Excessive remuneration to partners cannot be disallowed u/s 40A(2) if it is within limits of S. 40(b) – Allhbd HC


CIT v Great City Manufacturing Co [ITA No: 461 of 2009 dtd 10.12.2012] – Allahabad High Court

Background:

The assessee is a partnership firm engaged in the business of manufacture and export/sale of brass art ware. The assessee filed its return of Income for AY 2005-06 on 31.10.2005 declaring a total income of Rs. 57,68,627. During the course of assessment proceeding the AO noticed that the assessee had paid remuneration to its partners to the tune of Rs. 39,31,965/- whereas it has paid total salary to its employees only Rs. 486918/-.

The AO stated that the partnership deed does not specify the functions and duties in respect to working partners justifying the remuneration of Rs. 13,10,665/- to each of its partners when barely a total salary of Rs. 486918/- was paid to all its employee. The remuneration paid to working partners was highly excessive. On this point the Assessing Officer allowed the remuneration upto Rs. 4,00,000/- per annum to each of the partners. HELD:

  • All the three partners are working partners of the assessee firm and the AO has himself allowed the remuneration of Rs. 4,00,000/- per annum to each of the partners.
  • The terms of the partnership deed specifically provided the payment of remuneration to the working partners.
  • Section 40(b) (v) of the Act prescribed limit of remuneration which can be allowed to its partner as deduction while computing the business income.
  • The remuneration paid to the working partners was within the provision of clause (v) of of subsection (b) of Section 40 of the Act.
  • The Parliament in its wisdom had fixed a limit on allowing the remuneration to the working partners and if the remuneration are within the ceiling limit provided then recourse to provision of Section 40A(2)(a) of the Act cannot be taken.
  • The AO is only required to see as to
    (i) whether the partners are the working partners
    mentioned in the partnership deed,

    (ii) the terms and conditions of the partnership deed provide for payment of remuneration to the working partners and
    (iii) whether the remuneration provided is within the limits prescribed under Section 40(b)(v) or not.
  • If all the aforementioned conditions are fulfilled then he cannot disallow any part of the remuneration on the ground that it is excessive.

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