Clerical Error in Partnership Deed Not a Ground to Disallow Partner’s Remuneration: ITAT Sets Aside ₹31.30 Lakh Disallowance [Read Order]

The Income Tax Appellate Tribunal (ITAT) Mumbai Bench held that a mere clerical error or an inadvertent mistake in incorporating the updated limits of Section 40(b) in the partnership deed cannot be used to deny the legitimate partner’s remuneration.

The Tribunal also held that as long as the payment is authorized by the deed and within the limits prescribed by the Income Tax Act it is fully allowable.

​The assessee M/s Bharat Paper Mart is a partnership firm carrying out the business of dealing in papers and boards. The assessee had claimed a deduction of ₹99,76,470 as remuneration paid to a working partner for the Assessment Year 2013-14.

However,the Assessing Officer (AO) had disallowed the difference between the two figures as while calculating the remuneration the assessee had applied the current statutory limits (90% on the first ₹3,00,000 of book profit) and while the partnership deed had an inadvertent mistake in incorporating outdated slabs (90% on the first ₹75,000).

The assessee stated that the partnership deed clearly provided that Book Profit shall mean profits as defined in Section 40(b) or any statutory modification or re-enactment. It was further contended that the inclusion of lower limits was due to a manual oversight and the deed mainly authorized the payment as opposed to quantifying it.

Additionally, it was argued that the assessee being the partner has already offered the entire remuneration to tax in his individual return and disallowing it again amounts to double taxation.

The Tribunal consisting of Amit Shukla [Judicial Member] and Girish Agrawal [Accountant Member] allowed the appeal. While allowing the appeal the Bench of the Tribunal noted that the expression used in Section 40(b) is authorized as opposed to quantify.

Thus,the ITAT held that since the deed had authorized the remuneration and related it to the applicable statutory provisions the error in recording incorrect limits was not fatal to the claim. Since the payment made was within the limits prescribed under the Act the addition made by the AO was deleted.

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