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Income Tax Appellate Tribunal, KOLKATA BENCH (SMC
Before: Shri P. M. Jagtap, A.M.)
ORDER This appeal filed by the assessee is directed against the order of Ld. CIT(Appeals) – 6, Kolkata dated 14.12.2016 and in the solitary ground raised
therein, the assessee has challenged the action of the Ld. CIT(A) in confirming the disallowance of Rs. 3,01,998/- made by the AO on account of partner’s remuneration in the assessment order passed under section 143(3) / 263 of the Income Tax Act, 1961.
2. The assessee in the present case is a partnership firm which is engaged in the business of civil construction. The return of income for the year under consideration was filed by it declaring total income of Rs. 3,21,748/-. In the assessment originally assessment was completed under section 143(3)
2 vide an order dated 27.12.2010, the total income of the assessee was determined by the AO at Rs. 4,31,170/-. Thereafter, it came to the notice of the Ld. CIT that the claim of the assessee for deduction of Rs. 3,01,998/- on account of partner’s remuneration was wrongly allowed by the AO in the assessment completed under section 143(3) and the order of the AO to that extent was erroneous as well as prejudicial to the interest of the revenue. He, therefore, issued a notice under section 263 and since the explanation offered by the assessee in response to the said notice was not found satisfactory by him, the Ld. CIT passed an order under section 263 setting aside the assessment order dated 27.12.2010 passed by the AO with the direction to the AO to frame the assessment de novo as per law and in the light of the discussion made by him in the order.
As per the direction of the Ld. CIT given in the order passed under section 263, fresh assessment proceedings were initiated by the AO. During the course of the said proceeding a copy of partnership deed was filed on behalf of the assessee in support of its claim that the remuneration of Rs. 3,01,998/- paid to the partners was allowable as deduction in accordance with the provision of Section 40(b) of the Act. The AO, however, did not find merit in the stand of the assessee and rejecting the same, he made an addition of Rs. 3,01,998/- to the total income of the assessee on account of disallowable of partner’s salary after recording the following findings / observations in paragraph no 5 of his order dated 31.02.2014 passed under section 143(3) r.w.s. 263 of the Act.
3 “It was observed, from the deed of partnership clause 7 of the assessee firm that it enables its partners to draw remuneration from firm as mutually agreed upon by them at the end of the F.Y. It thus transpired that the partnership deed leaves a scope for exercise of the partners discretion in the matter, though the deed stipulates that the aggregate remuneration is to be guided by the provisions of Sec. 40(b). Sec. 40(b) does not allow a firm to determine its partner’s salary as per the mutual agreement amongst the partners. In this regard the CBDT’s circular no 739 dated 25.03.1996 is quite relevant. The said circular clarifies that the quantum of the remuneration payable to the partners has to be specified in the partnership deed. Absence of such specification would render the partners’ salary debited to the profit & loss account an inadmissible expenditure. The same view has been expressed by the Hon’ble Pubjab & Haryana High Court in the case of M/s. Sood Bhandari & Co. Vs CBDT (2012) 204 Taxman 340 (P&H) and by the Hon’ble Delhi high Court in the case of M/s. Sood Brij & Associates vs CIT (2011) 203 Taxman 188 (Delhi). Since the partnership is silent about the quantification of the remuneration claim should not be allowed. The assessee’s such type of claim violates one of the conditions stipulated in the Sec. 40(b). Moreover, it was not declared anywhere in the original partnership deed – as such who are the working partners, which is another vital criteria for allowing remuneration. Because deeping partners are not allowed remuneration & salary etc. An amended partnership deed was also produced during the hearing which was not produced before the then AO. It also raised doubt that during relevant assessment year whether the said amendment was done. In this juncture claims so made by the assessee is not acceptable. Hence, it is disallowed entirely.”
Against the order passed by the AO under section 143(3) / 263, an appeal was preferred by the assessee before the Ld. CIT(A) and since the submissions made by the assessee in support of its case on the issue relating to the allowability of partner’s remuneration were not found acceptable by him, the Ld. CIT(A) proceeded to confirm the disallowance made by the AO on account of partner’s remuneration for the following reasons given in paragraph no 5 of his impugned order. “The appellant also relied upon some other case laws. I have considered the facts of the case and the appellant’s submissions. The dispute relates to disallowance of 4 remuneration of Rs. 3,01,998/- paid to partners as the relevant partnership deed dated 25.04.2007 did not specify the working partner and clause 7 of the deed enabled the partners to draw remuneration from the firm as mutually agreed upon by the partners. According to the CIT, in the order u/s 263, the implied discretionary power vested in the partners in relation to the remuneration payment clearly violated the provisions of section 40(b). The amended partnership deed executed on 01.06.207 was rejected by the CIT in order u/s 263 by stating that the said deed was never produced before the AO. Accordingly, relying upon CBDT’s circular no. 739 dated 25.03.1996 and the judgements in the Sood Bhandari & Co. Vs. CBDT(2012) 204 Taxman 340 (P&H) and M/s. Sood Brit & Associates vs CIT(2011) 203 Taxman 188 (Del), the CIT held that the partnership deed was not in consonance with the conditions enshrined in section 40(b) of the Act. The CIT held that failure of the AO to disallow the inadmissible remuneration which violated the conditions of section 40(b) of the act rendered the original assessment order erroneous. The AO was directed the frame the fresh assessment order in the light of the discussion made in the order u/s 263 of the Act. Thus, the CIT has given a clear finding that the remuneration was inadmissible in the light of the violation of conditions of section 40(b) of the Act. The AO has merely reiterated this finding in his fresh assessment order. Thus, it is beyond my jurisdiction to decide the issue raised by the appellant in the second ground. Hence, the second ground of appeal
is rejected. Aggrieved by the order of the Ld. CIT(A), the assessee has preferred this appeal before the Tribunal.
5. The learned counsel for the assessee vehemently challenged the disallowance made by the AO and confirmed that the Ld. CIT(A) on account of partner’s remuneration. He contended that the reasons given by the authorities below for disallowing the claim of the assessee for partner’s remuneration are not tenable in law as per ratio laid down in various judicial pronouncements. In this regard, he relied on the decision of Hon’ble Himachal Pradesh High Court in the case of Durga Dass Devki 5 Nandan vs IT, 342 ITR 0017 wherein it was held that even if the remuneration is not fixed in the partnership deed, the firm shall be entitled to deduct amount payable under section 40(b)(v). He also relied on the decision of Chandigarh Bench of this Tribunal in the case of ITO vs Tulsi Ram Tej Chand 91 TTJ 0452 wherein it was held that there is no requirement in Section 40(b)(v) to describe a partner as “working partner” who is entitled to salary. It was held that the requirement is only that such partner should be working partner and the salary should be paid in accordance with the terms of partnership. He further relied on the decision of the Cuttack Bench of the Tribunal in the case of Jailaxmi Transport vs ACIT (ITA No. 292/CTK/2012 dated May 25, 2012) wherein it was held that the requirement of furnishing a copy of partnership deed could not be utilised against the assessee for quantum addition of disallowance of remuneration.
The learned DR on the other hand strongly relied on the impugned order of the Ld. CIT(A) in support of the revenue’s case on the issue. He contended that a clear finding was given by the Ld. CIT in the order passed under section 263 that the partner’s remuneration was inadmissible in the light of the violation of conditions of Section 40(b) of the Act and since the said order was accepted by the assessee and no appeal against the same was filed before the Tribunal, no fault can be found in the order of the AO disallowance disallowing the assessee’s claim for partner’s remuneration passed under section 143(3) r.w.s. 263 to give effect to the order of Ld. CIT passed under section 263.
I have considered the rival submissions and also perused the relevant material available on record. As rightly observed by the Ld. CIT(A) in his impugned order and further reiterated by the Ld. DR at the 6 time of hearing before the Tribunal, a specific finding was given by the Ld. CIT in the order passed under section 263 that the claim of the assessee for deduction on account of partner’s remuneration was not in consonance with the conditions enshrined under section 40(b) of the Act and the omission on the part of the AO to disallow the said inadmissible expenditure rendered his assessment order erroneous as well as prejudicial to the interest of the revenue. He accordingly had set aside the assessment order of the AO with the direction to the AO to make the assessment de novo as per law and in the light of discussion made in the order passed under section 263. Keeping in view these findings / directions given by the Ld. CIT in the order under section 263, I find myself in agreement with the Ld. CIT(A) that the issue relating to the disallowance of assessee’s claim for deduction on account of partners remuneration was finally decided by the Ld. CIT on merit in the order under section 263 and the assessee having not challenged the said order by filing an appeal before the Tribunal, the same had attained the finality. During the fresh assessment proceedings initiated by the AO to give effect to the order of the Ld. CIT passed under section 263, it was thus not open to the assessee to challenge the disallowance on account of partner’s remuneration on merit and the Ld. CIT(A) in my opinion is fully justified in holding that it was beyond his jurisdiction to decide the issue relation to the disallowance made by the AO on account of partners remuneration in the order passed under section 143(3)/263, on merit. Even the learned counsel for the assessee has not been able to raise any material contention in support of the assesssee’s case on this aspect of the matter. I, therefore, find no infirmity in the impugned order of the Ld. CIT(A) on this issue and upholding the same, I dismiss this appeal of the assessee.