2019 (8) TMI 1045 - AT - Income Tax

Remuneration to partners - increase / change the quantum of the salary/remuneration by a separate agreement or supplementary deed - validity of resolution increasing the salary not singed by any witness - scope of the Partnership Act, 1932- Deduction u/s. 28 read with section 40(b) - reason for the disallowance is that the same is not admissible in view of section 40(b) - HELD THAT - The assessee s conduct, i.e., in first continuing with an impermissible clause (in the partnership deed) even years after clarification by the Board and, then, in not defining the manner of quantification, but passing resolutions, with no record as to the time when they were actually passed, stating to be valid amendment/s to the partnership agreement, itself betrays its case of having passed the resolutions on the date from which they are made effective, i.e., prospectively. The resolution/s also does not qualify the term partners with the word working , so that in terms thereof, the salary is to be paid irrespective of whether a particular partner is a working partner or not, and which is not sustainable in view of section 40(b)(i). The entries in the books of account, even otherwise not decisive of the matter, also do not support the assessee s case. The said resolution, or the one stated to be passed earlier thereto, cannot, in view of the fore-going factual and legal incidents, be regarded as a valid partnership deed, i.e., as a valid instrument of partnership, or as a valid amendment to the partnership deed dated 05.6.2007. One could argue that even ignoring the resolution/s the total salary provided in the partnership accounts could be regarded as agreed to by the partners, i.e., from time to time. The same implies that there is no need for a separate written agreement, which cannot be accepted in view of the same being a requirement of law for a firm to be assessed as a firm (ss. 184, 185). The decision in Suman Constructions 2008 (12) TMI 275 - ITAT PUNE-A as well as ITO v. Kakkar Cold Storage 2002 (12) TMI 194 - ITAT AMRITSAR which pertains to AY 1993-94 (for which exception has been made by the Board circular (supra) itself), would, accordingly, be of no consequence, as would be the assessee s reliance on Durga Dass Devki Nandan v. ITO 2011 (3) TMI 20 - HIMACHAL PRADESH HIGH COURT would be of little assistance to the assessee. In fact the latter two decisions are distinguishable in-asmuch as in these cases the partnership deed provided for allowance of salary to the working partners in terms of the relevant clause of the Act (s. 40(b)(v)), and which is precise and definite, so that the salary could be quantified with reference thereto, even as explained in and therefore consistent with the board circular (supra), upheld by the Hon ble jurisdictional High Court. Section 40(b)(v) defines the maximum remuneration admissible to the working partners of a partnership firm, assessed as such. The said decisions are thus distinguishable on facts. No merit in law in the assessee s claim qua the allowance of remuneration to the working partners, i.e., in the facts and circumstances of the case. The salary allowed having however been, as given to understand during hearing, assessed in the hands of the partners (to whom it stands allowed), they shall be allowed relief by the AO in terms of s. 155 of the Act. - Decided against assessee.

Issues Involved:
1. Validity of disallowance of remuneration to partners under section 40(b) of the Income Tax Act, 1961.
2. Interpretation of partnership deed and relevant clauses.
3. Admissibility and genuineness of the resolution passed for increasing partner remuneration.
4. Applicability of Board Circular No. 739 dated 25.3.1996.
5. Legal enforceability of the resolution and its compliance with partnership and income tax laws.

Detailed Analysis:

1. Validity of Disallowance of Remuneration to Partners under Section 40(b):
The main issue in the appeal is whether the disallowance of ?4,40,000 as remuneration to partners is valid under section 40(b) of the Income Tax Act, 1961. The Revenue disallowed the remuneration on the grounds that the partnership deed did not specify the remuneration amount or the manner of its quantification, which is a mandatory condition under section 40(b).

2. Interpretation of Partnership Deed and Relevant Clauses:
The partnership deed dated 05/6/2007, specifically clause 9, mentions that the salary to partners shall be as mutually agreed between the partners. This clause does not specify the amount or the manner of quantification of remuneration, which is required by section 40(b). The Tribunal noted that the clause is not an agreement for a specific sum and does not identify the working partners by name, thus failing to meet the requirements of section 40(b).

3. Admissibility and Genuineness of the Resolution Passed for Increasing Partner Remuneration:
The assessee relied on a resolution dated 01.4.2013, which increased the salary of both partners from ?1.20 lacs per annum to ?2.20 lacs per annum. The Tribunal questioned the genuineness of this resolution, noting that it was not furnished during the assessment proceedings and lacked contemporaneous records to prove its execution date. The Tribunal also highlighted that the resolution was neither stamped nor registered, making it inadmissible as evidence in a court of law.

4. Applicability of Board Circular No. 739 dated 25.3.1996:
The Tribunal referenced Board Circular No. 739, which clarifies that for assessment years after AY 1996-97, no deduction under section 40(b)(v) is admissible unless the partnership deed specifies the amount of remuneration or the manner of quantifying it. The Tribunal upheld the circular, noting that it correctly explains the legislative intent and is binding on the Revenue authorities. The Tribunal also cited the Hon’ble jurisdictional High Court's decision in Sood Bhandari & Co. v. CBDT, which upheld the Board Circular.

5. Legal Enforceability of the Resolution and Its Compliance with Partnership and Income Tax Laws:
The Tribunal concluded that the resolution dated 01.4.2013 could not be regarded as a valid amendment to the partnership deed. The resolution lacked proper stamping and registration, making it legally unenforceable. The Tribunal emphasized that the remuneration clause must be agreed upon at the beginning of the period for which it is to operate and cannot be decided retrospectively. The Tribunal also noted that the resolution did not qualify the term 'partners' with 'working,' which is required under section 40(b)(i).

Conclusion:
The Tribunal dismissed the assessee's appeal, finding no merit in the claim for the allowance of remuneration to the working partners. The Tribunal directed the Assessing Officer to provide relief to the partners under section 155 of the Act if the salary had been assessed in their hands. The order was pronounced in the open court on April 10, 2019.

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