Remuneration Paid to Partner Not Present Daily but Assisting in Accounts Maintenance is Allowable | ITAT

Case Details: Rameshchandra Balachand vs. Joint Commissioner of Income-tax (OSD) - [2024] 169 taxmann.com 735 (Mumbai-Trib.)

Judiciary and Counsel Details

• Saktijit Dey, Vice President & Ms Padmavathy S, Accountant Member
• Bhupendra Shah, for the Appellant.
• Smt. Sanyogita Nagpal, for the Respondent.

Facts of the Case

The assessee was a resident partnership firm. A search and seizure operation under section 132 was carried out in the assessee’s case. Following such search and seizure operations, proceedings under section 153A were initiated for various assessment years. For the relevant assessment year, regular proceedings under section 143(3) were undertaken.

In the course of the assessment proceeding, the Assessing Officer (AO), while examining the details, noticed that two of the partners of the assessee firm were paid remuneration. It was noted that one partner helps in account maintenance of the firm, and the other partner helps in business. Thus, the AO disallowed remuneration paid to the partner helping in accounts maintenance, contending that such expenditure was not for business in section 37.

On appeal, the CIT(A) sustained the disallowance made by the AO. Aggrieved by the order, an appeal was filed to the Mumbai Tribunal.

ITAT Held

The Tribunal held that the only disallowance made in all these assessment years was ‘remuneration paid to the partner engaged in account maintenance’. In the case of AO, the remuneration paid did not qualify as a ‘business expense’ under section 37. Though, the AO referred to a statement recorded under section 132(4), however, that cannot be considered as an incriminating material for enabling the AO to vest with himself the jurisdiction to make the disputed disallowances in assessments completed under section 153A.

Even otherwise, the assessee also had a strong case on merits. As seen from the observations of the AO, he initially believed that remuneration was not allowable in terms of section 40(b). However, ultimately, he made the disallowance under section 37, which, in other words, means that the expenditure incurred was not for business.

It was relevant to observe, in the statement recorded under section 132(4), in response to a specific query raised, one of the partners of the assessee firm has stated explicitly that such partner helped in accounts maintenance of the firm and for that purpose, she came to the office once or twice a week. Therefore, the fact that the partner went to the office and helped maintain accounts was proved on record.

Merely because she did not come to the office daily, it cannot be grounds to hold that she was only a sleeping partner and, hence, not entitled to remuneration. In any case, the remuneration paid to the partner was taxable at the hands of the partner under section 28(v). Undisputedly, the remuneration received was offered to tax at the hands of the concerned partner. That being the factual position emerging on record, expenditure towards remuneration paid to the partner was certainly allowable at the hands of the assessee firm. Therefore, the disallowances in all the assessment years under dispute were deleted.

List of Cases Reviewed

• Pr. CIT, Central v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399 (SC) [Para 11] followed

List of Cases Referred to

• Pr. CIT v. Abhisar Buildwell (P.) Ltd. [2023] 149 taxmann.com 399/293 Taxman 141/454 ITR 212 (SC) (para 9).