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 26th March, 2009. JUDGMENT 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 (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 and counsel appearing for the respondent assessee. 2. The assessee is a partnership firm consisting of nine partners of which five are ladies. In the course of assessment the Assessing Officer noticed that the assessee has paid salary to other partners treating each and every partner as working partner. On enquiry the asssessing officer 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 assessing officer found that at least these four partners are not I.T.Appeal 33/2007 2 working partners and therefore, he proposed to disallow the salary paid by the assessee to these partners under Section 40(b) of the I.T Act. The assesee could not establish the nature of work done by these partners. However, in appeal minutes book and partnership deed were produced before the CIT (Appeal) who held that the partners are working partners as defined under explanation 4 to Section 40(b) of the Act. This order is confirmed by the Tribunal. Similarly the assessing officer 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 Section 40A(b) of the I.T. Act the assessing officer conducted enquiry and found that bills were exorbitant and therefore he made disallowance up to 25% under Section 40A(2)(a) of the Act. The appeal filed against this was also allowed by the CIT (Appeal) which got confirmed in S.A. It is against this order of the Tribunal the department has filed this appeal. I.T.Appeal 33/2007 3 3, So far as the first question is concerned we find from the order of the CIT (Appeal) 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 (Appeal) to allow the claim and the Tribunal to confirm it. However, since assessment pertain 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 I.T.Appeal 33/2007 4 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 payments 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 assessing officer 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 I.T.Appeal 33/2007 5 reverse the finding of the assessing officer because he himself allowed 75% of the expenditure and only 25% 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 Assessing Officer 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 assessing officer 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% 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 I.T.Appeal 33/2007 6 payments made are apparently huge amounts aborting 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% made by the assessing officer under Section 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. C.N. RAMACHANDRAN NAIR Judge K. SURENDRA MOHAN Judge jj K.K.DENESAN & V. RAMKUMAR, JJ. ---------------------------------------------------- M.F.A.NO: ----------------------------------------------------- JUDGMENT Dated: