2022 (1) TMI 1039 - AT - Income Tax

Challenged remuneration disallowance under Income Tax Act - Importance of partnership deed terms

The appeal challenged the disallowance of partner's remuneration under section 40(b) of the Income Tax Act, 1961. The AO disallowed the remuneration as it ... Disallowing the partners remuneration u/s. 40(b) - rejecting the explanation and evidences brought on record by the assessee to prove the genuineness of the partner remuneration - HELD THAT:- In the present case, admittedly the AO has reproduced the clause into the Partnership Deed as per that clause it was envisaged that either of the partners will be entitled to draw monthly remuneration, if decided by both the partners or the amounts shall be decided from time to time in writing. The assessee has not placed any material suggesting that the partners had decided in writing about the remuneration paid to the partners. In the absence of such writing, we do not see any reason to interfere in the decision of the authorities below. Therefore, ground raised by the assessee is dismissed. Issues:1. Disallowance of partner's remuneration under section 40(b) of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Disallowance of partner's remuneration under section 40(b) of the Income Tax Act, 1961:The appeal was filed against the order of the Ld. CIT(A) sustaining the addition made by the AO on account of disallowing partner's remuneration. The AO disallowed a remuneration amount of Rs. 3,00,000 received by the assessee from two partners as it was not quantified or described in the Partnership Deed. The Ld. CIT(A) upheld this addition. The AO followed Circular No. 739 dated 25.03.1996 issued by CBDT. The assessee relied on a decision of the Hon'ble Himachal Pradesh High Court in a similar case. The High Court decision emphasized that remuneration should be paid strictly as per the terms of the partnership deed. In this case, no written decision was provided by the partners regarding the remuneration, leading to the dismissal of the appeal. The tribunal dismissed the appeal, upholding the disallowance of partner's remuneration under section 40(b) of the Act.This case highlights the importance of documenting and following the terms of the partnership deed regarding partner remuneration to claim deductions under section 40(b) of the Income Tax Act, 1961. The absence of written decisions on remuneration can lead to disallowances, as seen in this judgment. It also underscores the significance of judicial precedents in interpreting and applying tax laws, as evidenced by the reliance on a High Court decision to support the disallowance of partner's remuneration in this case.