joginder pall, a.m. :

1. These are cross appeals one of the Revenue and another of the assessee filed against the order of CIT(A), Jalandhar, for the asst. yr. 2002-03. Since both the appeals arise from the same order of CIT(A) and are for the same assessment year, these were heard together and are being disposed of by this consolidated order for the sake of convenience.

2. First, I take up assessee’s appeal. The only grievance of the assessee is that CIT(A) was not justified in sustaining the disallowance of salary of Rs. 2,40,000 paid to partners. The facts of the case are that Assessing Officer referred to cl. 4 of the partnership deed dt. 4th April, 2001 and observed that the same did not specify the names of working partners and also had not specified salary payable to each working partner. Further, the partnership deed mentioned that working partners shall be entitled to remuneration of Rs. 1,20,000 per annum but salary at the rate of Rs. 60,000 per annum to each of four partners was paid. The Assessing Officer, therefore, held that the salary paid to partners was not in accordance with the terms of partnership deed. Accordingly, the Assessing Officer made disallowed of salary of Rs. 2,40,000 under s. 40(b) of the Act.

3. Aggrieved, the assessee filed an appeal before the CIT(A). It was argued before CIT(A) that cl. 4 of the partnership deed clearly indicated that all working partners shall be entitled to salary at the rate of Rs. 1,20,000 per annum and it was also mentioned that all were working partners, salary at the rate of Rs. 60,000 each was paid to 4 partners and one partner was not paid salary because she was also working partner in another firm. Relying on the decision of Tribunal , Chandigarh Bench, in the case of ITO vs. Tulsi Ram Tej Chand (2004) 91 TTJ (Chd) 452, it was argued that claim of the firm for deduction of salary to partners could not be disallowed simply because the partnership deed did not mention the names of working partners if, otherwise they were working partners and remuneration paid was authorized by the partnership deed. However, these submissions did not find favour with the CIT(A), who upheld the disallowance by recording following findings :

"I have carefully considered the submissions from both the sides in the light of material available on record. It is an undisputed fact that the relevant salary clause in the partnership deed refer to the working partners without mentioning the names of those partners and as per the decision of Hon’ble Tribunal , Chandigarh Bench (supra) even though no partner was described in the instrument of partnership as working partner yet in the absence of any dispute that the partner to whom salary was paid in that case in fact worked for partnership the partners become working partners even though not mentioned in the deed as rendering of services by partners have not been denied. In the case under consideration the amount to be paid as salary to the partners was specified with the rider that the same will be subject to maximum amount admissible under the Income-tax Act. Therefore, on the limited issue of non-specifying the partners as working partners as objected to by the Assessing Officer, I find merits, in the submissions of the appellant. But it is seen from the order that the appellant firm consists of five partners and salary was paid only to the four partners. Thus, the salary in the present case, which was paid to the partners, was not in accordance with the relevant clause of the partnership deed. The assessment year involved is asst. yr. 2002-03 and it has specifically been covered by Board’s Circular No.739 dt. 25th March, 1996 that subsequent to asst. yr. 1996-97 no deduction under s. 40(b)( v) will be admissible unless partnership deed either specifies the amount of remuneration payable to each individual working partner or lays down the manner of quantifying such remuneration. As facts stands though the amount payable to working partners was specified yet the overall salary paid was not in accordance with the partnership deed as it was paid to four partners as against five partners of the firm. Thus, I find merits in the conclusion of the Assessing Officer that as per Board’s circular the deduction is not admissible as the relevant assessment year is subsequent to the asst. yr. 1996-97 when in the prior years to the said assessment year the liberal approach was directed to be adopted. Therefore, the addition of Rs. 2,40,000 made by the Assessing Officer is confirmed."

Assessee is aggrieved with the order of CIT(A). Hence, this appeal before me.

4. The Learned Authorised Reprsentative reiterated the submissions made before the authorities below. He drew my attention to a copy of the partnership deed dt. 4th April, 2001 placed at pages 9-12 of the paper book and stated that as per cl. 4 of the partnership deed it was mentioned that all were working partners and each shall be entitled to remuneration at the rate of Rs. 1,20,000 per annum or at such rate as the partners may at the end of each financial year mutually settle subject to the maximum amount admissible under the Act. He submitted that remuneration at the rate of Rs. 60,000 each, i.e., the maximum amount admissible under s. 40(b)(v) had been paid to 4 of the five partners. The fifth partner was not paid any salary because she was working in another firm and had drawn salary from there. The very fact that one of the partners had not drawn the salary does not mean that remuneration had not been authorized by the partnership deed. Relying on the decision of Tribunal , Chandigarh Bench in the case of Tulsi Ram Tej Chand (supra), the Learned Authorised Representative submitted that the non-mentioning the names of working partners in the partnership deed does not disentitle the firm for deduction of salary paid to partners.

5. The Learned Departmental Representative, on the other hand, relied on the orders of authorities below.

6. I have heard both the parties and given my thoughtful consideration to the rival contentions, gone through the material, evidence placed on record and perused the orders of the authorities below. As per provisions of s. 40(b) of the Act substituted by the Finance Act, 1992 with effect from 1st April, 1993, deduction for payment of remuneration paid to working partners cannot be allowed which is not authorized by, or is not in accordance with, the terms of partnership deed. As per clause (v) of sub-section (b) of s. 40, payment of remuneration to partners is limited to the amount specified therein. Now the issue that requires to be decided by this Bench is whether, remuneration paid to 4 of the five partners was authorized by and was in accordance with the terms of partnership deed. In order to find answer to this issue, I consider it appropriate to reproduce herein the relevant cl. 4 of the partnership deed, which is as under:

"4. All the partners shall diligently attend to the business of partnership and carry on the same to the greatest common advantage of all the partners. The working partners shall be entitled to annual remuneration at the rate of Rs. 1,20,000 per annum or at such other rate or rates, as the partners may, at the end of each financial year, mutually settle, subject to the maximum amount admissible under the IT Act, 1961."

Bare reading of cl. 4 reveals that all the partners were required to work and attend to the business of the firm and, therefore, all were working partners. Each of them was entitled to remuneration at the rate of Rs. 1,20,000 per annum. The partnership deed further provides that rates of remuneration may at the end of financial year be modified as mutually agreed by the partners subject to maximum amount admissible under the Income-tax Act. This means that any change in the rate of remuneration fixed at Rs. 1,20,000 per annum would be subject to maximum admissible under the Act.

6.1 Now in this case, it is not in dispute that remuneration paid to 4 working partners were maximum amount admissible under the Act. Since the partnership deed authorized payment of remuneration to working partners at Rs. 1,20,000 per annum and also modification subject to a maximum amount admissible under the Income-tax Act, it could be said that the payment of remuneration to working partners was in accordance with the terms and as authorized by the partnership deed. Reliance in this regard is placed in the decision of Tribunal , Chandigarh Bench in the case of Gopal Dass Kulwant Rai vs. ITO (2004) 82 TTJ (Chd) 951 : (2004) 88 ITD 445 (Chd). The facts of that case were that partnership deed provided remuneration at the rate of Rs. 20,000 per annum to each working partners subject to the overall limit as laid down in s. 40(b) of the Income-tax Act. The assessee paid remuneration to working partners at the rate of Rs. 17,000 each, i.e., the maximum admissible under clause (v) of sub-section (b) of s. 40 of the Act. The Assessing Officer disallowed the claim on the ground that the remuneration to partners had not been paid in accordance with terms of partnership deed. On these facts, it was held by the Tribunal that since remuneration claimed by an assessee was less than the maximum statutory limit fixed in the Act, the assessee had not violated statutory provisions and was entitled to deduction of remuneration paid to partners. The ratio of this decision would also apply to the facts of the present case because as per partnership deed, working partners were entitled to remuneration at the rate of Rs. 1,20,000 per annum yet, the same had been paid at lower amount of Rs. 60,000, i.e., maximum admissible under the provisions of the Act. Therefore, in this case also, the assessee would be entitled to claim deduction for the same.

6.2 The next objection of the Revenue for making disallowance was that the names of the working partners were not mentioned in the partnership deed. This is also not correct. In fact, as per the relevant cl. 4 of partnership deed extracted in the preceding Paragraph, all were working partners and were entitled to remuneration at the rate of Rs. 1,20,000 per annum. Even otherwise, it is not the case of the Revenue that the person to whom remuneration had been paid were not the working partners. No such finding has been recorded in the orders of the authorities below. In the case of Tulsi Ram Tej Chand’s (supra), it was held that there was no requirement in s. 40(b)(v ) to describe a partner as working partner in the partnership deed who is entitled to salary as per instrument of partnership and was otherwise working partner and had worked for the firm. Since the Revenue has not disputed that the remunerations were paid to working partners, the assessee would be entitled to deduction of remuneration even though specific names of the working partners were not mentioned in the partnership deed. On the contrary, the partnership deed itself indicated in the present case that all were working partners. Thus, this objection of the Revenue is also without any merit.

6.3 The other objection of the Revenue is that in cl. 4 of the partnership deed, it was mentioned that the partners could modify the rates of remuneration before the end of financial year as mutually agreed and this added an element of uncertainty in quantification of the remunerations payable to the partners. I do not find any force in such submission. The implication of such mention in the cl. 4 of the partnership deed is that the partners have been authorized to modify the rates of remuneration before the end of the financial year subject to restriction that the same shall not exceed maximum amount admissible under s. 40(b)( v) of the Act. Even without making such stipulation in the partnership deed, the partners are free to modify the terms of the partnership deed if mutually agreed by making a supplementary deed. There is no restriction either in the Income-tax Act or in the Partnership Act for making a supplementary deed. Moreover, the modification in the remuneration of Rs. 1,20,000 per annum mentioned to each working partner in the partnership deed is only to the extent as admissible under the Income-tax Act, which is also provided in the partnership deed itself. The requirement of executing supplementary deed would have arisen only had the remuneration been paid more than the maximum admissible as deduction under s. 40(b)( v). Therefore, this submission is also rejected.

6.4 The next aspect that requires to be considered in this case is that although the partnership deed mentions all partners of the firm as working partners, yet remunerations were paid to only 4 out of the five working partners and, therefore, whether the payment to four partners could be considered as authorized and in accordance with the terms of the partnership deed. In my humble view, the claim of the assessee cannot be denied on this ground that since remunerations were paid to only four of the five partners, such payment could not be considered in accordance with the partnership deed. It is to be noted that s. 40(b) is to be considered only when the assessee claims deduction for the payment of salary to the partners. In case, no payment is made to one of the partners, the same would not disentitle the assessee from claiming deduction in respect of the remaining 4 working partners. For example, if partnership deed mentioned the names of 3 working partners entitled to remuneration, but remunerations are paid to 4 partners and the assessee claimed deduction in respect of remuneration paid to 4 working partners, the deduction shall not be allowed only in respect of remuneration paid to one of the four partners because the same was not authorized and was in accordance with the terms of partnership deed. However, deduction in respect of salary paid to remaining 3 partners which was authorized and was in accordance with the terms of partnership deed cannot be denied because nowhere s. 40(b) lays down that such remunerations should be paid to all the working partners mentioned in the partnership deed. If the assessee chooses not to make payment to one or two of the working partners as per their mutual agreement and does not claim deduction for the same, Revenue cannot have any objection for the same because s. 40(b) shall come into operation only when the deduction is claimed and not otherwise.

7. Thus, in the light of the detailed discussions in the preceding Paragraphs and legal position discussed, I am of the considered opinion that the CIT(A) was not justified in disallowing the claim of the assessee for deduction of remuneration amounting to Rs. 2,40,000 paid to 4 working partners. The order of the CIT(A) is set aside and the Assessing Officer is directed to allow deduction of remuneration amounting to Rs. 2,40,000. Accordingly, the grounds of appeal of the assessee are allowed.

8. Now, I take up Revenue’s appeal. The only issue raised in this appeal is that the CIT(A) was not justified in deleting the disallowance of interest of Rs. 3,83,623 representing borrowed amounts diverted to partners for non-business purpose. The facts of the case are that Assessing Officer observed that assessee had paid interest on deposits from parties and bank aggregating to Rs. 6,35,759 and claimed deduction for the same. However, he noticed that assessee had diverted borrowed funds to partners and debit balance in the capital account of the partners stood at Rs. 24,75,101. The Assessing Officer, therefore, observed that borrowed amounts had not been utilized by the assessee for its own business. Detailed analysis of the withdrawals by the partners aggregating to Rs. 63.97 lakhs during the assessment years from 1999-2000 to 2002-03 was shown in Annexure to assessment orders. Accordingly, the Assessing Officer worked out the interest on the debit balance of the partners at Rs. 3,83,623 and disallowed the same on the ground that these loans have not been utilized for the purpose of assessee’s business.

9. Being aggrieved, the assessee impugned the disallowance of interest in appeal before the CIT(A). It was submitted before the CIT(A) that debit balance in the capital account of the partners had increased due to losses suffered in the business. It was also argued that such debit balance in the capital accounts of the partners had decreased in comparison to earlier assessment years. It was also argued that no disallowance was made in the earlier assessment years despite debit balance in the capital accounts of the partners stood at higher figures. Thus, it was contended that no disallowance of interest could be made. Accepting the contentions of the assessee, the Learned CIT(A) deleted the disallowance of interest by recording following findings :

"I have considered the rival contentions and have gone through the copies of the capital account of the partners from the year ending 31st March, 1999 till the relevant assessment year. In the asst. yr. 1999-2000 debit balance in the capital account of the partners emerged because of loss incurred by the firm and subsequent to that till 31st March, 2001 only a sum of Rs. 4.62 lakhs was withdrawn in excess by the partners vis-a-vis profits whereas in the relevant year the accretion to the capital was more than the amount withdrawn by the partners. The facts of this case, as exists, gets covered by the decision of Hon’ble Tribunal Calcutta Bench in the case of Kesarlal Chandalal vs. ITO (1981) 11 TTJ (Cal) 544 wherein it was held that if withdrawals of the partners in the books of the firm for the year under consideration is less than the profits earned by the partners then no part of the borrowing of the firm can be held to have been diverted to the account of the partners. Further, no nexus was established that the interest bearing borrowed funds were withdrawn by the partners. In the absence of any finding in the earlier year on the said issue the case of the appellant also gets covered by the decision of Hon’ble Tribunal , Chandigarh Bench in the case of Malwa Cotton Spinning Mills vs. Asstt. CIT (2004) 83 TTJ (Chd)(TM) 72. Thus, as the fact stand the debit balance was not because of excessive withdrawals because of loss in asst. yr. 1999-2000 and in the asst. yr. 2001-02 even if there were excess withdrawals to the tune of Rs. 4.62 lakhs vis-a-vis profits there was no finding on the said issue when the position in the relevant assessment year got reversed. Therefore, finding merits in the submissions of the appellant which are supported by judicial pronouncements as relied upon, the addition of Rs. 3,83,623 effected by Assessing Officer is deleted."

Revenue is aggrieved with the order of CIT(A). Hence, this appeal before me.

10. The Learned Departmental Representative, Shri Achal Sharma heavily relied on the order of Assessing Officer. He submitted that during the course of assessment proceedings, the Assessing Officer has analysed the position regarding withdrawals by the partners in the capital accounts, profits/losses and the debit capital balances, which was indicated in Annexure to the assessment order. He placed a copy of the Annexure before the Bench. He submitted that submission of the assessee that debit balance had arisen due to business loss suffered by the firm was found to be factually wrong. He submitted that such loss was suffered only in the asst. yr. 1999-2000 and in all the subsequent years the assessee had earned profit. Even for the assessment year under reference, there was a profit of Rs. 5,53,780. He further submitted the capital balance of the partners being a negative; the interest relatable to debit balance of the partners was rightly disallowed by the Assessing Officer.

11. The Learned Authorised Representative Shri Y.K. Sud, on the other hand, heavily relied on the order of CIT(A) and reiterated the submissions made before the authorities below. He submitted both withdrawals and debit balance in the capital accounts of the partners were higher in the asst. yrs. 1999-2000 to 2001-02 as compared to the assessment year under reference. But no disallowance of interest was made. For the assessment year under reference, the assessee had profit of Rs. 5,53,780 which was credited to capital accounts of the partners and in addition, the partners had contributed sum of Rs. 10,40,960 to their capital. As against the same, the withdrawals by the partners were only of Rs. 11,47,021. The net effect was reduction in the debit balance of capital accounts of partners from Rs. 25,50,501 to Rs. 17,87,382. Thus, he submitted that there was no justification for making any disallowance for the assessment year under reference, when on same facts no disallowance was made in the earlier assessment years and no fresh loans were also taken.

12. I have heard both the parties and considered the rival submissions with reference to facts and evidence on record. I have referred to Annexure-A of the assessment order. The same shows that for the assessment year under reference the debit balance in the capital accounts of partners came down for Rs. 25,50,501 to Rs. 17,87,382 as against debit balance of Rs. 20,63,975 and Rs. 20,12,018 at the end of accounting years relevant to asst. yrs. 1999-2000 and 2000-01 respectively. It is also a fact that despite the debit balance in the partner’s capital accounts being higher in the earlier years, no disallowance of interest was made. The Revenue has not brought any material on record to show that there was increase in the borrowed funds in the assessment year under reference which could be linked with the withdrawals by the partners. In fact, the withdrawals by the partners for the assessment year under reference were lower than the profit and fresh contributions by the partners resulting in reduction in the debit balance in the capital accounts of the partners. Therefore, disallowance of interest for the assessment year under reference would not be justified. Further in the case of CIT vs. Sridev Enterprises (1991) 97 CTR (Kar) 80 [LQ/KarHC/1991/75] : (1991) 192 ITR 165 (Kar) [LQ/KarHC/1991/75] , the facts before the Karnataka High Court were that assessee had borrowed funds from ‘X’ in the earlier year. No disallowance of interest was made in the earlier assessment year. However, subsequently the Assessing Officer disallowed the interest on the same balance, which was brought forward from the earlier assessment year. On these facts, the Karnataka High Court held that consistency and definiteness of approach by the Revenue is necessary and since interest was not disallowed in the earlier year and the balance was brought forward from the earlier year, no disallowance could be made for the subsequent assessment year. Here also, the facts of the case are the same as for earlier year. In the assessment year under reference, the assessee had not borrowed any fresh loans and no disallowance of interest was made in the earlier assessment years. Therefore, in the light of these facts and circumstances of the case, I am of the opinion that CIT(A) was justified in deleting the impugned disallowance of interest. The order of CIT(A) is upheld and the grounds of appeal of the Revenue are dismissed.

13. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.