2011 (10) TMI 384 - HC - Income Tax

Deductability of salary and interest paid by firm - Non registration of firm with original partnership deed - AO disallowed interest and salary as were not in accordance with partnership deed - Held That - As per Circular No.739, read with provisions of 40B, where neither the amount of wages has been quantified nor even the limit of total remuneration has been specified and that the same has been left to be determined by the partners at the end of the accounting period, such payment of remuneration to partners cannot be allowed as deduction in the computation of the firm s income. - Decided against assessee.

Summary

Issues Involved:
1. Interpretation of Section 40(b) of the Income Tax Act, 1961 regarding deduction of salary and interest paid to partners.
2. Validity of circular dated 25.03.1996 issued by the Central Board of Direct Taxes regarding remuneration of working partners.
3. Requirement of registration of firm under Section 184 of the Act for assessment purposes.

Analysis:

Interpretation of Section 40(b) of the Income Tax Act:
The judgment dealt with the question of whether deduction of salary and interest paid to partners is permissible under Section 143(1)(a) and Section 40(b) of the Income Tax Act, 1961. The petitioner claimed deduction of salary and interest paid to partners based on an agreement dated 01.04.1992. However, the Assessing Officer declined registration of the firm under Section 184 of the Act, citing non-compliance with the amended provisions introduced by the Finance Act, 1992. The Assessing Officer made an addition to the income of the firm due to lack of authorization and compliance with the partnership deed terms regarding salary and interest payments to partners.

Validity of Circular on Remuneration of Working Partners:
The circular dated 25.03.1996 issued by the Central Board of Direct Taxes clarified the provisions of Section 40(b)(v) of the Act regarding the admissibility of remuneration to working partners. The circular addressed the issue of quantification of remuneration and laid down guidelines for allowing deductions for remuneration to working partners. It emphasized the importance of specifying remuneration amounts in the partnership deed to qualify for deductions under Section 40(b)(v) of the Act.

Requirement of Firm Registration under Section 184:
The judgment highlighted the necessity for a firm to comply with the registration requirements under Section 184 of the Act for assessment purposes. The amended provisions introduced by the Finance Act, 1992 mandated firms to submit a certified copy of the partnership deed specifying individual partner shares. Failure to comply with these requirements resulted in the firm being assessed as an association of persons, as per Section 185 of the Act.

In conclusion, the judgment dismissed the writ petition and appeals filed by the assessee, upholding the denial of deductions for salary and interest payments to partners due to non-compliance with the partnership deed terms and registration requirements. The reference sought by the Revenue was answered in favor of the Revenue, emphasizing the importance of adhering to the provisions of Section 40(b) and fulfilling the registration criteria under Section 184 of the Act for assessment purposes.