2023 (1) TMI 264 - AT - Income Tax

Determination of remuneration paid to partner - working / retiring partner - CIT-A deleted the addition - whether CIT(A) erred in ignoring the provisions of section 40(b) as the partner has not worked for whole year? - HELD THAT - The Revenue s grievance, as we understand, is that no remuneration is exigible to the working partner for P1 as he had not worked for the entire year. We find no merit in the Revenue s claim, by which logic, even no remuneration for P2, claimed at Rs. 2.10 lacs, also ought to have been allowed. It is thus clear that the firm has incorporated the terms of section 40(b), providing for the maximum amount of remuneration payable to the working partners of a partnership firm with reference to it s book-profit , as defined therein, in the partnership deed itself for quantifying the said remuneration. As the same is thus based on book-profit, the firm prepared two profit loss accounts, i.e., for the period up to the date of retirement (P1), and thereafter (P2), computing the remuneration to the working partner separately for each period, i.e., for settling the accounts between the partners, even as it filed, as is required to by law one return of income for the entire year. A consolidated profit loss account for the year was required to be prepared, which profit or loss is to be then appropriated amongst the partners, including remuneration as well as interest payable thereto, which is only their business income assessable u/s. 28(v), in terms of the partnership deed. Unless the right to profit comes into existence, there is no accrual of profit, and the destination of profits must be determined by the title thereto on the day on which they arise. The concept of accrual of the profits of a business involves their determination by the method of accounting at the end of the accounting year or any shorter period determined by law. The appropriation of profit between the partners is to be in the terms of the partnership deed which, in case of it being silent thereon, as appears to be case inasmuch as some of the clauses of the earlier deeds (not on record) have been incorporated, could be on any cogent basis. The allocation by the firm in the instant case for P1 is at 37.39% (of the total profit for the year), as against at 40.27% if the said profit is allocated on time (147/365) basis. The remuneration to the retiring partner, Sanjay Pathak, would therefore work to a still higher amount if such a method was adopted. Coming back to the Revenue s objection, the same is based on book-profit which, as afore-stated, is to be worked out for the entire year and, further, the remuneration allowed to the retiring partner is only up to the date of his retirement, i.e., with reference to profit relatable to the period for which he was a partner. Working, for which the partner is to be remunerated, being a function of time, we find the same as a valid basis. What, then, we wonder is the controversy about, to which no answer could be provided during hearing by Sh. Kumar? We accordingly find no substance in the Revenue s case. We consider it appropriate to state that no document evidencing the retirement of Shri Sanjay Pathak, i.e., in terms of section 32 read with section 72 of the Indian Partnership Act, 1932, which concern the need to, and the manner of, public notice, in case of retirement of a partner from a partnership firm, has been placed before us as also, as apparent, before the CIT(A); his order being sans any reference thereto. The same, however, would only impact the liability of the retiring partner vis-a-vis the obligations of the firm to third parties, and has no bearing on the instant case, which relates to the deductibility of the remuneration allowed to the retiring working partner up to the date of his retirement, and no further, and qua which the relevant facts are not in dispute.Revenue s appeal is dismissed.

Summary

Issues involved:
- Disallowance of remuneration paid to a partner
- Interpretation of provisions of section 40(b) of the IT Act

Analysis:
1. Disallowance of remuneration paid to a partner:
The case involved an appeal by the Revenue against the Order of the Commissioner of Income Tax (Appeals) allowing the assessee's appeal regarding the processing of its return of income for Assessment Year 2016-17. The dispute arose from the disallowance of remuneration paid to a retiring partner, Shri Sanjay Pathak, by the assessee firm. The partnership deed specified the remuneration payable to the working partner based on the book-profit, as defined under section 40(b) of the Income Tax Act, 1961. The firm prepared two profit & loss accounts for the period before and after the partner's retirement to calculate the remuneration. The Revenue contended that no remuneration should be paid for the period when the partner did not work for the entire year. However, the Tribunal found no merit in this argument, emphasizing that the partnership deed clearly outlined the remuneration structure based on book-profit. The Tribunal also highlighted the need for a consolidated profit & loss account for the entire year, as profits accrue at specific points and must be allocated accordingly among partners. The Tribunal dismissed the Revenue's claim, stating that the remuneration to the retiring partner was correctly calculated based on the partnership deed and the applicable legal provisions.

2. Interpretation of provisions of section 40(b) of the IT Act:
The Tribunal addressed the Revenue's objection regarding the application of section 40(b) of the IT Act to the remuneration paid to the retiring partner. The Revenue argued that since the partner did not work for the entire year, no remuneration should be allowed. However, the Tribunal clarified that the remuneration was calculated based on the profit attributable to the period when the partner was actively working. The Tribunal emphasized that the remuneration was in accordance with the partnership deed and did not exceed the maximum limit specified under section 40(b). Additionally, the Tribunal noted that the method of accounting for profits and the allocation of remuneration among partners should align with the partnership agreement. The Tribunal found the Revenue's objection unfounded and upheld the decision of the Commissioner of Income Tax (Appeals) to allow the remuneration claimed by the assessee. The Tribunal's detailed analysis highlighted the importance of adhering to the partnership agreement and relevant legal provisions in determining partner remuneration.

In conclusion, the Tribunal dismissed the Revenue's appeal and upheld the decision in favor of the assessee regarding the disallowance of remuneration paid to the retiring partner. The judgment provided a comprehensive interpretation of the partnership deed, the provisions of section 40(b) of the IT Act, and the principles governing the calculation and allocation of partner remuneration in a partnership firm.