Issues :- Whether the provisions of section 40A can be applied, in case the section 40(b) had already been applied – Whether when the partnership deed is complete with regard to all the details regarding remuneration and salary etc, disallowance can be made on the basis that it was excessive – Whether remuneration to partners should be allowed u/s 40(b)(v) only on the basis of declaration made in the partnership deed.
Held – It was noticed that all the three partners to whom the impugned remuneration was paid were working partners of the assessee-firm and this position was accepted even by the Assessing Officer while allowing remuneration paid to them to the extent of Rs. 4 lakhs each. It was also not in dispute that there was a specific clause contained in the partnership deed of the assessee-firm allowing payment of remuneration to the working partners and the quantum of such remuneration was agreed to be in accordance with the provisions of section 40(b)( v). The remuneration paid by the assessee-firm to its working partners for the year under consideration amounting to Rs. 39,31,165 was within the ceiling limit prescribed in the provisions of section 40(b) and it was not the case of the department that the said remuneration was in excess of such ceiling limit. The only contention raised by the department was that the remuneration paid by the assessee-firm to its working partners aggregating to Rs. 39,31,165 was highly excessive and unreasonable, having regard to all the facts of the case as highlighted by the Assessing Officer and such excessive portion of the said remuneration worked out by the Assessing Officer at Rs. 27,31,965 was rightly disallowed by him invoking the provisions of section 40A(2). In this regard, the assessee had cited the decision of Ahmedabad Bench of Tribunal in the case of Chhajed Steel Corpn. v. Asstt. CIT  77 ITD 419 wherein it was held that the provisions of sub-sections 40(b ) and 40A(2) operate in different fields and the provisions of section 40A have no application in the cases where section 40(b) has been applied. It was held by the Tribunal that the Assessing Officer, thus, has no power to go into the question of reasonableness of remuneration paid by the firm to its partners and he can only examine whether the remuneration is not exceeding the prescribed limits as laid down in section 40(b ). To the similar effect is the decision of the Karnataka High Court in the case of N.M. Anniah & Co. v. CIT  101 ITR 348 cited by the assessee wherein it was held that section 40A has no application to the matters contained in section 40(b) and the overriding effect given to section 40A is only in respect of matters not covered by section 40(b). The ratio of these two judicial pronouncements cited by the assessee was directly applicable to the issue involved in the instant case and following the same, it was to be held that the disallowance made by the Assessing Officer on account of partners’ remuneration covered under section 40(b) by invoking the provisions of section 40A(2) was not sustainable.