Jetkool Exports India Vs National E-Assessment Centre (ITAT Mumbai)
It is an admitted fact that the assessee being a partnership firm was entitled to deduction in respect of the remuneration payable to the partners as per clause 7 of the Partnership Deed. This in turn depends on the provision of Income Tax Act, 1961 which facilitate remuneration pay out allowable for partnership firms. The assessee vide registered partnership deed dated 01.08.2005 was entitled to deduction with regard to the remuneration payable to partners. Since inception, the assessee was bound by the old provisions of section 40(b)(v) of the Act, which subsequently was amended vide Finance Act No.2, 2009 which came into effect from 01.04.2010. The amended provision provide for higher remuneration pay out in case of partnership firms. It is an undisputed fact that the assessee would get the benefit of the amended provision for higher remuneration from 01.04.2010. The only lacuna in the assessee’s claim is that the assessee has failed to execute the supplementary partnership deed immediately after the enactment of the amended provision. It is only on 16.03.2021 that the assessee has executed the supplementary deed of partnership where the modified remuneration payable to working partners was specified. Nevertheless the assessee vide its supplementary deed gave retrospective effect to the modified remuneration as on 01.04.2010, when the amended provision of section 40(b)(v) came into effect. This action of the assessee was not convincing to the A.O. as the lower authorities have alleged it to be a self serving document which was an afterthought subsequent to the issuance of the show cause notice. The moot question here is whether the assessee was entitled to modify remuneration as per the amended provision based on the supplementary deed giving effect retrospectively. For this proposition, we would be placing our reliance on the decision of the Hon’ble Allahabad High Court in the case of CIT vs. Alison Singh & Co. [2013] 358 ITR 458 (All), which was though on a different facts has upheld the validity of the retrospective effect given to a partnership deed based on a subsequent rectification deed. It has held that as the subsequent deed is executed in accordance with the primary deed, there would be no objection in giving retrospective effect to the subsequent deed.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
This appeal has been filed by the assessee, challenging the order of the learned Commissioner of Income Tax (Appeals) (‘ld.CIT(A) for short), National Faceless Appeal Centre (‘NFAC’ for short) u/s.250 of the Income Tax Act, 1961 (‘the Act’), pertaining to the Assessment Year (‘A.Y.’ for short) 2018-19.
2. The assessee has challenged the addition made u/s. 40(b)(v) of the Act, amounting to Rs.90,27,721/- towards remuneration paid to partners. The assessee has also challenged the grounds of violation of principle of natural justice.
3. The brief facts of the case are that the assessee being a partnership firm is engaged in the business of trading, exports and job work related to textiles and other items. The assessee filed its return of income for the impugned year dated 31.10.2018, declaring total income of Rs.1,78,90,440/-. The assessee’s case was selected for complete scrutiny and the assessment order dated 19.03.2021 was passed u/s. 143(3) r.w.s. 143(3A) and 143(3B) of the Act where the A.O. made additions/disallowances and determined the total income at Rs.2,69,18,161/-.
4. The assessee was in appeal before the ld. CIT(A) who confirmed the addition made by the A.O.
5. The assessee is in appeal before us, challenging the order of the ld. CIT(A).
6. Ground no. 1 raised by the assessee is on the addition u/s. 40(b)(ii) of the Act. It is observed that the assessee had paid a remuneration amount of Rs.2,70,60,662/- to both the partners of the assessee firm during the impugned year and had furnished the deed of partnership in support of its claim. The A.O. relied on clause 7 of the partnership deed and calculated the remuneration payable to the partners which according to the A.O. was not in accordance with the terms of deed of partnership dated 01.08.2005 and held that the same was in violation to the provision of section 40(b)(ii) of the Act.
7. During the assessment proceeding, the assessee in its submission has stated that the remuneration of the partnership was in accordance to the supplementary deed dated 16.03.2021, which was made within the ambit of clause 9 of original partnership deed dated 01.08.2005. The assessee further submitted that the supplementary deed was w.e.f. 01.04.2010 which had calculated the remuneration of the partners in accordance with the amended provision of section 40(b)(v) of the Act vide Finance Act (No.2) 2009 314 ITR (St) 57 which came into effect from 01.04.2010 as per which higher remuneration pay out for the partnership firms were allowed. The A.O. failed to consider the submission made by the assessee for the fact that there was no supplementary deed executed as on the date of filing of the returns for the impugned year and also that the assessee has not submitted any such deed until date of issuance of final show cause notice dated 09.03.2021 by the A.O. The A.O. held that the execution of supplementary deed after the issuance of final show cause notice dated 09.03.2021 was only an afterthought and was merely a self serving document filed by the assessee. The A.O. distinguished the cases relied upon by the assessee and has also controverted the assessee’s contention that Circular No. 12/2019 dated 19.06.2019 was only for guidance and clarification for the A.O.’s. The assessee’s contention that the remuneration for partners as per the amended law was considered in the earlier years was also controverted by the A.O. that there was no assessment proceeding u/s. 143(3) of the Act for those years relied upon by the assessee and only section 143(1) adjustments was done for the earlier years. The A.O. disallowed the impugned amount of Rs.90,27,721/- u/s. 40(b)(ii) of the act and added the same to the total income of the assessee. The A.O. calculated the remuneration payable to the partners as per the deed of partnership deed dated 01.08.2005 as under:
