2009 (9) TMI 870 - AT - Income Tax

Summary

Issues involved: Disallowance of remuneration paid to partners u/s.40A(2)(b) and deductibility of amount paid to Surat Municipal Corporation.

Issue 1: Disallowance of remuneration paid to partners u/s.40A(2)(b):

The Assessing Officer disallowed remuneration paid to partners amounting to Rs.27,00,000 u/s.40A(2)(b) of the IT Act, considering it unreasonable and excessive. The assessee's argument that the remuneration was paid in the interests of the business was rejected. Additionally, the contention that section 40A(2)(b) does not apply to partners' remuneration paid u/s.40(b) was also dismissed by the departmental authorities. The assessee relied on a previous order of the Ahmedabad Bench to support their case. The Tribunal, referring to previous judgments, held that the Assessing Officer cannot question the reasonableness of remuneration paid to a working partner under sec.40(b) of the Act. Consequently, the disallowance of Rs.27,00,000 was deleted, and the appeal of the assessee was allowed.

Issue 2: Deductibility of amount paid to Surat Municipal Corporation:

The department questioned the deductibility of Rs.7,00,000 paid by the assessee to Surat Municipal Corporation (SMC) as a premium fee for covering balconies, arguing it was not allowable as a deduction in computing business profits. The payment was made for deviating from the approved plan, with the Corporation allowing the deviation on payment of the premium fee. The Assessing Officer relied on an Explanation below sec.37(1) inserted retrospectively to disallow the deduction. However, the CIT(A) held that the payment, termed as an impact fee, was not a penalty for infringing the law but for changing the approved plan. Citing a judgment of the Delhi High Court, the CIT(A) supported the deductibility of the payment. The Tribunal, following a previous order concerning a similar issue, confirmed the decision of the CIT(A) and dismissed the appeal of the revenue department.

In conclusion, the appeal of the assessee was allowed, and that of the department was dismissed in the judgment pronounced on 25th September 2009 by the Appellate Tribunal ITAT Ahmedabad.