|COURT:||Delhi High Court|
|CORAM:||S. Muralidhar J, Vibhu Bakhru J|
|CATCH WORDS:||business expenditure, deduction, Partnership|
|DATE:||August 11, 2015 (Date of pronouncement)|
|DATE:||August 21, 2015 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 40(b)(v): Provision in partnership deed for payment of salary at percentage share of profits multiplied by “allocable profits” is valid and entitles claim for deduction. S. 37(1): Contribution by law firm to IFA to create awareness of its activities is business expenditure|
The High Court had to consider two important issues:
(i) The Assessee firm was initially constituted with Smt. Manju Vaish, Smt. Kali Vohra and Mr. Vinay Vaish and was carrying on the profession of law in New Delhi and Mumbai. With effect from 1st April 2006, Smt. Manju Vaish and Smt. Kali Vohra retired from the partnership and Mr. Ajay Vohra and Mr. Bomi F. Daruwala joined the partnership. A fresh retirement-cum-partnership deed was executed on 22nd June 2008 and made effective from 1st April 2006. 4. Clause 6(a) of the said deed provided that each Partner shall be entitled to an annual salary equivalent to his percentage share of profits multiplied by “Allocable Profits”. It was stated that “Allocable Profits shall be calculated as per the provisions of Section 40(b)(v)(1) of the Income-tax Act, 1961. The monthly salary of a Partner shall be equivalent to annual salary divided by 12. Such salary shall be deemed to accrue from day to day and may be drawn out in arrears and the salary so paid shall be treated as working expenses of the partnership before the profits thereof are ascertained.” Subsequently on 1st August 2009 a supplementary deed of partnership was executed between Mr. Ajay Vohra, Mr. Vinay Vaish and Mr. Bomi F. Daruwala whereby Clause 6 was substituted as follows: “AV, VV and BFD shall be paid with effect from 1st April, 2009 a monthly salary of Rs.26,50,000, Rs.10,00,000 and Rs.13,50,000 respectively. Such salary shall be deemed to accrue from day to day and may be drawn out in arrears and the salary so paid shall be treated as working expenses of the partnership before the profits thereof are ascertained.” The AO held that since the partnership deed “neither specified the amount of salary to be paid to each of the working partners nor has laid down a specific method of computation thereof” and has only mentioned “allocable profit” which has not been defined in the partnership deed, Section 40(b)(v) of the Act would not apply and the remuneration to the partners, not being in terms of Section 40(b)(v) of the Act, was disallowed. This was upheld by the CIT (A) but reversed by the ITAT. The ITAT came to the conclusion that the term “allocable profit” should be understood by applying the common meaning which would be “profits available for allocation”. Explanation 3 to Section 40(b)(v) of the Act defines the term “book profit” as the “net profit before remuneration”. The ITAT, therefore, concluded that “a plain reading of Clause 6(a) leads us to a conclusion that the term ‘allocable profits’ was used to mean ‘book profits’ as used in Section 40(b)(v) of the Act or otherwise the reference to the section in the Clause has no meaning. When the partners have understood and meant that the word “allocable profits” to mean surplus/book profits, prior to calculation of partners’ remuneration, and when such an understanding is manifest in its actions, we do not see any reason why the Revenue authorities should not understand this term in the same sense.”
(ii) The assessee agreed to contribute Rs. 50 lakhs to the Indian branch of the International Fiscal Association (IFA) on progressive basis towards the cost of constructing one of its meeting halls on the understanding that the hall would be named after the Assessee firm. The AO held the payment of Rs. 19 lakhs made by the Assessee as aforementioned was not for business purposes. The CIT (A) upheld the order of the AO. The ITAT accepted the explanation of the Assessee that the IFA was a professional body and a non-profit organisation engaged in the study of international tax laws and policies. It, inter alia, undertakes research, holds conferences and publishes materials for the use of its members. Mr. Ajay Vohra, one of the partners of the Assessee firm, was also a member of the executive body of the IFA. In the facts and circumstances, the contribution made by the Assessee to the IFA was held to be for inter alia creating greater awareness of the Assessee firm’s activities and therefore expenditure incurred for the purposes of the profession of the Assessee. It was accordingly held to be allowable as a deduction under Section 37(1) of the Act. Further, since the Indian branch of IFA was a non-profit organisation registered under Section 12 AA of the Act, its income was not taxable and the question of deducting tax at source from the payment made to it in terms of Section 40 (a) (ia) did not arise.
On appeal by the department to the High Court HELD dismissing the appeal:
(1) Clause 6(a) of the partnership deed dated 20th June 2008 clearly indicates the methodology and the manner of computing the remuneration of partners. The remuneration of the partners has been computed in terms thereof. Under Section 28(v) of the Act, any salary or remuneration by whatever name called received by partners of a firm would be chargeable to tax under the head profits and gains of business or profession. The proviso to Section 28 (v) states that where such salary has been allowed to be deducted under Section 40(b)(v), the income shall be adjusted to the extent of the amount not so allowed to be deducted. Further Section 155 (1A) of the Act states that where in respect of a completed assessment of a partner in a firm, it is found on the assessment or reassessment of the firm that any remuneration to any partner is not deductible under Section 40(b), the AO may amend the order of the assessment of the partner with a view to adjusting the income of the partner to the extent of the amount not so deductible.
(2) The decision of the ITAT that the contribution made by the Assessee to the Indian branch of the IFA, in the manner and in the circumstances noted hereinbefore, would create greater awareness of the Assessee firm and therefore for its business purposes was a possible view to take. No substantial question of law arises as regards this issue as well.