ITAT rules on remuneration under the IT Act
ITAT rules on remuneration under the IT Act
The assessee had contended that the amount was the salary paid to the working partners
The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) has held that the remuneration paid to a partner out of the share of profit cannot be treated as 'salary' for consideration as 'expenditure' under the Income Tax Act, 1961.
It maintained that the remuneration, even if paid in cash that exceeds the threshold limit prescribed under the IT Act is not applicable under the provision.
The assessee is a partnership firm engaged in the business of canvas tarpaulins wholesale.
The assessee e-filed its Income Tax Return (ITR) in September 2015 declaring a total income of Rs.9,40,320. Upon verification of the ledger account during the assessment proceedings, the assessing officer (AO) found that the assessee had paid a remuneration of Rs.30,000 to one of its working partners in cash.
Accordingly, the AO asked the assessee why the payment could not be disallowed under the IT Act.
The assessee contended that the amount was the remuneration paid to the working partners and it was not covered under the provisions of the IT Act.
The tribunal bench comprising Judicial Member Sandeep Singh Karhail and Accountant Member Gagan Goyal held that the partnership firm was not a juristic person and the firm and its partners did not have separate identities. It was merely a collection of separate persons.
Citing the judgment of the Supreme Court in an earlier case, the bench held, "The remuneration paid to the partner is the share of profits of the partnership firm. It cannot be treated in the nature of salary paid to the employee."
ITAT further stated, "Being a share of profit, remuneration paid to a partner will not fall within the category of the 'expenditure' as considered normally. So, if paid in cash above the threshold under the IT Act, it would be allowed as deduction while computing the income under the head 'Profits and Gains' of a business or a profession."
