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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’ NEW DELHI
Before: SH. H.S. SIDHU & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 27/01/2014 of the learned Commissioner of Income-tax (Appeals)-XXVIII, New Delhi, raising following grounds: i. The order of the Assessing Officer is bad in law & against the facts of the case. ii. That the learned Commissioner of Income Tax (Appeals) has wrongly confirmed the order of the Assessing Officer. iii. The partner salary for the period from 01.04.08 to 17.07.08 amounting to Rs.9,02,868/- has wrongly been disallowed by Assessing Officer & upheld by the Commissioner of Income Tax (Appeals) which needs deletions. iv. That appellant prays for leave to add, amend or vary any of the grounds either before or at the time of hearing of the appeal.
The facts in brief of the case are that the assessee, a partnership firm, amended the partnership deed in the year under consideration w.e.f. 18/07/2008 quantifying the salary of the partners. The salary to the partners in the un-amended partnership deed dated 01.04.2008 was specified in the ratio of profit-sharing. The admissible salary as per the two partnership deed was as under: Sr. Name of the Salary as per Salary as per partnership deed dated no. partner partnership 01.04.2008 (in profit sharing ratio - deed dated limited to maximum allowable under I 18.07.2008 T Act.) Profit sharing ratio is 25% Rs.80,000/- per Ganpat Ram 1. month Choudhary 40% Rs.80,000/- per Madan Lai 2. month Choudhary 3. Prahlad Singh 30% Rs.80,000/- per month 4. Shiv Kumar 5% Rs. 13,000/- per Choudhary month 2.1 In the return of income filed, the assessee claimed remuneration to the partners for the entire year under consideration as per the amended partnership deed dated 18.07.2008. The Assessing Officer held that the amended partnership deed would not cover the period prior to the date of amendment and the earlier partnership deed did not authorize the payment in accordance with the provisions of the Income- tax Act, 1961 (in short “the Act”), and accordingly, he 01/04/2008 to 18/07/2008, which amounted to Rs.9,02,366/-. 2.2 The learned Commissioner of Income-tax (Appeals) held that the partnership dated 01/04/2008 has not specified the salary amount and, thus, relying on the CBDT Circular No. 739 dated 25/03/1996, he upheld the disallowance made by the Assessing Officer. Aggrieved, now the assessee is before the Tribunal raising grounds as reproduced above.
Before us, the learned Authorized Representative of the assessee submitted that the partnership deed dated 01/04/2008 had specified the salary to the partner in the ratio of the profit and which is not in violation of the para-4 of the CBDT Circular(supra) as the manner of quantifying the remuneration has been laid down in the partnership deed. In support of his submissions, he relied on the decision of the coordinate bench of the Tribunal dated 22/11/2013 in the case of Assistant Commissioner of Income Tax Vs. M/s. DCS International Trading, in & 694/Del/2012 and the decision of the Hon’ble Himachal Pradesh High Court in the case of Durga Dass Davki Nandan Vs. Income Tax Officer reported in (2012) 342 ITR 17 (HP). Accordingly, he submitted that salary to the partners for the period from 01/04/2008 to 18/07/2008 might be allowed in the ratio of the sharing profit amongst the partners subject to allowability under Income-tax Act. 4. On the other hand, learned Sr. Departmental Representative relied on the finding of the lower authorities.
We have heard the rival submissions and perused the material on record. The Assessing Officer as well as the learned Commissioner of Income-tax (Appeals) has disallowed the salary for the period from 01/04/2008 to 18/07/2008 on the ground that the partnership deed dated 01/04/2008 did not specify the remuneration in terms of para-4 of the CBDT Circular (supra). The issue in dispute before us is whether the salary provided under the partnership dated 01/04/2008 satisfies the conditions mentioned in para – 4 of the CBDT Circular No. 739 dated 25/03/1996. The relevant para of the circular is reproduced as under: “4. It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under Section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.”
We find that in terms of the Circular (supra), the salary to the partner is deductible unless the partnership deed specifies either the amount of remuneration payable to each individual working partner, or lays down the manner of quantifying such remuneration. We find from the facts mentioned in respect of partnership deed dated 01/04/2008 that the salary/remuneration has been specified in terms of profit- sharing ratio. Thus, the partnership deed has laid down the manner of quantifying remuneration in terms of profit-sharing ratio. Accordingly, in our opinion, the manner of specifying the salary in partnership deed dated 01/04/2008 is not in CBDT Circular (supra). Accordingly, we direct the Assessing Officer to allow the salary to the partners for the period from 01.04.2008 to 18.07.2008, as per the partnership deed dated 01/04/2008 limited to maximum amount allowable under Section 40(b)(v) of the Act. The effective ground of the appeal is allowed.
In the result, appeal of the assessee is allowed The decision is pronounced in the open court on 21st Sept., 2016.