2021 (1) TMI 835 - AT - Income Tax

Disallowance of salary and remuneration paid to one of the partners - altered and amended clause 4 and 10 of the original deed of partnership and authorized payment of interest and salary / remuneration to fulfill in accordance to the provision of Section 40(b) - HELD THAT - Authorities below erred in disallowing the claim and misdirected themselves by looking into the clause 8 of the old partnership deed which in no way conflict with that of the subject matter discussed in clause 10 - As brought to our notice that after the supplementary deed has been executed on 10.05.1996 i.e. from AY 1997-98 till AY 2014-15, the assessee Firms expenditure on account of salary / remuneration to Smt. Sharmila Dugar has not been disallowed. On the principle of consistency also the claim which was rightly claimed should not have been disallowed. So we find force in the submission of the Ld. AR Shri S. P. Bhati that the assessee Firm has rightly claimed the salary and remuneration to its partner Smt. Sharmila Dugar at ₹ 2.50 lakhs as provided for in amended supplementary deed dated 10.05.1996 and so, I direct the AO to allow ₹ 2.50 Lakhs claimed by the assessee Firm for salary/ remuneration to Smt. Sharmila Dugar. We direct the AO to allow the claim of expenditure in respect of remuneration/salary partner Smt. Sharmila Dugar.

Summary

Issues:
Disallowance of salary and remuneration paid to a partner.

Analysis:

1. The appeal was filed by the assessee against the order of the Ld. CIT(A) for the assessment year 2014-15, specifically challenging the disallowance of salary and remuneration paid to one of the partners, Smt. Sharmila Dugar, amounting to ?2.50 Lakhs. The AO noted that the assessee firm had declared total income of ?4,52,370 and claimed salary and remuneration of ?2.50 Lakhs to each of the two partners, totaling ?5 Lakhs. The AO examined the partnership deed and supplementary deed to assess the validity of the claim.

2. The original partnership deed dated 01.07.1985 and the supplementary deed dated 10.05.1996 were crucial in this case. The supplementary deed amended clauses 4 and 10 of the original deed, authorizing the payment of interest and salary/remuneration in compliance with Section 40(b) of the Income Tax Act, 1961. The disagreement arose due to clause 8 of the original partnership deed, which raised concerns about the involvement of Smt. Sharmila Dugar in the day-to-day management of the firm.

3. The Ld. CIT(A) confirmed the AO's decision to disallow the claim, leading the assessee to appeal further. During the hearing, it was emphasized that the supplementary deed of partnership, executed in 1996, clearly outlined the entitlement of partners to remuneration, including Smt. Sharmila Dugar. The Tribunal found that the authorities erred in disallowing the claim based on clause 8 of the old partnership deed, which did not conflict with the provisions of the amended clause 10.

4. The Tribunal highlighted the principle of consistency, noting that the firm had consistently claimed and not faced disallowance for Smt. Sharmila Dugar's remuneration since the execution of the supplementary deed in 1996. Therefore, the Tribunal directed the AO to allow the claimed amount of ?2.50 Lakhs for salary/remuneration to Smt. Sharmila Dugar for the relevant assessment year.

5. Ultimately, the Tribunal allowed the appeal of the assessee, emphasizing the validity of the claim based on the amended supplementary deed and the principle of consistency. The order was pronounced on 20th January 2021, in favor of the assessee.