Facts of the Case

The assessee, a partnership firm engaged in the business of plying vehicles, filed its return declaring income and claimed deduction for salary and interest on capital paid to partners. During scrutiny assessment under Section 143(3), the Assessing Officer obtained a copy of the partnership deed dated 01.02.2013 from the bank, which did not contain provisions for payment of salary or interest to partners.

The assessee subsequently produced a rectified partnership deed dated 13.05.2013, asserting that the earlier deed was improperly drafted and later corrected. The Assessing Officer rejected the rectified deed as an afterthought and disallowed the claim of salary and interest amounting to ₹3,10,000. The CIT(A) confirmed the disallowance.

Issues Involved

  1. Whether salary and interest to partners can be allowed based on a rectified partnership deed.
  2. Whether the rectified deed dated 13.05.2013 was valid and operative.
  3. Whether the Assessing Officer was justified in ignoring the later deed and relying on the earlier deed.

Petitioner’s Arguments (Assessee)

  • The initial deed dated 01.02.2013 was executed without proper legal scrutiny.
  • A corrected partnership deed was executed on 13.05.2013 incorporating provisions for remuneration and interest.
  • PAN was issued by the Income Tax Department based on the rectified deed, indicating its acceptance.
  • Therefore, the later deed should be treated as the valid governing document of the firm.

Respondent’s Arguments (Revenue)

  • The rectified deed was produced only after the discrepancy was pointed out.
  • It appeared to be an afterthought designed to justify the claim of expenses.
  • Hence, the Assessing Officer rightly relied on the original deed lacking such provisions.

Court Order / Findings (ITAT Allahabad)

The Tribunal examined both deeds and the original stamp papers and found no material contradiction to doubt the existence or authenticity of the rectified deed.

Key observations included:

  • Stamp papers for both deeds were issued around the same period.
  • Partners, capital contributions, and business objectives were identical in both deeds.
  • PAN issued by the Income Tax Department bore the date 13.05.2013, corroborating that the rectified deed formed the basis of registration.

The Tribunal held that the Assessing Officer erred in rejecting the rectified deed as an afterthought. However, since the factual aspects relating to the claim had not been verified, the matter was remanded to the Assessing Officer for limited verification.

The Assessing Officer was directed to allow the claim of salary and interest if, upon verification, the rectified deed was found valid and applicable.

The appeal was allowed for statistical purposes.

Important Clarification

  • A rectified partnership deed can govern the rights and obligations of partners if validly executed.
  • PAN issuance based on a particular deed may corroborate its authenticity.
  • Disallowance under tax law must consider the operative partnership agreement.
  • The Tribunal did not decide the claim on merits but restored the matter for verification.

Link to download the order -  https://itat.gov.in/public/files/upload/1694578293-55%20of%202023%20Neeraj%20Gas%20Movers(Assessee%20Appeal)%20uder%20section%20143(3)%20of%20the%20Act%20SMC%20(Corrected).pdf

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