2022 (6) TMI 184 - AT - Income Tax

Revision u/s 263 by CIT - assessee has claimed partners' remuneration u/s 40(b)(v) - as per CIT deed is not quantified the partners' salary thus accordingly, the assessee is not eligible to get the benefit of section 40(b)(v) related remuneration of the partners - HELD THAT - The assessee in its partnership deed mentioned the drawing power of the salary is 24 lakh per annum for each partner. In fact more than salary Rs. 24 lakh will be disallowed as per section 40(b)(v) - Here it cannot say that the specific salary is not quantified. The assessment order has not pointed out about anything related to partnership deed. But during calculation of total income the said deed was considered documents was within the record of the proceeding. On basis of remuneration clause in deed two views are different in between the ld. AO ld. Pr CIT. On other hand the disallowance of partners remuneration means the tax was paid by the assessee on Rs. 36 lakhs in its return income. So, the full partnership remuneration is under tax bracket. The general prudence of the law is that the same income cannot be taxed twice. On other hand, the partners are not liable to pay tax on the remuneration which was already paid by the firm in its return of income. The beauty of the section 40(b)(5) is that the remuneration to the partner is fully regulated by the book profit. More book profit more remuneration of partner will be allowed. So as per act the assessee can claim more remuneration but it will be allowed subject to provision 40(b)(5) of the Act depending of its book profit. On the other hand, the same remuneration is taxed in the hands of the assessee. The learned Pr. Commissioner of Income Tax, during issuance of notice under section 263 of the act and also during passing the order under section 263 of the act did not cognizance on the calculation of tax and the benefit of the revenue. We consider the order under section 263 of the act. The two opinions were formed by two Authorities in the question of acceptance of clause of partnership deed related Partners' Remuneration. Respectful consideration of the judgments of Hon'ble Apex court is in the case of Malabar Industrial Company Ltd. vs CIT 2000 (2) TMI 10 - SUPREME COURT in the case of Principal Commissioner of Income-tax, Surat-2 v. Shreeji Prints (P.) Ltd. 2021 (9) TMI 108 - SUPREME COURT Here, the view of ld. Assessing Officer being a plausible view could not be considered erroneous or prejudicial to interest of revenue. Accordingly, the order of the ld. AO cannot be considered erroneous or prejudicial to the interest of revenue. - Appeal of assessee allowed.

Summary

Issues:
Assessment under section 263 of the Income Tax Act, 1961 for Assessment Year 2015-16 related to partners' remuneration quantification under section 40(b)(v) of the Act.

Analysis:
1. The appeal was against the order passed by the Principal Commissioner of Income Tax-1, Jalandhar under section 263 of the Income Tax Act, 1961, regarding the quantification of partners' remuneration. The partnership deed did not explicitly quantify the partners' salaries, leading to the initiation of the notice under section 263 by the Principal Commissioner.

2. The assessee argued that the partnership deed did quantify the salaries of partners in point number 7, allowing each partner a maximum of Rs. 24,00,000 per annum. The counsel contended that the assessing officer had considered the partnership deed during the assessment, and the salaries were within the authorized limits, hence not erroneous. However, the CIT-DR argued that the quantification was not explicitly mentioned in the deed, making the entire order erroneous.

3. The Principal Commissioner's order under section 263 highlighted discrepancies in the assessment order, emphasizing the non-quantification of salaries in the partnership deed as required by section 40(b)(ii). The response from the assessee's counsel reiterated that the salaries were quantified as per the deed and authorized limits, citing relevant sections of the Income Tax Act.

4. The counsel further argued that invoking section 263 was not in the interest of revenue, as the assessee had paid taxes on the full remuneration amount of Rs. 36 lakhs, resulting in double taxation if disallowed. Documents attached supported the claim that the partners had already paid taxes individually on their share of the remuneration.

5. The Tribunal analyzed the two views presented by the assessing officer and the Principal Commissioner regarding the acceptance of the partnership deed's clause on partners' remuneration. Referring to relevant judgments, the Tribunal concluded that the assessing officer's view was plausible and not erroneous or prejudicial to the interest of revenue, ultimately allowing the appeal filed by the assessee.

6. The Tribunal highlighted the importance of considering the book profit in regulating partner remuneration under section 40(b)(5) of the Act, emphasizing that the same income should not be taxed twice. The Tribunal's decision was based on the plausibility of the assessing officer's view and the lack of error or prejudice to revenue in the original order.

7. In conclusion, the Tribunal allowed the appeal filed by the assessee, emphasizing that the assessing officer's decision was not erroneous or prejudicial to the interest of revenue. The order was pronounced in favor of the assessee on 19.05.2022.