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TMI Blog2003 (3) TMI 16X X X X Extracts X X X X X X X X Extracts X X X X ..... unal, Cochin Bench, has referred the following question of law under section 256(1) of the Income-tax Act, 1961, for short "the Act", for the decision of this court, at the instance of the Revenue: "Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that for the purpose of section 40(b) of the Income-tax Act, the remuneration payable to the partners in terms of clause 13 of the partnership deed is to be worked out on the basis of the net profit without deducting the income-tax liability?" The brief facts necessary for adjudication of this question are as follows. The respondent-assessee, M/s. Kajah Company, is a partnership firm carrying on the business in the manufacture and sale of beedie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther appeal by the assessee, the Tribunal allowed the claim of the assessee by holding that the remuneration payable to the partners in terms of clause 13 is to be worked out on the basis of the net profit without deducting the income-tax liability. It is against this order the question of law set out in para. 1 is referred. We have heard learned Central Government standing counsel for taxes appearing for the applicant and Sri P. Balakrishnan, learned counsel appearing for the respondent. As already noted, the dispute is regarding the disallowance of Rs. 2,23,216. The two working partners were to be paid a total remuneration of Rs. 5,24,140 as provided under clause 13 of the partnership deed dated April 27, 1982. The Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firm. Each of them shall be paid a remuneration of 2.5 per cent. of the net profits of the business and it shall be treated as an expenditure of the firm. Net profits for the purpose of working out the aforesaid remuneration shall mean the net profits worked out after deducting all expenses, including interest on loans as well as capital, but without deducting the remuneration to the parties of the first and second parts." By virtue of the provisions of clause (ii) of section 40(b), the remuneration paid to any partner who is a working partner should be authorised by or in accordance with the terms of the partnership deed. Clause 13 which is already extracted above is the relevant portion with reference to which remuneration payable to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... what is paid out or paid away. Income-tax represents the levy by the Government after the net profit has been arrived at. It is a case of application of profit after it has been earned. In any case, the partners of the assessee-firm who signed the partnership deed understood the term 'net profits' as the profit of the business arrived at without deducting the income-tax liability. It was on that basis they computed the remuneration paid to the working partners. When the contractual agreement between the partners has been understood by the parties concerned in that way and also acted upon thus, it would not be correct for the Department to interpret clause 13 in a different way, to insist that the net profit should have been worked out after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e executants of the partnership deed itself had understood clause 13 of the partnership deed as if it does not provide for deducting the income-tax liability, for, the remuneration payable under clause 13 itself was worked out by the assessee without deducting the income-tax liability. According to us, the Assessing Officer and the first appellate authority were not justified in interpreting clause 13 of the partnership deed as if the expression "net profit" used in clause 13 is the profit after deducting the income-tax liability also. We are of the view that the Tribunal has correctly held that for the purpose of working out the remuneration, the expression net profit in clause 13 cannot be arrived at after deducting the income-tax liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X
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