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Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Darshan Singh
Judges
  • JOGINDER PALLBhavnesh Saini
Acts
  • provisions of section 40A(2)(b) of the Income-tax Act
  • provisions of section 40(b) of the I.T. Act
  • SECTION 68 INCOME TAX ACT
  • section 40(b) of the I.T. Act
  • section 40(b)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Attorney(S)
  • Darshan Singh
Judges
  • JOGINDER PALLBhavnesh Saini
Acts
  • provisions of section 40A(2)(b) of the Income-tax Act
  • provisions of section 40(b) of the I.T. Act
  • SECTION 68 INCOME TAX ACT
  • section 40(b) of the I.T. Act
  • section 40(b)
See more information ...
Smart Summary

Structured Summary of the Tribunal Opinion (Per Bhavnesh Saini, J.M.)

Factual and Procedural Background

This is an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals), Jalandhar dated 14-11-2000 relating to assessment year 1997-98. The Tribunal heard learned representatives of both parties and considered submissions and the paper book filed by the assessee's counsel. The appeal raised three effective grounds contesting additions made by the Assessing Officer: (1) disallowance of Rs. 1,45,007 claimed by the Assessing Officer as commission/disallowance for payment to a partner-company; (2) disallowance of Rs. 1,07,000 as unexplained cash credits under section 68 of the Income-tax Act; and (3) disallowance of Rs. 98,395 as travelling expenses relating to foreign travel of a partner.

Legal Issues Presented

  1. Whether the amount of Rs. 1,45,007 described by the Assessing Officer as "commission paid to the partner" was properly disallowable under the provisions of the Income-tax Act (specifically in the context of section 40(b) and references to section 40A(2)(b)), or whether it was a genuine discount on sale and not remuneration to partners.
  2. Whether credits of Rs. 39,000 and Rs. 68,000 (total Rs. 1,07,000) in the books of the firm in the name of a partner were unexplained cash credits properly chargeable to tax under section 68, or whether they were capital introduced by the partner and thus explained.
  3. Whether Rs. 98,395 claimed as travelling allowance for foreign travel of a partner could be disallowed on the ground that the tour was not for business purposes, or whether the documentary evidence sufficed to show a business nexus for the travel expenses.

Arguments of the Parties

Revenue's (Respondent) Arguments

  • For Ground 1: The Assessing Officer contended that the amount described as commission to M/s. Dhiman System (India) Ltd. was not authorized by the partnership deed; therefore payment was not allowable. The learned D.R. maintained that commission payable to partners must be authorized by the partnership deed (relying on the meaning given in section 40(b)).
  • For Ground 2: The Assessing Officer treated the cash credits as unexplained and charged them to tax under section 68 because he did not accept the explanation that the amounts represented capital introduced by the partner.
  • For Ground 3: The Assessing Officer concluded that the foreign tour of the partner was not undertaken for business purposes and therefore disallowed the related expenditure; the learned D.R. reiterated that the assessee failed to provide adequate details to prove business purpose.

Assessee's Arguments

  • For Ground 1: The assessee argued the amount was a discount (10% on sales of Rs. 14,50,070 amounting to Rs. 1,45,007) given on sales to M/s. Dhiman System (India) Ltd., a purchaser/partner, and not remuneration under section 40(b). The assessee pointed out that section 40(b) limits remuneration to partners but does not include discounts on sales as remuneration requiring partnership-deed authorization.
  • For Ground 2: The assessee explained that the credits represented capital introduced by the partner and filed a confirmatory letter; the partner was assessed individually, provided PAN and other details, and documentary proof was placed on record.
  • For Ground 3: The assessee relied on documentary correspondence and authorities (including the decision in Woodcraft Products Ltd.) to show the partner's foreign visit had a business nexus; it argued that it was not necessary to show actual business concluded during the tour.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Woodcraft Products Ltd. [1996] 217 ITR 862 (Calcutta High Court) Principle that it is not necessary for the assessee to establish that actual business was secured during a foreign tour in order to claim travelling expenses if the tour had a business nexus. The Tribunal applied this view to hold that mere absence of concluded business during the partner's foreign tour did not justify disallowance where documentary evidence showed the trip was in connection with the firm's business.
Commissioner of Income-Tax v. Metachem Industries [2000] 245 ITR 160 (Madhya Pradesh High Court) Authority cited in connection with the treatment of cash credits introduced by partners and related consistent view (as referenced by the Tribunal). The Tribunal relied on this decision (along with the consistent view of the ITAT, Amritsar Bench) to support the deletion of the addition under section 68 where a partner introduced capital with documentary confirmation and personal tax details available.
ITAT, Amritsar Bench (consistent view) The approach that cash credits in the name of partners are to be examined/considered in the hands of the partners rather than automatically added to the firm under section 68. The Tribunal noted the consistent approach of the ITAT, Amritsar Bench and found it appropriate to treat the credits as capital introduced by the partner and not to sustain the addition against the firm.

Court's Reasoning and Analysis

The Tribunal considered each ground on the record, the findings of the Assessing Officer and the Commissioner (Appeals), the documentary material in the paper book, and the submissions of both sides. The Tribunal's step-by-step reasoning is as follows:

  1. Ground 1 (Rs. 1,45,007 — alleged commission):
    • The Tribunal accepted the assessee's submission that the amount in question was a discount given on sales to M/s. Dhiman System (India) Ltd. (a partner-related purchaser) and not remuneration to partners. The paper book contained sales details showing sales to that company and a ten percent discount yielding Rs. 1,45,007.
    • The Tribunal noted that discounts are commercial/business concessions given for business exigencies and are conceptually different from remuneration (salary/commission) payable to working partners under section 40(b), which requires partnership-deed authorization for remunerative payments.
    • Because the amount was a discount on sale rather than remuneration, the provisions invoked by the Assessing Officer (and the Revenue's reliance on partnership-deed authorization) were not applicable. The Tribunal therefore confirmed the CIT(A)'s deletion of the addition.
  2. Ground 2 (Rs. 1,07,000 — unexplained credits under section 68):
    • The Tribunal recorded that the Assessing Officer observed credits of Rs. 39,000 and Rs. 68,000 in the name of a partner, which the assessee explained as capital introduced by that partner. The partner furnished a confirmatory letter and was individually assessed to tax, provided PAN and other details. Copies of the documentation were in the paper book.
    • The Tribunal acknowledged the consistent view of the ITAT, Amritsar Bench (and noted confirmation by the Madhya Pradesh High Court in Commissioner of Income-Tax v. Metachem Industries) that such cash credits ought to be considered in the hands of the partner rather than treated as unexplained credits of the firm under section 68.
    • Given the documentary confirmations, the partner's individual assessment and PAN details, the Tribunal found the explanation satisfactory and upheld the deletion by the CIT(A).
  3. Ground 3 (Rs. 98,395 — travelling expenses relating to foreign travel):
    • The Assessing Officer had disallowed the travel expenditure on the ground that the partner's tour to U.K. and Germany did not appear to be for business purposes.
    • The assessee produced correspondence and other documents (filed from page 26 onwards in the paper book) indicating the partner's visits abroad were connected with the firm's business. The assessee also relied on the Calcutta High Court decision in Woodcraft Products Ltd.
    • The Tribunal followed the Woodcraft principle that it is not necessary to show that business was actually closed or revenue received during the tour; the existence of a business nexus and supporting correspondence sufficed. On the basis of the documents supplied, the Tribunal concluded there was sufficient nexus to allow the expenditure and thereby confirmed the CIT(A)'s deletion of the addition.

Holding and Implications

Holding (core ruling): The appeal of the Revenue is dismissed.

Immediate consequences for the parties:

  • The Tribunal confirmed the Commissioner (Appeals) order deleting the three additions made by the Assessing Officer — (a) Rs. 1,45,007 treated as a discount (not remuneration) and deleted; (b) Rs. 1,07,000 treated as capital introduced by the partner and deleted; and (c) Rs. 98,395 travelling expenses allowed as connected with business and deleted.
  • The Revenue's appeal was dismissed in respect of all three grounds; the disallowances made by the Assessing Officer are not sustained by the Tribunal.

Broader implications:

  • The Tribunal applied existing authority (including Woodcraft Products Ltd. and the decision cited from the Madhya Pradesh High Court) and consistent ITAT practice (Amritsar Bench) to resolve the issues. The opinion does not assert or create a new legal principle beyond application of those authorities to the facts before the Tribunal.
  • Accordingly, the decision has the direct effect of upholding the CIT(A)'s relief to the assessee on the facts and authorities relied upon; the text does not indicate that the Tribunal intended to lay down a novel precedent beyond application of cited authorities and the factual conclusions recorded.

No other points were argued or pressed. The Tribunal disposed of the appeal in the result by dismissing the Revenue's appeal.

Show full summary ...

    Income-tax Officer v. Dhiman Systems

    Per Bhavnesh Saini, J.M. - This appeal of the Revenue is directed against the order of the CIT(A), Jalandhar dated 14-11 -2000 for the assessment year 1997-98.

    We have heard the learned representatives of both the parties and gone through the observations of the authorities below and detailed submissions in the paper book filed by the counsel for the assessee.

    This appeal is filed on three effective grounds, which we will take up as under:-

    "1. That, on the facts and in the circumstances of the case, the learned. CIT(A) has erred in deleting the addition of Rs. 1,45,007 made by the Assessing Officer on account of commission paid to the partner."

    3A. The assessee firm is partnership firm constituted by two partners, namely, Shri Prabh Dayal Dhiman & M/s. Dhiman System (India) Ltd. represented by Miss Nishi Walia, Director. The Assessing Officer noticed that commission of Rs. 1,45,007 had been paid to M/s. Dhiman System (India) Ltd. as per page 3 para 6 of the Audit Report. The Assessing Officer pointed out that there was no provisions in the partnership deed regarding this commission payment to the partners. Therefore, this amount was not allowable as deduction to the assessee. The Assessing Officer did not accept the explanation of the assessee that a reference was made in the audit report in view of the provisions of section 40A(2)(b) of the Income-tax Act and that the correct description of this amount should have been discount and commission. The Assessing Officer has pointed out that the discount was allowed on amounts including Excise Duty and that in some cases the rate at which machinery was sold to the associate company was less than the rate charged from other customers. However, no adverse inference was drawn from these observations by the Assessing Officer and the same was, therefore, disallowed. The addition was challenged before the CIT(A) and it was pointed out that section 40(b) of the I.T. Act provides only a limit on the payment of remuneration to the partners and that partners remuneration could be in the name of salary, bonus, commission or any other name and that this remuneration could be paid only to working partners as per the provision of the partnership deed. It was pointed out that the commission mentioned in section 40(b) was meant to be in the name of salary. It was also pointed out that for other types of payments to partners like rent, payment for purchases etc. no provisions is required to be made in the partnership deed. It was submitted that the assessee has sold machinery to M/s. Dhiman System (India) Ltd. for Rs. 14,50,070 on which discount of Rs. 1,45,007 was allowed at the rate of ten per cent and as such cannot be treated as remuneration within the meaning of section 40(b) of the I.T. Act. The CIT(A) considering the submissions of the assessee and the facts available on record was of the view that the facts clearly proved that it was a discount given to the partners on sale and as such the provisions as were made applicable by the Assessing Officer for making the disallowance are not applicable. The CIT(A) has accordingly deleted the addition.

    The learned D.R. submitted that commission as is mentioned in section 40(b) to the partners is to be authorized by the partnership deed and since in this case there was no provision in the partnership deed, therefore, the Assessing Officer was justified in making the disallowance of the amount, in question. On the other hand, the learned counsel for the assessee reiterated the submissions as made before the authorities below and submitted that since discount is not covered by the definition of salary or commission to the partners, therefore, section 40(b) is not applicable to this case.

    On a consideration of the rival submissions, we find that the learned counsel for the assessee was justified in contending that the discount is not part of remuneration. The assessee in the paper book has filed details of the sales made to M/s. Dhiman System (India) Ltd. at page 12. It clearly shows that the assessee made sales to the aforesaid company though it was a partner in the assessee firm upon which the discount was given on the sale. The discounts are given for business exigencies and as such even if the purchaser was one of the partners in the firm, but certainly the provisions of section 40(b) of the I.T. Act are not applicable as it was never salary nor related commission for which the provisions in the partnership deed is to be made. We accordingly do not find any justification to interfere in the order of the CIT(A) we confirm the same and dismiss this ground of appeal of the Revenue.

    6.Ground No. 2 reads as under:-

    "2. That, on the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 1,07,000 made by the Assessing Officer on account of unexplained credits."

    The Assessing Officer made the addition of Rs. 1,07,000 as unexplained credits. The Assessing Officer noticed that there were credits of Rs. 39,000 on 16-4-1996 and credit of Rs. 68,000 on 31-3-1997 in the books of the assessee in the name of Shri P.D. Dhiman, one of the partners. It was explained that the partners had introduced aforesaid capital on withdrawals made on different dates. The partners also made confirmatory letter which was filed before the Assessing Officer. The partner is stated to be one of the assessee with the same Assessing Officer but the Assessing Officer was not inclined to accept the plea of the assessee and made the addition of the cash credits being the amount deposited by one of the partners in his capital account. The Assessing Officer accordingly made the addition under section 68 of the Income-tax Act. The CIT(A) deleted the addition considering the consistent view of the ITAT, Amritsar Bench in which it was held that cash credit in the name of partners be considered in the case of the partners and as such deleted the addition.

    The learned D.R. conceded the point before us that since the partner introduced the capital and the ITAT, Amritsar Bench is taking consistent view that such addition could not be made in the case of the firm and should be considered in the name of the individual partner, therefore, the learned D.R. did not press this ground of appeal. However, apart from this submissions made by the learned D.R., we find that the partner had introduced capital and gave confirmatory letter confirming the introduction of the above capital in the assessee firm and the partner is individually also assessed to tax and has given PAN No. and other details from which the amount was introduced as capital in the assessee firm. Copy of the same is filed at page 16 of the paper book. These facts clearly establish that the assessee has been able to explain the deposit of capital in the assessee firm by one of the partner. Since the ITAT Bench, Amritsar has been taking consistent view that addition be considered in the name of partner. Such view is also confirmed by the Hon'ble Madhya Pradesh High Court in the matter of Commissioner Of Income-Tax v. Metachem Industries [2000] 245 ITR 160. Therefore, we do not find any justification to interfere in the order of the CIT(A). We accordingly dismiss this ground of appeal of the Revenue.

    9. Ground No. 3 reads as under:-

    "3. That, on the facts and in the circumstances of the case the learned CIT(A) has erred in deleting the addition of Rs. 98, 395 made by the Assessing Officer on account of traveling expenses."

    10. The Assessing Officer noticed that the assessee has claimed travelling allowance of Rs. 1,12,641 as against travelling expenses of Rs. 19,430 in the last year. The Assessing Officer also noticed that the travelling expenses included Rs. 98,395 which pertained to foreign travel of Shri P.D. Dhiman partner to U.K. and Germany. The Assessing Officer after discussion came to the conclusion that the tour could not be considered as having been undertaken for the purposes of business and, therefore, the expenditure could not be allowed to the assessee. The Assessing Officer accordingly disallowed Rs. 98,395. It was submitted before the CIT(A) that it was not necessary that foreign traveling expenses should be allowed only if export sales was made during the year under assessment. The assessee relied upon the decision of Hon'ble High Court in the case of Woodcraft Products Ltd. [1996] 217 ITR 862. The assessee also placed reliance on various documents to show that the partners made visit abroad for the purposes of business. It was also pointed out that letters were received from various companies which showed that it was business tour of the partners for the business purposes. All the details of the expenditure were filed before the authorities below. The CIT(A) considering the material and evidence available on record and that the material available on record show that the visit of the partner was for the purposes of the business of the assessee, accordingly set aside the order of the Assessing Officer and allowed the appeal of the assessee. The learned D.R. reiterated the findings of the Assessing Officer and submitted that the assessee has failed to furnish any details regarding business purpose for which the partner was sent on tour.

    On the other hand, the learned counsel for the assessee submitted that the correspondence with the various parties are filed in the paper book which shows that the partners of the assessee firm went abroad in connection with the business of the assessee and as such his tour to abroad has nexus with business purposes of the assessee firm for which the all details were filed. Therefore, the CIT(A) was justified in deleting the addition.

    12. On a consideration of the above fact and the decision of the Hon'ble Calcutta High Court in the matter of Woodcraft Products Ltd. (supra), we are of the view that it was not necessary for the assessee to establish that the assessee has actually got business while one of the partners was on tour. Hon'ble Calcutta High Court has taken this view in the matter of Woodcraft Products Ltd. (supra). The assessee from pages 26 onwards in the paper book filed copies of the letters, which clearly shows that the partner of the assessee firm was on tour abroad in connection with the business of the assessee. Merely because some business could not be transacted at that time is not sufficient to disallow the travelling expenses. In view of the above, we do not find any justification to interfere in the order of the CIT(A). We accordingly dismiss this ground of appeal of the Revenue.

    13. No other point is argued or pressed.

    14. In the result, the appeal of the Revenue is dismissed.

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    Comments

    Income-tax Officer v. Dhiman Systems
    (Dec 29, 2004)