2009 (9) TMI 15 - HC - Income Tax

Analysis of Partnership Deed for Remuneration under Income Tax Act

Commissioner of Income Tax Versus M/s. Anil Hardware Store

The court analyzed the partnership deed to determine if it specified remuneration as required by Section 40(b)(v) of the Income Tax Act, 1961. The deed ... Interest Paid to Partners – section 40(b)(v) – remuneration clause in the partnership deed is in line with section 40(b) - It is contended on behalf of the revenue that in respect of the profits upto Rs.75,000/-, even in the partnership deed, the word “upto Rs.50,000/- or 90% of the book profits” have been used which shows that the partnership deed does not exactly determine the remuneration of the partners – Held that - the manner of fixing the remuneration of the partners has been specified. In a given year, the partners may decide to invest certain amounts of the profits into other venture and receive less remuneration than that which is permissible under the partnership deed, but there is nothing which debars them from claiming the maximum amount of remuneration payable in terms of the partnership deed. The method of remuneration having been laid down, the assessee firm is entitled to deduct the remuneration paid to the partners under Section 40(b)(v) of the Income Tax Act Issues:1. Interpretation of Section 40(b)(v) of the Income Tax Act, 1961 regarding payment of remuneration to partners.2. Application of precedent and earlier decisions by the Income Tax Appellate Tribunal (ITAT) in similar matters.Issue 1: Interpretation of Section 40(b)(v) of the Income Tax Act, 1961The court analyzed whether the partnership deed in question specified the remuneration payable to partners as required by Section 40(b)(v) of the Income Tax Act, 1961. The Central Board of Direct Taxes (CBDT) clarified through circular No.739 that for assessment years after 1996-97, remuneration must be specified in the partnership deed. In this case, the partnership deed was amended in 1997 to include clauses detailing the method for fixing remuneration based on book profits. The court examined these clauses and concluded that they adequately specified the remuneration payable to partners, allowing the firm to deduct such payments under Section 40(b)(v). The court emphasized that the method of remuneration was clearly laid down, enabling partners to claim the maximum amount specified in the partnership deed.Issue 2: Application of Precedent by ITATThe court addressed the contention regarding the ITAT's failure to follow its earlier decision in a similar case. The appellant argued that consistency in decisions is essential unless reasons are provided for a different view. However, the court distinguished the present case from the earlier decision where lesser remuneration was actually paid compared to what was specified in the partnership deed. The court noted that the facts of the two cases were different, and the method of remuneration in the earlier partnership deed was not clear. Therefore, the court held that the ITAT's decision in the previous case did not apply to the present matter. The appeal was ultimately rejected based on these findings.This judgment provides a detailed analysis of the interpretation of Section 40(b)(v) of the Income Tax Act, 1961 in relation to remuneration payable to partners based on the partnership deed's specifications. It also highlights the importance of consistency in judicial decisions while allowing for exceptions based on factual distinctions between cases.