Luthra & Luthra Law Offices Vs ACIT (ITAT Delhi)
Hon’ble Delhi High Court in the case of Vaish Associates held that the partners were entitled to annual salary equivalent with percentage of profit multiplied by the allocable profit calculated as per the provisions of section 40(b)(v) of the Act. In the instant case also remuneration has been shared in the profit-sharing ratio.
The issue in dispute also deserve to be allowed on the principle of consistency as identical disallowance has been deleted by the Ld. CIT(A) immediately preceding assessment year i.e. 2009-10 and no appeal has been preferred by the Department on the said issue before the Tribunal.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is directed against order dated 07/08/2015 passed by the Ld. Commissioner of Income-tax (Appeals)-20, New Delhi [in short the Ld. CIT(A)] for assessment year 2011-12 raising following grounds:
“1. The order passed by the Learned Commissioner of Income Tax (Appeals) – XX (“CIT(A)”) under section 250 of the Income Tax Act, 1961 (“the Act”) is bad in law and on the facts and circumstances of the case.
2. The Ld. CIT(A) has erred in law and in the facts and circumstances of the case by upholding disallowance of Rs. 45,00,000 made by the Learned Asstt. Commissioner of Income Tax, Circle 37(1) (“Ld. AO”) on account of remuneration paid to partners of the firm.
3. The Ld. CIT(A) has erred in law by ignoring the order passed by the Hon’ble Commissioner of Income Tax (Appeals) in the appellant’s own case in Assessment Year 2009-10 deleting the disallowance of remuneration paid to the partners of the firm.
4. The above grounds of appeals are independent and without prejudice to one another.
5. The appellant craves leave to add /withdraw or amend any ground of appeal at the time of hearing.”
2. In the above grounds of appeal, the solitary issue involved is of disallowance of Rs. 45,00,000/- on account of remuneration paid to partners of the firm.
3. The briefly stated facts of the case are that the assessee is a law firm (partnership) and derived income under the head “profit and gains of business & profession” and “income from other sources”. The Assessing Officer in the assessment completed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred as the Act) on 29/03/2014 disallowed one of the amount as remuneration of Rs. 45,00,000/- paid to two partners namely Sh Rajiv K Luthra ( Rs. 30,00,000/-) and Sh. Mohit Saraf ( Rs.15,00,000/-) on the ground that same has not been paid in accordance with the provisions of section 40(b)(v) of the Act. The Assessing Officer noted that the partnership deed provided that the remuneration paid to all the partners will be the amount of remuneration allowable u/s 40(b)(v) of the Act to be shared amongst themselves in their profit-sharing ratio in that year .
4. The Ld. Assessing Officer relying on the CBDT circular No. 739 dated 25/03/1996 ,observed that the CBDT has clarified that for the assessment year subsequent to AY 1996-97, no deduction u/s 40(b)(v) of the Act will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. In view of the Assessing Officer, the partnership deed neither did quantify the amount of remuneration to partners nor specified the manner of quantifying such remuneration. Thus, the remuneration paid not being in accordance with the provisions of section 40(b)(v), not allowable . The Ld. Assessing Officer also relied on the decision of the Hon’ble Delhi High Court in the case of Sood Brij & Associate Vs. CIT (2010)15 com76 (Delhi). The Ld. CIT(A) upheld the finding of the Ld. Assessing Officer. Aggrieved with the finding of the Ld. CIT(A), the assessee is in appeal before the Tribunal raising the grounds as reproduced above.
5. Before us, the Ld. Counsel of the assessee filed a paper book containing pages 1 to 93 and submitted that the assessee has paid remuneration to the partners in accordance with the provisions of section 40(b)(v) of the Act. The Ld. Counsel drawn our attention to the relevant clauses of the partnership deed and submitted that manner of the quantifying remuneration to partner has been duly specified. He further relied on the decision of the Hon’ble Delhi High Court in the case of CIT vs. Vaish Associates (2015) 63 com 90 (Delhi) . He further submitted that remuneration paid by the firm to its partners was also disallowed by the Assessing Officer in assessment year 2009-10. However, the Ld. CIT(A) deleted the said addition and the Department has not preferred any appeal on said issue before the Tribunal. According to the assessee, the order of Ld. CIT(A) in the year under consideration has been passed ignoring the principle of the consistency which is supported by plethora of decisions including Radhasoami Satsang Vs CIT (1992) 193 ITR 321 (SC). The Ld. Counsel also submitted that ratio of the decision of the Hon’ble Delhi High Court in the case of Sood Brij and Associates (supra) is not applicable over the facts of the instant case because in the said case remuneration was payable to future mutual agreements.
6. The Ld. DR on the other hand relied on the order of the lower authorities.
7. We have heard the rival submissions and perused the relevant material on record. In the instant case, the partnership firm has paid remuneration of Rs. 45,00,000/- to two partners in the ratio of 2/3 : 1/3. The relevant clause of the partnership deed dated 31.3.1999 of the assessee firm is reproduced by the Ld. Assessing Officer in the assessment order. For ready reference said Clause is reproduced as under:
“It is hereby agreed that all partners of the firm are working partners (RKL the Sr. Managing Partner) and would be required to perform such duties as are decided and allotted to them after due deliberation and discussions. The remuneration paid to all of the partners will be the amount of remuneration allowable under section 40(b)(v) of the Income Tax Act, 1961 to be shared amongst themselves in their profit sharing ratio in that year.”
8. The amount of allowability of remuneration to partners has been specified in section 40(b)(v) of the Act , which is reproduced as under :
“Notwithstanding anything to the contrary to sections 30 to [38J, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession “.
(v) any payment of remuneration to any partner who is a working partner, which is authorized by,and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as here under :-
