Allowability of Partner Remuneration and Cash Basis Taxation: statutory book profit formula and receipt based recognition determine tax effect.

Where a partnership deed expressly adopts the statutory definition of book profit, an inadvertent clerical error in the deed's tabulated remuneration limits does not defeat allowability; the statutory limiting formula governs quantification and remuneration actually taxed in the partner's hands is deductible, so the disallowance was deleted. Where an assessee consistently follows cash basis accounting and documentary records show non-receipt, commission shown in third party tax records does not trigger taxation before receipt; taxation and TDS credit arise on actual receipt, so the addition was deleted.

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Issues: (i) Whether remuneration paid to a working partner is allowable under Section 40(b) of the Income-tax Act, 1961 despite an inadvertent incorrect reference to old limits in the partnership deed; (ii) Whether commission income shown in Form 26AS but not received in the year and accounted on cash basis is taxable for Assessment Year 2013-14.

Issue (i): Allowability of partner's remuneration where the partnership deed contains an inadvertent incorrect tabulation of limits but expressly adopts the definition of "book profit" as per Section 40(b) of the Income-tax Act, 1961.

Analysis: The partnership deed authorises payment of remuneration and explicitly refers to the definition of "book profit" as per Section 40(b) of the Income-tax Act, 1961 or statutory modification thereof. The dispute concerns quantification of remuneration determined by the firm and an inadvertent clerical error in the deed's tabulated limits. The limiting formula under Section 40(b) governs allowability; quantification is for the firm to decide and remuneration actually offered to tax by the partner indicates receipt and taxation in his hands. No loss to revenue arises from allowing the remuneration within the correct limits prescribed by Section 40(b).

Conclusion: The remuneration quantified and claimed by the assessee is allowable under Section 40(b) of the Income-tax Act, 1961; the addition of Rs. 31,30,490 is deleted. Conclusion: in favour of assessee.

Issue (ii): Taxability of commission income reflected in Form 26AS but not received in the relevant year where the assessee follows a consistent cash basis accounting policy and offers such amounts to tax only on receipt.

Analysis: The assessee consistently follows a cash basis accounting policy, discloses it in notes to accounts, and did not receive the commission in the year under consideration. Documentary evidence establishes that the commission and corresponding TDS were offered to tax and TDS credit claimed in the subsequent assessment year. Recognition on cash basis defers taxation until receipt; Form 26AS entry alone does not alter the accounting/tax treatment where the assessee's policy and records show non-receipt in the year.

Conclusion: The addition of Rs. 3,77,617 on account of commission income is not tenable and is deleted. Conclusion: in favour of assessee.

Final Conclusion: Both contested additions are deleted and the appeal is allowed, resulting in deletion of the disallowance under Section 40(b) and the commission income addition; the assessee succeeds on the decided issues.

Ratio Decidendi: Where a partnership deed authorises payment of remuneration and expressly adopts the definition of book profit under Section 40(b) of the Income-tax Act, 1961, an inadvertent clerical error in the deed's tabulated limits does not defeat allowability if the remuneration, as quantified by the firm, falls within the correct statutory limits; similarly, consistent cash basis accounting defers taxation of commission income until actual receipt despite an entry in Form 26AS.

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