TMI Blog2005 (12) TMI 209X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the case are that Assessing Officer referred to clause 4 of the partnership deed dated 4-4-2001 and observed that the same did not specify the names of working partners and also had not specified salary payable to each working partner. Further, the partnership deed mentioned that working partners shall be entitled to remuneration of Rs. 1,20,000 per annum but salary at the rate of Rs.60,000 per annum to each of four partners was paid. The Assessing Officer, therefore, held that the salary paid to partners was not in accordance with the terms of partnership deed. Accordingly, the Assessing Officer made disallowed of salary of Rs. 2,40,000 under section 40(6) of the Act. 3. Aggrieved, the assessee filed an appeal before the CIT(A). It was argued before CIT(A) that clause 4 of the partnership deed clearly indicated that all working partners shall be entitled to salary at the rate of Rs. 1,20,000 per annum and it was also mentioned that all were working partners, salary at the rate of Rs.60,000 each was paid to 4 partners and one partner was not paid salary because she was also working partner in another firm. Relying on the decision of ITAT, Chandigarh Bench, in the case of ITO v. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rits in the conclusion of the Assessing Officer that as per Board's circular the deduction is not admissible as the relevant assessment year is subsequent to the assessment year 1996-97 when in the prior years to the said assessment year the liberal approach was directed to be adopted. Therefore, the addition of Rs. 2,40,000 made by the Assessing Officer is confirmed. Assessee is aggrieved with the order of CIT(A). Hence, this appeal before me. 4. The Ld. A.R. reiterated the submissions made before the authorities below. He drew my attention to a copy of the partnership deed dated 4-4-2001 placed at pages 9-12 of the paper book and stated that as per clause 4 of the partnership deed it was mentioned that all were working partners and each shall be entitled to remuneration at the rate of Rs. 1,20,000 per annum or at such rate as the partners may at the end of each financial year mutually settle subject to the maximum amount admissible under the Act. He submitted that remuneration at the rate of Rs.60,000 each, i.e., the maximum amount admissible under section 40(b)(v) had been paid to 4 of the five partners. The fifth partner was not paid any salary because she was working in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation fixed at Rs. 1,20,000 per annum would be subject to maximum admissible under the Act. 6.1 Now in this case, it is not in dispute that remuneration paid to 4 working partners were maximum amount admissible under the Act. Since the partnership deed authorized payment of remuneration to working partners at Rs. 1,20,000 per annum and also modification subject to a maximum amount admissible under the Income-tax Act, it could be said that the payment of remuneration to working partners was in accordance with the terms and as authorized by the partnership deed. Reliance in this regard is placed in the decision of ITAT, Chandigarh Bench in the case of Gopal Dass Kulwant Rai v. ITO [2004] 88 ITD 445. The facts of that case were that partnership deed provided remuneration at the rate of Rs. 20,000 per annum to each working partners subject to the overall limit as laid down in section 40(b) of the Income-tax Act. The assessee paid remuneration to working partners at the rate of Rs. 17,000 each, i.e., the maximum admissible under clause (v) of sub-section (b) of section 40 of the Act. The Assessing Officer disallowed the claim on the ground that the remuneration to partners had not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the clause 4 of the partnership deed is that the partners have been authorized to modify the rates of remuneration before the end of the financial year subject to restriction that the same shall not exceed maximum amount admissible under section 40(b)(v) of the Act. Even without making such stipulation in the partnership deed, the partners are free to modify the terms of the partnership deed if mutually agreed by making a supplementary deed. There is no restriction either in the Income-tax Act or in the Partnership Act for making a supplementary deed. Moreover, the modification in the remuneration of Rs. 1,20,000 per annum mentioned to each working partner in the partnership deed is only to the extent as admissible under the Income-tax Act, which is also provided in the partnership deed itself. The requirement of executing supplementary deed would have arisen only had the remuneration been paid more than the maximum admissible as deduction under section 40(b)(v). Therefore, this submission is also rejected. 6.4 The next aspect that requires to be considered in this case is that although the partnership deed mentions all partners of the firm as working partners, yet remunerations we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance of interest of Rs. 3,83,623 representing borrowed amounts diverted to partners for non-business purpose. The facts of the case are that Assessing Officer observed that assessee had paid interest on deposits from parties and bank aggregating to Rs. 6,35,759 and claimed deduction for the same. However, he noticed that assessee had diverted borrowed funds to partners and debit balance in the capital account of the partners stood at Rs. 24,75,101. The Assessing Officer, therefore, observed that borrowed amounts had not been utilized by the assessee for its own business. Detailed analysis of the withdrawals by the partners aggregating to Rs. 63.97 lakhs during the assessment years from 1999-2000 to 2002-03 was shown in Annexure to assessment orders. Accordingly, the Assessing Officer worked out the interest on the debit balance of the partners at Rs. 3,83,623 and disallowed the same on the ground that these loans have not been utilized for the purpose of assessee's business. 9. Being aggrieved, the assessee impugned the disallowance of interest in appeal before the CIT(A). It was submitted before the CIT(A) that debit balance in the capital account of the partners had increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Assessing Officer is deleted. Revenue is aggrieved with the order of CIT(A). Hence, this appeal before me. 10. The Ld. DR, Shri Achal Sharma heavily relied on the order of Assessing Officer. He submitted that during the course of assessment proceedings, the Assessing Officer has analysed the position regarding withdrawals by the partners in the capital accounts, profits/losses and the debit capital balances, which was indicated in Annexure to the assessment order. He placed a copy of the Annexure before the Bench. He submitted that submission of the assessee that debit balance had arisen due to business loss suffered by the firm was found to be factually wrong. He submitted that such loss was suffered only in the assessment year 1999-2000 and in all the subsequent years the assessee had earned profit. Even for the assessment year under reference, there was a profit of Rs. 5,53,780. He further submitted the capital balance of the partners being a negative; the interest relatable to debit balance of the partners was rightly disallowed by the Assessing Officer. 11. The Ld. AR Shri Y.K. Sud, on the other hand, heavily relied on the order of CIT(A) and reiterated the submissions m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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