Itta/203/2006 Of M/S. Egg Guard v. Income Tax Officer

IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD WEDNESDAY ,THE FOURTEENTH DAY OF DECEMBERTWO THOUSAND AND TWENTY TWO PRESENT THE HON'BLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDYANDTHE HON'BLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRIBUNAL APPEAL NO: 203 OF 2006 Appeal Under Section 260A of the lncome Tax Act 1961 againstthe order dated 22-11-2005 in ITA No. 992/ Hydl 2004 ( Asst. Year 200'l-20021on the file of the lncome Tax Appellate Tribunal, Hyderabad Bench - B,Hyderabad preferred against the order of the Commissioner of lncome Tax(Appeals) Vl , Hyderabad dated 03-08-2004 in Appeal No. 0248M-9 (3) / HYD/CIT (A) -Vl I 2003 -04 preferred against the order of the lncome Ta Officer,Ward -9 (3) , Hyderabad dated 30-01-2004 in PAN / GIR No. E-305 /9 (3) /2001-o2 Between: M/S. EGG GUARD, 7-2-104119, Sudershan Complex, Tirumala Colony, L.B.Nagar,...APPELLANTHyderabad. ANDINCOME TAX OFFICER, Ward-9(3), 13th floor, Gagan Vihar, M.J. Road,...RESPONDENTHyderabad. Counsel for the Appellant: SRl. M. M. FIRDOS ( Not present ) Counsel for the Respondent: Ms. SAPNA REDDY ON BEHALF OF SRI B.NARASIMHA SARMA The Court delivered the following: JUDGMENT THEHoBLEHEEFTIUIIBHI.IYANAND HS I.T.T.A.No.203 of [2006] JUDGMENT,4aT [tbe ][llot'bb ][tbe ][Cbbf ][lttttiz ][Ujial Bhryaa)] None has [aPpe ][ared ][for ][the ][aPpellaflt ][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 gnder [Section ]!60A [of ][the ][Income Tax ][Act, ][1961 (brrefly]'the Act' hereinafter) against [the ][order ][dated ][22'71'2005 ][passed ][by]the Income [Tax ][Appellate ][Tribunal, ][Bench ]['B', ][Hyderabad (briefly]'the Tribunal' hercinafter) [in ][I.T.A'No'992/Hyd/2004 ][for ][the]asscssment Year [2001 ][-2002.] 3. From the docket [proceedings ][we ][find ][that ][aide ][the ][order]dtted 04.09.2006, [the ][appeal ][was admitted ][for ][hearing ][but ][no]substantial [quesrion ][o[ ][Iaw ][rvas ][ftatned' ][However' ][from ][the memo]of appeal, [we ][find ][that ][the ][following question ][has ][been ][proposed ][as]' a substantial cluestion oI larv: "Whether the Income Tax Appellate Tribunal .8,Bench, Hyderabad was lcgally cofiect in holdrng that thetequirements of the provisions of Section a0@) (v) ofIncome ['I'ax ]Act, 1961 are lacking in the facts andcircumsances of the case and evidence on recordentiding the assessee to seek deduction of the amount ofremuneradon paid to the partnets from its incomechargeable to tax under Income Tax Act, 1961 ? 4. Issue raised in this appeal is regarding claim of the appellantto deduction of the amount of remuneration paid to tlre partnersfrom its incomc chargeable to Lrx under the Act and whetherprovisions of Secrion 40(bX") of the Act are applicable 5. Appellant before us is an assessee under the Act having thestatus of a firm. Assessmcnt year under consideration is 2001-2002. Appellanr is engaged in the business o[ trading i, .ggpacking marerials. \Xzhile filing rerurn of income, appellant claimeddeduction of the remuneradon of Rs.1,0g,000.00 debited to profitand loss account. 6. After re[erring to clause g.2 of thcpartnership deedcomprising the appcllant and after hearing the appcllant, assessing offrcer held that [appellant ][did ][not ][specift ][the ][amount ][of]remuneration payable [to ][each ][individual ][working ]Parmer [nor ][did ][it]Iay down the manner of [quantiffing ][such ][remuoeration' ][Hence']deduction of the [remuneration ][claimed ][by ][the ][appellant ][to ][have]been paid to the [partners was disallowed ][and ][added ][back ][to ][the]income o[ the [appellant ][vide the ][assessment ][order]dated 30.01.2004. 6. After re[erring to clause g.2 of thcpartnership deedcomprising the appcllant and after hearing the appcllant, assessing offrcer held that [appellant ][did ][not ][specift ][the ][amount ][of]remuneration payable [to ][each ][individual ][working ]Parmer [nor ][did ][it]Iay down the manner of [quantiffing ][such ][remuoeration' ][Hence']deduction of the [remuneration ][claimed ][by ][the ][appellant ][to ][have]been paid to the [partners was disallowed ][and ][added ][back ][to ][the]income o[ the [appellant ][vide the ][assessment ][order]dated 30.01.2004. 7The aforesaid [order ][o[ ][the ][assessing ][officer ][was ][challenged]by the appellant [before ][the ][Commissioner ][of ][Income ][Tax](Appeals)-Vl, [Hyderabad ]@riefly ['CIT(A)' ][hereinafter)' ][By ][the]order [dated ][03.08.2004, ][CIT(A) ][dismissed ][the ][appeal ][of]appellate the appellant [and ][affirmed ][the ][disallowance made ][by ][the ][assessing]olficer. 8. It was [thereafter ][that appellant ][Fr1ed ][further ][appeal ][before ][the]Tribunal. Tribunal [uitle ][the ][order ][dated ][22't1'2O05 ][held ][that]payment made [to ][the ][partners ][amounting ][to ][Rs'1,08'000'00 is ][not]an allowable [deduction ][under ][Section ][a0@)(v) ][of ][the ][Act']Therefore, the appeal [was ][dismissed.] 9. Before we adverr to the order of the Tribunal, we may referto Secdon 40 of the Act which deais with amounts not deductible.Section 40 says that nonvithstanding anything ro rhe contrary iriSections 30 to 38, the amounts mentioned thereafter shall not bededucted in computing rhe income chargeable under rhe beadpnfttand gains of busines or pmfession. Clause @)(v) mendons, in the caseofany assessable finn, any paymeflt of remuneradon to any partneqwho is a working partner, which is authorized by and is inaccotdance with, the terms of the partnership deed and relates toany period falling after the dare of such partnership deed insofar asthe amount of such paymenr to all t}te pafiners during the previousyear exceeds the aggregate amount computed thercunder. In otherwords, what the aforesaid provlsron contemplates is that in the caseof a firm, any payment o[ remuneradon to any paftner exceedingthe amount mentioned therein shall not be deductcd in computingthe income chargeable under the head pmf* and gains of butinett orpmferion. 10. Before the CIT(A), appellant relied upon a circular o[ the Central Board of Dircct Taxes (CBDT) bcaring No.739 dated25.03.1996, which is as under: It is clarified that for the assessment years subsequentto the assessment year 1996-97, no deduction underSection 40@)(v) will be admissible unless the parmetshipdeed either specifies the amount of temuneration payableto each individual wotking partner or lays down themanner of quantiSing such remuneration. 1.1.. This was examined by the CIT(A) whereafter it was held thatthe above circular of the CBDT is clarificatory in nature and it onlyclarifies the provision contained in Section a0@) [(v) ]of the [Act.] 12. In further appeal, Tribunal held as follows: 10. Before the CIT(A), appellant relied upon a circular o[ the Central Board of Dircct Taxes (CBDT) bcaring No.739 dated25.03.1996, which is as under: It is clarified that for the assessment years subsequentto the assessment year 1996-97, no deduction underSection 40@)(v) will be admissible unless the parmetshipdeed either specifies the amount of temuneration payableto each individual wotking partner or lays down themanner of quantiSing such remuneration. 1.1.. This was examined by the CIT(A) whereafter it was held thatthe above circular of the CBDT is clarificatory in nature and it onlyclarifies the provision contained in Section a0@) [(v) ]of the [Act.] 12. In further appeal, Tribunal held as follows: Before us, the assessee has put forth the samecontention whereas learned DR has claimed that theptovision of Section 40(b) of the Act is very clear and thecircular issued by the Board is in consonance with theabove ptovision. We find merit in the case made out bythe revenue in so far as the ptovision of the Act is veryclear with reFerence to payment of remunetation to [the]working partners in case of a firm. It clearly states thatthe payment has to be authorized by the partnership [deed]and the same has to be in accordance with the terms ofthe patnership dced. In the irnpugned Partncrship [dccd]contention whereas learned DR has claimed that theptovision of Section 40(b) of the Act is very clear and thecircular issued by the Board is in consonance with theabove ptovision. We find merit in the case made out bythe revenue in so far as the ptovision of the Act is veryclear with reFerence to payment of remunetation to [the]working partners in case of a firm. It clearly states thatthe payment has to be authorized by the partnership [deed]and the same has to be in accordance with the terms ofthe patnership dced. In the irnpugned Partncrship [dccd] )) no teffns for payment to the working parmers have beenstipulated. In this view of the mamer, we hold that thepayment made to the partners amounting toRs.1,08,000/- is not an allowable dedication as perSection 40@)(v) of the Act Therefore, this ground of theassessee is dismissed. 13. Thus according to rhe Tribunal, the appellant has to beauthorized by the partnership deed and the samc has to be inaccordaflce widr dre tenrrs of the partnership deed. Rcfering tothe partnership deed coflstirudng the appellant. 'I.ribunal held thatthe partnership deed did not contain any terms for payment to theworking partners. In that ul.* of rhe marrer, Tribunal whilecon firming the order of the assessing ofFrcer held rhat paymentmade to the partners amounring to Rs.1,0g,000.00 ls not anallowable deduction as per Section 40&Xv) o[ thc Act. 14. On due consideration, we do flot find any error or in frrmityin the view taken by the Tribunal. No question oilaw, not to speakof any substantial question of law, arises from the said order o[ the'f ribunal.\ / 15.Appeal is devoid o[ any merit and the same is accordinglydismissed. No costs.accordinglydismissed. No costs. As a sequel, miscellaneous petitions, pending if any, stand dismissed. I HIGH COURTDATED:14l12120221eLA'^k'4,,'\9F5l't,a,-YN"CrIJJ.st)J:t-Ia\,,-o\<i //JT]DGMENT,a,ll*.,//:) f Hi)ITTA.No.203 of 2006IIl DISMISSING THE ITTA WITHOUT COSTSet)1