2003 (1) TMI 250 - AT - Income Tax

Summary

Issues:
- Disallowance of salary paid to partners under section 40(b) of the IT Act.

Analysis:
1. The appeals by the Revenue were against the CIT(A)'s orders deleting the disallowance of salary paid to partners under section 40(b) of the IT Act for the assessment years 1994-95, 1995-96, 1996-97, and 1997-98.

2. For the assessment years 1994-95 and 1995-96, the AO initially allowed the deduction claimed but later withdrew it, stating that the partnership deed should specify the partners as "working partners" to receive salary. This withdrawal was based on a misinterpretation of section 40(b)(i) of the Act.

3. In the subsequent assessment years 1996-97 and 1997-98, the salary paid to partners was disallowed by the AO, who insisted that partners should be designated as "working partners" in the partnership deed to claim salary as a deduction under section 40(b).

4. The CIT(A) allowed the appeals of the assessee after considering the terms of the partnership deed, the amendment in section 40(b) from April 1, 1993, and a relevant CBDT Circular. The CIT(A) held that the deduction of salary was rightly claimed as per the partnership deed and the provisions of section 40(b)(v) of the IT Act.

5. The Revenue appealed to the Tribunal, reiterating that salary paid to partners could not be allowed as no partner was designated as a "working partner" in the partnership deed, citing section 40(b)(v) of the Act.

6. The Tribunal analyzed the statutory provisions, particularly section 40(b)(v), and concluded that the requirement was for partners to be working partners and for salary to be paid in accordance with the partnership terms, not necessarily to be designated as "working partners" in the deed. The Tribunal upheld the CIT(A)'s decision, noting that the AO's insistence on specific wording in the partnership deed was unfounded.

7. The Tribunal confirmed that the deduction of salary to partners was justified as per the law and disagreed with the AO's interpretation of section 40(b). It also highlighted that a similar deduction disallowed in a previous year was allowed on appeal, indicating inconsistency in the AO's approach.

8. Consequently, the Tribunal upheld the CIT(A)'s orders, dismissing the Revenue's appeals.

9. In conclusion, the appeals were dismissed, affirming the allowance of the deduction for salary paid to partners under section 40(b) of the IT Act.