Remuneration Paid to Partner Exceeding the Limit specified in Deed can’t be disallowed If the Deed permits Salary Hike: ITAT [Read Order]

Visakhapatnam bench of Income Tax Appellate Tribunal (ITAT) recently held that remuneration paid to partner cannot be disallowed since there is a clause existing in the partnership deed which specified the exceeding limit.

Assesse in the instant case is a granite industries duly filed its return of income for the relevant assessment year. During the course of assessment proceedings the Assessing Officer (AO) made an addition of Rs.4,94,000 towards partner’s remuneration. He was of the view that remuneration paid to the partner was exceeded the limit specified in the partnership deed. Further he found that the partnership deed permits remuneration to the extent of Rs.36,000 only and accordingly he made an addition of the said amount.

Assessee contended that the partnership deed permits the payment of remuneration of Rs.36,000 which is subject to increase or decrease by mutual agreement from time to time and subject to the limitation of section 40(b) of the Income Tax Act 1961 hence the same required to be allowed.

On appeal the CIT (A) also confirmed the addition made by the AO since there was no separate document in writing for increase in remuneration.

After hearing the rival submissions the tribunal bench comprising of Judicial Member V.Durga Rao and Accountant Member D.S.Sunder Singh observed that while examining the partnership deed of the assessee company with regard to payment of remuneration it has found that there was a clause for increase/decrease of remuneration as per mutual consent before the end of the financial year.

“In the present case there were only two partners and since there are only two partners in the partnership firm, and the remuneration paid is permissible as per partnership deed and the books of accounts are being verified and certified by both the partners hence it can be concluded that the payment of remuneration is in accordance with the partnership deed and the managing partner has admitted the income in his hands and also paid taxes,” the bench said.