M/s Prashanth Enterprises, vs. The Income Tax Officer,

ITTA/55/2004HC TelanganaHBHC01005852200409 December 2014Bench: CHALLA KODANDA RAM,L.NARASIMHA REDDY2 pages

AI SummaryAllowed

What did the High Court hold?

The High Court allowed the appeal and set aside the order of the Tribunal. The Court held that notwithstanding the fact that a formal deed of partnership was executed on 01.04.1993, the firm existed and was operational much prior to that date, specifically for the assessment year 1994-95. The Court relied on its previous decision in I.T.A.No.23 of 2003, filed by the same assessee, which dealt with the deduction of interest paid to partners for the same assessment year. Based on this precedent, the Court concluded that the assessee was entitled to claim the deduction of the entire salary paid to the partners for the assessment year 1994-95. The operative direction was to set aside the Tribunal's order and allow the deduction.

What were the facts?

The assessee, a firm established in 1993 for gas distribution, filed its return for assessment year 1994-95. The Assessing Officer allowed only 1/3rd of the salary paid to partners as a deduction, citing that the partnership deed was executed on 01.04.1993. This adjustment was made under Section 143(1)(a) of the Income Tax Act. The Commissioner and the Income Tax Appellate Tribunal upheld this view. The assessee preferred an appeal before the High Court against the Tribunal's order dated 12.02.2002.

What were the issues?

1. Whether the Assessing Officer was justified in permitting only 1/3rd of the salary paid to partners as a deduction for the assessment year 1994-95, in a prima facie adjustment under Section 143(1)(a) of the Income Tax Act, considering the partnership deed was executed on 01.04.1993? (Question of law and fact, concerning Section 143(1)(a) and provisions related to partner's salary deduction). Assessee's contention: The assessee argued that the firm was operational prior to the execution of the formal partnership deed on 01.04.1993, and therefore, the entire salary paid to partners for the assessment year 1994-95 should be allowed as a deduction. The assessee relied on the High Court's own decision in a related matter concerning interest paid to partners for the same assessment year. Revenue's contention: The revenue contended that the deduction should be restricted because the partnership deed was executed only on 01.04.1993, implying the firm's operational existence was limited from that date.

Which sections of the Income-tax Act were involved?

Section 143(1)(a)

AI-generated summary — verify with the full judgment below

THE HON’BLE SRI JUSTICE L.NARASIMHA REDDY

AND

THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM

I.T.T.A.No.55 of 2004

JUDGMENT: (Per the Hon’ble Sri Justice L.Narasimha Reddy)

This appeal is preferred by the assessee against the order, dated 12.02.2002, passed by the Hyderabad Bench ‘A’ of the Income Tax Appellate Tribunal in I.T.A.No.1487/Hyd/1997.

The dispute is as to whether the Assessing Officer is justified in permitting only 1/3rd of the salary to a partner, in a prima facie adjustment made under Section 143(1)(a) of the Income Tax Act, in respect of the returns submitted by the appellant for the assessment year 1994-95.

Heard Smt. K.Neeraja, learned counsel for the appellant, and Sri S.R.Ashok, learned Standing Counsel for the respondent.

The appellant is a firm that came into existence in the year 1993, to carry out the business of distribution of Gas in Karimnagar. In the returns filed by the appellant for the assessment year 1994-95, one of the items claimed as deduction was salary paid to the partners. The Assessing Officer permitted deduction of only to the extent of 1/3rd on the basis that the actual partnership deed came into existence only on 01.04.1993. The same view was upheld by the Commissioner as well as the Tribunal.

This very question fell for consideration before this Court in I.T.A.No.23 of 2003 filed by the appellant herein. That, however,

was in relation to the deduction of interest paid to the partners. In respect of the same assessment year in the order, dated 26.08.2014, we took the view that notwithstanding the fact that a formal deed of partnership was executed on 01.04.1993, the firm existed much prior to that and with reference to the assessment year 1994-95, it was very much operational.

Therefore, we allow the appeal and set aside the order of the Tribunal. Further, we hold that the appellant is entitled to claim deduction of the entire salary paid to the partners for the assessment year 1994-95. There shall be no order as to costs.

The miscellaneous petitions filed in this appeal shall also stand disposed of.

____________________ L.NARASIMHA REDDY, J.

_____________________ CHALLA KODANDA RAM, J.

Date:09.12.2014

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