Whether remuneration to partner can be disallowed on the ground of being excessive, even if it is within the limit u/s 40(b)?

This was the issue before Allahabad High Court. The citation of the case is as under:

CIT Vs. Great City Manufacturing Co.(2013) 351 ITR156, Allahabad HC

Short Overview of the case:

1. Sec 40(b)(v): As per section 40(b)(v) 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 will be disallowed:

(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.

2. Section 40A(2)(a) deals with powers of disallowance of expenditure on related party by Assessing Officer;

Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub- section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.

3. The question is that if remuneration paid is within the ceiling limit provided under Section 40(b)(v) , then recourse to provisions of Section 40A(2)(a) cannot be taken?

In CIT Vs. Great City Manufacturing Co.(2013) 351 ITR156, Allahabad HC held that:

a. The Assessing Officer is only required to ensure that the remuneration is paid to the working partners mentioned in Partnership Deed and the remuneration is within the limits prescribed under Section 40(b)(v) of the Act, 1961.

b. If these conditions are complied with ,then the AO cannot disallow any part of remuneration on the ground that it is in excess.

In short, Rementation to partner can not be disallowed on the ground of being excessive if it is within the limit u/s 40(b). Assesing Officer is merely required to check whether the remuneration is within the limit specified u/s 40(b). If it is within the said limit, it can never be treated as excessive.