Partnership salary allowed in profit loss ratio as per deed. Remuneration clause provided the manner of quantifying as per CBDT Circular No. 739 – ITAT
ABCAUS Case Law Ctation
1035 (2016)(10) ITAT
Important Judgments Cited:
Assistant Commissioner of Income Tax Vs. M/s. DCS International Trading
Durga Dass Davki Nandan Vs. Income Tax Officer
Brief Facts of the Case:
The assessee was a partnership firm which amended its partnership deed in the assessment year 2009-10 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 to be in the ratio of profit-sharing limited to maximum allowable under Income Tax Act, 1961.
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 (AO) held that the amended partnership deed would not cover the period prior to the date of amendment and that the earlier partnership deed did not authorize the payment in accordance with the provisions and accordingly, he disallowed the remuneration to partners for the period from 01/04/2008 to 18/07/2008.
The Commissioner of Income-tax (Appeals) held that the partnership dated 01/04/2008 had 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 AO.
Observations made by the Tribunal:
The ITAT observed that the Assessing Officer as well as the CIT(A) had disallowed the partners remuneration 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 No. 739 which 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.”
It was observed that in terms of the said Circular, the salary to the partners was 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. From the facts mentioned in partnership deed dated 01/04/2008 remuneration had been specified in terms of profit sharing ratio.
Thus, the Tribunal was of the view that the partnership deed had laid down the manner of quantifying remuneration in terms of profit-sharing ratio and the said manner of specifying the salary in partnership deed dated 01/04/2008 was not in contravention of para-4 of the CBDT Circular.
The Tribunal directed 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).