TaxTMI 
TaxTMI 
2022 (6) TMI 1269
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....Addition made under section 40A(3) of the Act unjustified - Rs.3,60,000/- i. The Ld. CIT(A) erred in upholding the action of the Ld. A.O in treating the remuneration paid to the working partner of the firm as alleged violation of provisions of section 40A(3) of the Act. The Appellant prays that the addition of Rs.3,60,000/- under section 40A(3) of the Act is unjustified and the same may be deleted. ii. The Ld. CIT(A) failed to appreciate that remuneration paid to the working partner of the firm is not hit by the provisions of Rule 6DD as there is no employer- employee relation. The Appellant, therefore, prays that the addition of Rs.3,60,000/- under section 40A(3) of the Act is unjustified and the same may be deleted." 3. The only issue arising in the present appeal is with regard to the disallowance of remuneration paid by the assessee to its Working Partner under section 40A(3) of the Act. 4. The brief facts pertaining to this issue, as emanating from the records are: The assessee is a partnership firm and is engaged in the business of wholesale of Canvas Tarpoulins. For the year under consideration, the assessee e-filed its return of income on 26.09.2015 declaring total....
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....strict law, between a firm and one of its partners. So that any agreement for remuneration of a partner for taking part in the conduct of the business must be regarded as portion of the profits being made over as a reward for the human capital brought in." Thus, remuneration paid to the partner is share of profits of the partnership firm and same cannot be treated to be in the nature of salary paid to the employee. 10. Before dealing with the issue at hand, it is pertinent to note following relevant facts of the present case, which have also not been disputed by the Revenue: (i) remuneration was paid to the Working Partner; and (ii) same was declared under the head "Profits and gains from business or profession" by the Working Partner. Further, it is also not the case of Revenue that the transaction of payment of remuneration to the Working Partner was of colourable nature. In light of above facts, we will analyse the relevant provisions of the Act. Section 40(b) of the Act lays down certain conditions under which payment to the partner shall not be allowed as a deduction while computing the income of the firm under the head "Profits and gains of business or profession". Thus, i....
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....y even if paid in cash above the threshold under section 40A(3) of the Act, provided the conditions of section 40(b) of the Act are not applicable, shall be allowed as deduction while computing the income under the head 'Profits and gains of business or profession'. 12. Our aforesaid conclusion is also supported by accounting treatment of remuneration paid to the partner by the firm. As the salaries paid to partners is an appropriation of profit rather than charge, so it is debited to 'profit and loss appropriation account' and shall be credited to respective partners' capital / current accounts. 13. We find that the Hon'ble Supreme Court in Attar Singh Gurmukh Singh v/s ITO: [1991] 191 ITR 667 (SC), while interpreting the term "expenditure" in section 40A(3) of the Act, observed as under: "....the word 'expenditure' has not been defined in the Act. It is a word of wide import. Section 40A(3) refers to the expenditure incurred by the assessee in respect of which payment is made. It means all outgoings are brought under the word 'expenditure' for the purpose of the section. The expenditure for purchasing the stock-in-trade is one of such outgoings." 14. However....
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....arlier, it is not the case of Revenue that the transaction of payment of remuneration to the Working Partner was of colourable nature. As the remuneration is from the firm to the Working Partner, which is nothing but sharing of profits, the identity of the payer and payee is also not doubted by the Revenue. Further, the genuineness of remuneration and source is also not in dispute. Thus, even in view of the above, the applicability of section 40A(3) of the Act, in the present case, is not justified. 17. In addition to above, we find that the Co-ordinate Bench of the Tribunal in Chhajed Steel Corpn. v/s ACIT: [2001] 77 ITD 419 (Ahmedabad - ITAT) while deleting the disallowance of remuneration to the partner under section 40A(2) of the Act, observed as under: "...we hold that provision of section 40A had no application to a case governed by section 40(b) of the I.T. Act. This intention is more clearly manifested after amendment of above provision with effect from 1st April, 1993. Even otherwise, section 40(b) is applicable only to the payment made by a firm to its partner whereas provision of section 40A(2) is of general nature applicable to several situations. It is settled law t....