2011 (11) TMI 3 - HC - Income Tax

Disallowance towards salary/remuneration paid to the partners on the ground of violation of Section 40(b)(v). - Held that -The manner of computing the remuneration is not specified. On the other hand, the remuneration payable is left to future mutual agreement between the partners who are entitled to decide and quantify the quantum. Remuneration can be any amount or figure but not more than the maximum amount stated in Section 40(b)(v) of the Act. Therefore, the requirements of Section 40(b)(v) are not satisfied.

Summary

Issues Involved:
1. Whether the remuneration paid to partners is deductible under Section 40(b)(v) of the Income Tax Act, 1961.
2. Interpretation of the partnership deed and supplementary partnership deed clauses regarding remuneration.

Issue-wise Detailed Analysis:

1. Deductibility of Remuneration under Section 40(b)(v):
The primary issue revolves around the deductibility of Rs. 21,40,000/- claimed as remuneration paid to partners under Section 40(b)(v) of the Income Tax Act, 1961. Section 40(b) outlines conditions under which remuneration to partners is deductible, specifically requiring that the payment must be to a working partner and authorized by the partnership deed. Additionally, the remuneration must relate to periods after the date of the partnership deed, and the quantum or manner of computation must be specified in the deed.

2. Interpretation of Partnership Deed Clauses:
The court examined the original partnership deed dated 1st May 1976 and the supplementary deed dated 1st April 1992. Clause 7 of the original deed stated that profits and losses are to be equally divided among partners. Clause 1 of the supplementary deed authorized remuneration subject to mutual agreement, without quantifying it or specifying a computation method. Clause 2 of the supplementary deed stated that the total remuneration payable should not exceed the amount permissible under the Act.

Analysis and Judgment:
- Section 40(b) Requirements: The court emphasized that Section 40(b) requires the remuneration to be authorized by the partnership deed and the quantum or manner of computation to be specified therein. The clauses must be read harmoniously to determine compliance with these requirements.

- Clause 1 of Supplementary Deed: The court found that Clause 1 did not satisfy Section 40(b)(v) requirements as it left the remuneration to be decided by mutual agreement in the future, without specifying the amount or computation method.

- Clause 2 of Supplementary Deed: The court analyzed whether Clause 2, which set a maximum limit as per the Act, satisfied the requirement. It concluded that while Clause 2 set a permissible limit, it did not quantify the remuneration or provide a computation method, thus failing to meet Section 40(b)(v) requirements.

- Practical Application: The court noted that the actual practice of paying Rs. 21,40,000/- was based on a subsequent mutual understanding not documented in the partnership deed, further indicating non-compliance with Section 40(b)(v).

- Precedent Case: The court distinguished the current case from the Himachal Pradesh High Court decision in Commissioner of Income Tax v. Anil Hardware Store, where the partnership deed specified the manner of fixing remuneration, unlike in the present case.

Conclusion:
The court concluded that the remuneration paid was not in accordance with the terms of the supplementary partnership deed and thus did not satisfy the requirements of Section 40(b)(v). Consequently, the appeal was dismissed, and the question of law was answered in favor of the Revenue, with no orders as to costs.