2011 (10) TMI 497 - AT - Income Tax

Remuneration and interest to partners dis-allowance u/s 40(b) - Revenue contended that reconstitution firm deed did not specify the quantum of remuneration - CIT(A) allowed the claim - Held That - Explanation 3 to section 40(b) does not give any method of computation of remuneration payable to a working partner. It simply states what is book-profit for the purpose of working out the remuneration under section 40(b). Clause (8) of the deed also states in the alternative that any other applicable provision which would be in force for the income-tax assessment has to be applied for such computation. There is a further mention that partners were entitled to increase or decrease the remuneration. Thus when all these read together would make the clause extremely vague for being applied in a meaningful manner. Assessee-firm through this clause is trying to find a method by which whatever remuneration claimed by it as payable or paid to the working partner would become allowable under the provisions of Income-tax Act. No doubt in the case of Suman Construction (2008 (12) TMI 275 - ITAT PUNE-A) it was held that CBDT had no jurisdiction to substitute the term authorise occurring in section 40(b) by the term quantify . However this cannot be extended to mean that an authorization which is so vague that no proper quantification could be done would also be sufficient for a claim. Where the authorization is such that the correct quantification of the remuneration payable to a working partner cannot be done it cannot be construed as a type of authorization which would satisfy the requirement of section 40(b) as clause (8) of the deed dated 1st April 2005 was vague and not susceptible to a meaningful quantification. The later deed dated 1st April 2005 does not have any clause which would enable the assessee to fall back upon the old deed dated 10th April 1997 in case of any deficiency therein. CIT(Appeals) fell in error directing the A.O. to delete the disallowance being remuneration paid to working partner considering it as not allowable as correct quantification of the remuneration payable to a working partner cannot be done it does not satisfy the requirement of section 40(b) - Decided against assessee Dis-allowance of loss on account of sale of flat - CIT(A)allowed the claim - Held that - Assessee is in a business of promoting commercial and residential flats and other lines of business therefore cannot be said that purchase and sale of land would be alien and not a part of the business. As stated by the CIT(Appeals) that the land was treated as stock-in-trade and this has not been disputed by the DR thus when stock-in-trade is sold result can only be business profit or business loss. Assessee might have been forced to sell it at a loss for a myriad of reasons. It is not for the Revenue to sit on the arm chair of a businessman and to decide appropriate point of time in which a sale or purchase has to be effected in the course of his business. Sale deed purchase deed books of account none of it being rejected nor the seller or purchaser had been called up by the Revenue for any verification. Thus the loss could not have been disallowed - in favour of assessee.

Issues Involved:
1. Disallowance of partner's remuneration under section 40(b) of the Income-tax Act, 1961.
2. Disallowance of loss on sale of flat at Saligramam.
3. Disallowance of loss on sale of property at T. Nagar.

Issue-wise Detailed Analysis:

1. Disallowance of Partner's Remuneration:
The Revenue contended that the CIT(A) wrongly deleted the disallowance made by the Assessing Officer (A.O.) under section 40(b) of the Income-tax Act, 1961. The A.O. disallowed the remuneration of Rs. 54,83,571/- paid to the sole working partner, arguing that the reconstitution deed did not specify the remuneration in terms of money payable. The CIT(A) allowed the remuneration, stating it was authorized in the reconstitution deed as per section 40(b). However, the Tribunal found that the reconstitution deed was vague and did not provide a clear quantification method for remuneration, thus reinstating the A.O.'s disallowance.

2. Disallowance of Loss on Sale of Flat at Saligramam:
The A.O. disallowed a loss of Rs. 16,57,950/- claimed by the assessee on the sale of a flat, arguing it was not incurred in the course of business. The CIT(A) allowed the loss, accepting the assessee's explanation that the flat was taken in settlement of dues from a contractee and sold at a loss. The Tribunal upheld the CIT(A)'s decision, noting that the assessee was engaged in the business of promoting commercial and residential flats, and the land was treated as stock-in-trade. The Tribunal decided that the loss was a business loss and should be allowed.

3. Disallowance of Loss on Sale of Property at T. Nagar:
The A.O. disallowed a loss of Rs. 36,83,334/- on the sale of property at T. Nagar, citing similar reasons as the Saligramam property. The CIT(A) allowed the loss, noting that the assessee had to abandon the project due to difficulties in obtaining plan approval and sold the property at a loss. The Tribunal upheld the CIT(A)'s decision, agreeing that the loss was incurred in the course of business and should be allowed.

Separate Judgments:
The Accountant Member and Judicial Member agreed on the disallowance of partner's remuneration but differed on the loss claims. The Judicial Member suggested remitting the issues back to the A.O. for further investigation. The Third Member (Vice-President) agreed with the Accountant Member, deciding that the losses on the sale of properties were business losses and should be allowed.

Final Decision:
The appeal of the Revenue was partly allowed. The disallowance of partner's remuneration was reinstated, while the disallowances of losses on the sale of the flat and property were deleted.

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