Partners remuneration as allowable u/s 40(b)(v) in profit-sharing ratio. ITAT upheld the remuneration clause in the partnership deed
ABCAUS Case Law Citation:
ABCAUS 2790 (2019) (02) ITAT
Important Case Laws Cited/relied upon by the parties
Sood Brij & Associate Vs. CIT (2010)15 taxmnn.com 76 (Delhi)
CIT vs. Vaish Associates (2015) 63 taxmann.com 90 (Delhi)
Radhasoami Satsang Vs CIT (1992) 193 ITR 321 (SC)
The assessee had challenged the order passed by the Commissioner of Income-tax (Appeals) in upholding disallowance u/s 40(b)(v) of the Income Tax Act, 1961 (the Act) made by the Assessing Officer (AO) on account of remuneration paid to partners of the firm.
The assessee was a law firm (partnership) and derived income under the head “profit and gains of business & profession” and “income from other sources”.
The Assessing Officer in the assessment completed u/s 143(3) of the Act and disallowed remuneration paid to two partners on the ground that same has not been paid in accordance with the provisions of section 40(b)(v) of the Act.
The Assessing Officer noted that the partnership deed provided that the remuneration paid to all the partners will be the amount of remuneration allowable u/s 40(b)(v) of the Act to be shared amongst themselves in their profit-sharing ratio in that year.
The Assessing Officer relying on the CBDT circular No. 739 dated 25/03/1996, observed that the CBDT had clarified that for the assessment year subsequent to AY 1996-97, no deduction u/s 40(b)(v) of the Act 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.
In view of the Assessing Officer, the partnership deed neither did quantify the amount of remuneration to partners nor specified the manner of quantifying such remuneration. Thus, the remuneration paid not being in accordance with the provisions of section 40(b)(v), not allowable . The AO also relied on the decision of the Hon’ble Delhi High Court
The CIT(A) upheld the finding of the Ld. Assessing Officer.
Aggrieved with the finding of the CIT(A), the assessee was in appeal before the Tribunal.
The assessee submitted that the firm had paid remuneration to the partners in accordance with the provisions of section 40(b)(v) of the Act as in the partnership deed, the manner of the quantifying remuneration to partner had been duly specified.
It was further submitted that remuneration paid by the firm to its partners was also disallowed by the Assessing Officer in preceding assessment year. However, the same was deleted by the CIT(A) and the Department has not preferred any appeal on said issue before the Tribunal. According to the assessee, the order of CIT(A) in the year under consideration had been passed ignoring the principle of the consistency which is supported by plethora of decisions.
The Tribunal observed that the amount of allowability of remuneration to partners has been specified in section 40(b)(v) of the Act which provides as under:
“Notwithstanding anything to the contrary to sections 30 to [38J, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession “.
(v) any payment of remuneration to any partner who is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :-
|[(a)on the first Rs. 3,00,000 of the book profit or in case of a loss||Rs 1,50,000 or at the rate of 90 per cent of the book profit, whichever is more;|
|(b) on the balance of the book-profit||At the rate of 60 per cent:|
Provided that is relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the previous year, provide for such payment.”
The Tribunal opined that the Assessing Officer belief that the partnership deed neither quantified nor provided manner of quantification of the remuneration was not correct.
The Tribunal observed that the partnership deed had specified that the amount of remuneration allowable u/s 40(b)(v) would be the amount of remuneration paid to the partners and same would be shared in their profit-sharing ratio in that year. The profit-sharing ratio of the partners had been specified as 2/3rd and 1/3rd. The assessee accordingly paid total remuneration in the profit sharing ratio to both the partners.
Accordingly, the Tribunal opined that the clause of the partnership deed satisfied the requirement of the CBDT circular and there was no violation on the part of the assessee in this regard.
The Tribunal also opined that the issue also deserved to be allowed on the principle of consistency as identical disallowance had been deleted by the CIT(A) in the immediately preceding assessment year and no appeal had been preferred by the Department on the said issue.
The Tribunal set aside the finding of the lower authorities on the issue in dispute and directed the Assessing Officer to delete the disallowance.