Disallowance of Partners remuneration of CA firm deleted by ITAT as the deed mentioned the method of quantification u/s 40(b)(v) of the Income Tax Act
ABCAUS Case Law Citation:
ABCAUS 2410 (2018) 07 ITAT
The instant appeal was filed by a chartered accountants firm against the order of the CIT(A) in confirming the disallowance made by the Assessing Officer (AO) towards the remuneration pait to CA partners.
The assessee was a Chartered Accountant Firm by profession. The case was selected for scrutiny and notice u/s 143(2) of the Act was issued and served upon the assessee. The Assessing Officer observed that during the year under consideration, the assessee firm had paid huge remuneration to the partners.
The relevant clauses of partnership deed were as under:-
“6. That all the FIVE partners shall be eligible to a share in partners’ remuneration, including interest. on capital, if any, which will be calculated as per the provisions under section 40(b) (iv & v) of the Income Tax Act. 1961. For this purpose the meaning of “Book Profit” shall be. as defined so in the said section of the Income Tax Act, 1961 and accordingly it shall be calculated.
7. That the share and distribution of partners’, remuneration, as in clause 6 above, amongst the partners shall be, as per the partnership deed.
8. That the yearly remuneration payable to the eligible partners, as above, shall be due to and credited to their respective capital accounts at the close of an accounting year when the final accounts of the partnership are drawn up. However, the remuneration so determined shall be deemed to have accrued evenly during the year on a month-to-month basis.
9. That the partners hereto shall withdraw from time to time amount from the partnership, as per amount available and determined for distribution; such withdrawals, shall be debited to their respective current / capital accounts arid the same shall be adjusted against their salary and other amounts due to them from the firm and credited to their respective current / capital accounts at the end of the year.
10. That the Net Profit / Loss of the partnership business, as per the accounts maintained by the firm, after deducting all expenses relating to the business of the partnership including rent, salaries and other establishment Expenses, as well as interest arid remuneration payable to the partner/s in. accordance with this deed of partnership or any supplementary deed, as may be executed by the partners, shall be divided and distributed amongst the partners in the manner as explained and detailed out hereunder:-
| S. No. | Name | Share in Profit/Loss % |
| 1 | ………………… | 45 |
| 2 | ………………… | 10 |
| 3 | ………………… | 5 |
| 4 | ………………… | 19 |
| 5 | ………………… | 21 |
The AO observed that the partnership dead neither specified the quantum of salary/remuneration payable to the partners nor provided method of their computation.
Therefore, the assessee was asked to submit partnership deed along with the note on why the remuneration paid to the partners may not be disallowed as per provisions on Section 40(b) of the Act and judgment of Hon’ble Delhi High Court.
After considering the reply, the AO observed that Section 40(b) (iv) was not relevant as it deals with payment of interest and Section 40(b) (v) deals with maximum permissible remuneration i.e. allowable as a deduction under the head profit and gains from business or profession. The Assessing Officer was of the view that CBDT Circular 739 dated 25/03/1996 leaves no doubt that either the amount of remuneration has to be specified or the manner of quantifying such remuneration has to be specified if it is not so remuneration cannot be allowed as deduction u/s 40(b) (v).
The AO held that partnership deed did not defined the quantum of remuneration nor the method of computation of remuneration paid to the partners and disallowed remuneration paid to the partners.
The CIT(A) dismissed the appeal of the assessee by confirming the order of the Assessing Officer.
Before the Tribunal the assessee submitted that the decision of the Hon’ble Delhi High Court relied by the AO was not applicable as in the said case, there was no method prescribed for quantification as per the Income Tax Act provisions pertaining to Section 40(b) (v) of the Act.
The Tribunal observed that said CBDT Circular in Clause 4 had categorically mentioned that even the method of quantification can be accepted as per the provisions of Section 40(b) (v) of the Act. Besides that the Hon’ble Delhi High Court had also given the finding that when the remuneration is quantified through method of prescribed under the Provisions of Section 40(b) (v) then the remuneration has to be allowed by the Assessing Officer.
The Tribunal also considered the decision of the Hon’ble Delhi High Court as relied by the AO and opined that it was not applicable as in the said case partners were equally distributing the remuneration yet it was on the terms of mutual agreement of the partners which might have element of uncertainty of the remuneration. There was no method given in the partnership deed in that particular case.
The ITAT opined that in the instant case, another judgment of Hon’ble Delhi High Court’s was applicable in which the remuneration clause was similar to the present case.
The Tribunal held that the CIT(A) and the Assessing Officer had not taken a proper cognizance of the clauses of the partnership deed in consonance with the provisions of Section 40(b) (v) of the Act. It set aside the order of the CIT(A) and allowed the appeal of the assessee
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