2000 (5) TMI 156 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of remuneration paid to the partner u/s 40A(2)(b) of the Income-tax Act.
2. Validity of the partnership deed and agreement regarding remuneration.

Summary:

Issue 1: Disallowance of remuneration paid to the partner u/s 40A(2)(b) of the Income-tax Act

The assessee firm paid remuneration of Rs. 4,30,000 to the working partner, Shri Dilip G. Shah, for the assessment year 1994-95, compared to Rs. 42,000 in the preceding year. The Assessing Officer (AO) disallowed the excess remuneration u/s 40A(2)(b), citing it as excessive and unreasonable. The AO noted several factors, including the lack of a separate agreement fixing the salary, no extra work by the partner, and the partner's admission that the salary rise was unreasonable. The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, referencing a similar case.

Issue 2: Validity of the partnership deed and agreement regarding remuneration

The assessee argued that the remuneration was paid as per the partnership deed dated 1-4-1992, which allowed maximum permissible remuneration under the Income-tax Act. The assessee cited decisions in Ganesh Factory CIT and CIT v. Yoganand Textiles, arguing that the AO had no right to disallow any part of the remuneration. The Departmental Representative contended that both sections 40(b)(5) and 40A(2) should be applied, with section 40A(2) being an overriding provision.

Judgment:

The Tribunal examined the history and background of sections 40(b) and 40A(2). It concluded that these sections operate in different fields. Section 40(b) was amended by the Finance Act, 1992, allowing remuneration to working partners within prescribed limits. The Tribunal held that the AO had no power to question the reasonableness of remuneration paid within these limits. The Tribunal also referenced Circular No. 739, which supported a liberal approach for initial years regarding remuneration clauses in partnership deeds.

The Tribunal found that the partnership deed authorized remuneration at the maximum rate permissible under the Income-tax Act. The agreement was valid and not contrary to the Act. The remuneration paid did not exceed the prescribed percentage of the book profit. Therefore, the disallowance of Rs. 4,34,000 was not justified.

Conclusion:

The Tribunal set aside the orders of the revenue authorities and directed the AO to allow the deduction of remuneration as claimed. The assessee's appeal was allowed.