Ita/33/2007 Of The Commissioner Of Income Tax v. M/S. Sulaikha Clay Mines

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN THURSDAY, THE 26TH MARCH 2009 / 5TH CHAITHRA 1931 ITA.No. 33 of 2007() -------------------------- ITA.860/COCH/2005 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT APPELLANT ------------------------------------- THE COMMISSIONER OF INCOME-TAX THIRUVANANTHAPURAM. BY ADV. MR.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT RESPONDENT ------------------------------------------ M/S.SULAIKHA CLAY MINES, THONNAKKAL, THIRUVANANTHAPURAM. BY MR.P.BALAKRISHNAN, SENIOR ADVOCATE ADV. SMT.S.JASMINE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 26/03/2009,THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: Rs/ C.N.RAMACHANDRAN NAIR & K.SURENDRA MOHAN, JJ. ------------------------------------------------------------------------------------ I.T.Appeal NO: 33 OF 2007 ----------------------------------------------------------------------------------- Dated this the 26[th] March, 2009. JUDGMENT RAMACHANDRAN NAIR, J. Two questions are raised by the revenue in the appeal filed bythem against the order of the Tribunal confirming the order of theCIT (Appeal) whereunder disallowances made under Section 40(b)and 40 A(2) of the I.T Act by the assessing officer are cancelled.We have heard standing counsel appearing for the appellant andcounsel appearing for the respondent assessee. 2. The assessee is a partnership firm consisting of ninepartners of which five are ladies. In the course of assessment theAssessing Officer noticed that the assessee has paid salary to otherpartners treating each and every partner as working partner. Onenquiry the asssessing officer found that four partners are residingin far away places from place of business of the firm. The firm wasengaged in mining of clay at a place near Trivandrum. However,these four partners are regularly residing in Alleppey where the firmdoes not have any branch of its or business operations. Theassessing officer found that at least these four partners are not I.T.Appeal 33/2007 working partners and therefore, he proposed to disallow the salarypaid by the assessee to these partners under Section 40(b) of theI.T Act. The assesee could not establish the nature of work done bythese partners. However, in appeal minutes book and partnershipdeed were produced before the CIT (Appeal) who held that thepartners are working partners as defined under explanation 4 toSection 40(b) of the Act. This order is confirmed by the Tribunal.Similarly the assessing officer noticed that out of total receipt ofRs.95,84,767/- the assessee has accounted expenditure ofRs.63,23,282/-. In fact out of the total expenditure around Rs.54lakhs was paid to partners or their relatives under various headsviz., compensation, development expenses, pit filling expenses andtransportation charges. Since persons were related persons asdefined under Section 40A(b) of the I.T. Act the assessing officerconducted enquiry and found that bills were exorbitant andtherefore he made disallowance up to 25% under Section 40A(2)(a)of the Act. The appeal filed against this was also allowed by theCIT (Appeal) which got confirmed in S.A. It is against this order ofthe Tribunal the department has filed this appeal. I.T.Appeal 33/2007 I.T.Appeal 33/2007 3, So far as the first question is concerned we find from theorder of the CIT (Appeal) that the only ground based on which heallowed the claim is that in the minutes recorded work have beenassigned to partners. Similarly the partnership deed provides thatevery partner will take part in business. We do not think these arethe tests to find out whether a person is engaged as a workingpartner in the business of the firm. A partner can take part inbusiness only at the place of business or where partnership hasbusiness transactions. The assessee has no case that it has anybusiness operations or dealings in the place where all these fourlady partners are residing at Alleppey which is 150 kms away fromthe place of business. No evidence whatsoever is produced toestablish the nature of operation or control or administrative orother work done by these ladies for the firm. We do not find anyjustification of the CIT (Appeal) to allow the claim and the Tribunalto confirm it. However, since assessment pertain to the year 2002-03 and since the partners' assessments have also become final wedo not think we should interfere with the orders of theseauthorities on this issue. However, we declare that these orders will I.T.Appeal 33/2007 not bind the department for any case pending before any authorityeither in appeal or otherwise. Even though we disapprove thefindings of the authorities below we do not wish to interfere withthe order in appeal only for the sake of finality of the assessmentsthat 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 payments of around Rs.54 lakhs out ofRs.63,23,282/- spent by the firm as having been paid to variouspartners or to their relatives. Since payments are made by thefirm to related persons the officer was perfectly justified inscrutinising the eligibility of the claim. It is the finding of theassessing officer that the payments are exorbitant. The details ofpayments made to partners or relatives are discussed in theassessment order. Neither the first appellate authority nor theTribunal examined the reasonableness of the expenditure incomparison to the expenditure incurred in similar cases. The firstappellate authority as well as the Tribunal allowed the claim byholding that the expenditure are required in the nature of thebusiness. We are of the view that this finding is not sufficient to I.T.Appeal 33/2007 reverse the finding of the assessing officer because he himselfallowed 75% of the expenditure and only 25% was found to beinflated for the purpose of helping the related persons. We do notfind any material or justification for the first appellate authority orthe Tribunal to allow the claim. At the maximum they could haveremanded the case to the Assessing Officer to examine each andevery bill and voucher pertaining to the payments made to partnersand relatives to compare with market rates and to disallow excessover actual payments. We do not think at this distance of time weshould remand the case for more than one reason. In the firstplace, if we remand, the assessing officer will have to examine eachand every bill and voucher and the excess over market rates forlorry charges, for tipper, for earth moving equipments etc shouldbe disallowed which may exceed more than 25% estimated by theofficer. Further, there is likelihood of excess payment for thesimple reason that the assessee firm though regularly engaged inmining has not chosen to acquire any mining equipments like earthmoving equipments, tippers, trucks, etc which are acquired bypartners and relatives and taken on hire by the firm and the I.T.Appeal 33/2007 I.T.Appeal 33/2007 payments made are apparently huge amounts aborting most of thereceipts in business. In the circumstances and for the sake offinality we decline to remand the case but confirm the disallowanceof 25% made by the assessing officer under Section 40A(2) (a) of theAct. Appeal is consequently allowed on this issue by reversing theorder of the Tribunal and that of the first appellate authority and byrestoring disallowance in assessment. C.N. RAMACHANDRAN NAIRJudge K. SURENDRA MOHANJudge jj K.K.DENESAN & V. RAMKUMAR, JJ. ---------------------------------------------------- M.F.A.NO: ----------------------------------------------------- JUDGMENT Dated: