Income Tax Appellate Tribunal - Madras
Sri Balaji Agencies vs The Income Tax Officer on 21 April, 2006
Equivalent citations: [2007]106ITD419(CHENNAI)
ORDER
Shamim Yahya, Accountant Member
1. These appeals by the assessee are against the respective orders of Commissioner of Income Tax (Appeals) for the assessment years 2000-01 and 2001-02. Since the issues are common and connected, these are being consolidated and disposed off together for the sake of convenience.
2. At the threshold, in both the appeals, the assessee had raised the plea that the re-opening is bad in law and illegal in this case. However, before us the learned Counsel of the assessee submitted that he is not pressing the ground. Hence this ground is dismissed as not pressed.
3. The next common ground raised is that the learned Commissioner of Income Tax (Appeals) erred in holding that the provisions of Section 44AF applies to the facts of the case. The Commissioner of Income Tax (Appeals) fundamentally failed to appreciate that the provisions of Section 44AF is a special provision and applies only in the case of retail business and factually the assessee had been carrying wholesale business and accordingly the Assessing Officer ought to have applied the correct provisions of law in the light of the mandate provided in the Article 265 of the Constitution of India to the effect that no tax shall be collected without the authority of law. The Assessing Officer ought to have appreciated well settled position that there is no fiscal estoppel.
4. On this issue, the learned Commissioner of Income Tax (Appeals) held as under:
The assessee offered income Under Section 44AF and, therefore, the Assessing Officer did not bother to examine the books of accounts and accepted the returned income. In such situation, the assessee during the course of appellate proceedings would not be justified in claiming that the Assessing Officer ought to have determined the net profit as per the books of account at a lower figure than what was admitted in the return of income. If the assessee had admitted lower income as per the books of accounts, the Assessing Officer would have got opportunity to examine the books of accounts which was prevented by the assessee by offering income at the rate of 5% of the turn over. Thus, I find there is no grievance for the assessee as the Assessing Officer has accepted the returned income. This ground is rejected.
5. In this regard, we find that provisions of Section 44AF read as under:
Special provisions for computing profits and gains of retail business.
44AF. (1) Notwithstanding anything to the contrary contained in Sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head "Profits and gains of business or profession:
Provided that nothing contained in this sub-section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year.
(2) Any deduction allowable under the provisions of Sections 30 to 38 shall, for the purposes of Sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed:
Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under Sub-section (1) subject to the conditions and limits specified in Clause (b) of section 40.
(3) The written down value of any asset used for the purpose of the business referred to in Sub-section (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years.
(4) The provisions of Sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in Sub-section (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded.
(5) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in Sub-section (1), if he keeps and maintains such books of account and other documents as required under Sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.
6. From a reading of the above, it is quite evident that this provision is specifically applicable to persons engaged in retail trade. However, in this case, it has been noted by the lower authorities that the assessee firm is a wholesale dealer. Evidently, when the assessee is a wholesale dealer, provisions of Section 44AF will obviously not be applicable in the case of the assessee. The assessment should be done as per the sanguine provisions of law as applicable to the facts of the case. It is neither open for the assessee nor for the Revenue to opt for a particular section of their choice for taxation of a particular item irrespective of its applicability to the facts of the case. Since this aspect has not been examined by the lower authorities, we, in the interest of justice, remit this issue to the files of the Assessing Officer to give a finding in this regard. The., assessee should be given adequate opportunity of being heard.
7. The next common issue raised is that the learned Commissioner of Income Tax (Appeals) fundamentally failed to appreciate that the partners are entitled to remuneration at Rs. 5,000/- per month as per the binding agreement entered into by them in terms of the partnership deed and they had not agreed to receive lesser salary as has been wrongly assumed by the Commissioner of Income Tax (Appeals) and hence the partners are entitled to remuneration on the basis of mercantile system of accounting.
8. In this case, the assessee claims Rs. 83,995/- as salary to working partners in their statutory limit Under Section 40(b). The Assessing Officer found that the actual salary payment was only Rs. 48,000/-. He, therefore, allowed salary payment only to the extent of Rs. 48,000/-.
9. Before the learned Commissioner of Income Tax (Appeals) the assessee's counsel relied upon Hon'ble Apex Court decision in Sutlej Cotton Mills Ltd. v. CIT 116 ITR 1 as regards the contention that entries in the books of accounts Is not determinative of the question whether a particular deduction is to be allowed or not. However, the learned Commissioner of Income Tax (Appeals) did not find the citation germane to the issue and held that, In the present case of the assessee, what is to be seen is clause 9 of the partnership deed r.w.s. 40(b). As per Section 40(b), only payment of remuneration to working partners which is authorised by and In accordance with the terms of partnership deed is allowable. Admittedly, only Rs. 48,000/- was paid during this year to partners, which was also credited in the accounts of the partners. Thus, there is no payment of remuneration in excess of Rs. 48,000/- even on accrual basis. As per clause 9 of the partnership deed, which is extracted in para 4 of this order, the salary to working partners is to be decided by mutual understanding in case there was no sufficient profit. In this case, the book profit before allowing salary to partners was only Rs. 64,823/-(Rs. 16,820/- + Rs. 48,000). Thus, there was no profit for payment of salary to the extent of Rs. 5,000/- per month to each working partner. Thus, the partners have mutually agreed to pay salary at the rate of Rs. 2,000/- per month to each working partner in accordance with clause 9 of partnership deed. The assessee is, therefore, entitled to claim deduction Under Section 40(b) only to the extent of Rs. 48,000/- which was credited to partners current account in accordance with the partnership deed.
10. We have heard both the counsels and perused the records. We find that Section 40(b)(v) of Income Tax Act allows payment of remuneration to partners in a firm as under:
any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:
(1) in case of a firm carrying on a profession referred to in Section 44AA or which is notified for the purpose of that section-
(a) on the first Rs. Rs. 50,000 or at the rate of 90 per cent of
1,00,000 of the the book- profit, whichever is more;
book-profit or in
case of a loss
(b) on the next Rs. at the rate of 60 per cent;
1,00,000 of the
book-profit
(c) on the balance o at the rate of 40 per cent;
the book-profit
(2) in the case of any other firm-
(a) on the first Rs. Rs. 50,000 or at the rate of 90 per cent of
75,000 of the the book- profit, whichever is more;
book-profit, or in
case of a loss
(b) on the next Rs. at the rate of 60 per cent;
75,000 of the
book-profit
(c) on the balance of at the rate of 40 per cent:
the book-profit
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
11. From the above, it is evident that the sanguine provisions of the Act mandate the allowance of amount actually paid/provided in the accounts as per the terms of partnership deed. The assessee may have a case that clause 9 of the partnership deed permitted the payment of the amount as contended by the assessee, but when the assessee is neither paying nor making provision to the extent permissible under the partnership deed, it is implied that the partners have agreed to take a sum which is lower and as appearing in the partnership accounts. In this regard, the provision of the partnership deed which stipulated "the salary to working partners is to be decided by mutual understanding in case there was no sufficient profit", is important.
12. In our opinion, Section 40(b)(v), while dealing with the payment of remuneration to partners provides framework under which such partners remuneration is to be paid and allowed. The provision cannot be interpolated to provide for allowance of remuneration with complete disregard to books of accounts. It is clear from the facts of this case that the profits were low and remuneration amounting to Rs. 1,20,000/- as specified in the partnership deed could not have been paid. In such circumstances, the clause of partnership deed, providing for deciding partners salary by mutual understanding when profits are low, becomes operational. Admittedly, partners of assessee firm have been paid the remuneration by way of monthly remuneration. It cannot be said that this remuneration paid is a hypothetical figure. It is also not a case that the assessee has erroneously paid a lower amount. Under the circumstances, we do not find any infirmity in the order of the learned Commissioner of Income Tax (Appeals) in this regard. In the result, assessee's appeal on this issue is dismissed.
13. In the result, the assessee's appeals are partly allowed for statistical purposes.