In DCIT v. M/s Eurotex Chemicals, the division bench of the Ahmedabad ITAT held that salary paid to a Partner in terms with the provisions of section 40(b) of the Income Tax Act and the Partnership Deed cannot be disallowed by the Assessing Officer by invoking section 40A(2) of the Income Tax Act.
The assessment against the assessee-Firm was completed by the AO by disallowing the salary paid to the partner on ground that one of them is a simple graduate and she might not be having day-to-day knowledge of business. The first appellate authority had reversed the order by finding that one of the female partner was doing chemical business since 1999 and she had been filing income-tax return. Other lady partner has also B.Com. graduate.
Aligning with the order of the first appellate authority, the ITAT noted that salary to the partner is being regulated by the provisions of section 40(b) of the Income Tax Act. “It is to be paid in accordance with the provision stipulated in the deed which should be in commensurate with the provisions of section 40(b) of the Income Tax Act. On such salary payment, provisions of section 40A(2) cannot be invoked.”
Read the full text of the Order below.
