COMMISSIONER OF INCOME TAX Vs. KAJAH COMPANY

JUDGEMENT

(1.) THE Income -tax Appellate Tribunal, Cochin Bench, has referred the following question of law under Section 256(1) of the Income -tax Act, 1961, for short 'the Act', for the decision of this court, at the instance of the Revenue :

(2.) THE brief facts necessary for adjudication of this question are as follows. The respondent -assessee, M/s. Kajah Company, is a partnership firm carrying on the business in the manufacture and sale of beedies. In the assessment of firm for the year 1993 -94, the Assessing Officer disallowed a sum of Rs. 2,23,216 out of the remuneration payable to the partners under Section 40(b) of the Act. The assessee had claimed deduction of a total sum of Rs. 5,24,140 as remuneration paid to the working partners. As per Clause 13 of the partnership deed dated April 27,1982, two of the working partners were to be paid a remuneration to the extent of 2.5 per cent, of the net profits of the business. According to the Assessing Officer, the net profits of the business referred to in Clause 13 of the partnership deed has to be worked out after deducting the income -tax liability also. In appeal filed by the assessee, the Commissioner of Income -tax (Appeals), Cochin, noted that Clause (ii) of Section 40(b) will apply and since the partnership deed of the appellant -firm clearly stipulates that the working partners are to be paid remuneration of 2.5 per cent, of the net profits of the business, and that for this purpose, net profit meant profit after deducting all expenses. It was further observed that normally in any profit and loss account, the income -tax liability is debited as expenditure and the net profit is shown only after claiming the liability. The Commissioner of Income -tax (Appeals) accordingly held that the assessing authority is justified in allowing remuneration on the net profit after deducting the income -tax liability. He accordingly confirmed the order of the Assessing Officer. In further appeal by the assessee, the Tribunal allowed the claim of the assessee by holding that the remuneration payable to the partners in terms of Clause 13 is to be worked out on the basis of the net profit without deducting the income -tax liability. It is against this order the question of law set out in para. 1 is referred.

(3.) BY virtue of the provisions of Clause (ii) of Section 40(b), the remuneration paid to any partner who is a working partner should be authorised by or in accordance with the terms of the partnership deed. Clause 13 which is already extracted above is the relevant portion with reference to which remuneration payable to the working partner were worked out by the assessee. Clause 13 clearly provides for remuneration to the partner for the general conduct and management of the day -to -day business activities of the firm, remuneration of 2.5 per cent, of the net profits of the business to each of the partners. It also provides that such remuneration shall be treated as an expenditure of the firm. It is further stated that net profits for the purpose of working out the aforesaid remuneration meant the net profits worked out after deducting all expenses including interest on loans as well as capital, but without deducting the remuneration to the partners. According to the Assessing Officer and the first appellate authority, since remuneration paid to the partners alone is excluded from arriving at the net profits, income -tax liability is liable to be deducted for arriving at the net profit referred to in Clause 13. The first appellate authority has also observed that normally in any profit and loss account, the income -tax liability is debited as expenditure and the net profit is shown only after claiming the liability. The Tribunal according to us has rightly understood Clause 13 of the partnership deed and had clearly stated as follows: