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TMI Blog2004 (9) TMI 591X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of remuneration paid to one of the working partners under section 40( b ) of the Act and the same was allowed while processing the return under section 143(1)( a ) of the Act. At a subsequent point of time, internal audit raised an objection stating that as per the provisions of section 40( b )( v ), remuneration paid to a working partner as authorized by the partnership deed is allowable whereas in the instant case, Ch. Ekambaram is not a partner in his individual capacity and hence he cannot be treated as a working partner . The audit party was of the opinion that remuneration paid to the working partner is not allowable as deduction in the light of the decision of the Hon ble Supreme Court in the case of Rasikh Lal Co. v. CIT [1998] 229 ITR 458 1 . Without prejudice to the above, the audit party observed that the remuneration payable, to each individual working partner/manner of quantifying such remuneration, was not specified in the partnership deed and hence remuneration is not allowable under section 40( b )( v ) in view of Board s Circular No. 739, dated 25-3-1996. The circular issued by the CBDT reads as under : "Clauses which are generally incorpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eans an individual who is actually engaged in conducting the affairs of the business of the firm of which he is a partner. Since a working partner is necessarily an individual, according to Explanation 4 , remuneration paid to the partner for the services rendered to a firm in a representative capacity cannot be said to have been paid to the working partner and hence cannot be qualified for deduction under section 40( b ) of the Act. 4. The learned CIT(A) however cancelled the assessment by observing in para 9 as under : "On a perusal of the assessment order made for the assessment year 1997-98 under section 143(3) r.w.s. 148 of the Income-tax Act, 1961, apparently, the reopening under section 147( b ) has been invoked only for the limited purpose of disallowing payment made to the partner who is representing his HUF in the partnership firm. This is undoubtedly a legal issue which obviously has been brought to the knowledge of the Assessing Officer by the internal audit party of the Income-tax department. As held by the Supreme Court in the case of Indian and Eastern Newspapers Society reported in 119 ITR 996 it is held to be valid and reiterated by a subsequent judgment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecord as well as the Circular of the CBDT which is binding upon the Assessing Officer. 5A. On the other hand, the learned counsel for the assessee submitted that in the light of the decision of Hon ble Supreme Court in the case of Rasikh Lal Co. ( supra ) Sri Ch. Ekambaram should be treated as partner in which event deduction is permissible under section 40( b ) of the Act since the payment of remuneration is authorized as per the partnership agreement dated 1-6-1992. It was also submitted that the opinion expressed by the audit party would not constitute information inasmuch as the issue raised by them is based on the interpretation of the provisions of the Act i.e., 40( b )( v ) of the Act. Placing reliance upon the decision of Hon ble Delhi High Court in the case of United Electrical Co. (P.) Ltd. v. CIT [2002] 258 ITR 317. It was submitted that even with regard to the notices issued under the post-amended provisions the reopening should not be based on mere rumour or gossip and it should be based on some information and limited to fact. Reliance was also placed upon the decision of the Madras High Court in the case of CIT v. Golden Touch [2003] 263 ITR 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a working partner in which event the deduction of remuneration claimed by the assessee is in accordance with law. Whereas the judgment of Supreme Court ( supra ) was misinterpreted by the internal audit party to say that it should be disallowed. The internal audit party has also interpreted the provisions of section 40( b ) of the Act, based upon the Circular issued by the CBDT (Circular No. 739 dated 25-3-1996) to state that the partnership deed has not specified the amount of remuneration payable to each individual working partner and hence the remuneration claimed is not authorized by the partnership deed. ( c ) Based upon audit objection the CIT appears to have given direction to initiate proceedings under section 147 of the Act to disallow remuneration as it is not authorized by partnership deed. The CIT appears to have understood the decision of the Supreme Court ( supra ) in the correct perspective. As could be seen from the letter dated 24-1-2000 addressed by the Addl. CIT (Audit) to Dy. CIT, Cir. 1, Warrangal, the above letter is silent on the first aspect mentioned in the audit objection but confined to the second aspect i.e., the clause in the partnership deed do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the partnership deed would be treated as a partner and not the HUF. It follows that if the remuneration is paid to the partner who is termed as a working partner , applying the decision of Supreme Court in the case of Rasikh Lal Co. ( supra ), remuneration is not disallowable. The Assessing Officer, however, discussed in detail to hold that Sri Ch. Ekambaram was a partner in a representative capacity and hence remuneration paid to such partner is hit by the provisions of section 40( b ) of the Act. There is no mention of the judgment of the Hon ble Supreme Court in the case of Rasikh Lal Co. ( supra ) in the order of the Assessing Officer though the audit objection as well as the letter dated 24-1-2000 specifically makes the mention of the said judgment. This shows that the Assessing Officer has merely applied a thumb rule to hold that the remuneration paid to Ch. Ehambaram is not allowable as deduction presumably because there is an audit objection. ( f ) Though the disallowance mainly rests on the aforesaid point, at the end the Assessing Officer has also mentioned that the claim is not in accordance with the terms of partnership deed. This is apparently on the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Ekambaram is actually engaged in conducting the affairs of the firm. Even as per Explanation 4, Sri Ch. Ekambaram has to be treated as a working partner. 9. The other contention of the learned DR is that the remuneration paid to the partner is not in accordance with the terms of partnership deed. The assessment order does not contain the relevant clauses of partnership deed. However, in the internal audit objection note, clause 9 of the partnership deed was reproduced which is extracted for immediate reference. "At the end of each year, the maximum remuneration allowable to the working partner, under section 49( b ) of the Act, shall be determined by the partners and shall be paid/credited to capital account of the working partner Ch. Ekambaram. Meanwhile the working partner may make periodical withdrawals against remuneration payable to him. Any excess withdrawal over remuneration payable is deemed as capital withdrawal. No remuneration shall be paid to working partner in case there are no profits available after charging interest on capital to partners. In case the available profits are insufficient to pay remuneration to the working partner at the maximum allowable u ..... X X X X Extracts X X X X X X X X Extracts X X X X
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