TaxTMI 
TaxTMI 
2005 (12) TMI 209
X X X X Extracts X X X X
X X X X Extracts X X X X
....of Rs.60,000 per annum to each of four partners was paid. The Assessing Officer, therefore, held that the salary paid to partners was not in accordance with the terms of partnership deed. Accordingly, the Assessing Officer made disallowed of salary of Rs. 2,40,000 under section 40(6) of the Act. 3. Aggrieved, the assessee filed an appeal before the CIT(A). It was argued before CIT(A) that clause 4 of the partnership deed clearly indicated that all working partners shall be entitled to salary at the rate of Rs. 1,20,000 per annum and it was also mentioned that all were working partners, salary at the rate of Rs.60,000 each was paid to 4 partners and one partner was not paid salary because she was also working partner in another firm. Relying on the decision of ITAT, Chandigarh Bench, in the case of ITO v. Tulsi Ram Tej Chand [2004] 91 TTJ 452, it was argued that claim of the firm for deduction of salary to partners could not be disallowed simply because the partnership deed did not mention the names of working partners if, otherwise they were working partners and remuneration paid was authorized by the partnership deed. However, these submissions did not find favour with the CIT(A)....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essee is aggrieved with the order of CIT(A). Hence, this appeal before me. 4. The Ld. A.R. reiterated the submissions made before the authorities below. He drew my attention to a copy of the partnership deed dated 4-4-2001 placed at pages 9-12 of the paper book and stated that as per clause 4 of the partnership deed it was mentioned that all were working partners and each shall be entitled to remuneration at the rate of Rs. 1,20,000 per annum or at such rate as the partners may at the end of each financial year mutually settle subject to the maximum amount admissible under the Act. He submitted that remuneration at the rate of Rs.60,000 each, i.e., the maximum amount admissible under section 40(b)(v) had been paid to 4 of the five partners. The fifth partner was not paid any salary because she was working in another firm and had drawn salary from there. The very fact that one of the partners had not drawn the salary does not mean that remuneration had not been authorized by the partnership deed. Relying on the decision of ITAT, Chandigarh Bench in the case of Tulsi Ram Tej Chand, the Ld. AR submitted that the non-mentioning the names of working partners in the partnership deed doe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aximum amount admissible under the Income-tax Act, it could be said that the payment of remuneration to working partners was in accordance with the terms and as authorized by the partnership deed. Reliance in this regard is placed in the decision of ITAT, Chandigarh Bench in the case of Gopal Dass Kulwant Rai v. ITO [2004] 88 ITD 445. The facts of that case were that partnership deed provided remuneration at the rate of Rs. 20,000 per annum to each working partners subject to the overall limit as laid down in section 40(b) of the Income-tax Act. The assessee paid remuneration to working partners at the rate of Rs. 17,000 each, i.e., the maximum admissible under clause (v) of sub-section (b) of section 40 of the Act. The Assessing Officer disallowed the claim on the ground that the remuneration to partners had not been paid in accordance with terms of partnership deed. On these facts, it was held by the Tribunal that since remuneration claimed by an assessee was less than the maximum statutory limit fixed in the Act, the assessee had not violated statutory provisions and was entitled to deduction of remuneration paid to partners. The ratio of this decision would also apply to the fa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ms of the partnership deed if mutually agreed by making a supplementary deed. There is no restriction either in the Income-tax Act or in the Partnership Act for making a supplementary deed. Moreover, the modification in the remuneration of Rs. 1,20,000 per annum mentioned to each working partner in the partnership deed is only to the extent as admissible under the Income-tax Act, which is also provided in the partnership deed itself. The requirement of executing supplementary deed would have arisen only had the remuneration been paid more than the maximum admissible as deduction under section 40(b)(v). Therefore, this submission is also rejected. 6.4 The next aspect that requires to be considered in this case is that although the partnership deed mentions all partners of the firm as working partners, yet remunerations were paid to only 4 out of the five working partners and, therefore, whether the payment to four partners could be considered as authorized and in accordance with the terms of the partnership deed. In my humble view, the claim of the assessee cannot be denied on this ground that since remunerations were paid to only four of the five partners, such payment could not b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....artners and debit balance in the capital account of the partners stood at Rs. 24,75,101. The Assessing Officer, therefore, observed that borrowed amounts had not been utilized by the assessee for its own business. Detailed analysis of the withdrawals by the partners aggregating to Rs. 63.97 lakhs during the assessment years from 1999-2000 to 2002-03 was shown in Annexure to assessment orders. Accordingly, the Assessing Officer worked out the interest on the debit balance of the partners at Rs. 3,83,623 and disallowed the same on the ground that these loans have not been utilized for the purpose of assessee's business. 9. Being aggrieved, the assessee impugned the disallowance of interest in appeal before the CIT(A). It was submitted before the CIT(A) that debit balance in the capital account of the partners had increased due to losses suffered in the business. It was also argued that such debit balance in the capital accounts of the partners had decreased in comparison to earlier assessment years. It was also argued that no disallowance was made in the earlier assessment years despite debit balance in the capital accounts of the partners stood at higher figures. Thus, it was c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l accounts, profits/losses and the debit capital balances, which was indicated in Annexure to the assessment order. He placed a copy of the Annexure before the Bench. He submitted that submission of the assessee that debit balance had arisen due to business loss suffered by the firm was found to be factually wrong. He submitted that such loss was suffered only in the assessment year 1999-2000 and in all the subsequent years the assessee had earned profit. Even for the assessment year under reference, there was a profit of Rs. 5,53,780. He further submitted the capital balance of the partners being a negative; the interest relatable to debit balance of the partners was rightly disallowed by the Assessing Officer. 11. The Ld. AR Shri Y.K. Sud, on the other hand, heavily relied on the order of CIT(A) and reiterated the submissions made before the authorities below. He submitted both withdrawals and debit balance in the capital accounts of the partners were higher in the assessment years 1999-2000 to 2001-02 as compared to the assessment year under reference. But no disallowance of interest was made. For the assessment year under reference, the assessee had profit of Rs. 5,53,780 whic....