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TMI Blog2019 (8) TMI 1045X X X X Extracts X X X X X X X X Extracts X X X X ..... t proceedings, per clause 9 thereof, mentions that the salary to partners shall be as mutually agreed between the partners. As per the Revenue, in-as-much as the same does not either quantify the remuneration to be allowed to the working partners, specified by name, or the manner in which remuneration thereto is to be quantified, the same does not satisfy the condition of section 40(b), mandatory in nature, even as also explained by the Board Circular No. 739 dated 25.3.1996. 3.1 Section 40(b) in its relevant part 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",- (a) in the case of any assessee- (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 to as "remuneration") to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effective - the said resolution being recorded on the letter-head of the firm, with in fact the partners signing the same (i.e., the resolution as on 01/4/2013) having not put any date alongside their signature, Sh. Arora would furnish the capital account of both the partners (copy on record). The same bear credit (for salary) to the capital account of the partners at Rs. 15,000 per month (for the first four months) and at Rs. 20,000 per month thereafter. This, in his view, would show that the resolution increasing the salary was indeed passed on 01.4.2013, and the said resolution is not back-dated. In fact, the salary prior to its' increase, Sh. Arora would continue, was at Rs. 1.20 lacs per annum for both the partners and, accordingly, credited to the partners account in that sum. The Assessing Officer (AO), however, has not even allowed the same. Further, again in response to a query by the Bench, he would, with reference to section 10 of the Indian Contract Act, 1872 submit that there is no requirement therein for witnessing a contract. As such, the non-signing of the resolution passed on 01.4.2013, or the earlier on the resolution dated (not specified), by any witness, does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an agreement agreeing to pay salary, and nothing more. That is, it could at best be regarded as an authorization by the partnership to pay salary to the partners. I say, 'at best', as it is equally valid to contend that the authorization has to be qua both, i.e., the partner/s to whom, and the sum at which, salary is to be allowed by the partnership, and an authorization wherein any of these elements is missing cannot be regarded as a proper authorization, or one as contemplated by section 40(b)(ii). The said provision, however, by including the words 'in accordance with' in conjunction with the words 'authorized by' in section 40(b)(ii), removes any ambiguity in law, making the discussion or debate on the scope of the words 'authorized by' redundant. It could be argued that the words 'authorized by' in section 40(b)(ii) are to be read broadly, signifying that the remuneration for their services is to be paid to the working partners. This is as the same is essentially a part of the profit of the firm, which is to be appropriated between the partners, and the salary clause only modifies the said appropriation to that extent, in-as-much as it is to be charged, as agreed to, prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iberal approach may be taken for the initial years. It has been decided that for the asst. yrs. 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of the clauses of the type mentioned at 1(i) above. 3. In cases, where neither the amount has been quantified nor even the limit of total remuneration has been specified but the same has been left to be determined by the partners 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 asst. yr. 1996-97, no deduction under s. 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 AOs of your region. Sd/- Nishi Singh, Secretary, CBDT [F. No. 225/29/93/ITA-II]" Para 4 is applicable for the current year, being an assessment year after AY 1996- 97. In fact, even for earlier years it is only a clause, of the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the partnership, it has to be, i.e., to be valid, arrived at the beginning of the period for which it would obtain. The remuneration clause; salary being a charge on the profits of the firm as per the partnership agreement, would also accordingly require clarification as to the amount of salary, if any, in case of absence or inadequacy of profit, i.e., where with reference to a defined ratio of profit. Continuing our discussion with regard to the primary relevancy of the date, the same is also mandated by law (section 40(b) (iii)), so that it is not tenable to say that the salary clause would operate retrospectively. Further, being neither stamped nor registered, it is not admissible in evidence in a court of law, i.e., as a legally enforceable contract. How could, then, the Revenue be faulted for not giving cognizance to such a document? It may be argued that it could be stamped and registered at any time in future, rendering as it admissible for the period prior thereto. The argument would require being examined with reference to the relevant provisions/statutes, only whereupon it could be answered, toward which no reference has though been made. The fact of the matter, neverth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qua the remuneration clause, that the assessee furnished the same in the assessment proceedings. The assessee's conduct, i.e., in first continuing with an impermissible clause (in the partnership deed) even years after clarification by the Board and, then, in not defining the manner of quantification, but passing resolutions, with no record as to the time when they were actually passed, stating to be valid amendment/s to the partnership agreement, itself betrays its' case of having passed the resolutions on the date from which they are made effective, i.e., prospectively. The resolution/s also does not qualify the term 'partners' with the word 'working', so that in terms thereof, the salary is to be paid irrespective of whether a particular partner is a working partner or not, and which is not sustainable in view of section 40(b)(i). The entries in the books of account, even otherwise not decisive of the matter, also do not support the assessee's case. The said resolution, or the one stated to be passed earlier thereto, cannot, in view of the fore-going factual and legal incidents, be regarded as a valid partnership deed, i.e., as a valid instrument of partnership, or as a valid a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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