2023 (4) TMI 136 - AT - Income Tax

Addition u/s. 40(b)(v) - remuneration paid to partners - amendment to partnership with retrospective effect - assessee challenged the grounds of violation of principle of natural justice - HELD THAT - The claim of the assessee is also supported by the case laws relied upon by the assessee in the case of Durgadas Devkinandan 2011 (3) TMI 20 - HIMACHAL PRADESH HIGH COURT wherein it was held that the remuneration to partners should be calculated as per the partnership deed subject to the provisions of the Act where the said remuneration should not exceed the maximum amount provided under the Act. We would also like to place our reliance on the decision of CIT vs. Great City Manufacturing Co 2012 (12) TMI 875 - ALLAHABAD HIGH COURT wherein it was held that the A.O. has to see if the conditions of the partnership deed provided for remuneration to working partners and that the same is within the limit prescribed u/s. 40(b)(v). The supplementary partnership deed operates retrospectively, the calculation of the remuneration paid to partners if in accordance with the provisions of the Act is to be allowed. We would also like to draw our support to the contention of the assessee that in the earlier years that the said claim was not disputed by the lower authorities for which we would like to place our reliance on the decision of Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT for the proposition that when there are no change in facts and when the claim has been allowed in the earlier years without being in dispute, the same may be considered for the impugned year also. As it is observed that the assessee has been claiming the modified remuneration since the amendment of the provisions for which there was no dispute, we are of the considered opinion that the assessee s claim for the impugned year should also be granted. From the above observation we hereby delete the impugned addition and allow the assessee s claim of remuneration to partners as per the amended provision of the Act. Hence, ground no.1 of the assessee is allowed. Violation of principle of natural justice - As no adjudication, as the assessee has been given a relief as prayed for in the previous ground.

Summary

Issues Involved:
1. Addition made under Section 40(b)(v) of the Income Tax Act, 1961.
2. Violation of the principle of natural justice.

Summary:

1. Addition under Section 40(b)(v):
The assessee, a partnership firm engaged in trading, exports, and job work related to textiles, challenged the addition of Rs.90,27,721/- made under Section 40(b)(v) of the Income Tax Act, 1961, towards remuneration paid to partners. The Assessing Officer (A.O.) based the addition on clause 7 of the original partnership deed dated 01.08.2005, which he deemed violated the provisions of Section 40(b)(v). The assessee argued that the remuneration was in accordance with a supplementary deed dated 16.03.2021, effective from 01.04.2010, as per the amended provisions of Section 40(b)(v) introduced by the Finance Act (No.2) 2009. The A.O. dismissed this supplementary deed as an afterthought, executed only after the issuance of the final show cause notice.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, rejecting the supplementary deed as a self-serving document. The CIT(A) also dismissed the assessee's argument regarding the acceptance of higher remuneration in previous years, citing that res judicata does not apply to income proceedings.

The Income Tax Appellate Tribunal (ITAT) observed that the supplementary deed, executed retrospectively, aligned with clause 9 of the original partnership deed, which allowed modification of remuneration terms. The ITAT relied on the decisions of the Hon'ble High Courts in similar cases, validating the retrospective effect of the supplementary deed. The ITAT concluded that the assessee's claim for higher remuneration was justified as per the amended provisions and deleted the impugned addition.

2. Violation of the Principle of Natural Justice:
The assessee also raised the issue of the violation of the principle of natural justice. However, this ground required no adjudication as the assessee was granted relief in the primary issue.

Conclusion:
The appeal filed by the assessee was allowed, and the addition made under Section 40(b)(v) was deleted. The principle of natural justice issue was not adjudicated as the primary relief was granted. The order was pronounced in the open court on 09.03.2023.