M/S. Egg Guard vs Income Tax Officer
2022 Latest Caselaw 6796 Tel

Citation : 2022 Latest Caselaw 6796 Tel
Judgement Date : 14 December, 2022

Telangana High Court

M/S. Egg Guard vs Income Tax Officer on 14 December, 2022

Bench: Ujjal Bhuyan, C.V. Bhaskar Reddy

          THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYAN
                                             AND
             THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY
                                  I.T.T.A.No.203 of 2006
JUDGMENT: (Per the Hon'ble the Chief Justice Ujjal Bhuyan)

        None has appeared for the appellant when the matter is

called upon though Ms. Sapna Reddy, learned counsel is present on

behalf of Mr. B.Narsimha Sarma, learned counsel for the

respondent.

2. This appeal has been preferred by the assessee as the

appellant under Section 260A of the Income Tax Act, 1961 (briefly

'the Act' hereinafter) against the order dated 22.11.2005 passed by

the Income Tax Appellate Tribunal, Bench 'B', Hyderabad (briefly

'the Tribunal' hereinafter) in I.T.A.No.992/Hyd/2004 for the

assessment year 2001-2002.

3. From the docket proceedings we find that vide the order

dated 04.09.2006, the appeal was admitted for hearing but no

substantial question of law was framed. However, from the memo

of appeal, we find that the following question has been proposed as

a substantial question of law:

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"Whether the Income Tax Appellate Tribunal 'B' Bench, Hyderabad was legally correct in holding that the requirements of the provisions of Section 40(b)(v) of Income Tax Act, 1961 are lacking in the facts and circumstances of the case and evidence on record entitling the assessee to seek deduction of the amount of remuneration paid to the partners from its income chargeable to tax under Income Tax Act, 1961 ?

4. Issue raised in this appeal is regarding claim of the appellant

to deduction of the amount of remuneration paid to the partners

from its income chargeable to tax under the Act and whether

provisions of Section 40(b)(v) of the Act are applicable.

5. Appellant before us is an assessee under the Act having the

status of a firm. Assessment year under consideration is 2001-

2002. Appellant is engaged in the business of trading in egg

packing materials. While filing return of income, appellant claimed

deduction of the remuneration of Rs.1,08,000.00 debited to profit

and loss account.

6. After referring to clause 8.2 of the partnership deed

comprising the appellant and after hearing the appellant, assessing ::3::

officer held that appellant did not specify the amount of

remuneration payable to each individual working partner nor did it

lay down the manner of quantifying such remuneration. Hence,

deduction of the remuneration claimed by the appellant to have

been paid to the partners was disallowed and added back to the

income of the appellant vide the assessment order

dated 30.01.2004.

7. The aforesaid order of the assessing officer was challenged

by the appellant before the Commissioner of Income Tax

(Appeals)-VI, Hyderabad (briefly 'CIT(A)' hereinafter). By the

appellate order dated 03.08.2004, CIT(A) dismissed the appeal of

the appellant and affirmed the disallowance made by the assessing

officer.

8. It was thereafter that appellant filed further appeal before the

Tribunal. Tribunal vide the order dated 22.11.2005 held that

payment made to the partners amounting to Rs.1,08,000.00 is not

an allowable deduction under Section 40(b)(v) of the Act.

Therefore, the appeal was dismissed.

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9. Before we advert to the order of the Tribunal, we may refer

to Section 40 of the Act which deals with amounts not deductible.

Section 40 says that notwithstanding anything to the contrary in

Sections 30 to 38, the amounts mentioned thereafter shall not be

deducted in computing the income chargeable under the head profits

and gains of business or profession. Clause (b)(v) mentions, in the case

of any assessable firm, any payment of remuneration to any partner,

who is a working partner, which is authorized by and is in

accordance with, the terms of the partnership deed and relates to

any period falling after the date of such partnership deed insofar as

the amount of such payment to all the partners during the previous

year exceeds the aggregate amount computed thereunder. In other

words, what the aforesaid provision contemplates is that in the case

of a firm, any payment of remuneration to any partner exceeding

the amount mentioned therein shall not be deducted in computing

the income chargeable under the head profits and gains of business or

profession.

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10. Before the CIT(A), appellant relied upon a circular of the

Central Board of Direct Taxes (CBDT) bearing No.739 dated

25.03.1996, which is as under:

It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under Section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.

11. This was examined by the CIT(A) whereafter it was held that

the above circular of the CBDT is clarificatory in nature and it only

clarifies the provision contained in Section 40(b)(v) of the Act.

12. In further appeal, Tribunal held as follows:

Before us, the assessee has put forth the same contention whereas learned DR has claimed that the provision of Section 40(b) of the Act is very clear and the circular issued by the Board is in consonance with the above provision. We find merit in the case made out by the revenue in so far as the provision of the Act is very clear with reference to payment of remuneration to the working partners in case of a firm. It clearly states that the payment has to be authorized by the partnership deed and the same has to be in accordance with the terms of the partnership deed. In the impugned Partnership deed ::6::

no terms for payment to the working partners have been stipulated. In this view of the matter, we hold that the payment made to the partners amounting to Rs.1,08,000/- is not an allowable dedication as per Section 40(b)(v) of the Act. Therefore, this ground of the assessee is dismissed.

13. Thus according to the Tribunal, the appellant has to be

authorized by the partnership deed and the same has to be in

accordance with the terms of the partnership deed. Referring to

the partnership deed constituting the appellant, Tribunal held that

the partnership deed did not contain any terms for payment to the

working partners. In that view of the matter, Tribunal while

confirming the order of the assessing officer held that payment

made to the partners amounting to Rs.1,08,000.00 is not an

allowable deduction as per Section 40(b)(v) of the Act.

14. On due consideration, we do not find any error or infirmity

in the view taken by the Tribunal. No question of law, not to speak

of any substantial question of law, arises from the said order of the