2017 (2) TMI 1087 - AT - Income Tax

Reopening of assessment - addition invoking the provisions of Section 40(b) - remuneration paid to partner - Held that - Any further disallowance made by the AO is not sustainable. First of all, the partnership deed specifies the manner in which the remuneration has to be paid to working partners. AO in the assessment order u/s. 143(3) has examined the claim and disallowed the amount paid to nonworking partner. Thus, the issue presently considered is change of opinion by the same officer. In fact, the circular relied on by the AO was issued way back on 25-03-1996 and has to be very much in the knowledge of the AO when assessment was completed in December 2011. Thus, the reopening and disallowance of the amount is not permissible on these facts. - Decided in favour of assessee.

Issues:
Disallowance of remuneration to partners under Section 40(b) of the Income Tax Act in re-assessment proceedings u/s. 147 - Validity of disallowance based on Board Circular No. 739 dt. 25-03-1996 - Change of opinion by Assessing Officer - Validity of reopening proceedings u/s. 147.

Analysis:

Issue 1: Disallowance of remuneration to partners under Section 40(b):
The appeal concerned the disallowance of remuneration made by the Assessing Officer (AO) invoking Section 40(b) of the Income Tax Act in re-assessment proceedings u/s. 147. The AO disallowed an amount of remuneration paid to a non-working partner, citing that the partnership deed did not specify the manner of quantifying such remuneration. The Commissioner of Income Tax (Appeals) upheld the disallowance based on a Board Circular, which stated that no deduction under Section 40(b)(v) would be admissible unless the partnership deed specified the amount of remuneration payable to each individual working partner or laid down the manner of quantifying such remuneration.

Issue 2: Validity of disallowance based on Board Circular:
The Circular issued by the CBDT clarified the allowability of remuneration to partners under Section 40(b)(v). The Circular stated that for assessment years post-1996-97, no deduction would be admissible unless the partnership deed specified the amount of remuneration or the method of quantifying it. The dispute centered around whether the remuneration claimed was allowable in accordance with the Circular and the Partnership Deed clause. The appellant contended that the remuneration was allowable as per the Circular, while the AO disallowed it due to lack of quantification in the Partnership Deed.

Issue 3: Change of opinion by Assessing Officer and reopening proceedings u/s. 147:
The Assessing Officer's disallowance was challenged on the grounds that the partnership deed specified the manner of remuneration payment to working partners, and the disallowance was not sustainable. The appellant argued that the AO's reliance on the Circular for disallowance was not valid, as the Circular could not override the provisions of the Act. Additionally, a Co-ordinate Bench judgment and a High Court judgment were cited to support the contention that the remuneration paid to partners was in accordance with the Partnership Deed and allowable under Section 40(b)(v). The Tribunal held that the AO's disallowance was not sustainable, and the reopening of proceedings u/s. 147 was impermissible based on the facts and the officer's prior knowledge of the Circular.

Conclusion:
The Tribunal allowed the appeal partly, holding that the disallowance of remuneration was not justified, and the reopening of proceedings was impermissible. The judgments cited emphasized that the remuneration paid to partners was in compliance with the Partnership Deed and the provisions of Section 40(b)(v), making it allowable as a deduction. The Circular issued by the CBDT could not override the statutory provisions, and the AO's disallowance was deemed unsustainable based on the legal principles discussed in the judgments.

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