9911796707
TMI Blog2000 (5) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances for allowing remuneration to the partner at Rs. 42,000 and disallowing the balance under the provisions mentioned above :--- (1) The partnership deed dated 1-2-1994 specifics the maximum limit of remuneration to be allowed to the partners. It does not fix the amount of salary of working partners. (2) No separate agreement is executed fixing the salary of working partners in each year (3) No fresh partnership deed authorising more amount of salary to working partner was executed in the year under reference. (4) No extra labour/work has been put in by working partner in the year under reference. This fact is also admitted by working partner in his statement recorded on 17-3-1997 vide Ans. to question No. 13 to 14. (5) Working partner Shri Dilipkumar G. Shah in his reply to Question No. 17 in the statement recorded on 17-3-1997 has admitted that the rise given to him in salary is not reasonable. He also admitted that there is no reason to give such rise in salary. (6) On making disclosure of Rs. 10 lakhs, working partner has not made any extra efforts or extra work which may entitle him such a huge rise in his salary. (7) No doubt his income falls under high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the maximum salary as permitted under the Income-tax Act could be paid to the working partner. Remuneration in this case was paid as per the above clause and having regard to provision of section 40(b)(5). The Assessing Officer had no right to disallow any part of remuneration. The maximum limit upto which remuneration could be paid was fixed by the Legislature and, therefore, the Assessing Officer had no discretion in the matter, Shri Soparkar drew our attention to decisions in the case of Ganesh Factory CIT [1989] 180 ITR 4161 (Punj. Har.) and in the case of CIT v. Yoganand Textiles [1993] 202 ITR 869 (Guj.). 4.2 The learned Departmental Representative argued that both the statutory provisions i.e., 40(b)(5) and 40A(2) were existing simultaneously and were to be applied. In fact, provision of section 40A(2) was overriding provision. The Assessing Officer, therefore, had full power to go into the question of reasonableness of salary. There was no justification for enhancing salary from Rs. 42,000 to Rs. 4,34,000 in the period under consideration. He further submitted that assessment at a higher figure was made on account of surrender made by the assessee. The higher income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be applied in preference to provision of section 40(b) for a case relating to assessment year 1974-75. Their Lordships of the Punjab and Haryana High Court after considering both the provisions referred to above repelled the contention with the following observation :--- "A reading of the aforesaid quotation shows that payment of salary to a partner of the firm, who may be working whole time for the assessee-firm, would not come within the ambit of services as the services provided under section 40A arc as noticed in the aforesaid quotation and not as an employee, i.e., relationship of master and servant. Moreover, the Legislature was aware of the meaning of "salary" in contradistinction to the services which may be rendered for carrying on business by a person. Here, in the statement of the case, it is mentioned that total salary of Rs. 18,000 was paid to three of the partners of the firm and the word 'salary" is clearly covered by section 40(b) and does not come within the ambit of section 40A. Therefore, we are of the opinion that such a matter is not covered by section 40A and would be covered only under section 40. Since salary has been paid by the assessee-firm to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t section (a) on the first Rs. 1,00,000 of Rs. 50,000 or at the the book profit or in case rate of 90 percent of a loss of the book profit, whichever is more; (b) on the next 1,00,000 of at the rate of 60 per the book-profit cent; (c) on the balance of the at the rate of 40 per book-profit cent; (2) in the case of any other firm --- (a) on the first Rs. 75,000 of Rs. 50,000 or at the the book-profit, or in rate of 90 per cent case of a loss of the book profit, whichever is more; (b) on the next Rs. 75,000 of at the rate of 60 per of the book-profit cent; (c) on the balance of book- at the rate of 40 per profit cent; Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1-- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented", respectively) --- (i) inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne whether the remuneration paid is not exceeding the prescribed limits of the book-profit. But he has no power to scale it down from the above percentage by saying that working partner did not render services to earn profit of the partnership. Accordingly, we hold that provision of section 40A had no application to a case governed by section 40(b) of the I.T. Act. This intention is more clearly manifested after amendment of above provision with effect from 1st April, 1993. Even otherwise, section 40(b) is applicable only to the payment made by a firm to its partner whereas provision of section 40A(2) is of general nature applicable to several situations. It is settled law that a special provision governing a special situation has to be applied when that situation arises and not a general provision which governs several fields. 5.5 It is, however, true that for getting deduction of remuneration paid to partner, the following conditions must be satisfied : (i) The partner entitled to remuneration must be a working partner. (ii) The payment of remuneration should be authorised by terms of partnership deed for the period for which remuneration is claimed. (iii) The remuneratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 firm's income." Having in mind the legal position stated above and the Circular of the Board No. 739 and on examination of provisions of partnership deed (relevant English translation agreed upon by parties quoted above), we are of the view that there is clear agreement between the parties to pay remuneration to the partner at maximum rate permissible under the Income-tax Act. The agreement suffers from no infirmity and cannot be treated as void or illegal. Under the agreement, the firm could pay maximum prescribed amount of the book-profit to the partner as remuneration. The provision which states, "upon the mutual understanding of the partners, the remuneration paid to the partner can be modified within the scope of the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
