Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, LUCKNOW BENCH ‘SMC’, LUCKNOW
Before: SHRI T. S. KAPOOR
This is an appeal filed by the assessee against the order of learned CIT(A) dated 25/03/2022. In this appeal the assessee has taken the following grounds:
“1. That the learned CIT(A) has taken a wrong view against the applicability of section 40B(v) as the partners remuneration is duly deductible after computing the profit u/s 44AD of the I.T. Act, 1961 for assessment year 2015-16.
That having regard to the facts and circumstances of the case, learned CIT(A) has erred in law and on facts in confirming the decision of learned Assessing Officer in making adjustment u/s 154 of the I.T. Act, 1961.”
I.T.A. No.135/Lkw/2022 Assessment year:2015-16 2
Learned counsel for the assessee, at the outset, submitted that there is a delay of 15 days in filing the appeal and in this respect my attention was invited to application for condonation of delay in filing the appeal and it was submitted that because of the fact that father of the attorney, who is 75 years of age, had fallen sick and was admitted to hospital, the attorney of the assessee could not file appeal within the prescribed period of time and therefore, the delay has happened. Learned counsel for the assessee in this respect invited my attention to notarized and duly signed copy of affidavit placed along with the application for condonation of delay. Learned D. R. did not object to the condonation of delay. Finding the reason in filing the appeal plausible, the delay was condoned and Learned counsel for the assessee was asked to proceed with his arguments.
Learned counsel for the assessee submitted that the assessee had filed return of income u/s 44AD of the Act and as per the provisions contained in supplementary partnership deed, had claimed remuneration to partners which the authorities below have rejected by holding that no specific amount of remuneration was mentioned vide original partnership deed or in the supplementary partnership deed. Learned counsel for the assessee in this regard invited my attention to the copy of original partnership deed as well as supplementary partnership deed placed in the appeal file. My specific attention was invited to supplementary partnership deed wherein the remuneration was mentioned to be as per the provisions of section 40(b) of the I.T. Act. The supplementary partnership deed further stated that the partners will receive such remuneration according to percentage of sharing of profits @ 50% each. Learned counsel for the assessee submitted that the only reason for not allowing the remuneration is that the assessee had not mentioned specifically a fixed amount of remuneration in the supplementary partnership deed. It was submitted that mentioning of remuneration as per the provisions of section 40(b) of the Act
I.T.A. No.135/Lkw/2022 Assessment year:2015-16 3
is also permissible in view of the judgment of Hyderabad Bench of the Tribunal wherein under similar facts and circumstances, the Tribunal had held that mentioning of remuneration to partners, as per the provisions of section 40(b), is permissible and therefore, it was prayed that the appeal filed by the assessee may be allowed.
Learned D. R., on the other hand, invited my attention to the same partnership deed and supplementary partnership deed and submitted that there is no mention of specific remuneration and therefore, authorities below have rightly made and sustained the disallowance.
I have heard the rival parties and have gone through the material placed on record. I find that the only dispute in this appeal is that the authorities below have not allowed the claim of remuneration paid to partners. In the supplementary partnership deed it has been mentioned that earlier remuneration to the working partners shall be calculated as per percentage to book profit for such accounting year as per the provisions of section 40(b) of the Act in the following manner:
On the first Rs.3,00,000/- of the Rs.1,50,000/- or at the rate of 90% book profit or of the book profit whichever is more In case of loss On the balance amount of book At the rate of 60% profit
The authorities below have not accepted the claim of remuneration as according to them in the supplementary partnership deed, no specific remuneration has been mentioned. The Hyderabad Bench of the Tribunal in the case of ACIT vs. Laxmi Sailaja Traders vide order dated 8th September, 2004, has considered a similar situation and has held that mentioning of remuneration payable to partners by mentioning the maximum permissible limit, as per the provisions of section 40(b), is permissible. The relevant
I.T.A. No.135/Lkw/2022 Assessment year:2015-16 4
findings of the Tribunal as contained in para 8 to 10, which for the sake of completeness are reproduced below:
“8. Even on merits, the disallowance of the claim of deduction is not in accordance with law. As per the decision of the Hon'ble High Court in the case of Rasikh Lal & Co. (supra) even though a partner represents his HUF in the firm, so far as the firm is concerned, it recognizes only that individual as a partner whose name is recorded in the deed. Therefore, in law only Sri Ch. Ekambaram has to be considered as a partner. The partnership deed having mentioned that he is working partner, salary paid to such working partner is in accordance with the provisions of section 40(b) of the Act, subject to the outer limits prescribed under sub-clause (v) thereof. It is not in dispute that Sri Ch. Ekambaram is actually engaged in conducting the affairs of the firm. Even as per Explanation 4, Sri Ch. Ekambaram has to be treated as a working partner.
The other contention of the learned Departmental Representative is that the remuneration paid to the partner is not in accordance with the terms of partnership deed. The assessment order does not contain the relevant clauses of partnership deed. However, in the internal audit objection note, clause 9 of the partnership deed was reproduced which is extracted for immediate reference.
"At the end of each year, the maximum remuneration allowable to the working partner, under section 49(b) of the Act, shall be determined by the partners and shall be paid/credited to capital account of the working partner Ch. Ekambaram. Meanwhile the working partner may make periodical withdrawals against remuneration payable to him. Any excess withdrawal over remuneration payable is deemed as capital withdrawal.
No remuneration shall be paid to working partner in case there are no profits available after charging interest on capital to partners. In case the available profits are insufficient to pay remuneration to the working partner at the maximum allowable under section 40(b), then the available profits shall be paid to the working partner, to the extent of making the firms income nil"
Section 40 of the Income Tax Act speaks of amounts not deductible. As per section 40(b) of the Act, salary or remuneration paid to a partner is not allowable. However, exceptions were provided in the said clause whereby remuneration paid to working partner is
I.T.A. No.135/Lkw/2022 Assessment year:2015-16 5
allowable as deduction, subject to sub-clause (v), if such payment is authorized by and is in accordance with the partnership deed. Nowhere in sub-clause (b) of section 40 the mode of authorization is prescribed. However, the CBDT has issued a circular stating that if the deed does not specify the amount of remuneration to each individual, it cannot qualify for deduction under section 40(b) of the Act. No doubt the Circular issued by the CBDT is binding on the officers, it does not bind the courts or Tribunals particularly when it is contrary to the provision of the Act. An assessee is always entitled to claim that the Circular issued by the CBDT is not in consonance with the plain language of the section. In the instant case, clause 9 of the Partnership deed authorizes the partner to receive the remuneration and also authorizes the partners to determine the quantum of remuneration at the end of the previous year, subject to the maximum allowable tinder section 40(b)(v) of the Act. Thus it cannot be said that the remuneration payable to the partner is not authorized by the partnership deed or the actual amount paid to the partner is not in accordance with the partnership deed. Similar view was taken by the ITAT, B-Bench, Ahmedabad in the case of Chhajed Steel Corporation v. Asstt. CIT (2001) 77ITD 419 (Amd) wherein it was held that in a case the partnership deed specifies that the working partner would be entitled to receive remuneration subject to the maximum allowable under section 40(b)(v) of the Act, such payment cannot be disallowed under section 40(b) of the Act. In the light of the plain language of the section and also consistent with the view taken by the ITAT, Ahmedabad Bench (supra), I am of the view that the remuneration paid to the partner is in consonance with the terms of the partnership deed and accordingly allowable as deduction. Under these circumstances, the disallowance made by the assessing officer is set aside and the appeal filed by the revenue is dismissed.”
In view of the above facts and circumstances and in view of the judicial precedents relied on by the assessee, the appeal of the assessee is allowed. 7. In the result, the appeal of the assessee stands allowed.
(Order pronounced in the open court on 08/08/2022)
Sd/. ( T. S. KAPOOR ) Accountant Member Dated:08/08/2022 *Singh
I.T.A. No.135/Lkw/2022 Assessment year:2015-16 6
Copy of the order forwarded to : 1. The Appellant 2. The Respondent. 3. Concerned CIT 4. The CIT(A) 5. D.R., I.T.A.T., Lucknow