Raja Enterprises, a partnership firm, commenced its trading business in the Jodhpur District of Rajasthan on 1st April, 2024 with two working partners Manish and Nilesh. The partnership deed provides remuneration to both

CS Professional · Advanced Tax Laws · PYQS · June 2025
Raja Enterprises, a partnership firm, commenced its trading business in the Jodhpur District of Rajasthan on 1st April, 2024 with two working partners Manish and Nilesh. The partnership deed provides remuneration to both the working partner @ ₹ 50,000 per month. Total remuneration ₹ 12,00,000 to both the partner is within the limit under section 40(b)(v) of the Income Tax Act, 1961. The firm has filed the return for the A.Y. 2025-26 on due date under section 139(1) of the Income Tax Act, 1961. Return was selected for scrutiny assessment. Assessing officer has disallowed ₹ 4,00,000 as an excessive remuneration to the partners by invoking provision of section 40A(2) of the Income Tax Act, 1961. Such disallowance was made on the ground that it is in excess having regard to their knowledge and qualification and also exceeds the total salary paid to various employees during the year. Whether the disallowance by the assessing officer is justified ? Answer should be supported with judicial pronouncement, if any.

Answer & Explanation:

As per Allahabad High Court in the case of CIT vs. Great City Manufacturing Co, the assessing officer is required to ensure that: Remuneration is paid to the working partners mentioned in the partnership deed. The terms and conditions of the partnership deed provide for payment of remuneration to the working partner The remuneration is within the limits prescribed under section 40(b)(v) of the Income Tax Act, 1961. If above conditions are complied with, the Assessing officer cannot disallow any part of remuneration on the ground that it is excessive. Accordingly, the disallowance by the Assessing officer is not justified and cannot be disallowed by invoking the provisions of section 40A (2) Income Tax Act, 1961.

Topics: Income Tax Act

Open in Interactive Practice Hub · Full Practice Hub · Chapter Weightage · More in this subject

Related Questions in this Topic