High Court Of Kerala
CIT vs. Sulaikha Clay Mines
Section 40(b), 40A(2)
Asst. Year 2002-03
C.N. Ramachandran Nair & K. Surendra Mohan, JJ.
IT Appeal No. 33 of 2007
26th March, 2009
Counsel appeared :
Jose Joseph, for the Appellant : P. Balakrishanan & Smt. S. Jasmine, for the Respondent
JUDGMENT
c.n. RAMACHANDRAN NAIR, J. :
Two questions are raised by the Revenue in the appeal filed by them against the order of the Tribunal confirming the order of the CIT(A) whereunder disallowances made under ss. 40(b) and 40A(2) of the IT Act by the AO are cancelled. We have heard standing counsel appearing for the appellant and counsel appearing for the respondent assessee.
The assessee is a partnership firm consisting of nine partners of which five are ladies. In the course of assessment the AO noticed that the assessee has paid salary to other partners treating each and every partner as working partner. On enquiry the AO found that four partners are residing in far away places from place of business of the firm. The firm was engaged in mining of clay at a place near Trivandrum. However, these four partners are regularly residing in Alleppey where the firm does not have any branch of its or business operations. The AO found that at least these four partners are not working partners and therefore, he proposed to disallow the salary paid by the assessee to these partners under s. 40(b) of the IT Act. The assessee could not establish the nature of work done by these partners. However, in appeal, minutes book and partnership deed were produced before the CIT(A) who held that the partners are working partners as defined under Expln. 4 to s. 40(b) of the Act. This order is confirmed by the Tribunal. Similarly the AO noticed that out of total receipt of Rs. 95,84,767 the assessee has accounted expenditure of Rs. 63,23,282. In fact out of the total expenditure around Rs. 54 lakhs was paid to partners or their relatives under various heads viz., compensation, development expenses, pit filling expenses and transportation charges. Since persons were related persons as defined under s. 40A(2)(b) of the IT Act, the AO conducted enquiry and found that bills were exorbitant and therefore, he made disallowance upto 25 per cent under s. 40A(2)(a) of the Act. The appeal filed against this was also allowed by the CIT(A) which got confirmed in second appeal. It is against this order of the Tribunal the Department has filed this appeal.
So far as the first question is concerned we find from the order of the CIT(A) that the only ground based on which he allowed the claim is that in the minutes recorded work have been assigned to partners. Similarly the partnership deed provides that every partner will take part in business. We do not think these are the tests to find out whether a person is engaged as a working partner in the business of the firm. A partner can take part in business only at the place of business or where partnership has business transactions. The assessee has no case that it has any business operations or dealings in the place where all these four lady partners are residing at Alleppey which is 150 kms. away from the place of business. No evidence whatsoever is produced to establish the nature of operation or control or administrative or other work done by these ladies for the firm. We do not find any justification of the CIT(A) to allow the claim and the Tribunal to confirm it. However, since assessment pertains to the year 2002-03 and since the partners’ assessments have also become final we do not think we should interfere with the orders of these authorities on this issue. However, we declare that these orders will not bind the Department for any case pending before any authority either in appeal or otherwise. Even though we disapprove the findings of the authorities below we do not wish to interfere with the order in appeal only for the sake of finality of the assessments that got settled in the case of the partners.
4. So far as the second issue is concerned it is not in dispute that the entire payment of around Rs. 54 lakhs out of Rs. 63,23,282 spent by the firm as having been paid to various partners or to their relatives. Since payments are made by the firm to related persons the officer was perfectly justified in scrutinising the eligibility of the claim. It is the finding of the AO that the payments are exorbitant. The details of payments made to partners or relatives are discussed in the assessment order. Neither the first appellate authority nor the Tribunal examined the reasonableness of the expenditure in comparison to the expenditure incurred in similar cases. The first appellate authority as well as the Tribunal allowed the claim by holding that the expenditure are required in the nature of the business. We are of the view that this finding is not sufficient to reverse the finding of the AO because he himself allowed 75 per cent of the expenditure and only 25 per cent was found to be inflated for the purpose of helping the related persons. We do not find any material or justification for the first appellate authority or the Tribunal to allow the claim. At the maximum they could have remanded the case to the AO to examine each and every bill and voucher pertaining to the payments made to partners and relatives to compare with market rates and to disallow excess over actual payments. We do not think at this distance of time we should remand the case for more than one reason. In the first place, if we remand, the AO will have to examine each and every bill and voucher and the excess over market rates for lorry charges, for tipper, for earth-moving equipments etc. should be disallowed which may exceed more than 25 per cent estimated by the officer. Further, there is likelihood of excess payment for the simple reason that the assessee firm though regularly engaged in mining has not chosen to acquire any mining equipments like earth-moving equipments, tippers, trucks, etc. which are acquired by partners and relatives and taken on hire by the firm and the payments made are apparently huge amounts absorbing most of the receipts in business. In the circumstances and for the sake of finality we decline to remand the case but confirm the disallowance of 25 per cent made by the AO under s. 40A(2)(a) of the Act. Appeal is consequently allowed on this issue by reversing the order of the Tribunal and that of the first appellate authority and by restoring disallowance in assessment.
[Citation : 325 ITR 410]
