Saturday, May 3, 2014

ITAT raps revenue for invoking sec. 40(b) by treating only those partners as working who were entitled to salary

Facts:
a)  The assessee firm had four partners. In terms of the partnership deed, salary was being paid only to three partners. However, bonus was paid to all the four partners.
b)  The Assessing Officer opined that when only three partners were drawing salary, only they could be treated as the working partners. Hence, the Assessing Officer disallowed the bonus paid to fourth partner.
c)  The CIT(A) confirmed said disallowance.
The Tribunal held in favour of assessee as under:
1)  It was not disputed that all the four partners were actively engaged in the conduct of the business of the firm and, thus, they were the working partners. The provisions contained under section 40(b) provide that any remuneration by whatever name called, shall not be allowable if such payment is not made to a working partner. Secondly, such payment is not found to be authorized by or is not found to be in accordance with the terms of the partnership deed;
2)  In the instant case, the partnership deed authorized payment of salary to three partners whereas payment of bonus was allowed to all the four partners. Thus, all the conditions provided under section 40(b) stand fulfilled. The interpretation by the AO and the ld. CIT(A) that only those partners who were paid the salary were working partners and not the others, was a complete misreading of the provision;
3)  It was decision taken by the partners by mutual consent that out of all the four partners, salary would be payable to only three partners whereas bonus shall payable to all the four partners, in which the law does not permit interference by the revenue.

4)  The CIT (A) had wrongly interpreted section40(b)(v) while holding that the definition of 'working partners' was meant only for section 40(b)(v). The Explanation 4 below section 40(b) clearly reads that for the purpose of this clause which meat clause (b) to section 40. Thus, the disallowance under section 40(b) was to be deleted. - Id. Mohd. Nizamuddin v. ACIT [2014] 44 taxmann.com 213 (Jaipur - Trib.)
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