Tribunal upholds disallowance of partner remuneration due to lack of legal compliance

The Tribunal dismissed the appeal, ruling that the disallowance of remuneration to partners was valid under section 40(b) of the Income Tax Act. The partnership deed did not specify the remuneration amount as required by law. The resolution increasing partner salaries was deemed inadmissible due to lack of evidence and non-compliance with legal formalities. The Tribunal upheld the applicability of Board Circular No. 739, emphasizing the importance of proper documentation and compliance with partnership and income tax laws. The decision was pronounced on April 10, 2019.

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Issues Involved:
1. Validity of disallowance of remuneration to partners under section 40(b) of the Income Tax Act, 1961.
2. Interpretation of partnership deed and relevant clauses.
3. Admissibility and genuineness of the resolution passed for increasing partner remuneration.
4. Applicability of Board Circular No. 739 dated 25.3.1996.
5. Legal enforceability of the resolution and its compliance with partnership and income tax laws.

Detailed Analysis:

1. Validity of Disallowance of Remuneration to Partners under Section 40(b):
The main issue in the appeal is whether the disallowance of Rs. 4,40,000 as remuneration to partners is valid under section 40(b) of the Income Tax Act, 1961. The Revenue disallowed the remuneration on the grounds that the partnership deed did not specify the remuneration amount or the manner of its quantification, which is a mandatory condition under section 40(b).

2. Interpretation of Partnership Deed and Relevant Clauses:
The partnership deed dated 05/6/2007, specifically clause 9, mentions that the salary to partners shall be as mutually agreed between the partners. This clause does not specify the amount or the manner of quantification of remuneration, which is required by section 40(b). The Tribunal noted that the clause is not an agreement for a specific sum and does not identify the working partners by name, thus failing to meet the requirements of section 40(b).

3. Admissibility and Genuineness of the Resolution Passed for Increasing Partner Remuneration:
The assessee relied on a resolution dated 01.4.2013, which increased the salary of both partners from Rs. 1.20 lacs per annum to Rs. 2.20 lacs per annum. The Tribunal questioned the genuineness of this resolution, noting that it was not furnished during the assessment proceedings and lacked contemporaneous records to prove its execution date. The Tribunal also highlighted that the resolution was neither stamped nor registered, making it inadmissible as evidence in a court of law.

4. Applicability of Board Circular No. 739 dated 25.3.1996:
The Tribunal referenced Board Circular No. 739, which clarifies that for assessment years after AY 1996-97, no deduction under section 40(b)(v) is admissible unless the partnership deed specifies the amount of remuneration or the manner of quantifying it. The Tribunal upheld the circular, noting that it correctly explains the legislative intent and is binding on the Revenue authorities. The Tribunal also cited the Hon’ble jurisdictional High Court's decision in Sood Bhandari & Co. v. CBDT, which upheld the Board Circular.

5. Legal Enforceability of the Resolution and Its Compliance with Partnership and Income Tax Laws:
The Tribunal concluded that the resolution dated 01.4.2013 could not be regarded as a valid amendment to the partnership deed. The resolution lacked proper stamping and registration, making it legally unenforceable. The Tribunal emphasized that the remuneration clause must be agreed upon at the beginning of the period for which it is to operate and cannot be decided retrospectively. The Tribunal also noted that the resolution did not qualify the term 'partners' with 'working,' which is required under section 40(b)(i).

Conclusion:
The Tribunal dismissed the assessee's appeal, finding no merit in the claim for the allowance of remuneration to the working partners. The Tribunal directed the Assessing Officer to provide relief to the partners under section 155 of the Act if the salary had been assessed in their hands. The order was pronounced in the open court on April 10, 2019.

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