Full Judgment
This is a case where the partnership has been constituted right from the beginning i.e., 31-3-1993 between two partners having 50% share of each and both the partners were working partners. According to clause 13 of the deed of partnership, it has been stated that both the partners shall participate in the management and conducting of the business and if so decided, both the partners shall be entitled to draw monthly salary at the rate as will mutually be settled from time to time subject to the provisions of the Income Tax Act. But the assessing officer disallowed the remuneration on the ground that there was no specific mention in the deed about the quantification.
The revenue's stand is that in consonance with the provisions of section 40(b) and as per the CBDT Circular, salary and remuneration cannot be allowed in this case as because there is no quantification in the deed of partnership. But the assessee's contention is that although up to assessment year 1996-97 there was relaxation by the revenue but the CBDT should relax rigour of law and should not extend it when both partners are working partners merely on the point of technicalities the remuneration should not have been disallowed to the working partners.
In this connection, the learned Counsel on behalf of the assessee filed a copy of the partnership deed before us, trading and P & L Account of the firm for the relevant assessment year and one article written by him and published in tax literature on the heading Circular No. 739 relating to disallowance of partners' remuneration - invalid, illegal and devoid of binding force (See (2003) 127 Taxman 13 (Mag.)). He also filed one order of the 'E' Bench, ITAT Kolkata in the case of Asstt.
CIT v. Priya Gopal Bishoyi Grandson (IT Appeal No. 1032 (Cal.) of 2000) in favour of him.
On hearing both the sides and going through the relevant records, we find that the assessee has a good case because it is a fact that both the partners are there right from the beginning and their share allocation is stipulated and not changed from time to time. They have also made provision vide clause 13 of the deed of partnership regarding remuneration to be paid in accordance with the provisions of the Income-tax Law at the end of the accounting year. it is also a fact that they cannot go beyond the tax laws and they are to make payment within the permissible limit. The simple reason that for commercial expediency, according to the determination of profit at the end of the accounting year they stipulate the quantification portion within the permissible limit should not be a bar for them to do so, as it is within the parameter of law. Although the learned Departmental Representative has taken stringent view of the matter, we are not inclined to agree with them and allow the appeal in favour of the assessee and against the revenue.