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Facts
The assessee, a partnership firm, claimed deduction for partner's remuneration of Rs. 99,76,470. The Assessing Officer disallowed Rs. 31,30,490 due to a discrepancy in the computation limits prescribed under Section 40(b) of the Income Tax Act. The assessee also reported commission income of Rs. 3,77,617, which the AO added back.
Held
The Tribunal held that the partnership deed's incorrect capturing of the limits for partner remuneration was an inadvertent mistake, and the actual amount paid was authorized and allowable. Regarding commission income, the Tribunal noted that the assessee had accounted for it in the subsequent year, and taxing it in the current year would amount to double taxation.
Key Issues
Whether the disallowance of partner's remuneration due to incorrect computation limits in the partnership deed is justified, and whether commission income offered in a subsequent year should be taxed in the current year.
Sections Cited
40(b), 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of National Faceless Appeal Centre (NFAC), Delhi, vide order no. ITBA/NFAC/S/250/2025-26/1078818110(1), dated 23.07.2025, passed against the assessment order by Assistant Commissioner of Income Tax- 17(1)(2), Mumbai, u/s. 143(3) of the Income-tax Act (hereinafter referred to as the “Act”), dated 04.03.2016 for Assessment Year 2013-14.
Bharat Paper Mart AY 2013-14 2. Grounds taken by assessee are reproduced as under: 1. The learned National Faceless Appeal Centre (NFAC) erred in confirming order of Assessing Officer disallowing partner's remuneration of Rs.31,30,490/- paid to working partner out of remuneration of Rs.99,76,470/- paid to him without appreciating that said remuneration was paid in accordance with the provisions of section 40(b)(v) of Income tax act 1961 and hence the disallowance of remuneration of Rs. 31,30,490/- may be deleted.
The learned NFAC erred in confirming order of Assessing officer taxing commission income of Rs. 3,77,617/ on the basis of Form No. 26AS without appreciating that said commission income was not taxable in A.Y. 2013-14 and hence the addition of Rs. 3,77,617/- may be deleted.
The appellant craves leave to add, amend, alter or delete any of the above grounds of appeal.
Brief facts of the case are that assessee is a partnership firm engaged in business of dealing in papers and boards. Assessee filed its return of income on 28.09.2013, reporting total income at Rs.64,96,120/-. It claimed a deduction towards partners remuneration, computed at Rs. 99,76,470/-. The computation in this respect is as under: STATEMENT OF REMUNERATION TO WORKING PARTNER Book profit as per prov of Sec 40 (b) 16477450 First 300000 90% 270000 Next 16177450 60% 9706470 Maximum amount of remuneration allowed 9976470 Restricted to 9976333 3.1. In respect of ground No.1, assessee furnished that its partnership deed provides for remuneration to working partners and the quantum of remuneration under the said partnership deed is akin to what is prescribed u/s.40(b) of the Act as existed at the time of formation of partnership deed. The said partnership firm was formed on 01.01.2009. Subsequently, another partnership deed was entered into on 04.03.2013 whereby the modification stated that 100% of remuneration 3.2. While making the assessment, Ld. Assessing Officer noted from the partnership deeds furnished by the assessee that the erstwhile computation mechanism prescribed u/s.40(b) with the lower levels of limits were considered in the deed, i.e., to (a) On the first Rs. 75,000/- of the Rs. 50,000 or at the rate of book profit, or in case of loss 90% of the book profit, whichever is more (b) on the next Rs. 75,000/- of the At the rate of 60% book profit (c) on the balance of book profit At the rate of 40% 3.3. However, these limits were inadvertently taken note in the partnership deed. The correct limits for computation of allowability of partners remuneration, which the assessee adopted for its computation is as under:
a) On the first Rs. 3,00,000/- of the at the rate of 90% of the book book profit, or in case of loss profit, whichever is more (c) on the balance of book profit At the rate of 60% 3.4. Owing to this discrepancy on taking into account the correct limits prescribed u/s.40(b), ld. Assessing Officer calculated the difference and made the addition of Rs.31,30,490/-. Ld. Assessing Officer computed the maximum allowable remuneration based on the limits which considered the first Rs.75,000/- of the book profit as against the first Rs.3,00,000/- of the book profit which ought to have been considered.
In this regard, it is important to note from the partnership deed, itself wherein explanation is noted below the tabulation of limit for “For the purposes of this clause of expression 'Book Profit' shall mean the Book Profits as defined in S.40(b) of the I.T. Act, 1961 or sany statutory modification or re-enactment thereof, for the time being in force”
4.1. Thus, the partnership deed restricted the limits as prescribed u/s.40(b). According to the partnership deed, it authorises the payment of remuneration. It does not deal with quantification of the said remuneration. It is only in respect of allowability of such remuneration to the partners that reference is made to the provisions contained in section 40(b).
In the present case, ld. Assessing Officer has neither doubted the fact that remuneration is paid to the working partner nor doubted the fact that remuneration is not authorised by the partnership deed. The issue pertains to quantification of the remuneration paid to the working partner. Section 40(b) talks about remuneration being authorised by the partnership deed and payable to the working partner. Quantum of remuneration is to be decided by the firm and if such remuneration is paid by the firm to the partner is in excess of limits specified in section 40(b), the same needs to be disallowed. Section uses the term “authorise” and not the term “quantify”. It is not a case that the provisions contained in section 40(b) are ambiguous, therefore capable of more than one interpretation. It is a case where there is an inadvertent mistake on the part of the assessee while capturing the correct limits as prescribed in section 40(b) for the quantification of remuneration to the working partners. Further, it is important to note that concerned partner has offered the remuneration so received by him in his individual return which has been subjected to tax and there is no
Having perused the records placed in the paper book, provisions to section 40(b) as well as correct computation methodology applied by the assessee vis-à-vis provision of section 40(b) though inadvertently recorded incorrectly in the partnership deed, we find that, quantification of partners remuneration made by the assessee is allowable within limits prescribed u/s.40(b), since the payment of remuneration to the working partner is authorised by the partnership deed. Accordingly, addition made by the ld. Assessing Officer is deleted.
In the result, ground no.1 raised by the assessee is allowed.
In regard to ground no.2, whereby an addition of Rs.3,77,617/- has been made being commission income from one party Lotus Global Pvt. Ltd. Case of the assessee is that it offers commission/discount income on cash basis owing to uncertainty of intimation from the parties. This policy has been followed consistently by the assessee by appropriate disclosure of notes to accounts in its audited financial statements. In the year under consideration, Form–26AS reflected an entry towards TDS of Rs.37,762/- for the commission paid by Lotus Global Pvt. Ltd. to the assessee, which in fact was not received by the assessee in the year under consideration. Owing to its accounting policy, followed consistently, as stated above, this was not offered to tax in the year under consideration nor credit was claimed for the TDS so done. Fact of the matter is that, assessee offered the same to tax in the subsequent Assessment Year 2014-15 and claimed the credit for TDS also. Relevant documentary evidence in this regard are placed in the paper book. Considering these facts on record, verifiable from the documentary
Bharat Paper Mart AY 2013-14 evidence, addition made by the ld. Assessing Officer in this regard is not tenable, accordingly the same is deleted. Ground No.2 raised by the assessee is allowed.
In the result, appeal of the assessee is allowed.
Order is pronounced in the open court on 09 February, 2026 Sd/- Sd/- (Amit Shukla) (Girish Agrawal) Judicial Member Accountant Member
Dated: 09 February, 2026 MP, Sr.P.S. Copy to : 1 The Appellant 2 The Respondent 3 DR, ITAT, Mumbai 4 Guard File 5 CIT BY ORDER,
(Dy./Asstt.Registrar) ITAT, Mumbai