Can remuneration paid to a partner by a partnership firm be disallowed by A.O (Assessing officer) on the ground that it is excessive?
A partnership firm can pay out compensation to the partner in the form of Remuneration or salary, Share in profit and interest on capital. Considering the remuneration aspect, Income Tax Act, 1961 provides in Section 40(b)(v) that:
any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder
(a) on the first Rs. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more; (b) on the balance of the book-profit at the rate of 60 per cent
Now the question arises that whether the Assessing officer can disallow the remuneration paid to the partner on the ground that such remuneration is excessive.
A similar question was dealt with by the Hon’ble High Court of Allahabad in the case of Commissioner of Income-tax v. Great City Manufacturing Co wherein it was held that :
The assessing officer is only required to see as to whether the partners are the working partners mentioned in the partnership deed, the terms and conditions of the partnership deed provide for payment of remuneration to the working partners and whether the remuneration provided is within the limits prescribed under Section 40(b)(v) or not. If all the aforementioned conditions are fulfilled then he cannot disallow any part of the remuneration on the ground that it is excessive.
Therefore, considering the discussion, if remuneration paid is well within the limits of Section 40(b)(v) then there shall be no disallowance considering it excessive.
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