2019 (2) TMI 333 - AT - Income Tax

Disallowance of remuneration paid to working partners - authorization of remuneration paid to working partners as per the Partnership deed - Scope of Section 40(b)(v) - instead of specified remuneration, it is linked to provisions of income tax Act, 1961 - Held that - A reading of section 40(b)(v) clearly shows that the amount of remuneration which does not exceed the amount given in the Income-tax Act is deductible. In the present case, the partnership deed provides that the remuneration will be as per the provisions of the Income-tax Act. It clearly means that the remuneration payable to the partners shall be quantified as per the provisions of the Income-tax Act and shall not exceed the maximum remuneration provided. It is not in dispute that the partners were paid remuneration which was less than the maximum provided by the Income-tax Act. There is no doubt with regard to the payment of remuneration and in fact account books of the assessee firm have been accepted as correct. There is no doubt that the partners are working partners and remuneration has been paid to such working partners. Therefore, the Circular has to read along with section 40(b)(v) and has to be made subject to provisions of section 40(b)(v) of the I.T.Act. Section 40(b)(v) does not lay down any condition of fixing the remuneration or the method of remuneration in the partnership deed. All that the section provides is that in case the payment of remuneration made to any working partner is in accordance with the terms of the partnership deed and does not exceed the aggregate amount as laid down in the relevant provisions of the Income-tax Act. Remuneration paid to the working partners has to be allowed as deduction in the hands of the assessee-firm. - Decided in favour of assessee

Summary

Issues:
Disallowance of remuneration paid to working partners.

Analysis:
The appeal concerns the disallowance of remuneration paid to working partners by the CIT(A). The assessee, a firm dealing in three-wheelers, filed its return for the assessment year 2011-2012, declaring an income of ?4,11,690. The assessment completed by the Assessing Officer resulted in total additions of ?11,21,261, including disallowance of remuneration paid to working partners. The CIT(A) upheld the additions, leading to the current appeal before the Tribunal.

The main contention revolves around whether the CIT(A) erred in confirming the disallowance of remuneration paid to working partners. The provisions of section 40(b)(v) of the Income Tax Act govern the allowance or disallowance of such remuneration. The partnership deed must authorize and specify the remuneration to working partners, subject to certain limits as per the Act. The partnership deed in this case provided for remuneration to working partners, initially as per the 2007 deed and later revised in the 2011 deed.

The Assessing Officer disallowed the excess remuneration paid to working partners, citing a CBDT circular requiring specific quantification of remuneration in the partnership deed. However, the Tribunal held that the CBDT circular cannot impose conditions beyond the Act's provisions. The remuneration paid was within the limits set by the Income Tax Act, and the partnership deed provided for remuneration in accordance with the Act.

Referring to a judgment by the Himachal Pradesh High Court, the Tribunal ruled in favor of the assessee, emphasizing that the remuneration paid was as per the partnership deed and did not exceed the permissible amount. Therefore, the remuneration paid to working partners was allowed as a deduction in the hands of the assessee-firm. As a result, the appeal filed by the assessee was allowed.

In conclusion, the Tribunal's decision highlights the importance of aligning remuneration payments with the provisions of the Income Tax Act as specified in the partnership deed. The judgment serves as a precedent emphasizing that remuneration paid within the Act's limits and as per the partnership deed is allowable as a deduction, despite any conflicting circulars.