2015 (8) TMI 855 - HC - Income Tax

Disallowance u/s 40(b)(v) - whether remuneration paid to the partners of the Respondent Assessee firm was not in accordance with the provision of Section 40(b)(v) - ITAT deleted addition - Held that - No reason to take a view different from the one taken by the ITAT. Clause 6(a) of the partnership deed dated 20th June 2008 clearly indicates the methodology and the manner of computing the remuneration of partners. The remuneration of the partners has been computed in terms thereof. The Court additionally notes that under Section 28(v) of the Act, any salary or remuneration by whatever name called received by partners of a firm would be chargeable to tax under the head profits and gains of business or profession. The proviso to Section 28 (v) states that where such salary has been allowed to be deducted under Section 40(b)(v), the income shall be adjusted to the extent of the amount not so allowed to be deducted. Further Section 155 (1A) states that where in respect of a completed assessment of a partner in a firm, it is found on the assessment or reassessment of the firm that any remuneration to any partner is not deductible under Section 40(b), the AO may amend the order of the assessment of the partner with a view to adjusting the income of the partner to the extent of the amount not so deductible. A conspectus of these provisions makes the opinion the ITAT consistent with the legal position. - Decided against revenue. Addition on account of payment made to the Indian Branch of the International Fiscal Association - as per AO it was not relatable to the business purposes of the Assessee - ITAT deleted addition - Held that - ITAT has accepted the explanation of the Assessee that the IFA was a professional body and a non-profit organisation engaged in the study of international tax laws and policies. It, inter alia, undertakes research, holds conferences and publishes materials for the use of its members. Mr. Ajay Vohra, one of the partners of the Assessee firm, was also a member of the executive body of the IFA. In the facts and circumstances, the contribution made by the Assessee to the IFA was held to be for inter alia creating greater awareness of the Assessee firm s activities and therefore an expenditure incurred for the purposes of the profession of the Assessee. It was accordingly held to be allowable as a deduction under Section 37(1) of the Act. Further, since the Indian branch of IFA was a non-profit organisation registered under Section 12 AA of the Act, its income was not taxable and the question of deducting tax at source from the payment made to it in terms of Section 40 (a) (ia) did not arise. - Decided against revenue.

Summary

Issues:
1. Correctness of deletion of addition to income of Assessee firm based on remuneration paid to partners.
2. Deletion of addition made by AO on payment to Indian Branch of International Fiscal Association.

Issue 1:
The first issue in this case revolved around the correctness of the deletion of an addition to the income of the Assessee firm concerning the remuneration paid to partners. The Revenue contended that the remuneration paid was not in accordance with Section 40(b)(v) of the Income Tax Act, 1961. The partnership deed initially had a clause specifying the calculation of partners' salaries based on allocable profits, which was later modified in a supplementary deed. The Assessing Officer disallowed the remuneration, stating that the partnership deed did not specify the salary amount for each partner, leading to the conclusion that Section 40(b)(v) did not apply. The ITAT, however, interpreted "allocable profits" in the deed to mean "book profits" as defined in the Act, thereby ruling the disallowance as incorrect. The High Court concurred with the ITAT's interpretation, emphasizing that the methodology for computing partner remuneration was clearly indicated in the partnership deed, aligning with legal provisions under Sections 28(v), 40(b), and 155(1A) of the Act.

Issue 2:
The second issue involved the deletion of an addition made by the AO on a payment to the Indian Branch of the International Fiscal Association (IFA). The AO contended that the payment was not for business purposes, but 50% was allowed as a deduction under Section 80G. The ITAT, however, accepted the Assessee's explanation that the contribution to the IFA was for professional purposes, creating awareness of the firm's activities. As the IFA was a non-profit organization engaged in international tax laws research, the ITAT deemed the payment allowable as a deduction under Section 37(1) of the Act. The Court upheld the ITAT's decision, stating that the contribution served business purposes, aligning with the Assessee's profession, and therefore did not raise any substantial legal question.

In conclusion, the High Court dismissed the appeal, affirming the ITAT's decisions on both issues, emphasizing the alignment of the Assessee's actions with legal provisions and the business purpose served by the contributions made.