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10-04-2019, GRK Agencies, Section 40(b), 30, 38, Tribunal Amritsar

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2 months 1 week ago #9120 by amit
Section - 40(b), 30, 38, 10, 40(b)(ii), 28
Order Date - 10-04-2019
Favouring - Revenue
Court - Tribunal Amritsar
Appellant - GRK Agencies
Respondent - ITO
Justice - SANJAY ARORA AM
Citation - 419Taxpundit155
Appeal No. - I.T.A. No. 412/Asr/2018
Asstt. Year - 2014-15

Order

PER : Sanjay Arora, AM

This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-2, Amritsar ('CIT(A)' for short) dated 17.05.2018, dismissing the assessee’s appeal contesting its’ assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 13.12.2016 for the Assessment Year (AY) 2014-15.

2. The issue at large in the instant case is the validity in law, in the facts and circumstances of the case, of the disallowance of remuneration to partners, claimed in the sum of Rs. 4,40,000 in the computation of its’ business income u/s. 28 by the assessee-firm for the relevant year. The reason for the disallowance is that the same is not admissible in view of section 40(b) of the Act. The partnership deed dated 05/6/2007, copy of which was furnished during the assessment proceedings, per clause 9 thereof, mentions that the salary to partners shall be as mutually agreed between the partners. 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 accordance with, the terms of the partnership deed; or

(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or

(iv) any payment of interest to any partner …..; or

(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 during the previous year exceeds the aggregate amount computed as hereunder:’

3.2 The assessee, in this respect, relies on the decision by the Tribunal in Asst. CIT v. Suman Constructions [2009] 20 DTR 450 (Trib)(Pune)(copy on record). The tribunal per the same has held that the words ‘in accordance with’ occurring in section 40(b) cannot be construed to imply ‘quantification’ or the ‘manner of quantification’ of the remuneration, as interpreted by the Board per its’ Circular No. 739 supra, which has, in so interpreting the provision, traveled beyond the scope of the words ‘in accordance with’ in section 40(b). Board Circulars, it is well-settled, even as they may bind the Revenue authorities, are not binding on the appellate authorities. Further, the ld. counsel for the assessee, Sh. Arora, would, on a query by the Bench, clarify that an amendment to the partnership deed is not required to be registered with the Registrar of Firms & Societies. The resolution as on 01.4.2013, increasing the salary of both the partners, namely, Vikram Kundra and Gautam Kundra, from Rs.1.20 lacs per annum each (vide resolution dated – not specified), to Rs.2.20 lacs per annum each, despite being not registered under partnership law, is, thus, valid in law. Two, on being asked about any contemporaneous record exhibiting that the 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 Rs.15,000 per month (for the first four months) and at Rs.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 Rs.1.20 lacs per

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