Income Tax Appellate Tribunal - Chandigarh
Ito vs Durga Dass Devki Nandan Kangra on 22 September, 2004
Equivalent citations: [2005]1SOT263(CHD)
ORDER
Departmental Representative Singh, JM.-Both these appeals arising out of single order of the CIT (A) dated 8-12-2003 in appeal Nos. IT/212 & 213.03-04/PLP for the assessment years 1998-99 and 1999-2000, were heard together and are being disposed of through this common order for the sake of convenience because the facts and issue involved in the ground of appeals of the revenue are identical. The identical ground of appeals taken by the revenue reads as under:
"The assessee firm claimed salary paid to the working partners, as the same is not allowable as per Circular No. 739 dated 25-3-1996 issued by the CBDT, New Delhi. Neither the salary has been quantified nor any method laid down to calculate the amount of salary to the partners as per clause 6 of the partnership deed and the Learned CIT (A) allowed the claim in favour of the assessee"
2. The relevant and material facts for the disposal of the issue involved in the ground of appeals of the revenue are that the assessee claimed deduction as per section 40(b)(v) of the Act for the salary paid to each of its working partners S /Shri Madan Mohan Ohri and Rohit Ohri at the rate of Rs. 2,500 per month as per clause 6 of the partnership deed dated 1-4-1995, during the relevant period. However, the impugned deduction claimed by the assessee was disallowed by the assessing officer as according to him, the same was not paid to the each of the partners in accordance with the provisions of section 40(b)(v) of the Act and was also not in accordance with the Circular No. 739 dated 25-3-1996 issued by the CBDT, because as per clause 6 of the partnership deed, the assessee had neither specified the amount of working partners remuneration nor laid down specific method of quantification which should be specific proportion of the book profit.
2.1 On appeal, the assessee contended before the CIT (A) that the salaries at the rate of Rs. 2,500 per month paid to each of its working partners S/Shri Madan Mohan Ohri and Rohit Ohri have been duly debited monthwise to the respective accounts and since these salaries had been claimed as per provisions of section 40(b)(v) of the Act and also as per clause 6 of the instrument of partnership, so the assessing officer was not justified in disallowing the impugned salaries paid to each of the working partners of the assessee. He further contended that even the language of section 40(b)(v) of the Act nowhere provides that the quantification of the salary must be specified in the partnership deed and hence, the disallowance made by the assessing officer is liable to be deleted.
2.2 The CIT (A) after considering these submissions of the assessee, deleted the impugned disallowance made by the assessing officer by making following observations in his order:
"The appellant firm had paid remuneration at the rate of Rs. 2,500 per month each to both the working partners which is quite evident from the extract of ledger account pages 46, 47 for the assessment year 1998-99 and page 45 for the assessment year 1999-2000 available on assessment records. The assessing officer has not doubted that the payment is not made to the working partner and is not authorized by the instrument of partnership. He denied the deduction on account of remuneration to the working partners for the sole reason that the partnership deed has neither specified the amount of remuneration nor laid down the specific method of quantification as clarified by the CBDT Circular No. 739 dated 25-3-1996. No other reason and basis recorded in the assessment order for disallowing the deduction on account of remuneration paid to the working partners claimed by the appellant. Admittedly both the partners are working partners, payment of remuneration is authorized and in accordance with the terms of the instrument of partnership (supra). The language used in clause 6 of the partnership deed that each of them will be paid a monthly salary', the conduct of the appellant by debiting salary at the rate of Rs. 2,500 per month on account of remuneration to each of the working partner. In its books of account clearly indicates that the partners have agreed to pay remuneration at the rate of Rs. 2,500 per month to the working partners which in my considered view is in accordance with the terms of the partnership deed. In the instant case, the assessing officer has disallowed the remuneration merely following the clarification issued by the Board vide Circular No. 739 dated 25-3-1996 without considering the facts of the case, the terms of the partnership deed and its books of account where an amount of Rs. 2,500 per month is debited consistently by the firm in both the assessment years. In view of above discussions I am of the view that the assessing officer was not justified in disallowing the remuneration paid to the partners. Accordingly the addition by way of disallowing of remuneration to working partners at Rs. 60,000 is not sustainable and deleted for both the assessment years."
2.3 Before us, learned Departmental Representative for the revenue placed strong reliance on the reasoning given in the order of the assessing officer and submitted that in the instant case, in clause 6 of the partnership deed, neither the amount of remuneration to be paid to the working partners of the assessee is specified nor the specific method of quantification has been laid down which should be specific proportion of the book profit and so, the salaries paid to each of the working partners is not in accordance with the provisions of section 40(b)(v) of the Act and also not in accordance with the Circular No. 739 dated 25-3-1996 issued by the CBDT. So the assessing officer has rightly disallowed the impugned salaries paid to each of the working partners and added the same to the income of the assessee.
2.4 Whereas, on the other hand, Learned AR for the assessee placing strong reliance on the reasoning given in the order of the CIT (A) submitted that he has rightly allowed the deduction claimed by the assessee on account of salaries paid to each of its working partners as per section 40(b)(v) of the Act. He also placed reliance on the reasoning given in the consolidated order dated 2-7-2003 of the ITAT Chandigarh Bench "B" in the case of Bharat Rice Mills v. Asstt. CIT for the assessment year 1993-94 in IT Appeal No. 726/Chd. of 1997 and in the case of Asstt. CIT v. Bharat Rice Mills for the assessment year 1993-94 in ITA No. 790/Chd./97.
2.5 We have considered the rival submissions, perused the records and carefully gone through the orders of the tax authorities below as well the order (supra) dated 2-7-2003 of the Tribunal cited by the learned authorised representative for the assessee.
2.6 In the instant case, the relevant clause 6 of the partnership deed of the firm reads as under:
"That both the partners above mentioned shall be the working partners within the meaning of section 40(b) of the Income Tax Act to be actively engaged in looking after the affairs of the business of the firm diligently and honestly and each of them will be paid a monthly salary as per the income-tax provisions and which can be revised from time to time in the best interest of the partnership."
From this partnership deed, it is clear that as per clause 6, the salaries payable to each of the working partners, has not been specified which further means that this clause has neither specified the amount of salaries required to be paid to the each of the working partners nor has laid down the specific method of quantification which should have a specific proportion of the book profit, as laid down in section 40(b)(v)(i) /(ii) of the Act. Thus, the salaries paid to each of the working partners at the rate of Rs. 2,500 per month even if debited to the respective accounts of the partners, cannot be called to be in accordance with the terms and conditions of the partnership deed as required under the provisions of section 40(b)(v) and also under the CBDT's Circular No. 739 dated 25-3-1996. The ratio of the decision (supra) of the Bench relied upon by the learned authorised representative for the assessee is basically against the assessee and in favour of the revenue because at page 14 of its order (supra), the Tribunal has relied upon the case of Sadhu Ram Dev Dutt in ITA No. 247/Chd./97 assessment year 1993-94 wherein the Tribunal upheld the orders of the tax authorities below disallowed the salaries and remuneration paid to the working partners under section 40(b)(v) of the Act because the rate of the salary was not fixed in the instrument of the partnership in that case.
2.7 We are of the opinion that the facts of the instant case of the assessee as well as those decided by the Tribunal in the case of Bharat Rice Mills (supra) and Sadhu Ram Dev Dutt (supra) are identical. Hence, respectfully following the orders (supra) of the ITAT Chandigarh Bench, it is held that since the rate of salary required to be paid to the working partners has not been specified in clause 6 of the instrument of the partnership, so the impugned salary paid at the rate of Rs. 2,500 per month to each of its working partners of the assessee, is not in accordance with the provisions of section 40(b)(v) of the Act and also not in accordance with the circular No. 739 dated 25-3-1996 issued by the CBDT. Hence, the CIT (A) has wrongly deleted the impugned disallowance made by the assessing officer and accordingly, the impugned order of the CIT (A) is set aside and that of the assessing officer for the assessment years 1998-99 and 1999-2000 are upheld, and consequently the ground of appeal taken by the revenue is allowed.
3. In the result, both the appeals filed by the revenue are allowed.