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TMI Blog2011 (10) TMI 384X X X X Extracts X X X X X X X X Extracts X X X X ..... is no prior agreement to pay either the determined amount of salary or rate of interest. 2. The question of law, as raised in ITR No. 38 of 1999, reads as under: "Whether on the facts and circumstances of the case, the ITAT was right in law in allowing deduction of salary and interest paid to the partners on the ground that such an adjustment is not permitted under Section 143(1)(a), when the same is clearly inadmissible as per the provisions of Section 40(b) of the Income-tax Act, 1961?" 3. However, for facility of reference the facts are being taken from CWP No. 3765 of 1997, in which challenge is to the circular dated 25.03.1996 (Annexure P-5) issued by the Central Board of Direct Taxes (for short 'the Board') consequent to amendments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the amount of wages has been quantified nor even the limit of total remuneration has been specified and that the same has been left to be determined by the partners at the end of the accounting period, such payment of remuneration to partners cannot be allowed as deduction in the computation of the firm's income. The said circular in its entirety reads as under: "Circular No.739, dated 25th March, 1996 Subject : Provisions of Section 40(b)(v) of the Income Tax Act, 1961, regarding admissibility of remuneration of working partner in the assessment of firms - regarding. ** ** ** The Board have received representations seeking clarification regarding disallowance of remuneration paid to the working partners as provided u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners at the end of the accounting period, in such cases payment of remuneration to partners cannot be allowed as deduction in the computation of the firm's income. 4. It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under Section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. 5. The above clarification may be brought to the notice of all the Assessing officer of your region. Sd/- Nishi Singh, Secretary, Central Board of Direct Taxes (F. No. 225/29/93/ITA-II)" 6. Learned counsel for the petitioners has raised two-fold arguments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the partnership deed; or ** ** ** 7. On the other hand, learned counsel for the Revenue pointed out that the petitioner filed its return after the provisions of Finance Act, 1992 came into force w.e.f. 01.04.1993. The said Finance Act has made changes in respect of procedure of assessment of registered firms. The provisions of Section 182 of the Act prior to amendment of Finance Act, 1992 has the effect of double taxation in the cases of firms, as the income tax was payable by the firm in terms of Section 182(1)(i), tax was payable as well as on the share of each partners' income in terms of Section 182(1)(ii). After amendment w.e.f. 01.04.1993, a firm can be assessed as a firm for the purposes of this Act, if the part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. The argument that the partnership deed authorizes the payment of salary and interest to the partners, therefore, such amount is deductible as expenditure, is misconceived. In terms of Section 40(b)(ii) of the Act, any payment of remuneration to any partner, who is a working partner, or payment of interest to any partner on his capital contribution, which is not authorized by, or is not in accordance with the terms of the partnership deed is not allowable as expenses. 10. In fact, there is no material distinction between the terms of the original partnership deed dated 16.05.1988 and the subsequent agreement dated 01.04.1992. In the original partnership deed dated 16.05.1988, the term is as under: "8. That the partners of the firm shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pression authorized in the aforesaid circular dated 25.03.1996. The said circular does not run counter to any of the provisions of the Act. Therefore, the circular being clarificatory in nature cannot be said to be beyond the powers of the Board conferred on it under Section 119 of the Act. 11. The reliance of the petitioner that liberal approach is required to be given while applying the provisions of Section 40(b) of the Act is again not tenable. The case of the petitioner falls in category (ii) of para 1 of the said circular as the amount of remuneration to working partner has not been fixed. In respect of the said issue, the Board has clarified in its para 3 that payment of remuneration to partners cannot be allowed, if the same has no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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