Deepak Gupta, J. (Oral):
This appeal has been admitted on the following two substantial questions of law:
1. Whether the Ld. ITAT erred in not following the principle of precedent and its earlier decision dated 27.5.2004 on the same matter in issue given in ITA No. 562.Chandi/2002, titled as Mela Ram Mittar Bhushan v. ITO, Kullu?
2. Whether the Ld. ITAT was right in holding that the remuneration is payable to the partners in equal proportion in which the profit and losses are to be distributed to them, even though there is no provision in the partnership deed and only upper limit of remuneration payable has been fixed according to Section 40(b)(v) of the Income Tax Act, 1961?
We would first take up the second substantial question of law. The question which arises for consideration is whether as per the partnership deed in question, any remuneration was fixed for payment to the partners of the Firm. Relevant portion of Section 40(b)(v)(1) of the Income Tax Act, 1961 (hereinafter referred to as “the Act” reads as follows:
“40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”, (a) xxxxxx xxxxxx
xxxxxx
(b) in the case of any firm assessable as such,
(i) xxxxx xxxxxx xxxxxxx
(ii) xxxxx xxxxxx xxxxxxx
(iii) xxxxx xxxxxx xxxxxxx
(iv) xxxxx xxxxxx xxxxxxx
(v) any payment of remuneration to any partner who is a working partner, which is authorized 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:-
(1) in case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section -
(a) on the first Rs. 1,00,000 of Rs. 50,000 or at the the book-profit or in case of rate of 90 per cent a loss of the book-profit, whichever is more;
(b) on the next Rs. 1,00,000 of at the rate of 60 the book-profit per cent;
(c) on the balance of the book-at the rate of 40 Profit per cent;
This provision of law was the subject matter of a number of conflicting decisions and, therefore, Central Board of Direct Taxes (CBDT) issued circular No. 739, dated 25.3.1996, wherein the Board clarified in para 4 of the circular as follows:
“4. It is clarified that for the assessment years subsequent to the assessment year 1996-97, no deduction under Section 40(b)(v) will be admissible unless the partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration.”
It would be pertinent to mention that for the earlier assessment years 1993-94 to 1996-97, the Board took a lenient view of the matter and decided that keeping in view the ambiguity in the language of the Section even if the remuneration was not fixed in the partnership deed, the firm shall be entitled to deduct the amount payable under Section 40(b)(v). However, for the assessment year 1996-97 and subsequent thereto, it was clearly laid down that unless the partnership deed specified the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration, the benefit of Section 40(b)(v) would not be available to the assessee Firm.
It is apparent that prior to the assessment year 1996-97, the partnership deed of the assessee Firm did not contain any clause in respect of the payment of remuneration. The partners of the assessee Firm executed a fresh partnership deed in March, 1997 and incorporated therein conditions for fixing remuneration. Clauses 5 and 7 of the said partnership deed are relevant, which read as follows:-
“5. That individual share in the profits or losses of the partnership business shall be equal and the total yearly remuneration payable to the partners shall be calculated as under:-
The yearly remuneration payable to the partners shall be calculated the percentage of the book profits for each accounting year prescribed in the following manner:-
In respect of book Upto profits up to Rs. 75000 Rs. 50000 or 90% of the book profits whichever is more.
In respect of the next Rs. 75000 60%
In respect of the balance book profits 40%
For the purpose of above calculations of the book profits, the same shall be computed as defined in Section 40(b) of the Income-tax Act, 1961 or any other the provision of law as may be applicable for the assessment of partnership firm for the relevant accounting year.
The partners shall not be paid any remuneration in the accounting year in which the partnership firm has suffered losses on the basis of the book profits as computed under the provisions of Income-tax Act, 1961 referred to above.
7. The yearly remuneration payable to the partner shall be credited to their respective account at the close of the accounting year. However, nothing contained in this deed shall preclude any of the partners from withdrawing any amount from the partnership against any amount standing to capital and/or current loan account or his share of profit for the relevant accounting year in such a manner as may be mutually agreed upon.”
The only question which arises for consideration is whether the aforesaid Clauses 5 and 7 lay down the method for fixing the remuneration of individual partners in terms of Clause 4 of the CBDT circular No. 739 dated 25.3.1996 A bare perusal of the partnership deed clearly shows that in case the book profits are upto Rs. 75,000/-, then the partners would be entitled to remuneration upto Rs. 50,000/- or 90% of the book profits, whichever is more. In respect of the next Rs. 75,000/-, it is 60% and for the balance book profits, it is 40%. Thereafter, it is further clarified that the book profits shall be computed as defined in Section 40(b) of the Income-tax Act, 1961 or any other provision of law as may be applicable for the assessment of the partnership firm. It has also been clarified that in case there is any loss in a particular year, the partners shall not be entitled to any remuneration whereas the Section in question allows the remuneration even in case of losses. Clause 7 lays down that the remuneration payable to the partners shall be credited to their respective accounts at the close of the accounting year. The opening portion of Clause 5 lays down that the partners shall be entitled to equal remuneration. Therefore, it is apparent that in case of two partners, each of them would get 50% total remuneration payable under the partnership deed. It is contended on behalf of the revenue that in respect of the profits upto Rs. 75,000/-, even in the partnership deed, the word “upto Rs. 50,000/- or 90% of the book profits” have been used which shows that the partnership deed does not exactly determine the remuneration of the partners.
We are not in agreement with this submission. The CBDT circular referred to above lays down two conditions. Either the amount of remuneration payable should be specified or the manner of quantifying the remuneration should be specified. In the present case, the manner of fixing the remuneration of the partners has been specified. In a given year, the partners may decide to invest certain amounts of the profits into other venture and receive less remuneration than that which is permissible under the partnership deed, but there is nothing which debars them from claiming the maximum amount of remuneration payable in terms of the partnership deed. The method of remuneration having been laid down, the assessee firm is entitled to deduct the remuneration paid to the partners under Section 40(b)(v) of the Income Tax Act. Question No. 2 is accordingly answered in favour of the assessee and against the revenue.
Ms. Kuthiala, learned counsel for the appellant, has drawn our attention to Annexure P-4, which is an order passed by the Income Tax Appellate Tribunal, Chandigarh Bench, dated 27.5.2004, wherein the benefit of Section 40(b)(v) has not been given to the Firm. It is contended by her that this order has been rendered by the same Members of the ITAT and they should have followed their earlier order. There can be no quarrel with this preposition. In fact judicial discipline requires that once a decision is taken then the judicial or the quasi judicial authority should follow the said decision unless reasons are given in writing to take a different view. Every judicial authority has the right to correct itself but it is in the fitness of things that it should make a reference to its earlier orders and give reasons for the change in views.
However, in the present case, we find that the facts of the present case were very different. In the earlier case of Mela Ram Mitter Bhushan decided by the ITAT, it had been proved by the revenue that though as per the partnership deed, each partner was entitled to receive remuneration of Rs. 42,640/-, but as per the books of account, the assessee firm had paid only a sum of Rs. 18,516.50P. each to the partners. When the partnership deed provides the method of remuneration but lesser remuneration is paid, obviously, the assessee cannot take benefit of the remuneration which could have been paid but has not been actually paid.
It is further contended that in para 6 of the order in Mela Ram Mitter's case, the Tribunal itself has distinguished the earlier order delivered in the case of present assessee. That order is in reference to the earlier assessment years in which years the partnership deed had not been amended. We are not clear as to what was the method of remuneration provided in the earlier partnership deed. Therefore, the two cases cannot be said to be identical. Question No. 1 is answered by holding that the decision given by the Tribunal in Mela Ram Mitter's case is not applicable to the facts of the present case.
The appeal is accordingly rejected. No costs.