2004 (9) TMI 591 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening the assessment under Section 147 of the Income-tax Act.
2. Allowability of remuneration paid to a working partner representing his HUF under Section 40(b) of the Income-tax Act.
3. Compliance with the terms of the partnership deed regarding the quantification of remuneration.

Issue-wise Detailed Analysis:

1. Validity of Reopening the Assessment under Section 147:

The revenue reopened the assessment based on an internal audit objection. The audit party contended that the remuneration paid to a working partner representing his HUF was not allowable under Section 40(b) of the Income-tax Act. The CIT(A) canceled the assessment, stating that reopening under Section 147(b) was invalid as it was based on the audit party's interpretation of the law, which is not permissible. The Tribunal upheld this view, emphasizing that the Assessing Officer (AO) did not independently record reasons to believe that income had escaped assessment. The reopening was based solely on instructions from higher authorities without the AO's own satisfaction, making the reopening invalid.

2. Allowability of Remuneration Paid to a Working Partner Representing His HUF:

The assessee firm paid remuneration to a partner representing his HUF, which was disallowed by the AO based on the audit objection and a Supreme Court decision in the case of Rasikh Lal & Co. The Tribunal clarified that as per the Supreme Court's decision, an individual representing an HUF is considered a partner vis-a-vis the firm. Therefore, the remuneration paid to such a partner is allowable under Section 40(b) of the Act. The Tribunal noted that the AO misinterpreted the Supreme Court's decision and wrongly disallowed the remuneration.

3. Compliance with the Terms of the Partnership Deed Regarding the Quantification of Remuneration:

The audit party and the AO also contended that the partnership deed did not specify the amount of remuneration payable to each individual partner, as required by CBDT Circular No. 739. The Tribunal noted that the partnership deed authorized the payment of remuneration to the working partner, with the quantum to be determined at the end of the year, subject to the maximum allowable under Section 40(b)(v) of the Act. The Tribunal held that the CBDT circular, which required specific quantification, was not binding on the courts or tribunals if it contradicted the plain language of the statute. Since the partnership deed authorized the payment and the remuneration was within the statutory limits, the Tribunal allowed the deduction.

Conclusion:

The Tribunal dismissed the revenue's appeal, holding that the reopening of the assessment was invalid due to the lack of independent satisfaction by the AO. On merits, the Tribunal held that the remuneration paid to the partner representing his HUF was allowable under Section 40(b) of the Income-tax Act, as it was authorized by the partnership deed and within the statutory limits.