Where in terms of partnership deed assessee-firm paid bonus to all partners including working partners, conditions prescribed under section 40(b) stood fulfilled and, thus, Assessing Officer could not disallow said payment in case of one partner holding that he was not a working partner
IN THE ITAT JAIPUR BENCH
Id. Mohd. Nizamuddin
AND N.K. SAINI, ACCOUNTANT MEMBER
IT APPEAL NO. 41 (JP) OF 2013
[ASSESSMENT YEAR 2009-10]
FEBRUARY 28, 2014
Mahendra Gargiyea and Sita Ram Agarwal for the Appellant. D.C. Sharma for the Respondent.
Hari Om Maratha, Judicial Member – This appeal by the assessee is directed against the order of the ld CIT(A)-III, Jaipur dated 12-10-2012 for the A.Y. 2009-10.
2. The assessee has taken the following grounds of appeal:—
|“1.||The impugned additions and disallowances made in the order dated 21.12.2011 u/s 143(3) of the Act, bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted.|
|2.||Rs.20,47,000/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs.20,47,000/- on account of bonus paid to the fourth partner Shri Nizamuddin. The disallowance so made and confirmed by the ld. CIT(A), is contrary to the provisions of law and facts hence, kindly be deleted in full.|
|3.||The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C & 234D of the Act and as also in withdrawing of interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full.”|
3. The Ground No.1 was not pressed by the Ld. AR at the time of hearing hence; the same is dismissed as not pressed.
4.1 In ground No.2 the assessee has challenged the confirmation of the disallowance of Rs.20,47,000/- made by the AO on account of bonus paid to the fourth partner namely Shri Nizamuddin.
4.2 Briefly stated, the facts of the case are that the assessee firm has four partners. On a perusal of the partnership deed dated 01.04.2003, copy of which is placed at pages 10 to 12 of the assessee’s paper book, the AO noticed that salary was being paid only to three partners namely Shri Moinuddin, Shri Iqbal Ali and Shri Zahiruddin out of four partners. However, from the perusal of Profit & Loss A/c for this year it was found that bonus of Rs.20,47,000/- was paid to all the four partners. In other words, the bonus was also paid to Shri Nizamuddin but no salary was paid.
When asked to explain, the assessee replied vide submission dated 09.12.2011 as under:
‘Kindly refer para 5 of the partnership deed effective since A.Y. 2004-05. The said para may kindly be read in two parts A & B.
|(a)||That the parties to this Deed (Denotes all the partner of the firm) are actively engaged in the conduct of business of the firm.|
|(b)||But on A/c of devotion the parties from 2 to 4 parts (Moinuddin, Iqbal Ali &Zahiruddin) shall get salary of Rs. 7,000/- per months. Accordingly salary of Rs. 2,52,000/- has been credited in the respective accounts of the above partners i.e. Rs. 84,000/- in each a/c & debited the same a/c in the P/L a/c.|
Further in para 6 partners to this deed as aforesaid intents “all the partners (Sh. Nizamuddin, Moinuddin, Iqbal Ali &Zahiruddin) links with A of para 5 “ALL THE PARTNERS ARE ACTIVELY ENGAGED IN THE CONDUCT OF BUSINESS OF THE FIRM” & as such further entitled to bonus. Now we have to determine how much bonus would be payable to partners as such mentioned “which after including the total amount of salary payable i.e. Rs.2,84,000/- shall be equal to the amount specified in the provision of sub-cl (v) of cl. (b) of section 40 of the I.T. Act, which accordingly been calculated in the computation sheet & its perfectly in order.
In this regard the assessee would like to draw your kind attention at the bottom of computation sheet were figures of books profit Rs. 2,09,94,210/- appears & on top of page 2 calculation is as under.
|90% of first||Rs. 75,000/-||Rs. 67,500/-|
|60% of next||Rs. 75,000/-||Rs. 45,000/-|
|40% of remaining amount of||Rs.2,08,44,210/-||Rs.83,37,684/-|
|But claimed only Rs.84,40,000/- including salary which has been bifurcated in P&L a/c as under:|
|Salary partners||Rs. 2,52,000/-|
The said partnership Deed operates since Asstt. year 2004-05 & all the officials (AO’s) have accepted the above method as correct and completed assessment till Asstt. Years 2008-09. Further assessee firm’s each partner is assessed at income of highest tax rate either in the hands of firm or partners.’
The AO however, was not satisfied with the above reply. As per the AO vide Para 5 of the partnership deed, all the partners are actively engaged in the conduct of the affairs of the firm, but why salary was paid only to the three partners From clause 6 of the partnership deed, he has inferred that the bonus is to be paid only to those partners who are working partners. Thus, when only three partners were drawing salary hence, those only can be treated as the working partners. Hence, according to the A.O. , bonus is payable to those partners alone. The AO noticed that the word “working” in clause 6 of the partnership deed has been blackened for which no justification was offered by the assessee despite being asked. According to him, all the ‘working partners’ shall get the bonus in equal proportion then how Shri Nizamuddin was not drawing any salary although he cannot be called a working partner. In view of this stand, the bonus paid to fourth partner (i.e. Shri Nizamuddin) of Rs.20,47,000/- was disallowed by the A.O. In the first appeal, the ld. CIT(A) has also confirmed this disallowance for the reasons mentioned in his order.
4.3 Feeling further aggrieved, the assessee has filed this second appeal.
4.4 We have heard the rival submissions and have carefully perused the entire material on record. The ld. AR appearing before us filed a detailed written submission. He further submitted that when the A.O. has agreed to the fact, rather, he has admitted this fact, then how can he simultaneously hold that all the partners are not the working partners and without any material and particularly when salary is being paid to the partners for discharging voluminous work of the firm i.e. watching progress of procurement of Tendu leaves from the dense forest areas, travel in the mid of summer season and also assisting the head/main controller of business Shri Nizamuddin. He stated that Shri Nizamuddin, being the senior most partner and patron of the firm , is completely devoted to the business and to the overall activities of the firm. He regularly visited the factory, arranges finance, signs cheques, frames polices and takes policy decisions. He is also in close contact of the prospective buyers of the Tendu Pattas. These facts not having been denied it has to be accepted that all the four partners were working partners. This was a commercial decision taken by all the partners with mutual consent and it is also not denied that such mutual consent was duly recorded vide the clauses no. 5 & 6 of the partnership deed, copy of which is placed at pages 10 to 12 of the assessee’s paper book. He drew our attention towards the Explanation 4 below Sec. 40(b) which defines the term “working partner” as under:
‘Explanation 4.—For the purposes of this clause, “working partner” means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;’
He submitted that this term having been specifically defined to mean an individual who is actively engaged in conducting the affairs of the business, by the statue for this purposes, hence, no other meaning could be assigned and therefore, the interpretation by the AO and the ld. CIT(A) that only those partners who were paid the salary are the working partners and not the others, is a complete misreading of the provision. He further submitted that the ld. CIT(A) misinterpreted by saying that the meaning of the word working partner assigned by the statute was confined only and only to clause (v) to Sec. 40(b) which is a computation clause. However, Explanation 4 provides the meaning of working partner for the clause (b) to section 40 and not for the purpose of sub clause (iv) only. Hr further submitted that the authorities below unduly stressed upon the word workingand that this word was purportedly blackened out (erased), for the simple reason that in clause 5 of the said deed it is stated that all the parties to the partnership deed are actively engaged in the conduct of the business and in clause 6 states that “as aforesaid” which implies that all the partners are the working partners and hence, are entitled to bonus. This aspect was clarified also vide a detailed reply dated 20.12.2011 copy of which was placed at page 8 and 9 of the assessee’s paper book. Thus, all the partners, who are already working partners, were made entitled to the bonus. As per the ld. AR the only condition for the allowability of the deduction u/s 40 (b) is that the remuneration should be paid to working partners only and such remuneration by whatever name called, has to be authorised by and should be in accordance with, the terms of the partnership deed and all these conditions are fully satisfied in this case. It is not denied that all the partners are actively engaged and hence, are working partners and clause 5 authorizes payment of salary whereas clause 6 authorizes payment of bonus. He further argued that the claim so made was within the overall permissible limit in as much as the total amount permissible was Rs.84,50,184/- against which the assessee claimed only Rs.84,40,000/- and out of this after paying salary to three partners of Rs.2,52,000/- the balance of Rs.81,88,000/- was paid as bonus to all the partners. Even assuming the same was to be payable to three partners only then also this entire balance was to be distributed amongst them. Thus, the balance amount was fully allowable whether it was to be distributed amongst three partners or four partners. Lastly, he submitted that the firm was constituted in A.Y.2004-05 and since then the firm has been making payment of salary and bonus in a similar manner and the revenue never made any disallowance in the past. He referred to a chart placed at page 13 of the paper book as also drew our attention towards the copies of the assessment orders placed at paper book pages 14 to 24 of the assessee’s paper book. In support, he also relied upon the decisions in the cases of Eqbal Ahmed & Co. v. ITO  1 SOT 202 (Kol)Asstt. CIT v. Laxmi Sailaja Traders  1 SOT 608 (Hyd), Asstt. CIT v. Suman Construction  34 SOT 495 (Pune), ITO v. J.M.P. Enterprises  101 ITD 324 (Asr), ITO v. Tulsi Ram Tej Chand  91 TTJ (Chd) 452. Lastly, he made an alternative prayer that if in any case, the disallowance so made is upheld than the benefit of the proviso below u/s 28(v) has to be given, in the hands of partners, which provides that in case of disallowance of any amount of salary or bonus in the hands of the firm, the income to such extent has to be adjusted in the hands of the partners.
4.5 Per contra, the ld. DR has strongly relied upon the findings recorded by the AO and ld. CIT(A) in their respective orders and prayed to dismiss this ground raised by the assessee.
4.6 We have carefully considered the submission made by both the parties. We have also carefully perused the material placed on record and considered the case laws cited. It is neither disputed nor established by the authorities below that all the four partners were actively engaged in the conduct of the business of the firm and thus, are the working partners. The provisions contained u/s 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. Thus, the subjected payment has to be authorized by and has to be in accordance with the partnership deed. This further implies that the law does not interfere in the decision making by the partners and it is within the sole discretion of the partners to decide the amount payable (which is certainly allowable as per the limits prescribed) and also the particular partner to whom any payment of salary or bonus has to be made. The said clauses no. 5 and 6 of the partnership deed reads as under:—
“5. That the parties to this deed are actively engaged in the conduct of the business of the firm but on account of devotion the parties from Second to Fourth part (ShriMoinuddin, Shri Iqbal Ali and Shri Zahirudddin) shall get salary of Rs.7000/- P.M. since 01.04.2003 unless otherwise mutually agreed upon by and between the parties to this deed.
6. That the partners to this deed as aforesaid shall be further entitled to bonus/ commission at the end of each year, which after including the total amount of salary payable to the parties from second to Fourth part during the year, shall be equal to the sum computed accordingly to the method of computation as laid down in sub-clause (v) of clause (b) of section 40 of the Income Tax, as reproduced below:—”
In the present case, clause 5 authorized payment of salary to three partners whereas clause 6 authorized payment of bonus to all the four partners. This way, all the conditions provided u/s 40(b) stand fulfilled. We do not agree with the contention of the ld. CIT (A) that all the partners were not working partners, which finding is recorded without any basis. We further agree with the contention of the ld. A/R that the AO and CIT (A) have unduly stressed upon the erasing of the word “working” before the word “partner” in as much as clause 6 of the partnership deed, provides that “working partners to this deed” (assuming the word “working” is not erased) implies all the four partners; and “as aforesaid” implies that they are actively engaged in conduct of the business as per clause 5. Now even in absence of the word “working“, a combined reading conveys the same meaning. Further, 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 as per clause 5 whereas bonus shall payable to all the four partners as per clause 6, in which the law does not permit interference by the revenue. The ld. CIT (A) further wrongly interpreted Sec. 40(b)(v) while holding that the definition of “working partners” was meant only for Sec.40(b)(v) whereas Explanation 4 below Sec.40(b) clearly reads that for the purposes of this clause which means clause (b) to section 40. It is noticed that although the firm was constituted in A.Y. 2004-05 and it is not disputed that the assessee firm has been making this claim right since A.Y. 2004-05 but all along the revenue has been accepting such a claim even in the assessment made under scrutiny hence we do not find any justification to make a departure from the settled position in the past without bringing any material change in the facts and the circumstances of the case in this year. In any case, the issue in hand is revenue is neutral in as much as even assuming a certain part of the claimed remuneration is disallowed in the hands of the firm, the same cannot be treated to be an income from business in the hands of the partners and a necessary safeguard has already been provided under the proviso below the Sec.28(v) against the double taxation of the same income hence, even if the disallowance so made is upheld, deduction to that extent has to be allowed in the hands of the partners/s. Thus, revenue shall not be put to any loss if the remuneration as claimed, is allowed in the hands of the assessee firm. We thus, find no justification in the disallowance so made and confirmed, for the detailed reasons stated herein above, hence, the disallowance of Rs. 20,47,000/- made u/s 40(b) is hereby deleted. Therefore, Ground no. 2 raised by the assessee is allowed.
5.1 In Ground no. 3, the assessee has challenged the charging of interest u/s 234A, 234B, 234C & 234D of the Act. Such charging of interest is consequential in nature and shall be computed by the AO accordingly, after giving effect to this order.
6. In the result, appeal of the assessee is partly allowed.