PCIT found that the remuneration to the working partners of the Assessee Partnership firm was neither quantified nor quantifiable as per the Partnership deed. He relied on the CBDT circular no. 739 dated 25.03.1996 and observed that no deduction u/s 40(b)(v) will be admissible. He therefore invoked s. 263 holding that the assessment order passed is erroneous as well as prejudicial to the interest of revenue.

The Tribunal observed that clause 5 of the partnership deed proves that remuneration paid by the assessee firm to its working partners is as per the provisions contained u/s.40(b)(v) of the Act, out of the total income tax assessment of the firm in the relevant assessment year, out of the total income of remuneration so calculated to the partners shall be in equal proportions. Following judicial precedents and considering that revenue has not disputed the above facts, it held that the assessment order is not erroneous.

The Tribunal also held that remuneration paid to individual partners has been taxed at 30%, the same rate to which income of the assessee firm was to be taxed, the assessment order is therefore, not prejudicial to the interest of the Revenue. Order u/s 263 is not sustainable and appeal of the assessee is allowed. (AY.  2015-16)