M/s Raja & Co.,, Palakkad v. DCIT, Trichur

ITA 550/COCH/2009 | 2001-2002
Pronouncement Date: 28-04-2010

Appeal Details

RSA Number 55021914 RSA 2009
Assessee PAN AACFR8905K
Bench Cochin
Appeal Number ITA 550/COCH/2009
Duration Of Justice 5 month(s) 8 day(s)
Appellant M/s Raja & Co.,, Palakkad
Respondent DCIT, Trichur
Appeal Type Income Tax Appeal
Pronouncement Date 28-04-2010
Appeal Filed By Assessee
Bench Allotted DB
Tribunal Order Date 28-04-2010
Date Of Final Hearing 01-03-2010
Next Hearing Date 01-03-2010
Assessment Year 2001-2002
Appeal Filed On 19-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE T RIBUNAL COCHIN BENCH COC HIN BEFORE S/SHRI N.VIJAYAKUMARAN JM AND SANJAY ARORA AM I.T.A. NOS. 803 & 804/COCH./2008 ASSESSMENT YEARS : 2005-06 & 2006-07 THE DY. COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE THRISSUR. VS. M/S. RAJA & CO. VADAKKANTHARA ROAD PALAKKAD. [PAN: AACFR 8905K] (REVENUE-APPELLANT) (ASSESSEE-RESPONDENT) I.T.A. NOS. 549 TO 555/COCH./2009 ASSESSMENT YEARS : 2000-01 TO 2006-07 M/S. RAJA & CO. VADAKKANTHARA ROAD PALAKKAD. VS. THE DEPUTY COMMISSIONER OF INCOME-TAX CENTRAL CIRCLE THRISSUR. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI T.M. SREEDHARAN ADVOCATE REVENUE BY SHRI T.J.VINCENT DR O R D E R PER BENCH: WE SHALL FIRST TAKE UP THE APPEALS BY THE REVENUE BEING SENIOR FIRST. THESE ARE FOR TWO CONSECUTIVE ASSESSMENT YEARS (AYS) BEING 2 005-06 & 2006-07 ARISING OUT OF SEPARATE ORDERS OF EVEN DATE (7.3.2008) BY THE COMM ISSIONER OF INCOME TAX (APPEALS)-I KOCHI (`CIT(A) FOR SHORT). AS THE APPEALS RAISED C OMMON ISSUES THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY A COMMON CON SOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. THE FIRST ISSUE RELATES TO THE DELETION OF DISAL LOWANCE OF RS. 2.02 LAKHS AND RS. 4.52 LAKHS RESPECTIVELY FOR THE TWO YEARS ON ACCOUN T OF EXCESS SALARY PAID TO THE WORKING PARTNERS I.E. IN TERMS OF 40(B) OF THE INCOME-TAX ACT 1961 (THE ACT HEREINAFTER). ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 2 3. THE BRIEF FACTS OF THE CASE WHICH ARE COMMON FO R BOTH THE YEARS ARE THAT WHILE EXAMINING THE ASSESSEES RETURN FILED IN RESPONSE T O THE NOTICE U/S. 153A IT WAS OBSERVED BY THE ASSESSING OFFICER (A.O.) TO HAVE CLAIMED SAL ARY TO ITS TWO WORKING PARTNERS AT RS. 2.50 LACS AND RS. 5 LAKHS FOR THE TWO CONSECUTIVE Y EARS RESPECTIVELY AS AGAINST THE TOTAL LIMIT OF RS. 48 000/- AS PRESCRIBED BY THE PARTNERS HIP DEED DATED 1/2/2000 SUBJECT TO THE MAXIMUM ALLOWABLE IN TERMS OF S. 40(B)(V) OF THE AC T READ WITH EXPLANATION 3 THERETO; THERE BEING NO DOCUMENT TO SUGGEST ANY CHANGE IN TH E REMUNERATION TO THE PARTNERS AND AT THE RELEVANT TIME SO THAT THE BALANCE WAS CONSIDER ED BY HIM AS IN EXCESS IN TERMS THEREOF R/W THE SAID SECTION AND THUS NOT ENTITLED TO DEDU CTION. REFERENCE WAS ALSO MADE BY HIM TO THE CIRCULAR NO. 739/25.3.1996 ISSUED BY THE CBD T WHICH CLARIFIES THAT ANY DEDUCTION QUA REMUNERATION PAYABLE TO THE WORKING PARTNERS WOULD W.E.F. A.Y. 1997-98 BE ELIGIBLE WHERE THE AMOUNT OF REMUNERATION PAYABLE TO EACH IN DIVIDUAL PARTNER IS SPECIFIED IN THE PARTNERSHIP DEED OR THE MANNER IN WHICH THE SAME IS TO BE QUANTIFIED IS SPECIFIED THEREIN. 4. IN APPEAL THE ISSUE STOOD DECIDED BY THE LD. CI T(A) IN THE ASSESSEES FAVOUR FOLLOWING THE DECISION BY THE TRIBUNAL IN THE CASE OF ITO VS. PULIMOOTTIL SILK HOUSE (2008) 19 SOT 4 (COCHIN) EXHORTING FOR A LIBERAL I NTERPRETATION OF S. 40(B)(V) OF THE ACT SO THAT IT SAW NO REASON THAT A WHY A RESOLUTION BY THE PARTNERS TOWARD A REVISION IN THE SALARY CLAUSE COULD NOT BE CONSIDERED AS AN AMENDME NT TO THE PARTNERSHIP DEED AND THUS A PART THEREOF. AGGRIEVED THE REVENUE IS IN APPEA L. 5. BEFORE US LIKE CONTENTIONS STOOD RAISED B Y EITHER SIDE. THE LAW IN THE MATTER IS CLEAR AND UNAMBIGUOUS AND FURTHER STANDS CLARIFIE D BY THE BOARD AS WELL AS THE DECISIONS IN THE MATTER OVER THE LONG PERIOD THE PROVISION HA S BEEN ON THE STATUTE BY THE VARIOUS APPELLATE AUTHORITIES. THE FACTS OF THE CASE ARE NO T IN DISPUTE AND THE ASSESSEES CLAIM IS CLEARLY UNMAINTAINABLE THEREUNDER. FURTHER THE CIT ED CASE LAW IS INAPPLICABLE AS IN THE PRESENT CASE THE MANAGING PARTNER SHRI K.S.KANNAN ONE OF THE TWO PARTNERS TO WHOM SALARY STOOD ALLOWED CONFIRMED BY LETTER DATED 3.1 2.2007 THAT NO SEPARATE MINUTE BOOKS STOOD MAINTAINED BY THE FIRM WITH REFERENCE TO THE AFFAIRS OF THE PARTNERSHIP. AS SUCH ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 3 THERE IS NO RESOLUTION IN THE INSTANT CASE THE FAC TUM OF WHICH PREVAILED WITH THE TRIBUNAL IN THE DECISION RELIED UPON WHICH IS THUS CLEARLY DISTINGUISHABLE ON FACTS. THE LD. AR ON THE OTHER HAND WOULD SUBMIT THAT N O INTERFERENCE WITH THE IMPUGNED ORDER IS CALLED FOR THE RELEVANT CLAUSE # 8 OF THE PARTNERSHIP DEED CLEARLY PROVIDING THAT THE REMUNERATION TO THE WORKING PART NERS CAN BE INCREASED OR DECREASED BY THE MUTUAL CONSENT OF THE PARTNERS SUBJECT TO THE LIMIT PRESCRIBED IN ITS RESPECT BY S. 40(B)(V) READ WITH EXPLANATION 3 THERETO. AS SUCH THE SALARY CLAIMED IS TO BE CONS TRUED AS IN TERMS OF THE PARTNERSHIP DEED AND THE RATIO OF THE DECISION IN THE CASE OF PULIMOOTTIL SILK HOUSE (SUPRA) IS APPLICABLE AS ALL IT SPEAKS OF IS FOR ADOPTION OF A LIBERAL APPROACH IN THE MATTER. IN FACT THE INCOME STANDS DULY RETURNE D BY THE PARTNERS IN THEIR INDIVIDUAL RETURNS AND WOULD ONLY HAVE BEEN FINALIZED ON THAT BASIS. 6. WE HAVE HEARD THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. 6.1 WE FIRSTLY OBSERVE THAT THERE IS NO REFERENCE TO TH E `BOOK PROFIT WITH REFERENCE TO WHICH ALONE THE ASSESSEES CLAIM WOULD STAND TO BE RECKONED I.E. EVEN ASSUMING THE SATISFACTION OF THE OTHER CONDITIONS OF S. 40(B)(V) OF THE ACT AND THUS OF IT BEING ELIGIBLE THEREUNDER. THIS IS ALL THE MORE RELEVANT AS THE EN TIRE INCOME FOR THE FIRST YEAR STANDS ASSESSED AS UNDISCLOSED INCOME ONLY IMPLYING ITS N ON-RECORDING IN THE REGULAR BOOKS OF ACCOUNT WITH REFERENCE TO WHICH ALONE THE BOOK-PRO FIT IS TO DETERMINED. BESIDES A RECORDING WOULD ITSELF BE OF NO CONSEQUENCE IN VIEW OF THE CONCLUSIVE FINDING OF IT REPRESENTING THE ASSESSEES UNDISCLOSED INCOME SO THAT IT HAS NOT BEEN OR WAS NOT INTENDED TO BE DISCLOSED TO THE REVENUE. WE LEAVE THIS MATTER AT THIS STAGE WHICH WOULD ONLY WARRANT IN THE EVENT OF SATISFACTION OF THE O THER REQUIREMENTS OF THE QUALIFYING PROVISION A REMISSION BACK TO THE FILE OF THE AUTH ORITIES BELOW FOR THE NECESSARY FINDINGS IN THE MATTER. 6.2 COMING NEXT TO THE SATISFACTION OF THE CONDIT ION OF S. 40(B)(V) WHICH IS THE NON- OBSTANTE CLAUSE GOVERNING THE IMPUGNED CLAIM READ WITH ANY CIRCULAR ISSUED BY THE ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 4 CBDT IN THE MATTER. THIS IS AS IF PER THE SAME THE RIGOR OF THE SECTION STANDS RELAXED THE SAME WOULD BE BINDING ON THE REVENUE. THE SECTION M ANDATES ALLOWANCE OF REMUNERATION BY A PARTNERSHIP FIRM TO ITS WORKING PARTNERS SUBJ ECT TO THE LIMITS SPECIFIED THEREIN WITH REFERENCE TO THE BOOK PROFIT WHERE AUTHORIZED BY AND IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND RELATES TO ANY PERIOD FALL ING AFTER THE DATE OF THE PARTNERSHIP DEED. `BOOK-PROFIT STANDS DEFINED PER EXPLANATION 3 TO THE SECTION AS THE NET PROFIT AS SHOWN BY THE PROFIT & LOSS ACCOUNT FOR THE RELEVANT PREVIOUS YEAR COMPUTED IN THE MANNER LAID DOWN UNDER CHAPTER IV-D PRIOR TO THE CH ARGE OF REMUNERATION TO WORKING PARTNER. CIRCULAR NO. 739 DATED 25.3.1996 BY THE CB DT [218 ITR (ST.) 131] WHICH IS RELIED UPON BY BOTH THE PARTIES READS AS UNDER: THE BOARD HAVE RECEIVED REPRESENTATIONS SEEKING CLA RIFICATION REGARDING DISALLOWANCE OF REMUNERATION PAID TO THE WORKING PARTNERS AS PROVID ED UNDER SECTION 40(B)(V) OF THE INCOME-TAX ACT. IN PARTICULAR THE REPRESENTATIONS HAVE REFERRED TO TWO TYPES OF CLAUSES WHICH ARE GENERALLY INCORPORATED IN THE PARTNERSHIP DEEDS. THESE ARE: (I) THE PARTNERS HAVE AGREED THAT THE REMUNERATION TO A WORKING PARTNER WILL BE THE AMOUNT OF REMUNERATION ALLOWABLE UNDER THE PROVISIO NS OF SECTION 40(B)(V)OF THE INCOME- TAX ACT; AND (II) THE AMOUNT OF REMUNERATION TO WORKING PARTNER WILL BE AS MAY BE MUTUALLY AGREED UPON BETWEEN PARTNERS AT THE END OF THE YEAR. IT HAS BEEN REPRESENTED THAT THE ASSESSING OFFICERS ARE NOT ALLOWING DEDUCTION ON THE BASIS OF THESE AND SIMILAR CLAUSES IN THE COURSE OF SCRUTINY ASSESSMENTS FOR THE REASON THAT THEY NEITHER SPECIFY THE AMOUNT OF REMUNERATIO N TO EACH INDIVIDUAL NOR LAY DOWN THE MANNER OF QUANTIFYING SUCH REMUNERATION. 2. THE BOARD HAS CONSIDERED THE REPRESENTATIONS. S INCE THE AMENDED PROVISIONS OF SECTION 40(B) HAVE BEEN INTRODUCED ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 1993-94 AND THESE MAY NOT HAVE BEEN UNDERSTOOD CORRECTLY T HE BOARD IS OF THE VIEW THAT A LIBERAL APPROACH MAY BE TAKEN FOR THE INITIAL YEARS. IT HAS BEEN DECIDED THAT FOR ASSESSMENT YEARS 1993-94 TO 1996-97 DEDUCTION FOR REMUNERATION TO A WORKING PARTNER MAY BE ALLOWED ON THE BASIS OF THE CLAUSES OF THE TYPE MENTIONED AT 1 (I) ABOVE. ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 5 3. IN CASES WHERE NEITHER THE AMOUNT HAS BEEN QUAN TIFIED NOR EVEN THE LIMIT OF TOTAL REMUNERATION HAS BEEN SPECIFIED BUT THE SAME HAS BE EN LEFT TO BE DETERMINED BY THE PARTNERS AT THE END OF THE ACCOUNTING PERIOD IN SU CH CASES PAYMENT OF REMUNERATION TO PARTNERS CANNOT BE ALLOWED AS DEDUCTION IN THE COMP UTATION OF THE FIRMS INCOME. 4. IT IS CLARIFIED THAT FOR THE ASSESSMENT YEARS SUBSEQUENT TO THE ASSESSMENT YEAR 1996- 97 NO DEDUCTION UNDER SECTION 40(B)(V) WILL BE ADM ISSIBLE UNLESS THE PARTNERSHIP DEED EITHER SPECIFIES THE AMOUNT OF REMUNERATION PAYABLE TO EACH INDIVIDUAL WORKING PARTNER OR LAYS DOWN THE MANNER OF QUANTIFYING SUCH REMUNER ATION. 6.3 THE BOARD HAS THUS FIRSTLY CLARIFIED THE SC OPE OF THE WORDS `AUTHORIZED BY AND `IN ACCORDANCE WITH APPEARING IN THE SECTION TO MEAN T HAT THE INSTRUMENT OF PARTNERSHIP SHOULD SPECIFY THE REMUNERATION PAYABLE TO EACH PAR TNER OR THE MANNER IN WHICH THE SAME IS TO BE QUANTIFIED. HOWEVER FOR THE INITIAL YEARS BEING AY 1993-94 TO 1996-97 EVEN IF THE SALARY TO A PARTNER IS STATED TO BE AS ALLOWABL E U/S. 40(B)(V) OF THE ACT THE SAME WOULD MERIT DEDUCTION IN VIEW OF THE CONTROVERSY ATTENDI NG THE INTERPRETATION OF THE NEWLY INSERTED CLAUSE SO AS TO ESCHEW LITIGATION IN THE M ATTER. WE FIRSTLY FIND THE UNDERSTANDING OF THE SECTION AS EXPLAINED TO BE IN COMPLETE HAR MONY WITH THE TERMS OF THE PROVISION AND SECONDLY OF ITS INSISTENCE ON THE COMPLIANCE OF THE PROVISION ONLY W.E.F. AY 1997- 98. WE THUS FIND IT TO BE OF LITTLE ASSISTANCE IN THE FACTS OF THE CASE; IF ANYTHING IT PROVIDES A CONTEMPORANEOUS INTERPRETATION OF THE SE CTION PROVIDING GUIDANCE FOR APPLICATION THEREOF FOR FUTURE YEARS WHICH (SECTIO N) IN ANY CASE HAS RECEIVED LIKE INTERPRETATION FROM OTHER QUARTERS SO AS TO BE CON SIDERED A SETTLED ISSUE. WHAT ONE MAY ASK WOULD THE WORDS `AUTHORIZED BY AND IN ACCORDAN CE WITH SIGNIFY IF THESE DO NOT EITHER SPECIFY OR ENUMERATE THE MANNER OF QUANTIFY ING THE REMUNERATION PAYABLE TO AN IDENTIFIED WORKING PARTNER BY THE PARTNERSHIP DEED WHICH IS ALSO FOR THE REASON THAT THE CLAIM IS ELIGIBLE ONLY FOR THE PERIOD FALLING AFTER THE DATE OF PARTNERSHIP DEED THE CONSTITUTING DOCUMENT AND WITH REFERENCE TO WHICH ONLY THE FIRM CLAIMS ITS EXISTENCE AND STATUS AS A FIRM AND CONCOMITANTLY FOR BEING ASSE SSED AS SUCH UNDER THE ACT (REFER: SS. 184 185 AND 187 ). FURTHER THE RIGOR OF THE SECTION IS RELAXED THE REBY ONLY FOR AND UP TO THE AY 1996-97. ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 6 6.4 WE NEXT CONSIDER THE ASSESSEES CLAIM ON THE TOUCHSTONE OF THE PARAMETERS LAID DOWN U/S. 40(B)(V). THE SHARE OF EACH OF THE TWO WO RKING PARTNERS IN THE SALARY PROVIDED FOR BY THE DEED OF PARTNERSHIP IS AT RS. 24 000/- E ACH SO THAT THERE IS NO DISPUTE WITH REGARD TO THE CLAIM QUA SALARY FOR A TOTAL UP TO RS. 48 000/- I.E. SUBJE CT TO THE MAXIMUM AMOUNT ADMISSIBLE IN ITS RESPECT U/S. 40(B)(V) READ WITH EXPLANATION 3 THERETO. AND WHICH IS THUS ONLY QUA THE CLAIM IN EXCESS THEREOF I.E. AT RS. 2.02 LAC S AND RS. 4.52 LACS FOR THE TWO CONSECUTIVE YEARS RESPECTIVELY. THE ASSESSEE CL AIMS THE INCREASE AS HAVING BEEN MUTUALLY AGREED TO BY THE PARTNERS IN TERMS OF CLA USE 8 OF THE PARTNERSHIP DEED. WE FIND THE SAME TO BE OF NO CONSEQUENCE WHATSOEVER. COULD THERE BE A CLAIM QUA SALARY TO THE PARTNERS WHICH ASSUMES THE NATURE OF THE SHARE IN THE PARTNERSHIP PROFITS ONE MAY ASK WHICH DOES NOT HAVE THE APPROVAL OF ALL THE PARTNER S FOR THE TIME BEING ? IN OTHER WORDS THAT GOES WITHOUT SAYING AND IS IMPLIED IN THE DIV ISION OF THE PROFITS ON THAT BASIS; UNLESS OF COURSE IT IS A CASE OF DISPUTE AMONGST THE PART NERS LEADING TO A RANGE OF RELATED ISSUES. THE QUESTION IS NOT ONE OF AGREEMENT ON THE REVISED SALARY BY THE PARTNERS BUT OF THE SATISFACTION OF THE TERMS OF THE SECTION ENTITLING ITS ALLOWANCE. WHEN WERE THE INCREASES AGREED UPON AS THE SAME WOULD BE ON AT LEAST TWO S EPARATE DATES GIVEN THAT THE SALARY STANDS ALLOWED TO THE WORKING PARTNERS FOR THE TWO YEARS AT DIFFERENT AGGREGATE AMOUNTS? WHAT IS THE SHARE OF EACH OF THE TWO PARTNERS IN TH E INCREASE FOR EACH OF THE DATES? HOW ARE THE INCREASES DOCUMENTED? ALL THESE BEING MATT ERS OF FACT ARE OF VITAL IMPORT GIVEN THE TERMS OF THE SECTION (S. 40(B)(V)) AS DISCUSSE D HEREINBEFORE ANSWERS TO WHICH WE FIND ARE CONSPICUOUS BY THEIR ABSENCE SO THAT THE ASSES SEES WHOLE CASE RESTS ON A BALD STATEMENT OF THE INCREASE(S) HAVING THE CONSENT OF ALL THE PARTNERS WHICH WE FIND AS EVEN OTHERWISE OF LITTLE MERIT INASMUCH NO CLAIM WOULD Q UALIFY TO BE CONSIDERED AS OF THE FIRM IF IT DOES NOT HAVE THE APPROVAL OF ITS PARTNERS. H ERE IT MAY BE PERTINENT TO MENTION THAT THE SALARY STANDS `ALLOWED TO THE WORKING PARTNERS AT VARIOUS TOTAL AMOUNTS FOR THE VARIOUS YEARS FOLLOWING 1/2/2000 THE DATE OF THE D EED OF PARTNERSHIP AND AGAIN NOT NECESSARILY IN EQUAL RATIO SO THAT THERE HAVE BEEN NOT ONE BUT SEVERAL CHANGES THERETO. THE INCREASE(S) HAVE TO BE AT THE DEFINED DATES IN DEFINITE SHARE AND PER A DEFINED ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 7 DOCUMENT - THE PARTNERSHIP DEED I.E. TO VALIDATE THE ASSESSEES CLAIM(S) AND ON THE REQUIREMENT OF EACH OF WHICH THERE IS NO AMBIGUITY IN LAW. 6.5 WE NEXT CONSIDER THE IMPORT OF THE DECISION BY TH E TRIBUNAL IN THE CASE OF PULIMOOTTIL SILK HOUSE (SUPRA) ON THE BASIS OF WHICH IT HAS BEEN ALLOWED ITS CLAIM BY THE FIRST APPELLATE AUTHORITY. IN THE FACTS AND CIRCUMS TANCES OF THE SAID CASE THE INCREASE STOOD EVIDENCED BY A RESOLUTION PASSED BY THE PARTNERS. T HE TRIBUNAL CONSIDERED THAT THE SAME COULD BE CONSTRUED AS AN AMENDMENT TO THE PARTNERSH IP DEED SO THAT THE CLAIM ON ITS BASIS STOOD ALLOWED TAKING CUE FROM THE CBDT CIRCULAR FO R A LIBERAL CONSTRUCTION OF THE LANGUAGE OF THE PROVISION. WE HAVE OBSERVED EARLIER THAT SALARY FROM THE FIRM FORMS PART OF THE SHARE OF THE CONCERNED PARTNER. THIS IS AS T HE PARTNERSHIP BY DEFINITION IS A CONTRACTUAL RELATIONSHIP BETWEEN THE PARTNERS SO T HAT IT IS NOT A DISTINCT LEGAL ENTITY I.E. FROM THE PARTNERS CONSTITUTING IT FOR THE TIME BEIN G AND IT IS FOR THIS REASON THAT THE SAME IS ASSESSABLE AS BUSINESS INCOME U/S. 28 OF THE ACT . ANY CHANGE IN THE SALARY WOULD THUS AMOUNT TO A CHANGE IN THE TERMS OF THE PARTNERSHIP CONTRACT REQUIRING IT TO BE AGREED TO BY ALL THE PARTNERS. THE ACT RECOGNIZES A FIRM ONLY ON THE STRENGTH OF WRITTEN INSTRUMENT OF PARTNERSHIP FURTHER REQUIRING THE SAME INCLUDING ALL CHANGES THEREIN TO BE FURNISHED IN A CERTIFIED - BY ALL THE MAJOR PARTNERS - COPY ALONG WITH THE RETURN OF INCOME FOR THE RELEVANT YEAR I.E. FOR IT TO HAVE EFFECT. AS SUCH APART FROM SUBSTANTIATING AND BEING THE ONLY VALID BASIS FOR DOCUMENTING THE CLAIM FOR SALA RY TO A PARTNER THE WRITTEN INSTRUMENT OF PARTNERSHIP IS THE ONLY ADMISSIBLE EVIDENCE UNDE R THE ACT FOR IT BEING ASSESSED AS SUCH THERE-UNDER AND FOR CONVEYING ANY CHANGES THEREIN FOR BEING RECOGNIZED THERE-UNDER ( SS. 184 TO 187 ). NO PRESCRIBED FORM OF WRITING IS SPECIFIED SO T HAT WHERE THE EXISTENCE OF THE SAME IS NOT IN DOUBT THE TRIBUNAL FOUND NO REASON WHY THE SAME COULD NOT BE BY WAY OF A RESOLUTION AGREED TO BY ALL THE PARTNERS. IN THE PRESENT CASE FIRSTLY THERE IS ADMITTEDLY NO SUCH RESOLUTION. FURTHER AS OBSERVED EARLIER E ACH OF THE THREE VITAL FACTUAL ASPECTS OF THE CLAIM REMAINS UNESTABLISHED EVEN AS THE LAW PR ESCRIBES A DEFINITE MODE FOR THE SAME SO THAT IT WOULD NORMALLY PREVAIL ( REFER PARA # 6.4 ). IN FACT THERE IS COMPLETE SILENCE ON THE ASSESSEES PART ON EACH OF THEM. THE SAID DECIS ION THUS IS RENDERED ON ITS FACTS ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 8 WHICH ARE CLEARLY DISTINGUISHABLE SO THAT IT CAN I N NO WAY BE PRESSED IN TO SERVICE IN SUPPORT OF THE CLAIM UNDER REFERENCE. SIMILARLY RE LIANCE ON THE CBDT CIRCULAR 739 DATED 25/3/1996 IS CLEARLY MISPLACED. THE SAME IS ONLY ON THE INTE RPRETATION OF THE LANGUAGE OF S. 40(B)(V) AND FOR ITS APPLICATION FOR THE INITIA L YEARS AND HAS NOTHING TO DO WITH HOW A FACT FOR THE PURPOSE OF A CLAIM THERE-UNDER IS TO E VIDENCED OR PROVED OR WHAT COULD UNDER THE CIRCUMSTANCES BE CONSTRUED AS A PARTNERSHIP DEE D WHICH WILL ALWAYS REMAIN A MATTER OF FACT TO BE DECIDED IN THE FACTS AND CIRCUMSTANC ES OF THE CASE. 6.6 FINALLY WE CONSIDER THE ASSESSEES ARGUME NT OF THE SALARY AT THE CLAIMED AMOUNTS HAVING BEEN ASSESSED IN THE PERSONAL ASSESSMENT OF THE RESPECTIVE PARTNERS. FIRSTLY THE SAME CAN HAVE ITS BASIS IN EQUITY AND NOT IN LAW A S A CLAIM AS OBSERVED EARLIER COULD ONLY BE ALLOWED ON ITS MERITS. SECONDLY THE LAW TA KES CARE OF SUCH VARIANCES PROVIDING THEREFOR PER S. 28(V) WHEREBY ONLY THE SALARY ET C. TO THE EXTENT ALLOWED IN THE ASSESSMENT OF THE FIRM COULD BE BROUGHT TO TAX IN T HE HANDS OF THE RESPECTIVE PARTNERS. THE PLEADING THUS HAS AS IN LAW NO BASIS IN FACT. 7. IN VIEW OF THE FOREGOING WE FIND THE ASSES SEES CLAIM TOTALLY UNTENABLE AND HAVE NO HESITATION IN SETTING ASIDE THE IMPUGNED ORDER O N THIS POINT AND RESTORING THAT OF THE AO. WE DECIDE ACCORDINGLY AND THE REVENUE SUCCEEDS ON ITS RELEVANT GROUNDS. 8. THE SECOND GROUND AGITATES AN ADDITION FOR BOTH THE YEARS IN RESPECT OF THE PURCHASES OF RICE BY THE ASSESSEE. THE SAME WERE F OUND TO HAVE BEEN MADE LOCALLY BY PAYMENT IN CASH WHICH WERE EXPLAINED BY THE ASSESS EE TO BE THROUGH BROKERS AND AGENTS WHO MOBILISED THE SAME FROM GROWERS AS WELL AS FROM THE RICE MILLS. NOT ENTIRELY SATISFIED WITH THE ASSESSEES EXPLANATION; ITS CLAI M HAVING BEEN FOUND AS NOT FULLY VERIFIABLE BY THE ASSESSING AUTHORITY HE EFFECTED ADDITIONS SO AS TO COMPENSATE THE REVENUE FOR THE ESCAPEMENT OF INCOME FOR EACH OF TH E RELEVANT YEARS I.E. AT RS. 1 LAKH FROM A.Y. 2000-01 & 2002-03; RS. 2 LAKHS EACH IN A. Y. 2003-04 & 2004-05 APART FROM THE IMPUGNED DISALLOWANCE AT RS. 4 LAKHS FOR EACH O F THE YEARS UNDER REFERENCE I.E. ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 9 AGGREGATING TO RS. 15 LAKHS FOR ALL THE YEARS. IN APPEAL THE LD. CIT(A) CONSIDERED THE AO AS HAVING APPLIED THE PROVISION OF SECTION 40A(3) O F THE ACT EVEN THOUGH HE CONSIDERED THE ALTERNATIVE SITUATION AS WELL. IF THE DISALLOW ANCE WAS U/S. 40A(3) THE AO COULD NOT HAVE EFFECTED THE SAME AS THE SAID PROVISION DID NO T AUTHORIZE AN ESTIMATED DISALLOWANCE BUT ONLY A SPECIFIED ONE. AGAIN IF IT WAS NOT SO I.E. THERE WAS NO RESORT TO SECTION 40A(3) IT COULD NOT BE SUSTAINED AS IT LACKED AUTH ENTICATION IN THE ABSENCE OF ANY SPECIFIC INSTANCES HAVING BEEN POINTED OUT BY THE AO. HE TH EREFORE DIRECTED ITS DELETION. AGGRIEVED THE REVENUE IS IN APPEAL. 9. WE HAVE HEARD THE PARTIES AND PERUSED THE MATER IAL ON RECORD. WE FIRSTLY OBSERVE EVEN AS CONTENDED BY THE LD. DR THAT THE AO HAS NO T APPLIED SECTION 40A(3) OF THE ACT; THERE BEING NO MENTION OR EVEN A WHISPER THEREOF IN THE ASSESSMENT ORDERS. AS SUCH THE LD. DRS ARGUMENT THAT THE PURCHASES BEING OF RICE AND NOT OF PADDY SO THAT THE PROVISION OF RULE 6DD(E) (OF THE INCOME-TAX RULES 1962 OR T HE `RULES) WOULD NOT BE APPLICABLE HAS NO RELEVANCE. LIKE-WISE THE ASSESSEES CONTENT ION OF IT BEING COVERED UNDER RULE 6DD(K) I.E. WHERE THE PAYMENTS STAND MADE THROUGH AN AGENT WOULD HAVE NO APPLICATION. IN FACT THERE IS NOTHING ON RECORD TO SHOW SO BUT NEITHER WAS THE ASSESSEE TO BE FAIR REQUIRED TO EXHIBIT THE SAME; THE AO HAVIN G NOT SHOW CAUSED IT WITH REFERENCE TO S. 40A(3). THE OBSERVATIONS BY THE LD. CIT(A) WHO THOUGH COMPETENT TO INVOKE THE SAID PROVISION DID NOT DO SO IN RELATION THERETO ARE OF NO MOMENT. AS REGARDS THE DISALLOWANCE EFFECTED THE AO HAS NOT MADE ANY SPECIFIC OBSERVAT ION WITH REGARD TO ANY DEFECT IN THE BOOKING OF ITS PURCHASES BY THE ASSESSEE OR OF IT BEING INFLATED. AS SUCH MAKING SUCH A DISALLOWANCE THOUGH OTHERWISE NOT OUTSIDE HIS COMP ETENCE I.E. PER SE IS NOT WARRANTED IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND WE ARE IN AGREEMENT WITH THE LD. CIT(A) ON THIS SCORE. THIS ISSUE THUS GETS DECIDED FAVO UR OF THE ASSESSEE. 10. IN THE RESULT THE REVENUES APPEALS ARE PAR TLY ALLOWED. ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 10 11. THE SEVEN APPEALS BY THE ASSESSEE CONTESTS THE TWO CONSOLIDATED ORDERS BY THE LD. CIT (CENTRAL) KOCHI DATED 11.9.2009 I.E. FOR AYS 2000-01 TO 2004-05 AND AY 2005-06 & 2006-07 U/S. 263 OF THE ACT. THE FIRST ISSUE RA ISED BY THE LD. CIT PER HIS REVISION ORDERS RELATES TO THE NON-CONSIDERATION BY THE AO WHILE MAKING THE IMPUGNED ASSESSMENTS FOR THE APPLICATION OF THE PROVISION O F SECTION 40A(3) IN RESPECT OF EXPENDITURE INCURRED AND CLAIMED BY THE ASSESSEE IN RESPECT OF CASH PURCHASES OF RICE AND CARRIAGE FREIGHT WHICH STANDS LISTED BY THE LD. CI T FOR EACH OF THE YEARS (VIDE PARA 1) OF HIS ORDER. HE GOES ON TO OBSERVE THAT THE PROVISIO N OF RULE 6DD(E) IS NOT APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE; THE PAYMEN TS BEING TOWARD PURCHASE OF RICE AND NOT OF PADDY WHICH ONLY IS AN AGRICULTURAL PRODUCE SO AS TO BE COVERED BY THE SAID PROVISION. FURTHER THE PURCHASE IS FROM RICE MILLS THROUGH THE AGENCY OF BROKERS. IT IS A STANDARD TRADE PRACTICE THAT THE PURCHASES ARE MADE THROUGH SUCH AGENTS WHO ACT FOR A COMMISSION OR A PRICE DIFFERENCE IN EITHER CASE A CTING AS A TRADER AND NOT AS A CULTIVATOR. SIMILARLY THE PAYMENTS MADE ARE IN CASH DETAILS O F WHICH ARE ON RECORD SO THAT THE SAME SHOULD HAVE BEEN EXAMINED FOR THE APPLICABILITY OF SECTION 40A(3). HAVING BEEN NOT DONE SO THE SAME STANDS PASSED WITHOUT DUE APPLICATION OF MIND MAKING THE ORDER PER SE ERRONEOUS AND PREJUDICIAL TO THE INTEREST OF THE RE VENUE PLACING RELIANCE ON THE DECISION IN THE CASE OF MALABAR INDUSTRIES CO. LTD. VS. CIT 243 ITR 83 (SC). 12. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. THERE IS FIRSTLY NO DOUBT QUA THE PROPOSITION BEING TRITE LAW THAT THE NON-APP LICATION OF MIND OR LACK OF PROPER INQUIRY IN THE MATTER BY THE ADJUDICATING A UTHORITY WOULD MAKE ITS ORDER VULNERABLE TO REVISION (REFER INTER ALIA MALABAR INDUSTRIES CO. LTD. (SUPRA); GEE VEE ENTERPRISES V. CIT (ADDL.) 99 ITR 375 (DEL.) RENDERED RELYING ON TWO DECISI ONS BY THE APEX COURT; RAJALAKSHMI MILLS LTD. V. CIT 121 ITD 343 (CHENNAI) (SB)). IN THE PRESENT CASE AS PER THE FACTS ON RECORD THE ASSESSEE A R ICE MERCHANT IS PURCHASING RICE FROM THE MARKET BY MAKING PAYMENTS IN CASH WHICH IN FACT WERE FOUND AS NOT FULLY VERIFIABLE BY THE AO SO THAT HE PROCEEDED TO EFFECT DISALLOWANCE S IN ITS RESPECT FOR THE DIFFERENT YEARS ON ESTIMATED BASIS. THE SAID DISALLOWANCES MAY OR M AY NOT BE JUSTIFIED IN THE FACTS AND ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 11 CIRCUMSTANCES OF THE CASE(S) AND WHICH WOULD DEPEN D UPON WHETHER THE AO HAS BEEN ABLE TO ESTABLISH THE NON-GENUINENESS OF THE EXPEND ITURE OR INFLATION THEREIN THE PURPORTED BASIS OF THE DISALLOWANCE(S) TO THAT OR WHATEVER EXTENT OR NOT. SO HOWEVER IT IS A FACT THAT HE DID NOT EXAMINE THE TRANSACTIONS FROM THE STAND POINT OF THE APPLICABILITY OF S. 40A(3) WHICH IS PRIMA FACIE ATTRACTED IN THE FACTS AND CIRCUMSTANCES OF THE CA SE AND WHICH HE AS THE ASSESSING AUTHORITY OUGHT TO HAVE CONSIDERED OR EXAMINED. AS ALSO NOTED EARLIER WHILE DEALING WITH THE REVENUES APPEALS VIDE PARA # 9 OF THIS ORDER THERE IS NO MENTION OR EVEN A WHISPER OF S. 40A(3) IN THE ASSES SMENT ORDERS AND WHICH HAD LED US TO CONCLUDE THAT THERE HAS BEEN UNDER THE CIRCUMSTANCE S NO INVOCATION OF S. 40A(3) BY THE AO. CLEARLY THEREFORE THE ASSESSMENTS AS FRAMED A RE TO THAT EXTENT PREJUDICIAL AND ERRONEOUS TO THE INTEREST OF THE REVENUE LIABLE FO R REVISION. THE LD. CIT(A) EXAMINED THE ISSUE BOTH FROM THE STAND POINT OF THE INVOCATION O F SECTION 40A(3) BY THE AO OR OTHERWISE FINDING IT UNSUSTAINABLE ON BOTH COUNTS. HIS POWERS BEING CO-TERMINUS WITH THAT OF THE AO IT WAS POSSIBLE FOR HIM TO EXAMINE THE ISSUE OF THE APPLICABILITY OF SECTION 40A(3) OF THE ACT BY SHOW CAUSING THE ASSESSEE IN I TS RESPECT. HE HOWEVER DID NOT DO SO ONLY STATING THAT NO CASE FOR ANY DISALLOWANCE UNDE R SECTION 40A(3) STANDS MADE OUT BY THE AO. AND WHICH IS ONLY TRUE; THE AO HAVING NOT INVOKED THE PROVISION OF S. 40A(3) AS ALSO FOUND OUT BY US WHILE ADJUDICATING THE REVE NUES APPEALS FOR TWO OF THE RELEVANT YEARS ( REFER PARA 9 OF THIS ORDER ). NEITHER WAS THE ASSESSEE INQUIRED OR SHOW CAUSED IN ITS RESPECT NOR DID IT CONSEQUENTLY FURNISH ANY REPLY THERETO IN THE ASSESSMENT PROCEEDINGS. IN FACT THAT BEING THE CASE THE LD. CIT(A)S OBSE RVATIONS I.E. VIDE APPELLATE ORDERS FOR THE SAID TWO YEARS ARE SUPERFLUOUS AND OF NO CONS EQUENCE MADE AS THESE ARE ONLY BY PRESUMING WITHOUT ANY BASIS THAT THE AO HAD IN F ACT INVOKED S. 40A(3) AND WHICH WE HAVE FOUND AS INCONSISTENT WITH THE RECORD AND INCO RRECT. FURTHER IT CANNOT ALSO ON THAT GROUND BE SAID THAT THE MATTER STANDS CONSIDERED B Y THE FIRST APPELLATE AUTHORITY; ITS ONLY FINDING BEING THAT THE AO HAD NOT MADE ANY CASE IN THE MATTER AND WHICH IS A MATTER OF FACT; HE HAVING NOT CONSIDERED THE SAID ISSUE OR RE NDERED ANY FINDINGS IN THE MATTER. THE SAID OBSERVATIONS BY THE LD. CIT(A) WOULD THUS HA VE NO BEARING ON OUR DECISION IN THE PRESENT CASE AS RENDERED EARLIER. SIMILARLY THE C ASH PAYMENTS FOR CARRIAGE INWARDS HAVE ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 12 ALSO NOT BEEN EXAMINED BY THE AO FROM THE STAND-POI NT OF THE APPLICABILITY OF SECTION 40A(3) OF THE ACT. WE ACCORDINGLY HOLD NO INFIRMITY AS ATTENDING THE IMPUGNED ORDER AND UPHOLD THE SAME ON THIS GROUND. 13. THE SECOND GROUND ON WHICH THE REVISION STANDS MADE BY THE LD. CIT IS RESTRICTED ONLY TO ASSESSMENT YEARS 2005-06 AND 2006-07. THE S AME RELATES TO THE EXAMINATION OF THE APPLICABILITY OR OTHERWISE OF THE PROVISION OF SECTION 40(A)(IA) OF THE ACT IN RESPECT OF FREIGHT CHARGES; THERE BEING NOT DEDUCTION OF TAX A T SOURCE IN ITS RESPECT. TOWARD THIS THE LD. CIT OBSERVES THAT A CONTRACT IS IMPLICIT IN THE SE TRANSACTIONS INASMUCH AS THE ASSESSEE HAD AGREED TO PAY THE FREIGHT CHARGES AT THE TIME O F AND TOWARD THE DELIVERY OF GOODS AND THE CONTRACT NEED NOT BE IN WRITING SO THAT THE TR ANSACTIONS COULD WELL BE COVERED BY THE PROVISIONS OF SECTION 194C OF THE ACT. ITS NON-CONS IDERATION AS APPARENT FROM THE ASSESSMENT ORDERS IMPLIES IT HAVING BEEN PASSED WI THOUT APPLICATION OF MIND IN THE MATTER SO AS TO BE PER SE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE ENTITLING REVISION UNDER SECTION 263. 14. BEFORE US THE LD. AR PLACED RELIANCE ON THE D ECISION BY THE TRIBUNAL IN THE CASE OF R.R. CARRYING CORPORATION VS. ACIT 126 TTJ (CTK) 240 WHERE A SIMILAR DISALLOWANCE STOOD STRUCK DOWN BY THE TRIBUNAL ON THE FINDING OF NO CONTRACTUAL RELATIONSHIP HAVING BEEN BROUGHT FORTH BY THE REVENUE SO AS TO IMPINGE THE ASSESSEE WITH THE LIABILITY TOWARD TDS UNDER SECTION 194C OF THE ACT AND CONSEQUENTLY JUSTIFY THE APPLICATION OF SECTION 40(A)(IA). THE LD. DR ON THE OTHER HAND RELIED O N THE IMPUGNED ORDER. 15. WE HAVE HEARD THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. AS WOULD BE APPARENT FROM THE ORDER RELIED UPON BY THE LD. AR THE MATTER IS FACTUAL WHICH HAS NOT BEEN EXAMINED BY THE AO FOR THE APPLICATION OR OTHE RWISE OF THE SAID PROVISION. THE LD. CIT HAS NOT MADE ANY SPECIFIC OBSERVATION IN THIS R EGARD FOR US TO CONSIDER THE MODIFICATION OF HIS ORDER IN ANY MANNER; ONLY DIREC TING THE AO TO RE-DO THE SAME AS PER LAW AFTER EXAMINING THE APPLICABILITY OR OTHERWISE OF THE RELEVANT PROVISION I.E. 40A(IA) ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 13 EVEN AS DIRECTED BY HIM IN RESPECT OF S. 40A(3). AS SUCH WE ARE NOT PERSUADED TO CONSIDER HIS ORDER AS NOT BEING MAINTAINABLE IN LAW ; THE FACT OF NON-CONSIDERATION BY THE AO OF THE MATTER SO THAT HIS ORDERS STOOD PASSED W ITHOUT DUE APPLICATION OF MIND OR LACK OF PROPER INQUIRY IN THE MATTER BEING PATENT AND UNCONTROVERTED. WE DECIDE ACCORDINGLY. 16. IN THE RESULT THE ASSESSEES APPEALS ARE DISMI SSED. SD/- SD/- (N.VIJAYAKUMARAN) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: ERNAKULAM DATED: 28TH APRIL 2010 GJ COPY TO: 1. M/S. RAJA & CO. VADAKKANTHARA ROAD PALAKKAD. 2. THE DY. COMMISSIONER OF INCOME-TAX CENTRAL CIRC LE THRISSUR. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I KOCH I. 4. THE COMMISSIONER OF INCOME-TAX CENTRAL KOCHI. 5. D.R./I.T.A.T. COCHIN BENCH COCHIN. 6. GUARD FILE. BY ORDER (ASSISTA NT REGISTRAR) ITA. NOS.8 03 & 804/COCH./2008 & ITA NOS. 549 TO 555/COCH/2009 14