2003 (1) TMI 250

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..... on of the working partners". In other words, according to the AO, this statutory requirement that partners to whom salary was paid should be described in the instrument of partnership as "working partners" was not fulfilled. Otherwise salary could not be paid to them and allowed as a deduction in view of s. 40(b) of the Act. 3. In the two subsequent asst. yrs. 1996-97 and 1997-98, the salary paid to the partners was disallowed in regular assessments. In reply to query raised by the AO, the assessee did contend that salary was paid only to the partners who had worked for the partnership and were working partners. The AO disallowed the salary in asst. yr. 1996-97 with the following observations: "The reply of the assessee is not accepta .....

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..... uneration paid to partners could not be allowed as no partner was described in the instrument of partnership as a "working partner". He brought to our notice the following statutory provisions: "40. Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession'— (b) in the case of any firm assessable as such— (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners dur .....

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..... partnership. In other words, there should be an agreement between the partners to pay specified salary to the partner who should also work for the partnership. The AO acted under a misconception and wrongly insisted that partner receiving salary which was claimed as a deduction should be described as a "working partner" in the partnership deed. In our considered opinion, the requirement of sub-cl. (v) of s. 40(b) was fully satisfied in this case and the learned CIT(A) rightly allowed deduction of salary paid to the partners. We confirm the impugned orders. We also agree with the learned CIT(A) that in the asst. yrs. 1994-95 and 1995-96, the AO could not invoke the provisions of s. 154 of the IT Act. The action of the AO is also bad in law a .....

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