2003 (5) TMI 203 - AT - Income Tax

Summary

Issues:
Disallowance of salary to working partners under section 40(b)(v) of the Income-tax Act for the assessment year 1995-96.

Analysis:
The appeal was filed against the disallowance of Rs. 68,000 paid as salary to four working partners by the assessee firm. The Assessing Officer found that the claimed deduction of Rs. 68,000 was not in accordance with the terms of the partnership deed. The Commissioner of Income-tax (Appeals) upheld the disallowance, stating that the remuneration was not paid as per the partnership deed and was not covered by Circular No. 739, dated 25-3-1996 of CBDT.

Upon careful examination, it was noted that changes in the Income-tax Act from 1-4-1993 allowed remuneration to working partners as per section 40(b)(v) of the Act. For remuneration to be deductible, it must be authorized by the partnership deed, paid to a working partner, and not exceed the specified limits.

The partnership deed in question provided for remuneration of Rs. 20,000 per annum to each working partner, subject to the statutory limits under section 40(b). The sentence "subject to overall limits as laid down in section 40(b) of the Income-tax Act" was deemed redundant and not a term of the partnership deed but a statutory provision.

The maximum allowable remuneration based on the book profit was calculated to be Rs. 69,238. The assessee claimed Rs. 68,000 as remuneration, which was within the statutory limit. The claim was considered bona fide, and it was concluded that the remuneration should be allowed as a deduction under section 40(b)(v) of the Income-tax Act.

Additionally, an additional ground of appeal regarding charging of interest under section 234B of the Income-tax Act was raised during the hearing. The Tribunal allowed this ground for statistical purposes, directing the Assessing Officer to re-examine the chargeability of interest under section 234B.

In conclusion, the appeal was allowed, and the disallowance of the claimed remuneration to working partners was overturned, with the Tribunal ruling in favor of the assessee based on the provisions of section 40(b)(v) of the Income-tax Act.