Suresh A. Shroff & Co. v. Joint Commissioner of Incometax

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The Tax PublishersITA No. 4140 (Mum) of 2008 2013 TaxPub(DT) 0764 (Mum-Trib) : (2013) 140 ITD 0001 : (2013) 153 TTJ 0666 : (2013) 085 DTR 0446 INCOME TAX ACT, 1961 --Business disallowance under section 40(b)--Remuneration to partner Computation of book profits--Assessee-firm was deriving income from profession as advocate on record of Supreme Court. During course of assessment on examination of P&L account, it was observed by assessing officer that assessee had credited certain amount as other income which comprises of compensation and licence fees. Assessing officer noticed that both above items were included by assessee for computing book profits for deciding remuneration of working partners. Assessing officer treated other income as assessee's income from other sources and consequently reduced book profits and accordingly allowed remuneration to partners under section 40(b). Commissioner (Appeals) upheld order of assessing officer. *Held:* Not justified. Revenue authorities were not justified in excluding other income, i.e., compensation and licence fees from book profits for purpose of computing partner's remuneration. Under clause (v) of section 40(b) read with Explanation 3, the remuneration allowable to working partners upto Rs. 50,000 is fully allowable in the hands of the firm. In case the aggregate payment exceeds the limit of Rs. 50,000, certain monetary limits have been prescribed under section 40(b)(v) in the form of a percentage of 'book-profit'. For the purposes of this clause, according to Explanation 3, the 'book-profit' means the net profit (as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IVD) as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. The said chapter nowhere provides that net profit should be the only income from business or profession alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under sections 30 to 43D. Thus, for the purpose of section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit. In other words, according to the said Explanation 'book profit' means the net profit as shown in the profit and loss account including income from other sources not the profit computed under the head profit and gains of business or profession. [Para 12] Even if the income from other sources is included in the profit and loss accounts to ascertain the net profit qua book-profit for computation of the remuneration of the partners the same cannot be discarded and the Commissioner (Appeals) was not justified in upholding the order of the assessing officer in excluding the other income, i.e. compensation for use of shared facilities of Rs. 10,00,000 and license fees of Rs. 20,00,000, aggregating to Rs. 30,00,000 from the 'book profit' for the purpose of partners remuneration and accordingly, the assessing officer is directed to include the above sum of Rs. 30,00,000 in the 'book profit' for computation of the remuneration of the partners in terms of section 40(b)(v) and allow partners remuneration as claimed by the assessee. [Para 18] Income Tax Act, 1961 Section 40(b) IN The Itat, Mumbai J Bench Dinesh Kumar Agarwal, J.M. & N. K. Billaiya, A.M. Suresh A. Shroff & Co. v. Jt. CIT ITA No. 4140 (Mum) of 2008 A.Y. 2005-06 SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 4140 (Mum) of 2008
2013 TaxPub(DT) 0764 (Mum-Trib) : (2013) 140 ITD 0001 : (2013) 153 TTJ 0666 : (2013) 085 DTR 0446

INCOME TAX ACT, 1961

--Business disallowance under section 40(b)--Remuneration to partner Computation of book profits--Assessee-firm was deriving income from profession as advocate on record of Supreme Court. During course of assessment on examination of P&L account, it was observed by assessing officer that assessee had credited certain amount as other income which comprises of compensation and licence fees. Assessing officer noticed that both above items were included by assessee for computing book profits for deciding remuneration of working partners. Assessing officer treated other income as assessee's income from other sources and consequently reduced book profits and accordingly allowed remuneration to partners under section 40(b). Commissioner (Appeals) upheld order of assessing officer. Held: Not justified. Revenue authorities were not justified in excluding other income, i.e., compensation and licence fees from book profits for purpose of computing partner's remuneration.

Under clause (v) of section 40(b) read with Explanation 3, the remuneration allowable to working partners upto Rs. 50,000 is fully allowable in the hands of the firm. In case the aggregate payment exceeds the limit of Rs. 50,000, certain monetary limits have been prescribed under section 40(b)(v) in the form of a percentage of 'book-profit'. For the purposes of this clause, according to Explanation 3, the 'book-profit' means the net profit (as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IVD) as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. The said chapter nowhere provides that net profit should be the only income from business or profession alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under sections 30 to 43D. Thus, for the purpose of section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit. In other words, according to the said Explanation 'book profit' means the net profit as shown in the profit and loss account including income from other sources not the profit computed under the head profit and gains of business or profession. [Para 12] Even if the income from other sources is included in the profit and loss accounts to ascertain the net profit qua book-profit for computation of the remuneration of the partners the same cannot be discarded and the Commissioner (Appeals) was not justified in upholding the order of the assessing officer in excluding the other income, i.e. compensation for use of shared facilities of Rs. 10,00,000 and license fees of Rs. 20,00,000, aggregating to Rs. 30,00,000 from the 'book profit' for the purpose of partners remuneration and accordingly, the assessing officer is directed to include the above sum of Rs. 30,00,000 in the 'book profit' for computation of the remuneration of the partners in terms of section 40(b)(v) and allow partners remuneration as claimed by the assessee. [Para 18]

Income Tax Act, 1961 Section 40(b)

IN The Itat, Mumbai J Bench

Dinesh Kumar Agarwal, J.M. & N. K. Billaiya, A.M.

Suresh A. Shroff & Co. v. Jt. CIT

ITA No. 4140 (Mum) of 2008

A.Y. 2005-06