Remuneration to partners cannot be disallowed due to non-filing of reconstituted partnership deed

Issue before court:

The only issue before Hon’ble Court is that whether assessee can claim deduction on account to remuneration paid to partners when certified copy of instrument of change of partnership deed is not filed along with the return.

Brief Facts:

• Assessee filed return and claimed deduction on account of remuneration paid to partners but did not file certified copy of reconstituted partnership deed.
• Subsequently assessee filed copy of reconstituted deed before AO at the time of assessment proceedings.
• AO denied deduction and held that assessee was required to file copy of reconstituted deed at the time of filing return as per provision of section 184 (4). Assessee did not file amy such copy and claimed remuneration to partners.
• CIT (A) allowed appeal and held that Mere omission to file the deed with the return cannot and should not be treated as fatal.
• Tribunal relied upon judgment of Calcutta High Court in case of CIT vs. Magnum Export Pvt. Ltd. 262 ITR 10 in which Their Lordships held that the deduction under section 80HHC could not be disallowed simply because the audit report was not furnished along with the return.
• Tribunal also relied upon the findings Hon’ble Kerala High Court in the case of CIT-vs- G. Krishnan Nair [259 ITR 727] that filing of the audit report to claim deduction under section 80HHC (4A) of the Act is only directly in name and it can be filed at any time before the completion of the assessment.

Contention of Revenue:

• Assessee did not file reconstituted copy along with return so he is not entitled to claim deduction on account of remuneration paid to partner.
• Section 185 is emphatic and also starts with a non-obstante clause. Therefore, omission on part of the assessee to comply with the requirement of sub-section 4 of section 184 precludes the assessee from claiming any deduction by way of salary paid to the partners.
• The view taken by tribunal is purely contrary to language of section 185.
• After the amendment by the Finance Act, 2003, non filing of instrument of partnership deed along with the return will make the claim of the assessee illegal so as to deny the claim of the assessee though the requisite details and the evidence is made available to the A.O. before he completes the assessment.

Contention of the Assessee:

• Assessee could have filed copy of reconstituted deed along with revised return u/s 139 (4) and in that case return would have been a valid return and there will be no violation of section 184 (4).
• Assessee made a prayer before AO at the time of assessment proceedings to treat return as defective return because instrument of change in partnership deed was not annexed to return.
• In such case assessee was entitled to get an opportunity to cure defective return.

Held by the Court:

• Hon’ble Court while dismissing appeal of revenue held that section 185 r.w.s 184, although worded in emphatic, is not intended to be a mandatory provision.
• Section 139 (4) permits an assessee to revise his return before the expiry of one year from the end of relevant AY or before the completion of assessment, whichever is earlier.
• The non-filing of the instrument of change in the partnership deed along with the return filed by the assessee but filed during the course of assessment proceedings will disentitle the assessee to claim the remuneration paid to the partners, which is paid in accordance with the provisions of the deed of partnership and the provisions of the Act.
• The Hon’ble Gujrat High Court in the case of Billimora Engineering Mart – Vs – CIT 153] observed as under Head Note :

  “In the Act of 1961, the requirement is that a partnership deed should be evidenced by an instrument and the application shall be accompanied by the original instrument evidencing the partnership at the date of the application. The words, “evidenced by an instrument of partnership” do not indicate necessarily that the evidence should be a contemporaneous evidence when the application is made, because, in the ultimate analysis, the purpose of any evidence, and for that matter the instrument of partnership, is to satisfy the authority that there was a genuine and valid partnership in existence in the accounting year.

• Procedural law is always to be construed and applied in a manner so as to make it a hand maid to the cause of justice, and it cannot be treated as a substantive provision so as to defeat the rights of the parties.
• The Hon’ble Delhi High Court has also held in the case of Remfry & Sons – vs.- CIT [276 ITR – 1] that non filing of the partnership deed is an irregularity and is a curable defect, which gets cured by filing the same in the assessment proceedings.

Comments: The filing of revised/changed instrument of partnership deed along with the return is directive in nature and it can be filed at any time before the completion of assessment proceedings. It is not disputed that assessee can file an revised return before the completion of assessment along with reconstituted partnership deed and that will be hold as a valid return.

(Compiled by our Team Member- Advocate Jagjeet Singh )