Law:

Section:

Net profit both under provisions of Income-tax Act, 1961 and under general law will not take in statutory liability to pay income-tax Section 40(b) of the Income-tax Act, 1961 - Business disallowance - Interest, salary, etc., paid by firm to partner - Assessment year 1993-94 - Partnership deed of assessee-firm provided, inter alia, that two working partners shall be paid a remuneration of 2.5 per cent of net profits of business and it shall be treated as an expenditure of firm and net profit for purpose of working out aforesaid remuneration shall mean net profit worked out after deducting all expenses, including interest on loans as well as capital, but without deducting remuneration to said partners - Assessee claimed deduction of remuneration payable to working partners - Assessing Officer allowed remuneration payable to partners on net profit after deducting income-tax liability holding that since remuneration paid to partners alone was excluded from arriving at net profits, income-tax liability was liable to be deducted for arriving at net profit referred to in partnership deed - First appellate authority relying upon sub-clause (ii) of section 40(b) upheld impugned order - Tribunal held that remuneration payable to partners in terms of partnership deed should be worked out on basis of net profit without deducting income-tax liability - Whether relevant clause in partnership deed did not mean that income-tax liability which is charged on total income must be deducted for arriving at net profit - Held, yes - Whether net profit both under provisions of Income-tax Act and under general law will not take in statutory liability to pay income-tax - Held, yes - Whether, therefore, order passed by Tribunal was justified - Held, yes FACTS The partnership deed of the assessee-firm provided, inter alia, that the two working partners shall be paid a remuneration of 2.5 per cent of the net profits of the business and it shall be treated as an expenditure of the firm and the net profits for the purpose of working out the aforesaid remuneration shall mean the net profits worked out after deducting all expenses, including interest on loans as well as capital, but without…

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