2014 (12) TMI 508 - AT - Income Tax

Bonus paid to the fourth partner disallowed Held that - It is neither disputed nor established by the authorities below that all the four partners were actively engaged in the conduct of the business of the firm and thus, are the working partners - although the firm was constituted in A.Y. 2004-05 and the assessee firm has been making this claim right since AY 2004-05 but all along the revenue has been accepting such a claim even in the assessment made under scrutiny hence there was no justification to make a departure from the settled position in the past without bringing any material change in the facts and the circumstances of the case in this year - the issue is revenue is neutral in as much as even assuming a certain part of the claimed remuneration is disallowed in the hands of the firm, it cannot be treated to be an income from business in the hands of the partners and a necessary safeguard has already been provided under the proviso below the Sec.28(v) against the double taxation of the same income - even if the disallowance so made is upheld, deduction to that extent has to be allowed in the hands of the partners/s - revenue shall not be put to any loss if the remuneration as claimed, is allowed in the hands of the assessee firm there was no justification in the disallowance made u/s 40(b) is set aside Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction and validity of the impugned additions and disallowances.
2. Disallowance of Rs. 20,47,000 on account of bonus paid to the fourth partner.
3. Charging of interest under sections 234A, 234B, 234C, and 234D, and withdrawal of interest under section 244A.

Detailed Analysis:

1. Jurisdiction and Validity of the Impugned Additions and Disallowances:
The appellant did not press this ground at the time of hearing. Consequently, this ground was dismissed as not pressed.

2. Disallowance of Rs. 20,47,000 on Account of Bonus Paid to the Fourth Partner:
The assessee challenged the confirmation of the disallowance of Rs. 20,47,000 made by the AO on account of bonus paid to the fourth partner, Shri Nizamuddin. The partnership deed dated 01.04.2003 indicated that salary was being paid only to three partners, while the bonus was paid to all four partners. The AO disallowed the bonus paid to Shri Nizamuddin, arguing that he was not a working partner since he did not receive a salary. The CIT(A) upheld this disallowance.

The assessee argued that all partners, including Shri Nizamuddin, were actively engaged in the business, and the bonus was within the permissible limit under section 40(b). The assessee also highlighted that the partnership deed authorized the payment of bonus to all partners and that the firm had been following this practice since A.Y. 2004-05 without any disallowance by the revenue in previous years.

The tribunal found that all four partners were actively engaged in the business, fulfilling the condition of being working partners as per Explanation 4 to section 40(b). The tribunal also noted that the partnership deed authorized the payment of salary to three partners and bonus to all four. The tribunal concluded that the disallowance was unjustified, as all conditions under section 40(b) were met. Therefore, the disallowance of Rs. 20,47,000 was deleted.

3. Charging of Interest under Sections 234A, 234B, 234C, and 234D, and Withdrawal of Interest under Section 244A:
The assessee challenged the charging of interest under sections 234A, 234B, 234C, and 234D, and the withdrawal of interest under section 244A. The tribunal noted that the charging of interest is consequential and should be computed by the AO after giving effect to the tribunal's order.

Conclusion:
The appeal was partly allowed. The tribunal deleted the disallowance of Rs. 20,47,000 made under section 40(b) and directed the AO to compute the interest charges consequentially. The order was pronounced in the open court on 28-02-2014.