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Remuneration mutually agreed between partners is allowable if partnership deed permits the same subject to limit u/s 40(b)

Visakhapatnam bench of Income Tax Appellate Tribunal (ITAT) recently held that remuneration paid to partner cannot be disallowed since there is a clause existing in the partnership deed which specified the exceeding limit.

ACIT Vs. M/s Sri Navodaya Granite Industries (ITAT Visakhapatnam)

However, we have gone through the partnership deed and in the partnership deed with regard to payment of remuneration,there was a clause for increase/decrease of remuneration as per mutual consent before the end of the financial year. In the instant case, there were only two partners. The P&L account and the financial statement were examined by both the partners and agreed for payment of remuneration of Rs. 5,30,000/. The partnership deed also limits the remuneration as permissible u/s 40(b) of I.T. Act. Since there are only two partners in the partnership firm, and the remuneration paid is permissible as per partnership deed and the books of accounts are being verified and certified by both the partners as stated by the Ld.AR, we are in agreement with the submission made by the Ld.AR that the payment of remuneration is in accordance with the partnership deed. The Ld.AR further submitted that the managing partner has admitted the income in his hands and paid taxes. Therefore, we hold that the remuneration of Rs. 5,30,000/- is authorized by the partnership deed which required to be allowed.

This view is supported by the decision of Hon’ble High Court of Rajasthan in the case of CIT Vs. Asian Marketing [254 CTR 0453]. Therefore, we set aside the order of the lower authorities and allow the remuneration paid to the partners.

FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-

1. This appeal is filed by the revenue and the Cross Objection filed by the assessee against the order of the Commissioner of Income-Tax (Appeals) [CIT(A)]-2, Visakhapatnam vide ITA No. 186/2015-16/CIT(A)- 2/VSP/C-1,KKD/2016-17 dated 23.09.2016 for the A.Y. 2012-13.

2. The assessee filed return of income declaring total income of 2,03,750/-. The assessment was completed u/s 143(3) on total income of Rs. 58,15,640/-. During the assessment proceedings, the assessing officer(AO) made the following additions :

(i) Dis allowance of partners’ remuneration Rs. 4,94,000
(ii) Dis allowance of Finance charges u/s 40(a)(ia) Rs. 50,46,643
(iii) Dis allowance of payments u/s 40A(2)(b) Rs. 71,250

3. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition in respect of partners’ remuneration of Rs. 4,94,000/- and the Finance charges of Rs. 13,23.025/- and deleted the sum of Rs. 71,250/- with respect to the dis allowance of payments made u/s 40A(2)(b) of I.T.Act.

4. Aggrieved by the order of the Ld.CIT(A), the revenue has filed appeal challenging the deletion made by the Ld.CIT(A) with respect to the dis allowance of expenditure u/s 40A(a)(ia) of I.T. Act amounting to Rs. 37,23,628/- (50,56,643– 13,23,025) and the assessee filed cross objections challenging the order of the Ld.CIT(A) with respect to dis allowance of partners’ remuneration and dis allowance of finance charges u/s 40(a)(ia) amounting to Rs. 13,23.025/-

Revenue’s Appeal – ITA 486/Viz/2016

5. All the grounds of appeal of the revenue are related to deletion of the addition made by the AO w.r.t. finance charges paid to M/s Sundaram Finance Ltd., M/s Shriram Transport Finance Company aggregating to 37,23,628/-. Form 26AS shows that M/s Sundaram Finance Ltd. And Shriram Transport Finance Company have admitted the income of Rs. 38,86,822/- as per the details given below

Name of the deductee As per books As per Form 26A
a) Sundaram Finance Ltd. 5,21,695/- 6,84,889/-
b) Shriram Transport Finance Co. Ltd. 45,24,958/- 32,01,933/-
50,46,653/- 38,83,822/-

5.1. The Ld.CIT(A) verified the Form 26AS and found that M/s Sundaram Finance Ltd. has admitted the income of Rs. 5,21,695/- and M/s Shriram Transport Finance Co. Ltd. has admitted a sum of Rs. 32,01,933/- in their return of income for the assessment year under consideration. Following the decision of Hon’ble Delhi High Court in the case of CIT vs. Ansal Landmark Township P. Ltd. (377 ITR 635 Del.), the CIT(A) has deleted the addition of Rs. 37,23,628/- and confirmed the balance amount of Rs. 13,23,025/-.

6. Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us. We have heard both the parties and perused the material placed on record. During the previous year relevant to the assessment year 2012- 13, the assessee has made the payments of Rs. 50,46,653/- towards the interest as per details given above to M/s Sundaram Finance Ltd. and M/s Shriram Transport Finance Co.Ltd. without deduction of tax at source. The above payments attracts the TDS u/s 194A of I.T.Act, and non deduction of tax at source attracts the dis-allowance u/s 40 (a) (ia) of I.T.Act. Accordingly, the AO made the dis allowance u/s 40(a)(ia) amounting to Rs. 50,46,653/-. During the appeal hearing, the Ld.CIT(A) has verified the Form 26AS and found that the beneficiaries have admitted the income of Rs. 37,23,628/- as under :.

(i) M/s Sundaram Finance Ltd. Rs. 5,21,695/-
(ii) M/s Shriram Transport Finance Co. Ltd. Rs. 32,01,933/-

6.1 Section 40(a), sub section (ia) was amended w.e.f. 01.04.2013 by inserting a new (second) proviso which is as under :

“In view of the second proviso to section 40(a)(ia) read with proviso to section 201(1) of the Income Tax Act no dis allowance of expense u/s 40(a)(ia) can be made unless the assessee has been treated as assessee in default under S.201(1) of the Act for its failure to deduct tax at source from the payment made on account of interest.

In simple words, if the amount paid by payer have been included by the payee in his return of income for relevant Asst. year, filed the return of income u/s 139 and has paid the tax due on the income declared in such return, to the extent the recipient (i.e. payee) from the assessee have so included the sum in his return of income and filed the same, no dis allowance u/s.40(a)(ia) of the Act can be made by the AO in view of the second proviso to section 40(a)(ia) read with first proviso to section 201(1) of the Act.

This has been provided in the second proviso to section 40(a)(ia) inserted in the statute by the Finance Act, 2012 with effect from 1.4.2013. Therefore, on furnishing of certificate in form 26A as prescribed under proviso to section 201(1) read with rule 31ACB of the I.T. Rules no dis allowance u/s 40(a)(ia) can be made.”

6.2. As per the proviso, if the deductee admits the income and pays taxes on such income, the assessee is not deemed to be assessee in default and the dis allowance u/s 40(a)(ia) does not attract. Though the amendment has come into effect w.e.f. 01.04.2013, the Hon’ble Delhi High Court in the case of CIT Vs. Ansal Landmark (Supra) held that the second proviso to section 40(a)(ia) is declaratory and curative in nature and has retrospective effect from 01.04.2005. The Ld.CIT(A) has allowed the assessee’s appeal following the order of the Hon’ble Delhi High Court.

During the appeal hearing, the Ld.DR did not place any other decision to controvert the reliance placed by the Ld.CIT(A). Since the CIT(A) allowed the assessee’s appeal following the decision of Hon’ble Delhi High court, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld. Appeal of the revenue is dismissed.

Cross Objection– No. 11/Viz/2017

7. Ground No. 1 of cross objection is with regard to the addition sustained by the Ld.CIT(A) u/s 40(a)(ia) of I.T.Act. The AO made the dis allowance of payment of interest to M/s Sundaram Finance Ltd. and M/s Shriram Transport Finance Co. Ltd. aggregating to Rs. 50,46,653/- after verification of Form 26AS, the CIT(A) found that M/s Sundaram Finance Ltd. and M/s Shriram Transport Finance Co.Ltd. have admitted Rs. 37,23,628/- and confirmed the balance amount of Rs. 13,23,025/- The assessee has challenged the order of the CIT(A) for deleting the addition of Rs. 13,23,025/- relating to the balance amount. During the appeal hearing the Ld.AR did not press this ground. Therefore, ground no. 1 is dismissed as not pressed.

8. Ground No. 2 is related to the addition of Rs. 4,94,000/- towards partners’ remuneration. During the assessment proceedings, the AO found that the assessee has debited a sum of Rs. 5,30,000/- towards partners’ remuneration. The AO found from the partnership deed that the partnership deed permits remuneration to the extent of Rs. 36,000/- only and accordingly made the addition of Rs. 4,94,000/-, relating to the difference between the remuneration claimed and permitted under partnership deed.

9. Aggrieved by the order of the AO, the assessee went on appeal before the CIT(A) and the Ld.CIT(A) confirmed the addition holding that the assessee failed to furnish any written agreement for increasing the In the absence of written document, the CIT(A) was of the view that it is not justified to make such claim and accordingly confirmed the addition made by the AO.

10. Aggrieved by the order of the CIT(A), the assessee has filed the cross objections before this Tribunal. During the appeal hearing, the Ld.AR argued that the partnership deed permits the payment of remuneration of Rs. 3,000/- which is subject to increase or decrease by mutual agreement from time to time and subject to the limitation of section 40(b) of I.T.Act, Hence, Ld.AR argued that there are only two partners in the partnership firm, both of them are closely related and the managing partner is having 94% of share in the partnership firm. Since the partnership deed permits remuneration to the maximum extent of 40(b) of I.T. Act, the same required to be allowed. Ld.AR further argued that Indian Partnership Act does not mandate written agreement. The accounts of the partners are verified by both the partners and as per the mutually agreed terms, the working partner was paid remuneration of Rs. 5,30,000/- and for which no separate document is necessary as per the partnership deed, since the clause for increase/decrease of remuneration is subject to the limitation of Section 40(b) is embedded in the partnership deed. The partnership deed clearly provides for the increase/ decrease of partners remuneration and the payment is made within the limitation of section 40(b) of I.T.Act. Hence, the Ld.AR contended that the remuneration paid to the managing partner is provided and permitted in the partnership deed, hence, requested to allow the deduction. Further, the Ld.AR submitted that the entire remuneration paid to the managing partner amounting to Rs. 5,30,000/- was admitted as income in his hands and paid the taxes and filed the return of income, thus, further dis allowance in the hands of the partnership firm amounts to double taxation of the same amount.

11. Per contra, Ld.DR supported the orders of the CIT(A).

12. We have heard both the parties and material placed on record. The assessee firm has paid a sum of Rs. 5,30,000/- to managing partner as According to the AO, the partnership deed permits the payment of remuneration of Rs. 36,000/- only. Though the Ld.CIT(A) agreed that partnership deed permits for payment of remuneration, there was no separate document in writing for increase in remuneration. Since there is no document placed before the CIT(A), the Ld.CIT(A) confirmed the addition. However, we have gone through the partnership deed and in the partnership deed with regard to payment of remuneration,there was a clause for increase/decrease of remuneration as per mutual consent before the end of the financial year. In the instant case, there were only two partners. The P&L account and the financial statement were examined by both the partners and agreed for payment of remuneration of Rs. 5,30,000/. The partnership deed also limits the remuneration as permissible u/s 40(b) of I.T. Act. Since there are only two partners in the partnership firm, and the remuneration paid is permissible as per partnership deed and the books of accounts are being verified and certified by both the partners as stated by the Ld.AR, we are in agreement with the submission made by the Ld.AR that the payment of remuneration is in accordance with the partnership deed. The Ld.AR further submitted that the managing partner has admitted the income in his hands and paid taxes. Therefore, we hold that the remuneration of Rs. 5,30,000/- is authorized by the partnership deed which required to be allowed. This view is supported by the decision of Hon’ble High Court of Rajasthan in the case of CIT Vs. Asian Marketing [254 CTR 0453]. Therefore, we set aside the order of the lower authorities and allow the remuneration paid to the partners. The cross objection of the assessee are partly allowed.

13. In the result, appeal of the revenue is dismissed and cross objections of the assessee are partly allowed.

The above order was pronounced in the open court on 22nd Dec 2017.

Categories: Income Tax
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