1. This appeal by the assessee for the assessment year 1995-96 is directed against the order of Commissioner of Income-tax (Appeals) upholding disallowance of Rs. 68,000 paid as salary to the working partners.
2. The assessee firm filed a return declaring an income of Rs. 9,900 on 16-8-1995 for the assessment year under consideration. On scrutiny of accounts, the Assessing Officer found that the assessee claimed deduction of remuneration to four working partners @ Rs. 17,000 per partner. This way, a total sum of Rs. 68,000 was claimed as deduction in terms of Section 40(&)(v) of the Income-tax Act. However, instrument of partnership in operation provided payment of remuneration to the working partners as under :- 6. That all matters of policy and import shall be mutual decided by the parties from time to time by devoting such time and attention as may be necessary for the smooth and efficient running of the partnership business. Sarvshri Gopal Dass, Kulwant Rai, Naresh Kumar and Jiwan Kumar the aforesaid parties of the 1st to 4th parts respectively being the working partners shall be entitled to a salary remuneration of Rs. 20,000 per annum each subject to the overall limits as laid down in Section 40(b) of the Income-tax Act.
The salary/remuneration as to mentioned above shall be given to them either on monthly basis or at the end of every accounting period.
2.1 The abovesaid clause' was neither shown to be amended, nor modified. The Assessing Officer, therefore, held that remuneration to partners was not paid @ Rs. 20,000 per annum subject to overall limits as laid down in Section 40(b) of the Income-tax Act. Thus, payment of salary of Rs. 17,000 each was held to be paid neither in accordance with terms of partnership, nor as authorised by the deed and, therefore, not deductible. The Assessing Officer further held that Circular No. 739, dated 25-3-1996 of CBDT providing for taking a lenient view in the above matter for assessment years 1993-94 to 1996-97 was not applicable. Accordingly, Rs. 68,000 claimed as remuneration were disallowed. This order was confirmed on appeal by the learned Commissioner of Income-tax (Appeals) who maintained that remuneration to the working partners was not paid in accordance with terms of the partnership deed and that case was not covered by Circular No. 739, dated 25-3-1996 of CBDT.3. The assessee has brought the issue in appeal and it was reiterated by the learned counsel for the assessee that the remuneration was paid in accordance with Clause 6 of the partnership deed and should have been allowed in terms of Circular No. 739 referred to above. The learned Departmental Representative, on the other hand, reiterated that remuneration was not paid in accordance with terms of the partnership deed and, therefore, rightly disallowed.
4. We have given careful thought to the rival submissions of the parties and examined them in the light of material available on record and relevant statutory provisions.
5. The salary/remuneration or interest paid by a firm to a partner was totally disallowed under Section 40(b) of the Income-tax Act till assessment year 1992-93. However, w.e.f. 1-4-1993 changes have been made in the Income-tax Act by the Finance Act, 1992 allowing interest and remuneration to partners and working partners as per Clauses (iv) & (v) of Section 40(&) of the Income-tax Act. Clause (v) is relevant for our purposes and is reproduced as below :- (v) any payment of remuneration to any partner who is a working partner, which is authorised 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 insofar as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:- (1) in case of a firm carrying on a profession referred to in Section 44AA or which is notified for the purpose of that section-(a) on the first Rs. 1,00,000 of Rs. 50,000 or at the rate the book-profit or in case of 90 per cent of the of a loss book-profit, whichever is more;(b) on the next Rs. 1,00,000 of at the rate of 60 per cent; the book-profit(c) on the balance of the book- at the rate of 40 per cent; profit(a) on the first Rs. 75,000 of Rs. 50,000 or at the rate the book-profit, or in case of 90 per cent of the book- of a loss profit, whichever is more;(b) on the next Rs. 75,000 of at the rate of 60 per cent; the book-profit(c) on the balance of the at the rate of 40 per cent; book-profit (Other portion of the provision is not relevant for the present appeal) 6. It is clear from above that remuneration can be allowed as a deduction if the following conditions are satisfied:- (2) It is authorised and in accordance with the terms of the partnership deed.
(3) The total amount of remuneration to all the partners during the previous year should not exceed the aggregate amount computed as per Sub-clause (1) or (2) to Clause (v) of the sub-section.
7. Now when we consider Clause (vi) of partnership deed in question, we find that as per the terms, each of the working partners is entitled to remuneration to Rs. 20,000 per annum. This is the remuneration which is fixed as per agreement between the partners. The sentence "subject to overall limits as laid down in Section 40(&) of the Income-tax Act" is redundant and superfluous. They have no meaning and serve no purpose.
Even if above sentence was not there, remuneration fixed as per agreement between the partners was subject to the statutory ceiling provided in the Act. The agreement between the partners could not override the statutory provisions. So the above sentence cannot be treated as a term of partnership. It is a provision of statute.
8. It is further clear from the facts and circumstances of the case that if salary was paid @ Rs. 20,000 per partner, the same would have exceeded the overall limit provided in Sub-clause (2) to Clause (v) of Section 40(&). Therefore, the salary at the above rate could not be paid. The book profit as per the relevant profit and loss account of the assessee was Rs. 77,896. So the assessee could not pay salary @ Rs. 20,000 per annum per working partner. It was required to pay the salary within the overall limit fixed under Clause (2) referred to above. The same works out to Rs. 69,238 as per calculation below:- 8.1 The above referred to amount was the maximum salary that could be allowed. Having regard to the book profit of the assessee within the above limit, the assessee claimed salary of Rs. 68,000 i. e. @ Rs. 17,000 per partner per annum. It is the contention of the assessee that the above salary was bona fidely claimed within the ceiling limits. It was further contended that the provision introduced in the statute was new and was not understood properly by the general public. The quantification of remuneration was difficult and, therefore, Board issued Circular No. 739, dated 25-3-1996. Para 2 of the aforesaid circular provided as under:- 2. The Board have considered the representations. Since the amended provisions of Section 40(b) have been introduced only with effect from the assessment year 1993-94, and these may not have been understood correctly the Board are of the view that liberal approach may be taken for the initial years. It has been decided that for the assessment years 1993-94 to 1996-97 deduction for remuneration to a working partner may be allowed on the basis of clauses of the type mentioned at (i) above.
9. We find substance in the contention raised on behalf of the assessee. As slated earlier, the maximum amount that could be allowed as a remuneration was Rs. 69,238. The assessee was expected to claim remuneration less than the above amount. So in a bona fide manner, the assessee claimed remuneration of Rs. 68,000 in round figure. It is less by Rs. 1,230, the maximum statutory limit fixed in the Income-tax Act.
It is difficult to hold that by claiming above amount of deduction, the assessee violated statutory provisions and was not entitled to deduction of the remuneration.
10. There is another angle from which the matter can be examined i.e.
with reference to condition of payment of remuneration. It is not in dispute that all the four partners were working parnters and that payment of remuneration is duly authorised by the instrument of partnership. According to the revenue, the remuneration was not paid in accordance with the terms of the partnership deed but as elaborately discussed above, the remuneration was agreed to be paid @ Rs. 20,000 per annum per working partner i.e. the remuneration which was agreed to be paid as per terms of the partnership deed. But the above agreed remuneration exceeded the overall limit of remuneration which could be paid under the statutory provision. Therefore, the remuneration which was actually paid was less than the maximum amount payable under the statute. The sentence "subject to overall limit as laid down under Section 40(b) of Income-tax Act" is not a term of partnership deed. It is a statutory provision which is applicable to all partnerships whether provided in the instrument of partnership or not. In that sense, the claim might not be as per the statutory provision but it cannot be said that the claim made was not in accordance with term of the instrument of partnership. However, we have already held after discussion that remuneration has been rightly claimed and should be allowed as deduction under Section 40(b)(v) of the Income-tax Act. We order accordingly.
11. That during the course of hearing of appeal, the assessee raised an additional ground of appeal relating to-charging of interest under Section 234B of the Income-tax Act. It was contended that the assessee objected to charging of interest under the above provision as per ground No. 6 raised before the learned Commissioner of Income-tax (Appeals). The aforesaid ground was not adjudicated upon in the impugned order. After considering relevant material, we find that the contention advanced on behalf of the assessee is correct. While re-determining the income of the assessee as per our above directions, the question of chargeability of interest under Section 234B should also be looked into by the Assessing Officer. This ground of appeal is allowed for statistical purposes.