The Income Tax Appellate Tribunal (ITAT), Mumbai bench has held that the remuneration paid to Partner out of the share of profit cannot be treated as ‘salary’. If such remuneration is paid in cash then the threshold limit of section 40A(3) shall not be applicable.
The assessee is a partnership firm and is engaged in the business of wholesale of Canvas Tarpoulins. For the year under consideration, the assessee e-filed its return of income on 26.09.2015 declaring a total income of Rs. 9,40,320. During the course of assessment proceedings, upon verification of the Ledger account filed by the assessee, the Assessing Officer found that the assessee has paid remuneration of Rs. 30,000 to its Working Partners in cash. Accordingly, the assessee was asked to show cause as to why said payment be not disallowed under section 40A(3) of the Act. In reply, the assessee submitted that remuneration paid to Partner within the limit of section 40(b) of the Act is fully allowable expense Accordingly, the Assessing Officer added a sum of Rs.3,60,000 under section 40A(3) of the Act, to the total income of the assessee.
The learned CIT(A) vide impugned order dated 03.05.2019 dismissed the appeal filed by the assessee. Being aggrieved, the assessee is in appeal before Tribunal.
The Tribunal bench comprising Shri Sandeep Singh Karhail, Judicial Member, and Shri Gagan Goyal, Accountant Member held that It is trite that the partnership firm is not a juristic person and there is no separate identity for the firm and its partners. The partnership is only a collective of separate persons and not a legal person in itself.
Bench relied on Apex court’s case wherein The Hon’ble Supreme Court in the case of CIT v. R.M. Chdambaram Pillai: (1977) 106 ITR 292, “while holding that payment of salary to a partner represents a special share of the profits and the salary paid to the partner retains the same character of the income”. Thus, remuneration paid to the partner is the share of the profits of the partnership firm and the same cannot be treated to be in the nature of the salary paid to the employee.
Tribunal said, In the present case, there is no dispute that the remuneration was paid to the Working Partner. Also, there is no allegation that conditions of section 40(b) of the Act are not complied with. Thus, in view of the aforesaid judicial pronouncements also, we are of the view that section 40A(3) was wrongly invoked by the Revenue for disallowing remuneration paid to the Working Partner, which is within the permissible limits as per section 40(b) of the Act. Therefore, in view of our aforesaid findings, the order passed by the learned CIT(A), affirming the disallowance made under section 40A(3) of the Act, is set aside and the grounds raised by the assessee in the present appeal are allowed.
M/s. Ratilal & Sons vs Income Tax Officer
Assessment Year : 2015–16
Decision in favour of: AssesseeTHE INCOME TAX APPELLATE TRIBUNAL “SMC” BENCH, MUMBAI