2021 (3) TMI 948 - AT - Income Tax

Appeal allowed: Remuneration to partners upheld under Income-tax Act Section 40(b)(v).

The Tribunal allowed the appeal, ruling that the Pr. Commissioner of Income Tax's order under Section 263 was invalid. The remuneration paid to working ... Revision u/s 263 - disallowance of remuneration to working partners - HELD THAT:- When Revenue has not disputed the fact that partners are working partners as per partnership deed and as per clause 5, they are entitled for payment of remuneration which are to be determined as per provisions contained u/s 40(b)(v) of the Act, then Revenue has no business to disallow the same. In these circumstances, we are of the considered view that assessment order framed by the AO is not erroneous. Question of fulfilling the second condition that, “assessment framed is prejudicial to the interest of the Revenue is concerned”, again we are of the considered view that when it is undisputed fact that remuneration paid to the individual partners has been taxed @ 30%, the same rate to which income of the assessee firm was to be taxed, the assessment order is not prejudicial to the interest of the Revenue. Apart from non-fulfilling twin conditions to invoke the provisions contained u/s 263 of the Act by ld. Pr.CIT, it is a matter of record that in the preceding years i.e. AYs 2013-14 & 2014-15, the same remuneration as per clause 5 of the partnership deed and in consonance with section 40(b)(v) of the Act has been paid to the working partners by the assessee firm and has been accepted by the Revenue. No distinguishing facts have been brought on record by the Revenue to take a divergent view. So, in the ordinary course of circumstances, Revenue is required to follow the “rule of consistency” though every assessment year is to be assessed separately and independently. Question framed is answered in affirmative and the ld. Pr.CIT is held to have erred in invoking the provisions contained u/s 263 of the Act directing the AO to disallow the remuneration to the working partners. - Decided in favour of assessee. Issues Involved:1. Validity of the Pr. Commissioner of Income Tax's (PCIT) order under Section 263 of the Income-tax Act, 1961.2. Whether the remuneration paid to working partners was correctly quantified and allowable under Section 40(b)(v) of the Income-tax Act.3. Consistency in the treatment of remuneration to partners in previous assessment years.4. Whether the assessment order was erroneous and prejudicial to the interest of the Revenue.Detailed Analysis:1. Validity of the PCIT's Order under Section 263:The assessee challenged the order of the PCIT under Section 263 of the Income-tax Act, arguing that the assessment framed by the AO was neither erroneous nor prejudicial to the interest of the Revenue. The Tribunal noted that for invoking Section 263, two conditions must be satisfied: the assessment order must be erroneous, and it must be prejudicial to the interest of the Revenue. The Tribunal found that the assessment order was not erroneous because the remuneration paid to the partners was in accordance with the partnership deed and Section 40(b)(v) of the Act. Therefore, the PCIT's order was invalid.2. Quantification and Allowability of Remuneration under Section 40(b)(v):The PCIT had observed that the partnership deed did not specify or quantify the remuneration payable to the partners, invoking CBDT Circular No.739. However, the Tribunal found that Clause 5 of the partnership deed clearly stated that remuneration would be determined as per the provisions of Section 40(b)(v) and distributed equally among the partners. The Tribunal referred to the Delhi High Court's decision in Vaish Associates, which held that similar clauses were sufficient for the purposes of Section 40(b)(v). Thus, the remuneration was correctly quantified and allowable.3. Consistency in Treatment of Remuneration:The assessee argued that the remuneration had been consistently allowed in previous years' assessments under Section 143(3). The Tribunal emphasized the principle of consistency, noting that the Revenue had accepted similar remuneration in the assessment years 2013-14 and 2014-15. No distinguishing facts were presented by the Revenue to justify a different treatment for the assessment year in question.4. Erroneous and Prejudicial to the Interest of the Revenue:The Tribunal concluded that the assessment order was neither erroneous nor prejudicial to the interest of the Revenue. It was noted that the remuneration paid to the partners was taxed at the same rate (30%) as the firm's income. Therefore, even if the remuneration was disallowed, it would not result in any additional tax liability, making the assessment tax-neutral. The Tribunal held that the PCIT failed to fulfill the twin conditions required to invoke Section 263.Conclusion:The Tribunal allowed the appeal, holding that the PCIT erred in invoking Section 263 and directing the AO to disallow the remuneration to the working partners. The assessment order was neither erroneous nor prejudicial to the interest of the Revenue, and the principle of consistency should be followed in the absence of distinguishing facts. The order passed by the PCIT was deemed unsustainable, and the appeal was allowed.Order Pronounced:The order was pronounced in open court on the 23rd day of March, 2021.