Income Tax Appellate Tribunal - Bangalore
M/S I D Bhangarshattra And Sons , ... vs Income Tax Officer Ward-1 , Gadag on 9 January, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL
"SMC A" BENCH : BANGALORE
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
ITA No.3057/Bang/2018
Assessment year : 2014-15
I.D. Bhangarshettra & Sons, Vs. The Income Tax Officer,
Mulgund Naka, Ward 1,
Gadag. Gadag.
PAN: AAAFI 5040G
APPELLANT RESPONDENT
Appellant by : Ms. R. Mrinalini, Advocate
Respondent by : Shri D. Kiran, Jt.CIT(DR)(ITAT), Bengaluru.
Date of hearing : 07.01.2019
Date of Pronouncement : 09.01.2019
ORDER
This appeal by the assessee is directed against the order of CIT(Appeals), Hubballi, dated 27.08.2018.
2. There is a delay of 4 days in filing the appeal. In the application for condonation of delay along with an affidavit, it has been stated that the order of the CIT(A) was received on 10.09.2018 and appeal was to be filed on or before 09.11.2018, but since one of the partners of the assessee was not well and appeal was prepared on 09.11.2018 and due to holidays the appeal was before the Tribunal only on 13.11.2018. In such circumstances, it is prayed that the delay may be condoned and appeal admitted for hearing on merits. On these facts, I am of the view that there ITA No.3057/Bang/2018 Page 2 of 5 was a reasonable cause for delay in filing the appeal before the Tribunal and therefore condone the delay in filing the appeal.
3. The first ground of appeal is with regard to confirming addition of Rs.5,48,960 towards interest free advance made to partners. There was drawings of Rs.25,74,672 by the partners. The assessee did not charge any interest on it.
4. The AO was of the opinion that since the assessee has paid the interest on the advance made by the partner to the firm @ 12%, on the same principle the assessee has to receive interest from money advanced to its partners. Accordingly, he charged interest @ 12% on the advanced amount of RS.25,74,672. Further, the assessee advanced another Rs.20 lakhs to the partners which was meant for purchase of land and kept with the partner for safe keeping. According to the AO, the assessee has not explained the urgent need to keep such an amount in cash with the partners instead of deposit to bank. Hence on this amount also, he charged interest @ 12% p.a. Against these additions, the assessee is in appeal before the Tribunal.
5. The ld. AR reiterated the same arguments raised before the lower authorities before me and prayed that there is no condition in the partnership deed to charge any interest on amount advanced to its partners, hence interest was not charged. It was also submitted that the assessee was running a petrol bunk and there was a proposal of acquisition of this land by the Govt. authorities, hence alternative plot had to be found out due to which surplus cash was kept with the partner to receive it back on call.
ITA No.3057/Bang/2018 Page 3 of 56. Without prejudice to the above arguments, further the ld. AR submitted that the AO charged interest on closing balance without taking into consideration the opening balance also for the assessment year under consideration, hence it should be excluded while charging interest.
7. The ld. DR relied on the order of lower authorities.
8. I have heard both the parties and perused the material on record. In the present case, the assessee advanced money to its partners as well as partners advanced money to assessee also. The assessee paid interest to partners on amount advanced by the partners to the firm. On the other hand, the assessee has not charged any interest to the amount advanced by the assessee to its partners which is not correct. The assessee ought to have charged interest on the amount advanced by the firm to its partners. Hence, I do not find any infirmity in the order of lower authorities in charging the interest on the amount advanced by the assessee to its partners. However, I make it clear that interest on amount advanced to the partners by the firm be made on daily cumulative balance including opening balance and the AO cannot charge interest only on closing balance. Accordingly, I direct the AO to recalculate the interest on daily cumulative balance.
9. The next ground is with regard to confirming the addition of Rs.3 lakhs by the CIT(Appeals) towards payment of salary to family members of the partners as against the disallowance of Rs.1 lakh by the AO.
10. The assessee paid Rs.3 lakhs as salary to the family members of the partners. Out of this, the AO disallowed only Rs. 1 lakh as the assessee did not file any supporting evidence. On appeal, the CIT(Appeals) directed the AO to disallow Rs.3 lakhs as against Rs.1 lakh disallowed by the AO without giving any enhancement notice as required ITA No.3057/Bang/2018 Page 4 of 5 u/s. 251(1)(a) of the Income-Tax Act, 1961 ["the Act"]. Against this, the assessee is in appeal before me.
11. I have heard both the parties and perused the material on record. The main plea of the ld. AR is that the family members of partners have rendered services to the assessee firm and expenditure was incurred wholly and exclusively for the purpose of business of assessee. Further, it was submitted that the amount was taxed in the hands of the partners and it could be allowed as an expenditure in the hands of the assessee firm.
12. On the contrary, the ld. DR submitted that salary was paid to all the 3 family members of partners viz., Mr. Vaibhav Bhangarshettra, Mr. Vaishak Bhangarshettra and Ms. Aishwarya Bhangarshettra. According to the ld. DR, there are regular employees in the firm who manage the petrol bunk and there was no role of these family members in the day to day conduct of business so as to pay salary to them.
13. I have heard both the parties and perused the material on record. In the present case, firstly, the AO has not at all brought any material on record to show that the family members of partners are not involved in the day to day affairs of assessee firm, before invoking the provisions of section 40A(2)(a). It is incumbent upon the AO to bring on record whether these persons rendered any services or not before invoking the above provisions. He disallowed Rs.1 lakh out of Rs.3 lakhs paid to family members of partners. Contrary to this, the CIT(Appeals) enhanced the disallowance to the tune of Rs.3 lakhs without issuing any mandatory notice required u/s. 251(1)(a) of the Act, which is bad in law. Accordingly, in my opinion, first of all, the addition made by the AO itself is not based on any material brought on record. Secondly, the enhancement by the CIT(Appeals) without giving any mandatory notice is also against all norms ITA No.3057/Bang/2018 Page 5 of 5 of the law. In view of this, I am inclined to delete the addition made by the lower authorities. Thus, this ground of appeal of the assessee is allowed.
14. In the result, the appeal by the assessee is partly allowed.
Pronounced in the open court on this 09th day of January, 2019.
Sd/-
( CHANDRA POOJARI ) ACCOUNTANT MEMBER Bangalore, Dated, the 09th January, 2019.
/ Desai Smurthy / Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file By order Assistant Registrar, ITAT, Bangalore.