2016 (6) TMI 794 - AT - Income Tax

Tribunal upholds CIT(A) deletions for entry tax, partner remuneration, truck depreciation. Revenue appeal dismissed. (A)

Assistant Commissioner of Income-Tax Versus Modern Motors

The Tribunal upheld the CIT(A)'s deletions of disallowances for provision of entry tax liability, remuneration to partners, and depreciation on a truck ... Disallowances of the provision of entry tax liability under section 43B - Held that:- Following the double entry system of accounting, the appellant has created a liability by way of a provision towards the entry tax and a corresponding asset in its balance-sheet and there is no charge/transfer of provision to the profit/loss account. The appellant has been consistently passing these entries for the earlier years as well, i.e, the assessment years 2008-09, 2009- 10. Given that there is no claim of provision of entry tax in the profit/loss account and, hence, in the absence of a claim of an expense, the question of section 43B getting attracted does not arise at the first place. Section 43B postulates a situation where the expense otherwise allowable under the Act is subject to disallowance on non-fulfilment of the conditions stipulated therein. Unlike claim of depreciation where the statute stipulates a mandatory allowance of depreciation even if not claimed, there is no such statutory provisions in respect of the claim of statutory liability which even though not claimed but would still be deemed to be allowed for tax purposes. CIT(A) correctly deleted the addition - Decided in favour of assessee Disallowance of remuneration to the partners - Held that:- The remuneration has to be worked out based on certain percentage of the book profit which will be determined at the end of the year. It is also provided that the total amount of the remuneration so worked out is to be shared equally amongst all the three partners and in case of loss, no salary would be allowable to the partners. The CBDT circular similarly provides that where either the quantum or the manner of quantification of remuneration to the partners has been specified in the partnership, the same shall be allowable under section 40(b)(v) of the Act and not otherwise. In the instant case, given that the salary has been made a function of annual book profit which can be determined only at the end of the year, the exact quantum of remuneration has not been specified. At the same time, the partnership deed clearly provides for the manner of quantification of remuneration. It is not a case simpliciter that the partners have left the doors open to claim the remuneration as per section 40(b)(v) of the Act which apparently is the backdrop for issuance of CBDT Circular No. 739, dated March 25, 1996. Given the clear fact and CDBT guidance which rather supports the case of the appellant than the Revenue, the learned Commissioner of Income-tax (Appeals) has rightly deleted the disallowance where is hereby confirmed - Decided in favour of assessee Disallowance of depreciation - absence of valid documentary evidence in support of purchase of truck during the year - Held that:- Commissioner of Income-tax (Appeals) has given a categorical finding that the truck was registered in the name of assessee which is not disputed before us and the wrong mentioning of seller's name appears to be clerical error. He, accordingly, allowed depreciation of ₹ 31,800 which is hereby confirmed - Decided in favour of assessee Issues Involved:1. Deletion of disallowance of provision for entry tax liability under section 43B.2. Deletion of disallowance of remuneration to partners.3. Deletion of disallowance of depreciation on the purchase of a truck.Detailed Analysis:Issue 1: Deletion of Disallowance of Provision for Entry Tax Liability under Section 43BThe Revenue contested the deletion of a disallowance amounting to Rs. 40,03,853 for the provision of entry tax liability under section 43B. The assessee had created a provision for entry tax and simultaneously recorded an 'advance against entry tax' on the asset side, without charging it to the profit and loss account. The Assessing Officer (AO) disallowed this provision, arguing that the assessee was following a mercantile system of accounting and thus the liability should be disallowed under section 43B.The Commissioner of Income-tax (Appeals) (CIT(A)) deleted the addition, noting that since the provision was not claimed as an expenditure in the profit and loss account, it could not be disallowed. The Tribunal upheld this view, confirming that section 43B could only be invoked when an expense is claimed. The Tribunal also noted that the assessee did not collect entry tax from customers nor claimed it as an expenditure, hence section 43B was not applicable. The Tribunal dismissed the Revenue's appeal on this ground.Issue 2: Deletion of Disallowance of Remuneration to PartnersThe Revenue challenged the deletion of a disallowance amounting to Rs. 43,33,245 for remuneration to partners. The AO disallowed the remuneration, citing that the partnership deed did not specify the amount or the manner of quantifying the remuneration, as required by CBDT Circular No. 739.The CIT(A) examined the partnership deed and found that it did indeed specify the manner of quantifying the remuneration based on a percentage of book profit, which was to be shared equally among the partners. The Tribunal agreed with this finding, noting that the partnership deed provided a clear method for calculating remuneration and that the remuneration was within the permissible limits under section 40(b). The Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this ground.Issue 3: Deletion of Disallowance of Depreciation on Purchase of TruckThe Revenue contested the deletion of a disallowance amounting to Rs. 31,800 for depreciation on a truck purchased for Rs. 2,12,000. The AO disallowed the depreciation due to the absence of documentary evidence supporting the purchase.The CIT(A) found that the truck was registered in the name of the assessee and attributed the discrepancy to a clerical error. The Tribunal confirmed this finding, noting that the truck's registration in the assessee's name was not disputed. The Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal on this ground.ConclusionThe Tribunal dismissed the appeal filed by the Department, confirming the CIT(A)'s deletions of disallowances for the provision of entry tax liability, remuneration to partners, and depreciation on the purchase of a truck. The Tribunal's decision was pronounced in the open court on February 29, 2016.