Case Law Details
It is correct that the terms of partnership provided payment of interest at the rate of 12 per cent on capital of partners as well as remuneration to the working partners. The assesses, however, did not make payment thereof to the partners nor made any provision of liability in the books of account The perusal of deed of partnership reveals that the parties on mutual consent could add, amend, vary or alter any of the terms of partnership. This is found so spelled out in clause No. 11 of partnership deed dated 4-4-1998 and adopted in the supplementary deed as well. Front this clause it is evident that the various clauses of partnership which authorised the partners to charge interest on their capitals and remuneration to the working partners could be varied or amended either verbally or even by conduct.
It was not necessary for the parties to have reduced such terms in writing in case they desired not to charge any interest or remuneration as such. From the conduct of parties it is evident that they have acted in terms of clause No. 11 of the partnership deed. The Assessing Officer, therefore, could not have ‘compelled the assessee to charge such interest or remuneration by invoking section 40(b}( v) of the Act more particularly when it is not mandatory but discretionary for the assessee to have made such a claim.
Even otherwise, if this was to be taken as a case of contravention of provisions of section 184 or 185 of the Act, then also the amount of interest of salary payable to partners could not have been charged as their income in terms of clause (v) of section 28 of the Act. That being so, the folding reached by Id. CIT(A) that the assessee has circumvented tax liability by not claiming the deduction on account of salary, and interest to partners so as to take benefit of set off of brought forward losses will not result into tax evasion but was merely on legitimate tax planning
The Assessing Officer, therefore, could not have ‘compelled the assessee to charge such interest or remuneration by invoking section 40(b}( v) of the Act more particularly when it is not mandatory but discretionary for the assessee to have made such a claim. Even otherwise, if this was to be taken as a case of contravention of provisions of section 184 or 185 of the Act, then also the amount of interest of salary payable to partners could not have been charged as their income in terms of clause (v) of section 28 of the Act. That being so, the folding reached by Id. CIT(A) that the assessee has circumvented tax liability by not claiming the deduction on account of salary, and interest to partners so as to take benefit of set off of brought forward losses will not result into tax evasion but was merely on legitimate tax planning done by the appellant.
Keeping in view the overall conspectus of the case, I find no justification in the action of the Id. CIT(A) in upholding the decision of Id. assessing authority in enforcing deduction of interest on capital and remuneration to working partners of the firm while computing the assessable income for the year under consideration. I, therefore, by allowing the ground in appeal, direct the assessing authority to modify the computation of income accordingly.
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