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2005 (12) TMI 209 - AT - Income TaxDisallowance of salary of partners - In the partnership deed did not specify the names of working partners and also had not specified salary payable to each working partner - salary paid to partners not in accordance with the terms of partnership deed - HELD THAT:- 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 be considered in accordance with the partnership deed. It is to be noted that section 40(b) is to be considered only when the assessee claims deduction for the payment of salary to the partners. In case, no payment is made to one of the partners, the same would not disentitle the assessee from claiming deduction in respect of the remaining 4 working partners. For example, if partnership deed mentioned the names of 3 working partners entitled to remuneration, but remunerations are paid to 4 partners and the assessee claimed deduction in respect of remuneration paid to 4 working partners, the deduction shall not be allowed only in respect of remuneration paid to one of the four partners because the same was not authorized and was in accordance with the terms of partnership deed. However, deduction in respect of salary paid to remaining 3 partners which was authorized and was in accordance with the terms of partnership deed cannot be denied because nowhere section 40(b) lays down that such remunerations should be paid to all the working partners mentioned in the partnership deed. If the assessee chooses not to make payment to one or two of the working partners as per their mutual agreement and does not claim deduction for the same, Revenue cannot have any objection for the same because section 40(b) shall come into operation only when the deduction is claimed and not otherwise. Thus, CIT(A) was not justified in disallowing the claim of the assessee for deduction of remuneration amount paid to 4 working partners. The order of the CIT(A) is set aside and the Assessing Officer is directed to allow deduction of remuneration. Accordingly, the grounds of appeal of the assessee are allowed. Disallowance of interest - borrowed amounts diverted to partners for non-business purpose - The Revenue has not brought any material on record to show that there was increase in the borrowed funds in the assessment year under reference which could be linked with the withdrawals by the partners. In fact, the withdrawals by the partners for the assessment year under reference were lower than the profit and fresh contributions by the partners resulting in reduction in the debit balance in the capital accounts of the partners. Therefore, disallowance of interest for the assessment year under reference would not be justified. In the case of CIT v. Sri dev Enterprises [1991 (1) TMI 52 - KARNATAKA HIGH COURT], the facts before the Karnataka High Court were that assessee had borrowed funds from 'X' in the earlier year. No disallowance of interest was made in the earlier assessment year. However, subsequently the Assessing Officer disallowed the interest on the same balance, which was brought forward from the earlier assessment year. On these facts, the Karnataka High Court held that consistency and definiteness of approach by the Revenue is necessary and since interest was not disallowed in the earlier year and the balance was brought forward from the earlier year, no disallowance could be made for the subsequent assessment year. Here also, the facts of the case are the same as for earlier year. In the assessment year under reference, the assessee had not borrowed any fresh loans and no disallowance of interest was made in the earlier assessment years. Therefore, CIT(A) was justified in deleting the impugned disallowance of interest. The order of CIT(A) is upheld and the grounds of appeal of the Revenue are dismissed. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.
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