INCOME TAX ACT, 1961

Section 40(b)(v)

Business disallowance under section 40(b) - Remuneration to partner(s) - Effect of provisions of section 40(b)(v) - Profit sharing ratio vis-a-vis availability of profit as per CBDT Circular

Assessee was a law firm (partnership) and derived income under the head 'Profits and gains of business and profession' and 'Income from other sources'. The AO in the assessment completed under section 143(3) disallowed one of the amounts as remuneration of Rs. 45,00,000 paid to two partners, namely, RKL (Rs. 30,00,000) and MS (Rs. 15,00,000) on the ground that same had not been paid in accordance with the provisions of section 40(b)(v). AO relying on the CBDT Circular No. 739, dt. 25-3-1996, observed that no deduction under section 40(b)(v) will be admissible as remuneration paid not being in accordance with the provisions of section 40(b)(v), was not allowable. CIT(A) upheld the finding of the AO. Held: The finding of the AO as well as CIT(A) on this issue was not correct. The partnership deed had specified that the amount of remuneration allowable under section 40(b)(v) would be the amount of remuneration paid to the partners and same would be shared in their profit-sharing ratio in that year. The profit-sharing ratio of the partners had been specified C as 2/3rd RK Luthra and 1/3rd MS). The assessee accordingly paid total remuneration of Rs. 45,00,000 in the profit sharing ratio to both the partners. The clause of the partnership deed satisfies the requirement of the CBDT circular and there was no violation on the part of the assessee in this regard. In the instant case also, remuneration had been shared in the profit-sharing ratio.The issue in dispute also deserved to be allowed on the principle of consistency as identical disallowance had been deleted by the CIT(A) in immediately preceding assessment year, i.e., 2009-10 and no appeal had been preferred by the department.

Followed:CIT v. Vaish Associates (2015) 63 Taxmann.com 90 (Del-HC) : 2015 TaxPub(DT) 3326 (Del-HC). Relied:Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) : 1992 TaxPub(DT) 858 (SC). Distinguished:Sood Brij & Associated v. cIt (2010) 15 Taxmann.com 76 (Del) : 2011 TaxPub(DT) 19053 (Del-HC) and CIT v. Anil Hardware Store (2010) (2010) 323 ITR 368 (HP-HC) : 2010 TaxPub(DT) 764 (HP-HC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2011-12

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