum of Rs.1,50,000/- as remuneration and interest on capital amounting to Rs.1,61,833/- from the said partnership concern. The assessee had claimed car expenses and depreciation totaling Rs.67,330/- against the said remuneration received from the partnership concern. The Assessing Officer during the course of assessment proceedings asked the assessee to justify the claim of deduction of car expenses and also how the salary from the partnership firm was claimed in the hands of HUF. The explanation of the assessee in this regard was rejected by the Assessing Officer observing that the firm was a separate entity and was being separately assessed for the profit earned b y it after meeting of expenses and thus the expenditure claimed in relation to the earning of profit of the firm should have been claimed in the hands of the partnership form. Further the said motor car was not registered either in the name of the firm or even in the name of the assessee and thus the claim of car depreciation was also rejected by the Assessing Officer. The next contention of the assessee of having 50% share in the profit and loss of the firm and earning remuneration on account of capital contribution by HUF and not on account of personal qualification was rejected by the Assessing Officer observing as under:
"The assessee' explanation has been thoroughly considered and examined in the light of facts and figures emerging from trading and P&L account of the partnership firm. Capital account of the assessee HUF shows the opening capital at Rs.15,41,561/- as on 01/04/2005 and closing balance at Rs.12,23,719.89. As per the trading account, the total turnover of the firm is 6,18.44,867/-. The firm deals in trading of various items of food grain like wheat, Atta, Maida, Sugi and Brawn etc. The quantum of turnover and variety of commodities dealt with apparently speak of the fact that it is not the meager capital of the assessee's HUF, but the vast experience, expertise and personal exertion of the partners which are contributing to such huge turnover of partnership firm. It is also mentioned that the only other partner having equal share Mr. Ravi 2 3 Chand Sud, has also a meager capital of Rs.8,31,469/- besides the facts that he is much younger in age to this assessee. Thus, it stands conclusively established that for all purposes, it is not the capital employed, but the personal contribution of the assessee which is earning him salary in the case of the partnership firm and hence the same is assessable in his individual capacity and not in the hands of HUF. Moreover, the salary in the hands of firm is allowable only to working partner and not to a partner simply contributing capital to the partnership firm. For whatever capital has been employed by the assessee HUF, it has earned interest thereon as well as 50% share in the virtual profit of the partnership firm. Therefore, the salary income is excluded from the total income shown in the hands of HUF and the same is liable to be assessed in the individual case of the assessee, for which he has been filing his return separately. Since however, the assessee has himself shown the said income in his return, it is assessed on protective basis with the substantive addition to be made in his individual case. Also in view of the Board's Circular No.549 dated October 31st 1989 which is binding upon me, the income can not be assessed at a figure lower than the returned income."
4. The CIT (Appeals) upheld the order of the Assessing Officer observing that there was no real connection of the salary earned by Shri Subhash Chand Sood with the investment of the joint family funds. The observations of the CIT (Appeals) vide paras 5.6 to 5.8 are as under:
" 5.6 In the light of the principles discussed above, it can be seen that there is no real connection of the salary earned by Sh. Subhash Chand Sood with the investment of the joint family funds. The salary is not directly relatable to any utilization of family assets, nor has the family (HUF) suffered any detriment in the process of earning of salary income by the appellant. Sh.Sood has also not received the said income with the aid and assistance of the family funds. The Id. A.O. has rightly pointed out that the total turnover of the firm is more than Rs.6 crores and the firm deals in a variety of commodities. The quantum of turnover and variety of commodities dealt with apparently speak of the fact that it is not the meagre capital of the assessee's HUF, but the vast experience, expertise and personal exertion of the partners which are contributing to such a huge turnover of the partnership firm. 5.7 In view of the discussion above, it is held that the employment of Sh.Subhash Sood is an employment of personal responsibility and ability. The salary income earned by him is to be related to his labour and his employment, and not to the outstanding capital balance of HUF in the firm. By its very nature, salary is paid for certain services rendered and cannot be earned on account of capital contribution. There is separate earning of the HUF on its capital contribution in the form of interest, and 50% share of profits. 5.8 Sh. Subhash Chand Sood has contributed personally to the management of the business of the firm having a huge quantum and complexity, by virtue of his age, experience and input of personal time, energy and skills. Beside the appellant, there is only one more working 3 4 partner in such a big business. Accordingly, the Id. A.O. is fully justified in assessing the salary income in the hands of the appellant HUF on protective basis, and in the hands of Sh. Subhash Chand Sood on substantive basis. No interference is called for in this regard with the decision of the Ld. A.O. The appellant, therefore, fails on this ground- of appeal."
5. The claim of the assessee vis-à-vis the allowability of expenditure on account of car expenditure and car depreciation was also rejected by the CIT (Appeals). The assessee is in appeal against the order of the CIT (Appeals) on both accounts.
6. Shri Vishal Mohan appeared for the assessee and Shri N.K.Saini put in appearance on behalf of the Revenue and put forward their contentions.
7. We have heard the rival contentions and perused the record. The assessee HUF is partner in the partnership concern M/s Shimla Roller Flour Mills having 50% share in the profit and loss of the said firm. D u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n t h e a s s e s s e e H U F h a d e a r n e d interest on its capital contribution with the said firm amounting to Rs.1,61,833/-. Further the assessee claimed to have received sum of Rs.1,50,000/- on account of remuneration paid by the assessee firm to the assessee HUF. The assessee further claimed expenditure on account of car expenses and car depreciation totaling Rs.67,330/- against the said remuneration received by the assessee. A d m i t t e d l y, t h e i n t e r e s t received by the assessee HUF on its capital contribution to the p a r t n e r s h i p f i r m h a s b e e n a c c e p t e d a s i n c o m e o f t h e p r e v i o u s ye a r i n t h e hands of the assessee. The dispute in the present appeal is in relation to the assessability of the salary paid by the partnership firm amounting to Rs.1,50,000/- and its assessability in the hands of the assessee HUF. The corollary to the said claimed was claim of deduction on account of car expenses and depreciation totaling Rs.67,330/-. While computing 4 5 the income of the partnership concern, under section 40(b) of the Act it i s p r o v i d e d t h a t i n c a s e o f a n y f i r m , t h e d e d u c t i o n o n a c c o u n t o f s a l a r y, bonus, commission or remuneration, by what ever name called, to any p a r t n e r , w h o i s n o t a w o r k i n g p a r t n e r , o r a n y p a ym e n t o f r e m u n e r a t i o n t o any partner who is a working partner or of interest to any partner, which i n e i t h e r c a s e i s n o t a u t h o r i z e d b y, o r i s n o t i n a c c o r d a n c e w i t h t h e t e r m s of the partnership deed, is not allowable as an deduction. The above said provisions are as per section 40(b)(i)(ii) of the Act. It is further provided under the said sub-section under sub clause (iii) & (iv) of the A c t t h a t a n y p a ym e n t o f r e m u n e r a t i o n t o a n y p a r t n e r o r i n t e r e s t t o a n y partner for a period which is not specified in the partnership deed is not to be allowed as a deduction. Under sub-clause (v) to section 40(b) of t h e A c t t h e a l l o w a b i l i t y o f p a ym e n t o f r e m u n e r a t i o n t o a n y p a r t n e r w h o is working partner is linked to the profit of business shown by the p a r t n e r s h i p c o n c e r n d u r i n g t h e p r e v i o u s ye a r .
8. In view of the provisions of section 40(b)(i) of the Act the p a ym e n t o f a n y s a l a r y, b o n u s , c o m m i s s i o n o r r e m u n e r a t i o n i s t o b e m a d e to a working partner and the same should be authorized by the terms of the partnership deed. The Explanation-4 to section 40(b) of the Act defines working partner to be an individual who is actively engaged in conducting the affairs of business or profession of the firm of which he is a partner. As pointed out by the authorities below, the firm in which the assessee HUF was a partner was dealing in trading of various items of food grain like wheat, atta, maida, suzi and bran, etc.. The total t u r n o v e r o f t h e f i r m w a s R s . 6 . 1 8 c r o r e s d u r i n g t h e p r e v i o u s ye a r . In view of the quantum of turnover and variety of commodities dealt in by the firm, it cannot be ruled out that the business was carried on without the expertise and personal exertion of the partners. The assessee HUF 5 6 claimed to be partner of 50% and other partner was Mr.Ravi Chand Sood h a v i n g 5 0 % s h a r e w a s m u c h yo u n g e r i n a g e t o M r . S u b h a s h C h a n d S o o d . The salary being allowable to a working partner cannot be held to be the salary earned by the assessee HUF on account of its capital contribution. In view thereof, we are in conformity with the orders of the authorities below that the salary income is to be excluded from the total income shown by the assessee HUF and consequently the claim of deduction on account of car expenses is to be denied to the assessee HUF. Upholding the order of the CIT (Appeals) we dismiss ground Nos.1 and 2 raised by the assessee.
9. In the result, the appeal of the assessee is dismissed.
Order Pronounced in the Open Court on 28th d a y o f J a n u a r y, 2013.
Sd/- Sd/-
(T.R.SOOD) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 28th January, 2013
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 6