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Income Tax Appellate Tribunal, DELHI BENCH “SMC”, NEW DELHI
Before: SHRI R. K. PANDA
PER R. K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 15.06.2017 of the CIT(A)- 16, New Delhi relating to assessment year 2014-15.
The ld. counsel for the assessee, at the time of hearing, did not press ground of appeal no.3 for which ld. DR has no objection. Accordingly, the same is dismissed. Grounds no.1 and 4 being general in nature are dismissed.
3. Ground no.2 by the assessee reads as under :- “2. That the Ld. CIT(A)- 16, New Delhi has been erred in law for not considering the various judicial judgments of various Apex Court, High Courts and of Hon’ble High Court of Delhi and of ITAT, Delhi Bench for remuneration paid to partners in terms of Partnership deed and as per provision of section 40(b)(v) of the Income Tax Act amounting to Rs.17,62,862/-.”
Facts of the case, in brief, are that the assessee is a partnership firm engaged in the business of trading in food grains and commission agent. It filed its return of income on 10.11.2014 declaring total income of Rs.10,24,113/-.
The Assessing Officer, during the course of assessment proceedings, observed from the Profit & Loss appropriation account that the assessee has claimed salary to the two partners of the firm at Rs.8,81,430.76 for each partner totaling to Rs.17,62,861.52 (rounded off to Rs.17,62,862/-). From the copy of the partnership deed filed by the assessee, the Assessing Officer observed that Clause 7 of the partnership deed reads as under :-
“7. That both the partners shall be working partner and shall look after the day to day business of the firm and actively devote their time and attention for discharging such duties. And for such services, the working partner shall be paid and / or credited salary and / or remunerations follows : Shri Chatur Bhuj Sharma Party of the first part Rs.7500 p.m. Shri Sachindra Nath Paul Party of the second part Rs.7500 p.m. However, the partners by mutual, verbal consent may decide to reduce / waive the salary payable on the basis of financial condition of the firm. Any working partner, entitled to salary and / or remuneration as aforesaid may withdraw such amount or amounts during the year in anticipation of his salary and / remuneration as might be mutually agreed upon and the amount(s) so drawn by the partners concerned shall be adjusted against his salary and / or remuneration becoming due and payable to him. However, the salary / remuneration payable shall be restricted to the limits laid down under the Income Tax Act, 1961.”
He, therefore, asked the assessee to show cause as to why the salary paid to the partners be not disallowed in view of Circular No.739 dated 25.03.1996.
In response to the same, the assessee submitted a copy of second supplementary deed of partnership deed dated 01.04.2005 which was received by the Assessing Officer on 30.11.2016 wherein the Clause No.7 has been amended in this deed which reads as under :-
And parties have decided to add the following clause : i) That Clause No.7 of the partnership deed dated 01.04.2000 shall stand deleted and to be read as : “That remuneration shall be paid as per Income Tax Act, 1961 as amended : First party : 50% Second party : 50%
Again vide letter dated 05.12.2016, the assessee submitted another copy of the amended deed dated 02.04.2005 wherein the Clause No.7 has been amended which reads as under :-
“And parties have decided to add the following clause : Now the parties have mutually decided to modify the Clause No.7 of the partnership deed dated 01.04.2000 and supplementary deed dated 1.4.2005 which read as : That total remuneration payable to partners shall be calculated as per provision of section 40(b)(v) as amended from time to time and shall not exceed to the limit prescribed under I.T. Act and shall be distributed as : First Party : 50% Second Party : 50%
The Assessing Officer was not satisfied with the submissions made by the assessee from time to time on the ground that the reply filed by the assessee is fake. He has filed two supplementary deeds and none of the deeds are upto the mark as per Circlaur No.739 dated 25.03.1996. The Assessing Officer reproduced the Circular No.739 dated 25.03.1996 and came to the conclusion that the Circular issued by the CBDT is binding on the Assessing Officer. Since in the instant case salary has not been quantified in the partnership deed nor it has laid down the manner of quantifying of such remuneration, the Assessing Officer disallowed the claim of salary paid to the partners. He accordingly made addition of Rs.17,62,862/- to the total income of the assessee.
Before the ld. CIT(A), the assessee relying on various decisions submitted that since the partnership deed provides that the remuneration will be as per the provisions of the I.T. Act, therefore, it clearly means that the remuneration paid to the partners shall be quantified/calculated as per the provisions of the I.T. Act and has not exceeded the remuneration provided.
Since the salary to the partners in the instant case does not exceed the maximum salary allowable to the partners, therefore, no disallowance is called for.
Relying on the various decisions, the assessee argued that the addition made by the Assessing Officer should be deleted.
However, the ld. CIT(A) was not satisfied with the explanation given by the assessee and upheld the action of the Assessing Officer. While doing so, he held that the assessee has neither quantified nor laid down the procedure to quantify the salary to be paid to the working partners.
Aggrieved with such order of the ld. CIT(A), the assessee is in appeal before the Tribunal.
The ld. counsel for the assessee relying on the various decisions submitted that after considering the Circular No.739 dated 25.03.1996 it has been held in these decisions that when the partnership deed provides that the remuneration will be as per the provisions of the I.T. Act, it clearly means that the remuneration payable to the partners shall by quantified as per the provisions of the I.T. Act and shall not exceed the maximum remuneration provided. He submitted that since the assessee has filed the supplementary deed which quantified the amount of remuneration payable to the partners, therefore, the lower authorities are not justified in rejecting the claim of the assessee. He accordingly submitted that the order of the ld. CIT(A) be set-aside and the ground raised by the assessee should be allowed. He relied on the following decisions :-
(i) Durga Dass Devki Nandan vs. ITO, (2012) 342 ITR 17 (HP). (ii) ACIT vs. Suman Construction, [2009] 34 SOT 495. (iii) M/s. Osho Associates vs. ACIT (ITA-265/Agr/2011 dt. 23.11.2012). (iv) CIT vs. Asian Marketing, [2013] 213 Taxman 214 (Raj).
The ld. DR on the other hand strongly relied on the orders of the ld. CIT(A) and the Assessing Officer. He submitted that the partnership deed in the instant case does not quantify nor laid down the procedure to quantify the salary to be paid to the working partners. Further, the conduct of the assessee in filing two supplementary deeds dated 01.04.2005 and 02.04.2005 shows that it is only manipulation for claiming the salary paid to the working partners to reduce the taxable income and is against the spirit of the Circular No.739 dated 25.03.1996. He submitted that the above Circular was issued to remove hardship due to amendment in the Act. Further, even after a gap of more than 10 years, the assessee in its partnership deed has not quantified nor provided the manner of quantification of the remuneration payable to the working partners.
He accordingly submitted that the ground raised by the assessee should be dismissed.
I have considered the rival arguments made by both the sides and perused the orders of the authorities below. I find the Assessing Officer made disallowance of Rs.17,62,862/- being the remuneration paid to the working partners on the ground that neither the salary has been quantified in the partnership deed nor the deed lay down the manner of payment of such remuneration to the working partners. I find the ld. CIT(A) upheld the action of the Assessing Officer. It is the submission of the ld. counsel for the assessee that since the supplementary partnership deeds lay down the manner of quantification of remuneration payable to the working partners, therefore, no disallowance is called for. I find the impugned assessment year is 2014-15 and the supplementary deeds filed before the Assessing Officer are dated 01.04.2005 and 02.04.2005 respectively. It is not understood and also not borne out from the records as to what has happened in the intervening period i.e. from assessment year 2006-07 to assessment year 2013-14. Whether such higher remuneration has been allowed to the working partners on the basis of these supplementary deeds are not borne out from the record. Under these circumstances, I deem it proper to restore the issue to the file of the Assessing Officer with a direction to adjudicate the issue afresh after verifying the records of the Department regarding the remuneration paid to the working partners in the preceding years as per these supplementary deeds. The Assessing Officer shall decide the issue as per fact and law after giving due opportunity to the assessee. I hold and direct accordingly. The ground raised by the assessee is accordingly allowed for statistical purposes.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced in the open Court on this 28th September, 2018.