Short Overview : Where Supreme Court in case of Ramlik Kothari (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC) had held that expenditure incurred by partner for earning income from partnership firm was an allowable expenditure and since in the preceding and subsequent years such salary paid to employees were allowed as business expenditure from the salary income received from the firm, therefore, CIT(A) was not justified in upholding the disallowance made by AO.

Assessee had claimed business expense against remuneration received from the firm M/s. W. AO asked assessee to justify the allowability of such expenses against remuneration. Assessee submitted that remuneration from a firm was considered as business income as per section 28(v). He had employed two persons to look after the interest of Firm’s business, therefore, these expenses are fully allowable from the business income of the assessee. AO was not satisfied with the explanation given by assessee and disallowed the same. CIT(A) upheld the order of AO.

It is held that Supreme Court in the case of Ramlik Kothari (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC) had held that expenditure incurred by partner for earning income from partnership firm was an allowable expenditure. Further, the rule of consistency also was in favour of assessee, since in preceding and subsequent years such salary paid to employees were allowed as business expenditure from the salary income received from the firm. Therefore, CIT(A) was not justified in upholding the disallowance made by AO.

Decision: In assessee’s favour.

Followed: CIT v. Excel Industries Ltd. (2013) 358 ITR 395 (SC) : 2013 TaxPub(DT) 2414 (SC), Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) : 1992 TaxPub(DT) 0858 (SC), CIT v. Ramniklal Kothari (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC).

IN THE ITAT, DELHI BENCH

R.K. PANDA, A.M. & KULDIP SINGH, J.M.

Aman Tandon v. Asstt. CIT

ITA No. 3469/Del/2015

13 December, 2019

Appellant by: Gautam Jain, Advocate, Lalit Mohan, CA

Respondent by: S.S. Rana, CIT. (DR)

ORDER

R.K. Panda, A.M.

This appeal filed by the assessee is directed against the Order, dated 10-3-2015 of the Commissioner (Appeals)-18, New Delhi relating to assessment year 2011- 12.

2. The first issue raised by the assessee in the grounds of appeal relates to the disallowance of business expenses of Rs. 1,80,000 from the remuneration of Rs. 34,61,241 earned by the assessee from the partnership firm assessed as business income under section 28 (v) of the Income Tax Act, 1961.
3. Facts of the case, in brief are that the assessee is an individual and derives income from salary from partnership firm house property and other sources. He filed his return of income on 30-9-2011 declaring total income of Rs. 46,53,350. During the course of assessment proceedings the assessing officer noted that the assessee has claimed business expense of Rs. 1,80,000 against remuneration of Rs. 34,61,241 received from the firm M/s. Wenger & Co. He asked the assessee to justify the allowability of such expenses against remuneration. The assessee vide his reply dated 20-12-2013 submitted that remuneration from partnership firm is considered as business income as per section 28(v) of the Income tax Act. He has employed two persons to look after the interest of the Firm’s business, therefore, these expenses are fully allowable from the business income of the assessee.
4. However, the assessing officer was not satisfied with the explanation given by the assessee. He noted that the remuneration received by the partners from the Firm is according to the partnership deed and the work done by them for the business of the Firm. This has nothing to do with the persons employed by each of the partner in his/her personal capacity. Further, the partners of the firm are not liable to employ workers for the purpose of earning income by the firm. The liability to incur such expenditure lies with the firm itself. In view of the above the assessing officer disallowed the expense of Rs. 1,80,000 claimed by the assessee against the remuneration and added back to the income of the assessee.
5. In appeal the learned Commissioner (Appeals) upheld the action of the assessing officer by observing as under :–

“2.3 I have considered the contentions of the appellant however I find that the said remuneration received by the partner from the firm is according to the partnership deed and the work done by him for the business of the firm. This has nothing to do with the persons employed by the partner in his personal capacity. Further, the partner of the firm is not liable to employ workers for the purpose of earning income by the firm. The liability to incur such expenditure lies with the firm only. Hence, the expenditure incurred by the appellant on behalf of the firm in the form of employing workers to help in the business of the firm cannot be allowed in the name of the appellant. Accordingly, in my considered opinion, the claim of such expenditure amounting to Rs. 1,80,000 claimed by the appellant against the remuneration received by him as partner of the firm has been correctly disallowed. The case laws relied upon by the appellant are distinguishable on facts of the case. The same is confirmed in appeal. Ground raised in appeal is dismissed.”

6. Aggrieved with such order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal.
7. The learned Counsel for the assessee strongly challenged the order of the Commissioner (Appeals) in sustaining the disallowance made by the assessing officer.

He submitted that the payment of salary to the above two employees is not in dispute. However, the logic given by the revenue that the liability to incur such expenditure lies with the firm only is incorrect. Referring to the decision of the Hon’ble Supreme Court in the case of CIT v. Ramlik Lal Kothari reported in (1969) 74 ITR 57 (SC) : 1969 TaxPub(DT) 0354 (SC) he submitted that in the said decision it is held that the expenditure incurred for the purpose of earning the share income from the firm is an allowable expenditure. Referring to the copy of the assessment order for assessment year 2008-09 to 2014-15 he submitted that except for the year under consideration the expenses claimed on account of remuneration to the employees has been allowed as an expenditure in respect of income from the partnership firm for all the years although the assessments have been completed under section 143 (1).

Referring to the decisions of Hon’ble Supreme Court in the case of CIT v. Excel Industries Limited reported in (2013) 358 ITR 395 (SC) : 2013 TaxPub(DT) 2414 (SC) and the decision in the case of Radha Soami Satsang v. CIT reported in (1992) 193 ITR 321 (SC) : 1992 TaxPub(DT) 0858 (SC) he submitted that the rule of consistency should be followed. He submitted that identical disallowance was made in the hands of the other partner namely Sh. O.P. Tandon of M/s. Wenger and Co. for assessment year 2004-05 and the appeal filed by the revenue was dismissed by the Tribunal although on account of Low Tax Effect.

Relying on various other decisions he submitted that the disallowance made by the assessing officer and sustained by the Commissioner (Appeals) is not justified.

8. The learned DR on the other hand strongly relied on the order of the assessing officer and the Commissioner (Appeals).
9. We have considered the rival arguments made by both the sides, perused the orders of the assessing officer and the Commissioner (Appeals) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessing officer in the instant case disallowed an amount of Rs. 1,80,000 being the expenditure claimed by the assessee towards salary to two employees from the remuneration of the partnership firms. We find the learned Commissioner (Appeals) upheld the action of the assessing officer, the reason of which have already been reproduced in the preceding paragraphs. It is the submission of the learned Counsel for the assessee that when the remuneration paid to the employees has not been doubted, therefore, the learned Commissioner (Appeals) cannot alter the nature of expenditure. Further the assessing officer in assessee’s own case for the preceding and subsequent assessment years has accepted such remuneration to the employees as an allowable expenditure although the assessments have been completed under section 143 (1). It is also his submission that in another partners case such remuneration was allowed by Commissioner (Appeals) as an allowable expenditure and the appeal by the revenue was dismissed by the Tribunal on account of low tax effect.
10. We find some force in the above arguments of the learned Counsel for the assessee. As mentioned earlier the revenue in the preceding and subsequent years has accepted such remuneration to the employees as an allowable expenditure from the remuneration from the partnership firms which has been taxed as business income. It is also an admitted fact that in case of another partner such salary paid to the employees was allowed by the learned Commissioner (Appeals) as an expenditure from the remuneration of the partnership firm.

Further the payment of salary of the two employees is not in dispute. We, therefore, find merit in the argument of the learned Counsel for the assessee that the Commissioner (Appeals) cannot alter the nature of expenditure. The Hon’ble Supreme Court in the case of Ramlik Kothari (supra) has held that expenditure incurred by the partner for earning income from the partnership firm is an allowable expenditure. The various other decisions relied on by the learned Counsel for the assessee in the case law compilation also supports his case. Further the rule of consistency also is in favour of the assessee, since in the preceding and subsequent years such salary paid to employees were allowed as business expenditure from the salary income received from the partnership firm. No proceedings under section 147 or 263 have been initiated in subsequent years after the order of the Commissioner (Appeals), rejecting the claim of the assessee. In view of the above discussion we are of the considered opinion that the learned Commissioner (Appeals) was not justified in upholding the disallowance made by the assessing officer. Accordingly the order of the Commissioner (Appeals) on this issue is set aside and the ground raised by the assessee on this issue is allowed.

11. The other issue raised by the assessee in the grounds of appeal relates to the order of the Commissioner (Appeals) in confirming the addition of Rs. 5,25,000 under the head “income from the house property”.
12. Facts of the case, in brief, are that the assessing officer during the course of assessment proceedings noted that the assessee has declared income from house property at Rs. 4,24,270 from House Property no-801, Central Park Gurgaon after deducting house tax and standard deduction under section 24(a) of the Income Tax Act. However, from the perusal of rent agreement the assessing officer noted that initially assessee had rented the premises to Sinclair Knight Merz Consulting (India) Pvt. Ltd. on a monthly rent of Rs. 1,40,000 with effect from March 2009 which was valid till 9-3-2011. However, the assessee has contended that the premises was vacated during the year and was again rented to Robbins Tunneling & Trenchless Technology (India) Pvt. Ltd. on a monthly rent of Rs. 90,000 with effect from 1-10-2010. Since, the assessee did not submit any documentary evidence in support of his claim that the premises was vacated by Sinclair Knight Merz consulting (India) Pvt. Ltd, the assessing officer computed the income from house property as under :–

Rent from April 2010 to September 2010
Rs. 1,40,000 p.m. x 6	Rs. 8,40,000
Rent from October 2010 to March 2011
Rs. 90,000 p.m. x 6	Rs. 5,40,000
Gross Rent	Rs. 13,80,000
Less House Tax	Rs. 13,56,100
Less Deduction under section 24 A	Rs. 4,06,830
Income from house property	Rs. 9,49,270

The assessing officer accordingly made addition of Rs. 5,25,000 to the income of the assessee under the head income from house property.

13. In appeal the learned Commissioner (Appeals) upheld the action of the assessing officer by observing as under :–

“3.3 I have considered the submissions of the appellant, however, as the assessee has not submitted any documentary evidence in support of the claim that the premises was vacated by the said tenant, the contention has been rejected. During the appeal proceedings also the appellant has not justified his contentions hence, I am forced to accept the assessing officer’s stand. The ground raised in appeal is dismissed.”

14. Aggrieved with such order of the Commissioner (Appeals), the assessee is in appeal before the Tribunal.
15. 15. We have considered the rival arguments made by both the sides, perused the orders of the assessing officer and the Commissioner (Appeals) and the paper book filed on behalf of the assessee. We find the assessing officer made addition of Rs. 5,25,000 to the total income of the assessee on the ground that the assessee did not submit any documentary evidence in support of his claim that the premises was vacated by Sinclair Knight Merz Consulting (India) Pvt. Ltd. Even before the Commissioner (Appeals) also the assessee did not give any supporting evidence that the premises was vacated by the said tenant for which he upheld the action of the assessing officer. It is the submission of the learned Counsel for the assessee that given an opportunity the assessee is in a position to substantiate the claim by producing necessary evidence. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the assessing officer with a direction to grant an opportunity to the assessee to substantiate with evidence to his satisfaction that the tenant had in fact vacated the premises for the intervening period.

Needless to say the assessing officer shall decide the issue as per fact and law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The second issue raised by the assessee is accordingly allowed for statistical purposes.

16. In the result, the appeal filed by the assessee is allowed for statistical purposes.