Case Number: ITA 421/DEL/2019
Appellant: City Wines, New Delhi
Respondent: ACIT, Circle-55(1), New Delhi
Assessment Year: 2015-16
Case Filed On: 2019-01-21
Order Type: Final Tribunal Order
Date of Order: 2019-07-09
Pronounced On: 2019-07-09
City Wines, a partnership firm based in New Delhi, filed an appeal against the order dated 14/09/2018 of the Commissioner of Income Tax (Appeals) -19, New Delhi [“CIT(A)”], for the assessment year 2015-16. The primary issue in the appeal was the disallowance of Rs. 6 lakhs made by the Assessing Officer (AO) under Section 40A(3) of the Income Tax Act, 1961, due to salary payments made to the partners in cash.
The case was heard by the Delhi Bench ‘SMC’ of the Income Tax Appellate Tribunal (ITAT), presided over by Sh. R. K. Panda, Accountant Member. The appellant was represented by Sh. Rakesh Dubey, Advocate, while the respondent was represented by Shri S. L. Anuragi, Senior Departmental Representative (Sr. DR).
The appellant’s grounds of appeal included the challenge to the ex-parte order of the CIT(A) confirming the disallowance of Rs. 6 lakhs made by the AO. The disallowance was made on the grounds that the salary payments to the partners in cash were in contravention of Section 40A(3) of the Income Tax Act, which restricts cash payments exceeding Rs. 20,000 at a time.
During the hearing, the appellant’s counsel submitted that the provision of Section 40A(3) should not apply to cash payments made to partners towards their salary. He cited the decision of the Hon’ble Supreme Court in the case of CIT Vs. Chidambaram Pillai (106 ITR 292), which held that payment of salary to a partner represents a special share of the profits and retains the same character as income. A similar view was taken by the Hon’ble Madras High Court in the case of CIT Vs. Shiv Kumar (ITA No. 279 of 2010, order dated 11/02/2013).
The Sr. DR supported the order of the AO, stating that due to non-appearance before the CIT(A), an ex-parte order was passed without adjudication of the issue on its merits. He suggested that the matter be remanded back to the CIT(A) for fresh adjudication.
The Tribunal considered the arguments from both sides and reviewed the materials on record. It was noted that the AO had made the addition of Rs. 6 lakhs by invoking the provisions of Section 40A(3), and the CIT(A) had dismissed the appeal for want of prosecution due to non-appearance by the appellant despite repeated opportunities.
The Tribunal observed that the issue of disallowance under Section 40A(3) for salary payments to partners in cash had not been adjudicated on its merits by the CIT(A). In the interest of justice, the Tribunal decided to restore the issue to the file of the CIT(A) with a direction to provide a final opportunity to the appellant to explain the case and decide the issue as per facts and law. The Tribunal also directed the appellant to appear before the CIT(A) and present the case, failing which the CIT(A) would be at liberty to pass an appropriate order as per law.
In conclusion, the appeal filed by City Wines was allowed for statistical purposes. The order was pronounced in the open court on 09/07/2019 by Sh. R. K. Panda, Accountant Member.
For more information on similar cases and legal precedents, visit the official website of the Income Tax Appellate Tribunal of India.
City Wines vs ACIT: Dispute Over Salary Paid to Partners in Cash – ITA 421/DEL/2019
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