M/S. EGG GUARD V. INCOME TAX OFFICER

ITTA/203/2006

AI Insights

The case involves M/S. Egg Guard, a firm engaged in trading and packing materials, which appealed against the order of the Income Tax Appellate Tribunal, Hyderabad. The dispute centered on the deduction of Rs.1,08,000 claimed as remuneration paid to the partners from the firm's income. The Income Tax Officer disallowed this deduction, which was affirmed by the Commissioner of Income Tax (Appeals) and later by the Tribunal, on the grounds that the partnership deed did not specify the remuneration terms for the partners. The High Court dismissed the appeal, agreeing with the Tribunal's interpretation of Section 40(b)(v) of the Income Tax Act, 1961, which mandates that any payment of remuneration to partners must be authorized by and in accordance with the terms of the partnership deed.

• Counselvise Citation: [2022] 140 COUNSELVISE.COM (IT) 760776 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 14-12-2022
• Assessment Year: misc
• Laws Referred To: Income Tax Act 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: SAPNA REDDY
• Assessee Lawyers: M M FIRDOS
• Keywords: Assessment Year; Deduction; Income Tax; Partnership deed; Remuneration
• Section: 260A; 40(b)(v)

Judgement Text

"IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY ,THE FOURTEENTH DAY OF DECEMBER TWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN AND THE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 203 OF 2006 Appeal Under Section 260A of the lncome Tax Act 1961 against the order dated 22-11-2005 in ITA No. 992/ Hydl 2004 ( Asst. Year 200'l-20021 on the file of the lncome Tax Appellate Tribunal, Hyderabad Bench - B, Hyderabad preferred against the order of the Commissioner of lncome Tax (Appeals) Vl , Hyderabad dated 03-08-2004 in Appeal No. 0248M-9 (3) / HYD/ CIT (A) -Vl I 2003 -04 preferred against the order of the lncome Ta Officer, Ward -9 (3) , Hyderabad dated 30-01-2004 in PAN / GIR No. E-305 /9 (3) / 2001-o2 Between: M/S. EGG GUARD, 7-2-104119, Sudershan Complex, Tirumala Colony, L.B.Nagar, Hyderabad. ...APPELLANT AND INCOME TAX OFFICER, Ward-9(3), 13th floor, Gagan Vihar, M.J. Road, Hyderabad. ...RESPONDENT Counsel for the Appellant: SRl. M. M. FIRDOS ( Not present ) Counsel for the Respondent: Ms. SAPNA REDDY ON BEHALF OF SRI B. NARASIMHA SARMA The Court delivered the following: JUDGMENT THEHo BLE HE EF TI UII BHI.IYAN AND H S I.T.T.A.No.203 of 2006 JUDGMENT,4aT tbe llot'bb tbe Cbbf lttttiz Ujial Bhryaa) None has aPpe ared for the aPpellaflt when the matter is called upon though Ms. Sapna Reddy, learned counsel is present on behalf of Mr. B.Narsimha Sarma, learned counsel for the respondent. 2. This appeal has been preferred by the assessee as the appellant gnder Section !60A of the Income Tax Act, 1961 (brrefly 'the Act' hereinafter) against the order dated 22'71'2005 passed by the Income Tax Appellate Tribunal, Bench 'B', Hyderabad (briefly 'the Tribunal' hercinafter) in I.T.A'No'992/Hyd/2004 for the asscssment Year 2001 -2002. 3. From the docket proceedings we find that aide the order dtted 04.09.2006, the appeal was admitted for hearing but no substantial quesrion o[ Iaw rvas ftatned' However' from the memo of appeal, we find that the following question has been proposed as ' a substantial cluestion oI larv: \"Whether the Income Tax Appellate Tribunal .8, Bench, Hyderabad was lcgally cofiect in holdrng that the tequirements of the provisions of Section a0@) (v) of Income 'I'ax Act, 1961 are lacking in the facts and circumsances of the case and evidence on record entiding the assessee to seek deduction of the amount of remuneradon paid to the partnets from its income chargeable to tax under Income Tax Act, 1961 ? 4. Issue raised in this appeal is regarding claim of the appellant to deduction of the amount of remuneration paid to tlre partners from its incomc chargeable to Lrx under the Act and whether provisions of Secrion 40(bX\") of the Act are applicable 5. Appellant before us is an assessee under the Act having the status of a firm. Assessmcnt year under consideration is 2001- 2002. Appellanr is engaged in the business o[ trading i, .gg packing marerials. Xzhile filing rerurn of income, appellant claimed deduction of the remuneradon of Rs.1,0g,000.00 debited to profit and loss account. 6. After re[erring to clause g.2 of thc partnership deed comprising the appcllant and after hearing the appcllant, assessing ::3:: offrcer held that appellant did not specift the amount of remuneration payable to each individual working Parmer nor did it Iay down the manner of quantiffing such remuoeration' Hence' deduction of the remuneration claimed by the appellant to have been paid to the partners was disallowed and added back to the income o[ the appellant vide the assessment order dated 30.01.2004. The aforesaid order o[ the assessing officer was challenged by the appellant before the Commissioner of Income Tax (Appeals)-Vl, Hyderabad @riefly 'CIT(A)' hereinafter)' By the appellate order dated 03.08.2004, CIT(A) dismissed the appeal of the appellant and affirmed the disallowance made by the assessing olficer. 8. It was thereafter that appellant Fr1ed further appeal before the Tribunal. Tribunal uitle the order dated 22't1'2O05 held that payment made to the partners amounting to Rs'1,08'000'00 is not an allowable deduction under Section a0@)(v) of the Act' 7 Therefore, the appeal was dismissed. 4 9. Before we adverr to the order of the Tribunal, we may refer to Secdon 40 of the Act which deais with amounts not deductible. Section 40 says that nonvithstanding anything ro rhe contrary iri Sections 30 to 38, the amounts mentioned thereafter shall not be deducted in computing rhe income chargeable under rhe beadpnftt and gains of busines or pmfession. Clause @)(v) mendons, in the case ofany assessable finn, any paymeflt of remuneradon to any partneq who is a working partner, which is authorized by and is in accotdance with, the terms of the partnership deed and relates to any period falling after the dare of such partnership deed insofar as the amount of such paymenr to all t}te pafiners during the previous year exceeds the aggregate amount computed thercunder. In other words, what the aforesaid provlsron contemplates is that in the case of a firm, any payment o[ remuneradon to any paftner exceeding the amount mentioned therein shall not be deductcd in computing the income chargeable under the head pmf* and gains of butinett or pmferion. 10. Before the CIT(A), appellant relied upon a circular o[ the Central Board of Dircct Taxes (CBDT) bcaring No.739 dated 25.03.1996, which is as under: It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under Section 40@)(v) will be admissible unless the parmetship deed either specifies the amount of temuneration payable to each individual wotking partner or lays down the manner of quantiSing such remuneration. 1.1.. This was examined by the CIT(A) whereafter it was held that the above circular of the CBDT is clarificatory in nature and it only clarifies the provision contained in Section a0@) (v) of the Act. 12. In further appeal, Tribunal held as follows: Before us, the assessee has put forth the same contention whereas learned DR has claimed that the ptovision of Section 40(b) of the Act is very clear and the circular issued by the Board is in consonance with the above ptovision. We find merit in the case made out by the revenue in so far as the ptovision of the Act is very clear with reFerence to payment of remunetation to the working partners in case of a firm. It clearly states that the payment has to be authorized by the partnership deed and the same has to be in accordance with the terms of the patnership dced. In the irnpugned Partncrship dccd ) ) ..5.. ::6 no teffns for payment to the working parmers have been stipulated. In this view of the mamer, we hold that the payment made to the partners amounting to Rs.1,08,000/- is not an allowable dedication as per Section 40@)(v) of the Act Therefore, this ground of the assessee is dismissed. 13. Thus according to rhe Tribunal, the appellant has to be authorized by the partnership deed and the samc has to be in accordaflce widr dre tenrrs of the partnership deed. Rcfering to the partnership deed coflstirudng the appellant. 'I.ribunal held that the partnership deed did not contain any terms for payment to the working partners. In that ul.* of rhe marrer, Tribunal while con firming the order of the assessing ofFrcer held rhat payment made to the partners amounring to Rs.1,0g,000.00 ls not an allowable deduction as per Section 40&Xv) o[ thc Act. 14. On due consideration, we do flot find any error or in frrmity in the view taken by the Tribunal. No question oilaw, not to speak of any substantial question of law, arises from the said order o[ the 'f ribunal. I 7 15. Appeal is devoid o[ any merit and the same is accordingly dismissed. No costs. As a sequel, miscellaneous petitions, pending if any, stand dismissed. //TRUE COPY// To 1. The lncome Tax Appellate Tribunal, Hyderabad Bench- B, Hyderabad 2. The Commissioner of lncome Tax (Appeals) Vl , Hyderabad 3. lnconre Tax Officer, Ward-9(3), 'l3h floor, Gagan Vihar, M.J. Road, Hyderabad. 4. One CC to SRl. M. M. FIRDOS Advocate{OPUCI 5. One CC to SRl. B. NARSIMHA SARMA, SC rcR tT. DEPARTMENT J IoPUCI 6. Two CD Copies I / Sd/A.S.CH]RANJEEVI JOINT REGISTRAR (-fb SECTTON OFFICER HIGH COURT DATED:14l1212022 JT]DGMENT ITTA.No.203 of 2006 DISMISSING THE ITTA WITHOUT COSTS ,-Y a IJJ t- o ,,- LA e 1 a F5 N\" .s l' Cr J: t) ,a ,ll :) f Hi) e 1 '^k '4,, ' 9