2019 (2) TMI 897 - AT - Income Tax

Tribunal allows appeal, directs deletion of disallowed remuneration.

The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to delete the disallowance of Rs. 45,00,000 made on account of ... Disallowance on account of remuneration paid to partners of the firm - assessee is a law firm (partnership) and derived income under the head “profit and gains of business & profession” and “income from other sources” - whether remuneration paid to all the partners will be the amount of remuneration allowable u/s 40(b)(v) of the Act to be shared amongst themselves in their profit-sharing ratio in that year? - contention of the Assessing Officer is that the CBDT in circular No. 739 dated 25/03/1996 has clarified the position of the salary/remuneration paid to partners as provided u/s 40(b)(v) - Held that:- The finding of the AO as well as Ld. CIT(A) on this issue is not correct. The partnership deed has specified that the amount of remuneration allowable u/s 40(b)(v) would be the amount of remuneration paid to the partners and same would be shared in their profit-sharing ratio in that year. The profit-sharing ratio of the partners has been specified as 2/3rd ( Sh Rajiv K Luthra) and 1/3rd ( Sh Mohit Saraf). The assessee accordingly paid total remuneration of ₹ 45,00,000/-in the profitsharing ratio to both the partners. In our view, the clause of the partnership deed satisfies the requirement of the CBDT circular (supra) and there is no violation on the part of the assessee in this regard. As decided in the case of Vaish Associates [2015 (8) TMI 855 - DELHI HIGH COURT] the partners were entitled to annual salary equivalent with percentage of profit multiplied by the allocable profit calculated as per the provisions of section 40(b)(v) of the Act. In the instant case also remuneration has been shared in the profit-sharing ratio. The issue in dispute also deserve to be allowed on the principle of consistency as identical disallowance has been deleted by the Ld. CIT(A) immediately preceding assessment year i.e. 2009-10 and no appeal has been preferred by the Department on the said issue before the Tribunal. - Decided in favour of assessee. Issues Involved:1. Disallowance of Rs. 45,00,000 on account of remuneration paid to partners of the firm.Detailed Analysis:Issue 1: Disallowance of Rs. 45,00,000 on account of remuneration paid to partners of the firmBackground:The assessee, a law firm (partnership), derived income under the head 'profit and gains of business & profession' and 'income from other sources'. The Assessing Officer (AO) disallowed Rs. 45,00,000 paid as remuneration to two partners (Rs. 30,00,000 to one and Rs. 15,00,000 to another) on the grounds that it was not paid in accordance with Section 40(b)(v) of the Income Tax Act, 1961. The AO's decision was based on the partnership deed, which stated that remuneration would be shared among partners in their profit-sharing ratio but did not specify the amount or manner of quantifying the remuneration. The AO relied on CBDT Circular No. 739 dated 25/03/1996 and the Delhi High Court decision in Sood Brij & Associate Vs. CIT.Assessee's Argument:The assessee argued that the remuneration was paid in accordance with Section 40(b)(v) and pointed to the relevant clauses of the partnership deed specifying the manner of quantifying remuneration. They also cited the Delhi High Court decision in CIT vs. Vaish Associates, where similar issues were resolved in favor of the assessee. The assessee emphasized the principle of consistency, noting that a similar disallowance was deleted by the CIT(A) in the assessment year 2009-10, and the Department did not appeal that decision.Tribunal's Findings:1. Partnership Deed Compliance: The Tribunal noted that the partnership deed specified that the remuneration allowable under Section 40(b)(v) would be shared among partners in their profit-sharing ratio (2/3 and 1/3). This clause was found to satisfy the requirements of the CBDT Circular, contrary to the AO's findings.2. CBDT Circular No. 739: The Tribunal clarified that the circular requires either the quantification of the remuneration amount or the manner of quantification to be specified in the partnership deed. The Tribunal found that the partnership deed met these requirements as it provided for remuneration to be shared in the specified profit-sharing ratio.3. Case Law Analysis: The Tribunal distinguished the present case from Sood Brij & Associates, where remuneration was left to future mutual agreements, which was not the case here. The Tribunal found the decision in Vaish Associates applicable, where the methodology and manner of computing partner remuneration were deemed compliant with Section 40(b)(v).4. Principle of Consistency: The Tribunal emphasized the principle of consistency, noting that the CIT(A) had deleted a similar disallowance in the previous assessment year (2009-10), and the Department did not appeal that decision.Conclusion:The Tribunal set aside the findings of the lower authorities and directed the AO to delete the disallowance of Rs. 45,00,000. All grounds of appeal by the assessee were allowed, and the appeal was decided in favor of the assessee.Result:The appeal of the assessee was allowed, and the decision was pronounced in the Open Court on 12th February 2019.