TMI Blog2011 (11) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer on the ground of violation of Section 40(b)(v). The appellant-assessee has been unsuccessful in appeals before the Commissioner of Income Tax (Appeals) and t Income Tax Appellate Tribunal, Delhi (tribunal, for short). The impugn order of the tribunal is dated 29th October, 2010. 2. After hearing the counsel, the following substantial question law is framed: "Whether on reading of clause 7 of the partnership deed dated 1st May,1976 and clauses 1 and 2 of the supplementary partnership deed dated 1st April,1992, the tribunal was right in holding that remuneration of Rs. 21,40,000/- paid to the two partners cannot be allowed as a deduction under Section 40(b)(v) of the Act?" 3. Relevant part of Section 40 of the Act reads as under: "40. Amounts not deductible. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-- ** ** ** (b) in the case of any firm assessable as such,-- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1. Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented", respectively), (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2. Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be stated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date. 6. The question raised is whether the conditions stipulated in the aforesaid Section are satisfied in the present case or not. This requires examination of the relevant clauses of the partnership deed dated 1st May, 1976 and the supplementary partnership deed dated 1st April, 1992. 7. Clauses 7 of the partnership deed dated 1st May, 1976 reads as under: "7. That the profits or losses of the partnership, as the case may be, shall be divided amongst and borne by the partners equally." 8. Clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992 read: "1. That subject to mutual consent of the partners, and subject to the provisions of the Income Tax Act, 1961, the working partner or partners shall be paid such remuneration as may be mutually agreed between themselves, from time to time, and such remuneration shall be deductible expense before arriving at the share of the partners as allocable from the net profits. 2. That both the partners (hereinafter referred as working partners), shall devote their time and attention in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined the said clauses, we feel that on conjoint reading of clause 7 of the partnership deed dated 1st May, 1976 and clauses 1 and 2 of the supplementary partnership deed dated 1st April, 1992, conditions of Section 40(b)(v) are not satisfied. 11. Clause 2 of the supplementary deed has to be read along with clause 1 of the same deed. These two clauses have to be read harmoniously and reasonably to understand the two covenants and give effect to their true meaning. The second sentence of clause 2 neither quantifies nor lays down the manner of quantifying the total remuneration payable to the partners. Clause 2 stipulates the maximum amount that can be paid as remuneration to the two partners but does not quantify the remuneration payable in a particular year. Quantum or the amount of remuneration and the manner of computing is not specified or stipulated but as noticed under clause 1 has been left to be decided by a mutual agreement in future. 12. The appellant in actual practice has not read and understood clause 2 as stipulating that the two partners are entitled to remuneration equal to the maximum amount stipulated in Section 40(b)(v) of the Act. As per the return of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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