Disallowance u/s 40A(3) for payment of partners salary in cash. Case remanded in view of SC judgment

Disallowance u/s 40A(3) of payment of partners salary in cash. ITAT remands the case in view of Supreme Court judgment relied upon by the assessee  

ABCAUS Case Law Citation:
ABCAUS 3074 (2019) (07) ITAT

The appeal filed by the assessee firm was directed against the exparte order of the CIT(A) in confirming the disallowance made by the Assessing Officer (AO) u/s 40 A(3) of the Income Tax Act, 1961 (the Act) on account of salary paid to the partners in cash.

The assessee was a partnership firm. The Assessing Officer completed the assessment u/s 143(3) wherein he made addition by observing that the salary paid to the partners in cash were in contravention of provision of section 40A (3) of the Act.

In the appellate proceedings, the CIT(A) in the exparte order passed dismissed the appeal filed by the assessee and thereby sustained the addition.

Aggrieved with such order of the CIT(A), the assesse was in appeal before the Tribunal.

Before the Tribunal, the assessee submitted that the issue need not go back to CIT(A) for fresh adjudication since the issue was very small.

He submitted that provision of section 40A (3) should not be applicable to payment of cash to partners towards their salary in view of the decision of Hon’ble Supreme Court wherein the Hon’ble Supreme Court had held that payment of salary to a partner represents a special share of the profits and salary paid to a partner retains the same character of the income.

It was also submitted that a similar view had been taken by the Hon’ble Madras High Court.

The Tribunal observed that the admitted fact was that the Assessing Officer invoking the provisions of section 40A(3) made addition being the salary paid to partners in cash in violation of provisions of section 40A(3).

The Tribunal further noted that the CIT(A) had dismissed the appeal for want of prosecution and thereby confirmed the addition made by the Assessing Officer.

The Tribunal observed that the submission of the assessee was that the disallowance u/s 40 A(3) could not be made for payments in cash exceeding of Rs.20,000/- at a time to the partners towards his/her salary / remuneration.  However, due to non appearance before the CIT(A) despite repeated opportunities he had dismissed the appeal and had not adjudicated the issue on merit.  

Therefore, considering the totality of the facts of the case and in the interest of justice the Tribunal deemed it proper to restore this issue to the file of the CIT(A) with a direction to give one final opportunity to the assessee to explain his case and decide the issue as per fact and law.

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