PARTNERSHIP FIRM-- SALARY DISALLOWANCE

[puneet virmani]

ABC PARTNRSHIP FIRM WAS CONSTITUTED IN F.YR 2004-05. DEED WAS EXECUTED AND PROVISION FOR RENUMERATION TO 3 PARTNER'S WAS MADE AS TO Rs15000 P.M EACH PARTNER.CERTIFIED COPY OF DEED WAS SUBMITTED WITH THE ITR FILED FOR A.YR 2005-06. NEITER SALARY WAS PAID TO THE PARTNER DURING THE F.YR2004-05 AS FIRM WAS IN LOSS DUE TO NEW CONSTITUTION NOR CLAIMED AS DEDUCTION UNDER P&L A/C IRRESPECTIVE OF PROVISION IN DEED.ASSESSMENT WAS FRAMED ON RETURN INCOME BY THE DEPTT. U/S 143(1). FOR THE NEXT F.YR 2005-06 SALARY WAS PAID TO THE PARTNER AND ALSO CLAIMED AS DEDUCTION UNDER P&L A/C, NO FRESH DEED WAS EXECUTED AS NO CHANGE IN CONSTITUTION/ SHARE ALLOCATION/ PARTNER'S SALARY.ASSESSMENT FOR THE F.YEAR 2005-06 WAS FRAMED U/S 143(3) SCRUTINY ASSESSMENT AND SALARY AS CLAIMED IN P&L A/C WAS ALLOWED AS DEDUCTION. NOW NOTICE HAS BEEN RECIEVED BY THE ASSESSEE FOR RACTIFICATION OF MISTAKE U/S 154/155,SALARY TO BE DISALLOWED FOR WANT OF FRESH DEED.FROM MY OPINION THERE WAS NO NEED TO EXECUTE THE FRESH DEED AS NO CHANGE IN CONSTITUTION/ SHARE RATIO/ PARTNER'S SALARY.

[Darshan Jain]

The assessee is not required furnish instrument of partnership every year but should do so only in the first year. In your case as there is no change in the constitution of the firm or in the share of partners, the requirement of submission of revised deed u/s.184(3) is not applicable. The remuneration, if paid in accordance with the original deed and within limits prescribed u/s.40(b), cannot be disallowed.

[manoj gupta]

There is no need to execute fresh deed every year. Thus the salary cannot be disallowed.

[DEV KUMAR KOTHARI]

Views of the queriest learned Mr. Puneet Virmani and learned Mr. DARSHAN JAIN also that of learned Mr. Manoj Gupta are correct. The partnership deed was filed in the first year and then there was no change requiring the firm to file another copy of partnership deed. As stated in query, in the second year deduction of salary was also allowed in regular assessment made u/s 143 (3). Therefore, the matter stand settled with a formed opinion of the AO.The AO cannot disallow salary of partners for alleged failure to a file a copy of partnership deed. Check if the AO is contemplating some calculation mistake in the amount allowed. Further more except calculation mistake this does not appear a matter rectifiable u/s 154/ 155.

AI Summary

Partner remuneration: lack of a fresh deed alone does not justify disallowance if paid per filed deed and within prescribed limits.
Where a certified copy of the partnership deed was filed in the first year and there is no change in firm constitution or profit sharing and remuneration is paid per that deed and within the limits of s.40(b), there is no requirement to execute a fresh deed yearly, and absence of a new deed alone does not justify disallowance of partner remuneration; rectification under s.154/155 is confined to calculation or record mistakes.