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Income Tax Appellate Tribunal, SMC BENCH , COCHIN
Before: Shri George George K
This appeal at the instance of the assessee is directed against the CIT(A)’s order dated 20.03.2018. The relevant assessment year is 2011-2012.
The solitary issue raised in this appeal is whether the CIT(A) is justified in confirming the disallowance of remuneration paid to working partners.
The brief facts of the case are as follows:- The assessee is a firm running a dealership of three wheelers manufactured by M/s.Piaggio Vehicles Private Limited. For the assessment year 2011-2012, the return of income was filed on 12.01.2012 declaring an income of Rs.4,11,690. The assessment was completed u/s 143(3) of the I.T.Act vide order dated 22.01.2014 making total addition of
ITA No.264/Coch/2018. 2 St.George Motors. Rs.11,21,261. The details of the additions made by the Assessing Officer read as follows:-
Sr. Item Amount (Rs.) Reason No. 1. Commission received 140810 Difference with 26AS 2. Disallowance u/s 40A(3) 92760 Cash payment 3. Audit fee 45000 TDS not deducted 4. Remuneration paid to 136937 Not working Mrs.Neethu partner 5. Remuneration paid to working 705754 40(b)(ii) & partner 40(b)(v)
Aggrieved by the assessment completed, the assessee preferred an appeal to the first appellate authority. The CIT(A) confirmed the addition totaling to Rs.11,21,261 made by the Assessing Officer.
Aggrieved by the order of the CIT(A), the assessee has filed the present appeal before the Tribunal raising the issue of disallowance of remuneration paid to its working partners. The learned AR has filed a paper book comprising of 25 pages enclosing copy of the partnership deed dated 15.09.2007 and deed dated 08.01.2011. The learned AR submitted that as per the clauses of the partnership deed, it is specifically provides for remuneration to working partners. It was submitted that remuneration was allowable as per the provisions of the Income-tax Act. Therefore, it was submitted that since the clauses of the partnership deed authorizes remuneration payment to the partners of the assessee, the A.O. has erred in disallowing the said expenditure. Further, it was submitted by relying on the judgment of the Hon’ble Himachal Pradesh
ITA No.264/Coch/2018. 3 St.George Motors. High Court in the case of Durga Dass Devki Nandan v. ITO [2012) 342 ITR 17 (HP)], that it is settled law that the CBDT cannot issue a circular which goes against the provisions of the Act. It was contended that in the instant case the partnership deed provides for a clause, which authorizes remuneration to the working partners and that would be sufficient for deduction of such expenditure. The CBDT circular stating that each of the individual working partner should be provided with specified remuneration, goes against the provisions of the Act and cannot be relied on.
The learned Departmental Representative, on the other hand, strongly supported the orders of the Income-tax authorities.
I have heard the rival submissions and perused the material on record. The solitary issue for my consideration is whether the CIT(A) has erred in confirming the A.O.’s action in disallowing the remuneration paid to the working partners. The allowance / disallowance of remuneration paid to working partners is governed by the provisions of section 40(b)(v) of the I.T.Act. Section 40(b)(v) reads as follows:-
“40. Amounts not deductible. – Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-
(a)........
(b) in the case of any firm assessable as such, -
ITA No.264/Coch/2018. 4 St.George Motors. (i) to (iv)…..
(v) any payment of remuneration to any partners who is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:-
(a) on the first Rs.1,50,000 or at the rate Rs.3,00,000 of the of 90 per cent. of the book book-profit or in case profit, whichever is more; of a loss (b) on the balance of at the rate of 60 per cent. the book profit.
….
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.”
7.1 From reading of the above provision, it is clear that the partnership deed has to provide remuneration to working partners and the same if exceeds the amount mentioned u/s 40(b)(v) of the I.T.Act, to the extent of such excess would not be allowed as deduction. In the instant case, the total remuneration payable to the working partners was authorized as per clause 8(a) in the partnership deed dated 15.09.2007. The remuneration payable to the working partners as per deed dated 15.09.2007 are as follows:-
ITA No.264/Coch/2018. 5 St.George Motors.
Upto Rs.75,000/- of the book Rs.50,000/- or 90% of the profit for the year book profit whichever is higher On the next Rs.75,000/- of 60% of Rs.75,000/- the book profit On the book profit in excess of 40% of the excess over Rs.1,50,000/- Rs.1,50,000/-
7.2 The quantum of total remuneration to the working partners was revised by clause 8(b) of the partnership deed dated 08.01.2011 as follows:-
If the book profit is negative Rs.1,50,000/- In case of book profit is positive:
On the first Rs.3 lakhs of the Rs.1,50,000/- or 90% of the book profit book profit, whichever is higher. On the book profit in excess of 60% on the excess over Rs.3 Rs.3 lakh. lakh.
7.3 In terms of clause (v) of section 40(b), any remuneration which is in excess of what has been authorized in clause 8(a) of partnership deed dated 15.09.2007 is disallowable till the date of execution of amended partnership deed dated 08.01.2011. However, on account of other additions made in the assessment, the enhanced book profit was work out to Rs.15,33,055/- as against the book profit computed by the assessee at Rs.12,54,485/- and on re-computing the eligible remuneration payable to the working partners, there is no excess remuneration for disallowance. The Assessing Officer, however, held that the partnership deed did not provide for
ITA No.264/Coch/2018. 6 St.George Motors. payment of remuneration in terms of CBDT Circular No.739 dated 25th March, 1996 because it does not specify the amount of remuneration payable to individual working partners or lays down the manner of quantifying such remuneration (CBDT Circular reported in 208 ITR (St.) 131). The CBDT Circular has been extracted fully in the impugned CIT(A)’s order at para 4.3.2. The CBDT in the said Circular has stated that the amount of remuneration payable to each partner should be fixed in the agreement or the partnership deed. The agreement should lay down the manner of quantifying such remuneration.
7.4 It is trite law that CBDT cannot issue a Circular which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute. A reading of section 40(b)(v) clearly shows that the amount of remuneration which does not exceed the amount given in the Income-tax Act is deductible. In the present case, the partnership deed provides that the remuneration will be as per the provisions of the Income-tax Act. It clearly means that the remuneration payable to the partners shall be quantified as per the provisions of the Income-tax Act and shall not exceed the maximum remuneration provided. It is not in dispute that the partners were paid remuneration which was less than the maximum provided by the Income-tax Act. There is no doubt with regard to the payment of remuneration and in fact account books of the assessee firm have been accepted as correct. There is no doubt that the partners are working
ITA No.264/Coch/2018. 7 St.George Motors. partners and remuneration has been paid to such working partners. Therefore, the Circular has to read along with section 40(b)(v) of the I.T.Act and has to be made subject to provisions of section 40(b)(v) of the I.T.Act. As mentioned earlier, section 40(b)(v) of the I.T.Act does not lay down any condition of fixing the remuneration or the method of remuneration in the partnership deed. All that the section provides is that in case the payment of remuneration made to any working partner is in accordance with the terms of the partnership deed and does not exceed the aggregate amount as laid down in the relevant provisions of the Income-tax Act.
7.4 The Hon’ble Himachal Pradesh High Court in the case of Durga Dass Devki Nandan v. ITO (supra) on identical facts have decided the issue in favour of the assessee. The relevant finding of the Hon’ble High Court reads as follows:-
“9. In IT Appeal No.9 of 2005 decided on 2nd Sept., 2009 titled as CIT vs. Anil Hardware Store [reported at (2010) 233 CTR (HP) 595 : (2010) 43 OTR (HP) 44- Ed.], this Court was dealing with a partnership deed where the provisions of the IT Act· itself had been incorporated in the partnership deed. This Court held that this itself provides a method of computation. In that case we had not gone into the validity of the CBDT circular. The CBDT circular can only be held to be valid if it is in terms of the main section. As held above, the s. 40(b)(v) only lays down that either the working partner should be paid an amount specified in the partnership deed or it should not exceed the amount laid down in the section. In the present case the partners have been paid their remuneration /salary strictly in accordance with the terms of the partnership deed and this amount paid to the partners does not exceed the maximum permissible
ITA No.264/Coch/2018. 8 St.George Motors. amount and therefore, the assessee is entitled to the deduction.”
7.5 In view of the above said reasoning and the judgment of the Hon’ble Himachal Pradesh High Court, I hold that the remuneration paid to the working partners has to be allowed as deduction in the hands of the assessee-firm. It is ordered accordingly.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on this 6th day of February, 2019.
Sd/- (George George K) JUDICIAL MEMBER
Cochin ; Dated : 06th February, 2019. Devdas*
Copy of the Order forwarded to : 1. The Appellant. 2. The Respondent. 3. The CIT (A), Kottayam. 4. The Pr.CIT, Kottayam. 5. DR, ITAT, Cochin 6. Guard file.
BY ORDER,
(Asstt. Registrar) ITAT, Cochin