- (1.) VIMAL Gandhi, V.P. These four appeals by the revenue for assessment Years 1994-95, 1995-96, 1996-97 and 1997-98 are directed against the orders of the Commissioner (Appeals) deleting disallowance of salary paid to the partners under section 40(b) of the Income Tax Act.
(2.) The returns for assessment years 1994-95 and 1995-96 were processed under section 143(1)(a) of the Act and deduction as claimed was allowed. However, subsequently through an order under section 154/155 of the Act, the assessing officer withdrew the salary paid to the partners as in his view, "the terms of the partnership deed should contain specific mention of the working partners". In other words, according to the assessing officer, this statutory requirement that partners to whom salary was paid should be described in the instrument of partnership as "working partners" was not fulfilled. Otherwise salary could not be paid to them and allowed as a deduction in view of section 40(b) of the Act. In the two subsequent assessment years 1996-97 and 1997-98, the salary paid to the partners was disallowed in regular assessments. In reply to query raised by the assessing officer the assessee did contend that salary was paid only to the partners who had worked for the partnership and were working partners. The assessing officer disallowed the salary in assessment year 1996-97 with the following o servations: "The reply of the assessee is not acceptable on the ground that as per the provisions of section 40(b)(i) any payment of salary bonus, commission or remuneration to any partner who is not a working partner is not to be allowed as deduction in computing the income chargeable under the head business or profession. Working partners are required to be mentioned in the partnership deed and all the partners of the firm should not become working partners suo motu as per the will/mutual understanding of the partners. If it would be the case then there was no need to make a partnership deed." A similar order was passed in assessment year 1997-98.
(3.) THE assessee impugned the above disallowance in appeal before the Commissioner (Appeals) who after considering the submissions of the assessee, terms of instrument of partnership and the amendment made in section 40(b) with effect from 1-4-1993, held that similar disallowance was made in assessment year 1993-94 but on appeal, the disallowance was deleted. He further held that deduction of salary was rightly claimed as per clause (5) of the instrument of partnership which in fact reproduced the provisions of section 40(b)(v) of the Income Tax Act. THE learned Commissioner (Appeals) further observed that the case of the assessee was covered by the CBDT Circular No. 739, dated 25-3-1996, and, therefore, claim should be allowed. Accordingly, the appeals of the assessee were allowed.;