2012 (12) TMI 875 - HC - Income Tax

Remuneration to partners - Allowance of sec 40(b)(v) only on the basis of declaration made in the partnership deed declaring them as working partner OR firm to prove that these partners are actively engaged in conducting the affairs of the business - Held that - Section 40(b)(v) prescribed limit of remuneration which can be allowed to its partner as deduction while computing the business income. It is not in dispute that the remuneration paid to the working partners was within the provision of clause (v) of subsection (b) of Section 40 as all the three partners are working partners in the assessee opp.party firm and the AO has himself allowed the remuneration of Rs.4,00,000/- per annum to each of the partner. The Parliament in its wisdom had fixed a limit on allowing the remuneration to the working partners and if the remuneration are within the ceiling limit provided then recourse to provision of Section 40A(2)(a) cannot be taken. The AO is only required to see as to whether the partners are the working partners mentioned in the partnership deed, the terms and conditions of the partnership deed provide for payment of remuneration to the working partners and whether the remuneration provided is within the limits prescribed under Section 40(b)(v) or not. If all the aforementioned conditions are fulfilled then he cannot disallow any part of the remuneration on the ground that it is excessive. Since in the present case, all the conditions required has been fulfilled the question of disallowance does not arise.

Issues:
1. Interpretation of Section 40(b)(v) of the Income Tax Act regarding the allowance of remuneration to partners based on the partnership deed declaration.
2. Disallowance of excessive remuneration paid to partners by the Assessing Officer.
3. Application of Section 40A(2)(a) in disallowing remuneration.
4. Compliance with the provisions of Section 40(b) regarding the payment of remuneration to working partners.

Issue 1: Interpretation of Section 40(b)(v) regarding remuneration to partners based on partnership deed declaration

The case involved a partnership firm engaged in the business of manufacturing and exporting brass art ware. The dispute arose when the Assessing Officer noticed that the firm had paid excessive remuneration to its partners compared to the total salary paid to employees. The partnership deed did not specify the functions and duties of working partners justifying the remuneration paid. The Commissioner of Income Tax (Appeals) partly allowed the appeal, and the Revenue appealed to the Tribunal. The Tribunal found that the remuneration paid to working partners was within the prescribed limits of Section 40(b) and upheld the decision of the Commissioner of Income Tax (Appeals). The Tribunal clarified that the Assessing Officer cannot question the reasonableness of remuneration if it is within the limits specified in Section 40(b). Therefore, the Tribunal dismissed the appeal, emphasizing the importance of compliance with the partnership deed and Section 40(b) for the allowance of partner remuneration.

Issue 2: Disallowance of excessive remuneration paid to partners by the Assessing Officer

The Assessing Officer disallowed a portion of the remuneration paid to partners, considering it excessive and invoking Section 40A(2). However, the Tribunal held that the Assessing Officer's disallowance was not sustainable as the remuneration was within the prescribed limits of Section 40(b). The Tribunal cited judicial pronouncements to support its decision, stating that Section 40A does not apply when Section 40(b) is invoked. The Tribunal emphasized that the Assessing Officer's role is limited to ensuring compliance with Section 40(b) regarding partner remuneration and not questioning the reasonableness of the amount paid.

Issue 3: Application of Section 40A(2)(a) in disallowing remuneration

The appellant argued that the Assessing Officer could disallow excessive remuneration under Section 40A(2)(a) if the partnership deed did not specify the duties of partners. However, the Tribunal disagreed, stating that as long as the partnership deed allows remuneration to working partners and the amount is within the limits set by Section 40(b), the Assessing Officer cannot disallow the remuneration based on reasonableness. The Tribunal emphasized that the conditions specified in the Act must be met for the allowance of partner remuneration.

Issue 4: Compliance with the provisions of Section 40(b) regarding the payment of remuneration to working partners

The Tribunal found that all conditions required for the allowance of partner remuneration under Section 40(b) were fulfilled in the present case. It emphasized that as long as the partners are designated as working partners in the partnership deed, and the remuneration paid is within the prescribed limits, the Assessing Officer cannot disallow the remuneration. Therefore, the Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) and dismissed the appeal, concluding that the remuneration paid to partners was in compliance with the provisions of Section 40(b).

In conclusion, the judgment clarified the interpretation of Section 40(b)(v) regarding partner remuneration, emphasized compliance with the partnership deed and statutory provisions, and highlighted the Assessing Officer's limited role in questioning the reasonableness of remuneration within the prescribed limits.

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