M/s. Chandukaka Saraf & Sons, Pune V. Addl. CIT, Range-5, Pune

ITA 1270/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9876 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 07-10-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH VERMA
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND R.S. PADVEKAR, JUDICIAL MEMBER ITA NO. 1270/PN/2011 (ASSESSMENT YEAR: 2007-08) M/S. CHANDUKAKA SARAF & SONS MAHAVIR PATH, GANDHI CHOWK T & POST BARAMTI, DIST. PUNE-413 102 PAN AAAFC 8675 R .. APPELLANT VS. ADDL. CIT RANGE 5, PUNE RESPONDENT APPELLANT BY : SHRI NIKHIL PATHAK RESPONDENT BY : SHRI MUKESH VERMA DATE OF HEARING: 18-10-2012 DATE OF PRONOUNCEMENT: 31-10-2012 ORDER PER G.S. PANNU, A.M.: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III PUNE D ATED 31-12- 2010 WHICH, IN TURN, HAS ARISEN FROM ORDER DATED 17 -12-2009 PASSED BY THE ASSESSING OFFICER, UNDER SECTION 143(3) OF T HE INCOME-TAX ACT, 1961 (IN SHORT THE ACT), PERTAINING TO THE AS SESSMENT YEAR 2007-08. 2. THE ONLY ISSUE RAISED BY THE ASSESSEE IN THIS AP PEAL RELATES TO DISALLOWANCE OF REMUNERATION OF RS.1,13,17,830/- P AYABLE TO THE PARTNERS AS PER THE PARTNERSHIP DEED. IN BRIEF THE FACTS ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM HAVING TWO PARTNERS. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE C LAIMED DEDUCTION OF RS. 1,13,17,830/- U/S 40(B) OF THE ACT BEING REMUNERATION PAID TO PARTNERS. ACCORDING TO THE A SSESSING OFFICER, THOUGH THE PARTNERSHIP DEED HAS AUTHORIZED PAYMENT OF REMUNERATION TO WORKING PARTNERS, IT DID NOT SPELL OUT THE AMOUNT OF REMUNERATION PAYABLE TO EACH PARTNER OR THE MANNER QUANTIFYING SUCH REMUNERATION AND ITS DISTRIBUTION AMONGST THE PARTNERS AND 2 ITA NO 1270/PN/11 CHANDUKAKA SARAF & SON S A.Y. 2007-08 THEREFORE, CONDITIONS LAID DOWN IN SEC. 40(B)(II) W ERE NOT ADHERED TO. HE ACCORDINGLY MADE A DISALLOWANCE UNDER THE PROVIS IONS OF SEC. 40(B) OF THE ACT. 3. ON APPEAL, THE CIT(A) CONCURRED WITH THE CONCLUS ION OF THE ASSESSING OFFICER AND CONFIRMED THE DISALLOWANCE M ADE U/S 40(B) OF THE ACT. 4. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LOWER AUTHORITIES HAVE WRONGLY DISALLOWED ASSES SEES CLAIM, INASMUCH AS, REMUNERATION PAID TO THE PARTNERS WAS DULY AUTHORIZED AND WAS IN ACCORDANCE WITH THE PARTNERSHIP DEED. TH E LEARNED COUNSEL VEHEMENTLY POINTED OUT THAT THE PROVISIONS OF SEC 40(B)(II) DO NOT PROVIDE FOR SPECIFIC QUANTIFICATION OF REMUN ERATION PAYABLE TO THE PARTNERS AND THAT WAS AN ALLOWANCE AS THE PARTN ERSHIP DEED PROVIDES FOR PAYMENT OF REMUNERATION AND ACTUAL PAY MENTS ARE IN ACCORDANCE WITH AND AS AUTHORIZED BY THE PARTNERSHI P DEED, THE REMUNERATION SO PAID CANNOT BE DISALLOWED. THE LEA RNED COUNSEL RELIED UPON THE JUDGMENT OF HONBLE HIMACHAL PRADES H HIGH COURT IN THE CASE OF M/S DURGA DASS DEVKI NANDAN IN INCOME-T AX APPEAL NO. 4 OF 2005 DATED 11-3-2011 TO POINT OUT THAT IN IDEN TICAL CIRCUMSTANCES, THE CLAIM FOR DEDUCTION ON ACCOUNT O F REMUNERATION PAID TO THE PARTNERS HAS BEEN HELD TO BE ALLOWABLE. 5. THE LEARNED DR APPEARING FOR THE REVENUE POINTED OUT THAT HAVING REGARD TO CBDT CIRCULAR NO. 739 DATED 25-3-1 996 AND THE PROVISIONS OF SEC. 40(B)(II) OF THE ACT, THE CIT(A) MADE NO MISTAKE IN SUSTAINING THE DISALLOWANCE, INASMUCH AS THE QUANTI FICATION OF REMUNERATION PAYABLE TO EACH PARTNER WAS NOT CONTAI NED IN THE PARTNERSHIP DEED. 6. HAVING CONSIDERED THE RIVAL SUBMISSIONS, WE FIND THAT THE MAIN QUESTION ARISING FOR CONSIDERATION IS AS TO WHETHER AS PER PARTNERSHIP DEED IN QUESTION, ANY REMUNERATION WAS FIXED FOR PA YMENT TO THE PARTNERS, WHICH AS PER THE REVENUE, IS A PRE-REQUIS ITE FOR ALLOWANCE 3 ITA NO 1270/PN/11 CHANDUKAKA SARAF & SON S A.Y. 2007-08 U/S 40(B)(II) OF THE ACT. IN TERMS OF SEC. 40(B)(I I) OF THE ACT ANY PAYMENT OF REMUNERATION TO PARTNER WHICH IS AUTHORI ZED BY AND IS IN ACCORDANCE WITH THE TERMS OF PARTNERSHIP DEED IS AL LOWED AS DEDUCTION TO THE EXTENT SPECIFIED IN CLAUSE (V) OF SEC. 40(B) OF THE ACT. IN THE PRESENT CASE, THE CLAUSE IN THE PARTNER SHIP DEED AUTHORIZING PAYMENT OF REMUNERATION TO THE PARTNERS READS AS UNDER: 13. REMUNERATION TO THE PARTNERS: PARTNER NOS. 1 AND 2 IN THE SAID PARTNERSHIP FIRM A RE ACTIVELY INVOLVED AND ARE THE WORKING PARTNER OF TH E FIRM. THEY WILL DEVOTE THEIR TIME FOR PARTNERSHIP FIRM AS PER THE CIRCUMSTANCES AND REQUIREMENT OF THE BUSINESS. AS THE PARTNER NO. 1 AND 2 ARE THE WORKING PARTNERS IN THE SAID FIRM, THE REMUNERATION PAYABLE TO THEM IS DECIDED A S UNDER:- A) OF THE FIRST RS. 75,000/- OF BOOK PROFIT OR IN CASE OF LOSS, RS. 50,000/- OR 90% OF THE BOOK PROFIT WHICHEVER IS MORE. B) IF THE BOOK PROFIT IS MORE THAN RS. 75,000/- BUT LESS THAN RS. 1,50,000/- THEN AMOUNT AS MENTIONED ABOVE IN CLAUSE (A) PLUS AMOUNT AT THE RATE OF 60% ON THE AMOUNT IN EXCESS OF RS. 75,000/- OF THE BOOK PROFIT. C) IF THE BOOK PROFIT IS MORE THAN RS. 1,50,000/- THEN AMOUNT IS MENTIONED ABOVE IN CLAUSE (B) PLUS AMOUNT AT THE RATE OF 40% ON THE BOOK PROFIT IS IN EXCESS OF RS. 1,50,000/-. CLARIFICATION: THE BOOK PROFIT IN RELATION TO THIS CLAUSE MEANS BOOK PROFIT AS DEFINED IN SEC. 40(B) OF THE A CT OR AS PER AMENDMENTS THERETO OR AS PER NEW ACT TIME BE ING IN FORCE. 7. IN TERMS THEREOF, THE ASSESSEE FIRM PAID REMUNER ATION OF RS. 1,13,17,830/- TO ITS PARTNERS WHICH WAS CLAIMED AS DEDUCTIBLE IN TERMS OF SEC. 40(B) OF THE ACT. AS PER THE REVENUE , THE SAID CLAUSE IN THE PARTNERSHIP DEED DID NOT PROVIDE FOR PAYMENT OF REMUNERATION AS EXPLAINED BY CBDT CIRCULAR NO. 739 DATED 25-3-19 96 BECAUSE IT DID NOT QUANTIFY THE AMOUNT OF REMUNERATION PAYABLE TO THE PARTNERS. THE CIT(A) HAS ALSO CONCURRED WITH THE STAND OF THE ASSESSING OFFICER. 8. WE FIND THAT AN IDENTICAL SITUATION WAS CONSIDER ED BY HONBLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF M/S. DUR GA DASS DEVKI NANDAN (SUPRA). IN THE CASE BEFORE THE HONBLE HIG H COURT, THE 4 ITA NO 1270/PN/11 CHANDUKAKA SARAF & SON S A.Y. 2007-08 PARTNERSHIP DEED AUTHORIZED PAYMENT OF REMUNERATION TO PARTNERS AS PER THE INCOME-TAX PROVISIONS . THE REVENUE DISALLOWED THE CLAIM FOR REMUNERATION PAID TO PARTNERS ON THE GROUND TH AT THE CLAUSE IN THE PARTNERSHIP DEED DID NOT QUANTIFY THE REMUNERAT ION PAID TO THE PARTNERS AS REQUIRED BY CBDT CIRCULAR NO. 739 (SUPR A). HONBLE HIGH COURT NEGATED THE STAND OF THE REVENUE IN TERM S OF THE FOLLOWING DISCUSSION WHICH IS NOTE-WORTHY:- 5. THE RELEVANT PORTION OF THE PARTNERSHIP DEED READS AS FOLLOWS:- THAT BOTH THE PARTNERS ABOVE MENTIONED SHALL BE TH E WORKING PARTNERS WITHIN THE MEANING OF SECTION 40( B) OF THE INCOME-TAX ACT TO BE ACTIVELY ENGAGED IN LOOKIN G AFTER THE AFFAIRS OF THE BUSINESS OF THE FIRM DILIG ENTLY AND HONESTLY AND EACH OF THEM WILL BE PAID A MONTHLY SA LARY AS PER THE INCOME-TAX PROVISIONS AND WHICH CAN BE REVISED FROM TIME TO TIME IN THE BEST INTEREST OF T HE PARTNERSHIP. 6. THE ASSESSING OFFICER WAS OF THE OPINION THA T THE PARTNERSHIP DEED DID NOT PROVIDE FOR PAYMENT OF REMUNERATION IN TERMS OF CBDT CIRCULAR NO. 739 DATE D 25.3.1996 BECAUSE IT DID NOT SPECIFY THE AMOUNT OF REMUNERATION PAYABLE TO THE INDIVIDUAL WORKING PART NER OR LAYS DOWN THE MANNER OF QUANTIFYING SUCH REMUNERATI ON. THE COMMISSIONER INCOME-TAX HELD THAT THE METHOD OF QUANTIFYING THE REMUNERATION WAS FIXED IN THE PARTN ERSHIP DEED SINCE THE PARTNERSHIP DEED CLEARLY STATED THAT THE PARTNERS WOULD BE ENTITLED TO MONTHLY SALARY AS PER THE PROVISIONS OF THE INCOME-TAX ACT. HOWEVER, THE INC OME- TAX TRIBUNAL ALLOWED THE APPEAL OF THE REVENUE AND HELD THAT THE CLAUSE IN THE AGREEMENT QUOTED HEREINABOVE DID NOT MEET WITH THE REQUIREMENTS OF THE CIRCULAR AND THEREFORE, DEDUCTION OF THE SALARY PAID TO THE PART NERS WAS NOT ADMISSIBLE. 7. IT IS SETTLED LAW THAT THE CENTRAL BOARD OF DIRECT TAXES CANNOT ISSUE A CIRCULAR WHICH GOES AGAINST TH E PROVISIONS OF THE ACT. THE CBDT CAN ONLY CLARIFY I SSUES BUT CANNOT INSERT TERMS AND CONDITIONS WHICH ARE NO T PART OF THE MAIN STATUTE. A DELEGATE OR PERSON AUTHORIZ ED TO ISSUE DELEGATED LEGISLATION CANNOT VIRTUALLY SET AT NAUGHT THE PROVISIONS OF THE MAIN STATUTE. A READING OF S ECTION 40(B)(V) CLEARLY SHOWS THAT AMOUNT OF REMUNERATION WHICH DOES NOT EXCEED THE AMOUNT GIVEN IN THE INCOM E- TAX ACT IS DEDUCTABLE. THE CBDT HAS PROVIDED THAT EITHER THE AMOUNT OF REMUNERATION PAYABLE TO EACH INDIVIDUAL SHOULD BE FIXED IN THE AGREEMENT OR THE PARTNERSHIP AGREEMENT DEED SHOULD LAY DOWN THE MANN ER OF QUANTIFYING SUCH REMUNERATION. IN THE PRESENT CASE WHEN THE PARTNERSHIP DEED PROVIDES THAT THE REMUNERATION WILL BE AS PER THE PROVISIONS OF THE I NCOME- TAX ACT, IT CLEARLY MEANS THAT THE REMUNERATION PAY ABLE TO THE PARTNERS SHALL BE QUANTIFIED AS PER THE PROV ISIONS 5 ITA NO 1270/PN/11 CHANDUKAKA SARAF & SON S A.Y. 2007-08 OF THE ACT AND SHALL NOT EXCEED THE MAXIMUM REMUNERATION PROVIDED. IN THE PRESENT CASE, IT IS NOT DISPUTED THAT THE PARTNERS WERE PAID REMUNERATION W HICH WAS LESS THAN THE MAXIMUM PROVIDED BY THE INCOME-TA X ACT. NONE OF THE AUTHORITIES HAVE DOUBTED THE PAYM ENT OF REMUNERATION AND IN FACT ACCOUNT BOOKS OF THE ASSESSEE FIRM HAVE BEEN ACCEPTED TO BE CORRECT. THEREFORE, NOBODY HAS DOUBTED THE PAYMENT OF REMUNERATION TO THE PARTNERS. 8. IT HAS BEEN URGED BY SHRI VINAY KUTHIALA, LE ARNED COUNSEL FOR THE RESPONDENT THAT AS PER THE CBDT CIRCULAR THE PARTNERSHIP DEED SHOULD SPECIFY THE AM OUNT OF REMUNERATION OR SHOULD GIVE A SPECIFIC METHOD OF QUANTIFYING SUCH REMUNERATION, OTHERWISE DEDUCTION CANNOT BE ALLOWED. WE ARE UNABLE TO ACCEPT SUCH CONTENTION. THE CIRCULAR HAS TO BE READ ALONGWITH SECTION 40(B)(V) AND HAS TO BE MADE SUBJECT TO SECT ION 40(B)(V). THIS SECTION DOES NOT LAY-DOWN ANY CONDI TION OF FIXING THE REMUNERATION OR THE METHOD OF REMUNER ATION IN THE PARTNERSHIP DEED. ALL THAT THE SECTION PROV IDES IS THAT IN CASE THE PAYMENT OF REMUNERATION MADE TO AN Y WORKING PARTNER IS IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND DOES NOT EXCEED THE AGGREGATE AMOUNT AS LAID DOWN IN THE SUBSEQUENT PORTION OF TH E SECTION THE DEDUCTION IS PERMISSIBLE. THEREFORE, I F IN THE PARTNERSHIP DEED IT WAS CLEARLY MENTIONED THAT THE PARTNERS WOULD GET REMUNERATION CALCULATED AS PER T HE PROVISIONS OF THE INCOME-TAX ACT WHICH MEANS THAT T HIS WOULD NOT EXCEED THE MAXIMUM AMOUNT PROVIDED UNDER THE ACT. 9. IN ITA 9 OF 2005 DECIDED ON 2.9.2009 TITLED AS COMMISSIONER OF INCOME-TAX, SHIMLA VS. M/S ANIL HARDWARE STORE, MANALI THIS COURT WAS DEALING WITH A PARTNERSHIP DEED WHERE THE PROVISIONS OF THE INCOME -TAX ACT ITSELF HAD BEEN INCORPORATED IN THE PARTNERSHIP DEED. THIS COURT HELD THAT THIS ITSELF PROVIDES A METHOD OF COMPUTATION. IN THAT CASE WE HAD NOT GONE INTO THE VALIDITY OF THE CBDT CIRCULAR. THE CBDT CIRCULAR C AN ONLY BE HELD TO BE VALID IF IT IS IN TERMS OF THE M AIN SECTION. AS HELD ABOVE, THE SECTION 40(B)(V) ONLY LAYS DOWN THAT EITHER THE WORKING PARTNER SHOULD BE PAI D AN AMOUNT SPECIFIED IN THE PARTNERSHIP DEED OR IT SHOU LD NOT EXCEED THE AMOUNT LAID DOWN IN THE SECTION. IN THE PRESENT CASE THE PARTNERS HAVE BEEN PAID THEIR REMUNERATION/SALARY STRICTLY IN ACCORDANCE WITH THE TERMS OF THE PARTNERSHIP DEED AND THIS AMOUNT PAID TO THE PARTNERS DOES NOT EXCEED THE MAXIMUM PERMISSIBLE AMOUNT AND THEREFORE, THE ASSESSEE IS ENTITLED TO T HE DEDUCTION. 10. IN VIEW OF THE ABOVE DISCUSSION, THE APPEAL IS ALLOWED AND THE SUBSTANTIAL QUESTIONS OF LAW ARE DE CIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. NO COSTS. 9. IN THE CASE BEFORE US, THE PARTNERSHIP DEED CONT AINS A CLAUSE FOR PAYMENT OF REMUNERATION TO PARTNERS, WHICH IS C OMPLIANT WITH THE 6 ITA NO 1270/PN/11 CHANDUKAKA SARAF & SON S A.Y. 2007-08 LIMITS PLACED IN SEC. 40(B)(V) OF THE ACT. SIMILAR SITUATION WAS CONSIDERED BY THE HONBLE HIMACHAL PRADESH HIGH COU RT WHEREIN THE REVENUE CONTENDED THAT THE CLAUSE DID NOT QUANTIFY THE REMUNERATION PAYABLE TO THE PARTNERS. THE HONBLE HIGH COURT NEGATED THE CLAIM OF THE REVENUE, AND FOLLOWING THE PARITY OF REASONING LAID DOWN BY THE HONBLE COURT, THE CLAIM OF THE ASSESSEE HAS TO SUCCEED HEREIN ALSO. WE ACCORDINGLY SET ASID E THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELE TE THE DISALLOWANCE MADE U/S 40(B) OF THE ACT. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. DECISION PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER 2012. SD/- SD/- (R.S. PADVEKAR) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 31 ST OCTOBER 2012 ANKAM COPY TO:- 1. ASSESSEE 2. DEPARTMENT 3. THE CIT (A)-III PUNE 4. THE CIT-III PUNE 5. THE DEPARTMENTAL REPRESENTATIVE, A BENCH, I.T. A.T., PUNE. BY ORDER //TRUE COPY// SR. P.S. I.T.A.T., PUNE