2021 (7) TMI 798 - AT - Income Tax

Tribunal Decides on Partner Remuneration & Ad Expenses, Emphasizes Compliance

M/s. Shree Bhagwan Theatres Versus Income Tax Officer, Ward- 1 (5) Allahabad

M/s. Shree Bhagwan Theatres Versus Income Tax Officer, Ward- 1 (5) Allahabad - TMI Issues Involved:1. Validity of assessment framed under Section 147 read with Section 143(3) of the Income Tax Act.2. Disallowance of part of the remuneration paid to the partners of the assessee firm.3. Disallowance of office expenses.4. Disallowance of advertisement expenses.Detailed Analysis:1. Validity of Assessment:- The assessee raised concerns regarding the validity of the assessment framed under Section 147 read with Section 143(3) of the Income Tax Act. However, during the hearing, the assessee's counsel stated that these grounds were not pressed. Consequently, these grounds were dismissed as not pressed.2. Disallowance of Remuneration to Partners:- The assessee, a partnership firm, filed its returns declaring rental income from letting out a theater. The Assessing Officer (AO) reopened the assessment and proposed a disallowance of 50% of the remuneration paid to two partners due to discrepancies in their statements.- The AO disallowed Rs. 1,20,000/- on account of remuneration paid to the partners. The assessee challenged this before the CIT(A), but the challenge was unsuccessful.- Before the Tribunal, the assessee argued that the remuneration was in compliance with Section 40(b) of the Income Tax Act, which specifies the maximum permissible amount of partners' remuneration. The Tribunal noted that the remuneration was credited to the partners' capital accounts and was within the prescribed limits. The Tribunal cited the judgment in CIT Vs. Great City Manufacturing Co., which held that if the remuneration is within the limits prescribed under Section 40(b)(v), the AO cannot question its reasonableness.- The Tribunal concluded that the AO could not disallow the remuneration since it was within the prescribed limits and the genuineness of the payment was not disputed. The disallowance made by the AO was deleted.3. Disallowance of Office Expenses:- The assessee claimed office expenses of Rs. 69,450/-. The AO disallowed 20% of these expenses due to the absence of vouchers, amounting to Rs. 13,890/-. The CIT(A) deleted the adhoc disallowance, stating that the expenditure was incurred for business purposes and the AO did not point out specific defects.- The Tribunal upheld the CIT(A)'s decision, noting that the AO failed to provide material evidence that the expenses were not incurred or verifiable. Thus, the disallowance was not justified.4. Disallowance of Advertisement Expenses (A.Y. 2013-14):- The AO disallowed advertisement expenses of Rs. 25,298/- on the grounds that the assessee had let out the theater and was not running it, thus the expenses were not incurred for business purposes. The CIT(A) confirmed this disallowance.- The Tribunal noted that since the theater was let out, the advertisement expenses could not be regarded as incurred wholly and exclusively for the business of the assessee. The assessee also failed to produce supporting vouchers. The Tribunal found no error in the CIT(A)'s order and upheld the disallowance.Conclusion:- The appeals were partly allowed, with the Tribunal ruling in favor of the assessee on the issue of remuneration disallowance but upholding the disallowance of advertisement expenses. The Tribunal emphasized compliance with Section 40(b) regarding partners' remuneration and the necessity of supporting evidence for claimed expenses.