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TMI Blog2019 (8) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... ich is not sustainable in view of section 40(b)(i). The entries in the books of account, even otherwise not decisive of the matter, also do not support the assessee s case. The said resolution, or the one stated to be passed earlier thereto, cannot, in view of the fore-going factual and legal incidents, be regarded as a valid partnership deed, i.e., as a valid instrument of partnership, or as a valid amendment to the partnership deed dated 05.6.2007. One could argue that even ignoring the resolution/s the total salary provided in the partnership accounts could be regarded as agreed to by the partners, i.e., from time to time. The same implies that there is no need for a separate written agreement, which cannot be accepted in view of the same being a requirement of law for a firm to be assessed as a firm (ss. 184, 185). The decision in Suman Constructions [ 2008 (12) TMI 275 - ITAT PUNE-A] as well as ITO v. Kakkar Cold Storage [ 2002 (12) TMI 194 - ITAT AMRITSAR] which pertains to AY 1993-94 (for which exception has been made by the Board circular (supra) itself), would, accordingly, be of no consequence, as would be the assessee s reliance on Durga Dass Devki Nandan v. IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. As per the Revenue, in-as-much as the same does not either quantify the remuneration to be allowed to the working partners, specified by name, or the manner in which remuneration thereto is to be quantified, the same does not satisfy the condition of section 40(b), mandatory in nature, even as also explained by the Board Circular No. 739 dated 25.3.1996. 3.1 Section 40(b) in its relevant part reads as under: 40. Amounts not deductible. Notwithstanding anything to the contrary in sections 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 ,- (a) in the case of any assessee- (b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as remuneration ) to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salary was indeed enhanced on 01.4.2013, i.e., the date from which it is made effective the said resolution being recorded on the letter-head of the firm, with in fact the partners signing the same (i.e., the resolution as on 01/4/2013) having not put any date alongside their signature , Sh. Arora would furnish the capital account of both the partners (copy on record). The same bear credit (for salary) to the capital account of the partners at ₹ 15,000 per month (for the first four months) and at ₹ 20,000 per month thereafter. This, in his view, would show that the resolution increasing the salary was indeed passed on 01.4.2013, and the said resolution is not back-dated. In fact, the salary prior to its increase, Sh. Arora would continue, was at ₹ 1.20 lacs per annum for both the partners and, accordingly, credited to the partners account in that sum. The Assessing Officer (AO), however, has not even allowed the same. Further, again in response to a query by the Bench, he would, with reference to section 10 of the Indian Contract Act, 1872 submit that there is no requirement therein for witnessing a contract. As such, the non-signing of the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the partners to whom it is payable, and which is stated to have been passed, in modification of an earlier resolution, on 01.4.2013, i.e., the first day of the relevant previous year. In other words, it is an agreement agreeing to pay salary, and nothing more. That is, it could at best be regarded as an authorization by the partnership to pay salary to the partners. I say, at best , as it is equally valid to contend that the authorization has to be qua both, i.e., the partner/s to whom, and the sum at which, salary is to be allowed by the partnership, and an authorization wherein any of these elements is missing cannot be regarded as a proper authorization, or one as contemplated by section 40(b)(ii). The said provision, however, by including the words in accordance with in conjunction with the words authorized by in section 40(b)(ii), removes any ambiguity in law, making the discussion or debate on the scope of the words authorized by redundant. It could be argued that the words authorized by in section 40(b)(ii) are to be read broadly, signifying that the remuneration for their services is to be paid to the working partners. This is as the same is essentially a par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vidual nor lay down the manner of quantifying such remuneration. 2. The Board have considered the representations. Since the amended provisions of s. 40(b) have been introduced only with effect from the asst. yr. 1993-94 and these may not have been understood correctly the Board are of the view that a liberal approach may be taken for the initial years. It has been decided that for the asst. yrs. 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at 1(i) above. 3. In cases, where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners at the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of the firm s income. 4. It is clarified that for the assessment years subsequent to the asst. yr. 1996-97, no deduction under s. 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.4.2013 itself. The date assumes significance as a partnership, by definition, is an agreement between two or more persons to carry on business, severally or jointly, agreeing to share the profits or, as the case may be, losses of the partnership in a defined ratio. Such an agreement has therefore, per force the nature of the contract, to be arrived at before the partnership is formed. In-as-much as salary or remuneration to a partner is a part of his share in the profit of the partnership, it has to be, i.e., to be valid, arrived at the beginning of the period for which it would obtain. The remuneration clause; salary being a charge on the profits of the firm as per the partnership agreement, would also accordingly require clarification as to the amount of salary, if any, in case of absence or inadequacy of profit, i.e., where with reference to a defined ratio of profit. Continuing our discussion with regard to the primary relevancy of the date, the same is also mandated by law (section 40(b) (iii)), so that it is not tenable to say that the salary clause would operate retrospectively. Further, being neither stamped nor registered, it is not admissible in evidence in a court of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, being in fact only as it was in law obliged to. There is nothing on record to show, nor even a contention to that effect, of it being filed with any of the authorities. The question of whether it could be validly filed in the present form, continues, to again the same answer in-as-much as it cannot be regarded as a legally enforceable contract. Why, it was not even filed before the AO in the first instance, and it is only on being specifically questioned in its respect, i.e., qua the remuneration clause, that the assessee furnished the same in the assessment proceedings. The assessee s conduct, i.e., in first continuing with an impermissible clause (in the partnership deed) even years after clarification by the Board and, then, in not defining the manner of quantification, but passing resolutions, with no record as to the time when they were actually passed, stating to be valid amendment/s to the partnership agreement, itself betrays its case of having passed the resolutions on the date from which they are made effective, i.e., prospectively. The resolution/s also does not qualify the term partners with the word working , so that in terms thereof, the sala ..... X X X X Extracts X X X X X X X X Extracts X X X X
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