2017 (4) TMI 1341 - AT - Income Tax

Disallowance of partners remuneration - whether excess remuneration should not be disallowed as there were brought forward losses which were to be adjusted before computing the book profit for the allowability of remuneration to partners? - Held that - The book profit as shown in the Profit and Loss account has to be computed in the manner laid down in Chapter IV-D. Therefore in our considered opinion both the lower authorities have erred in setting off brought forward losses first in computing the book profit for the allowability of remuneration to partners. In our understanding of the law the remuneration to partners should be first allowed and thereafter brought forward business losses should be set off. We therefore set aside the findings of the CIT(A) and direct the A. O. to delete the disallowance.

Summary

Issues: Disallowance of partners remuneration and computation of book profit for the allowability of remuneration to partners.

In this case, the Appellate Tribunal, ITAT Ahmedabad, dealt with an appeal challenging the order of the Ld. CIT(A)-XX regarding the disallowance of partners remuneration. The assessee contended that the CIT(A) erred in confirming the disallowance of partners remuneration amounting to ?5,13,714. The Assessing Officer (A.O.) observed that the firm claimed remuneration to partners at ?7,73,486, but the correct allowable remuneration was determined to be ?2,59,772, resulting in an escaped income of ?5,13,714. The A.O. reopened the assessment, issuing notices to the assessee to justify the excess remuneration. The assessee argued that brought forward business losses should not be deducted from book profit for the calculation of remuneration to partners. However, the A.O. disagreed, citing the application of Section 32(2) governed by Section 72(2) of the Act in determining book profit. Consequently, the A.O. disallowed the remuneration of ?5,13,714.

Upon appeal, the Tribunal analyzed the definition of book profit under Explanation 3 of Section 40(b) of the Act, emphasizing that book profit should be computed in the manner laid down in Chapter IV-D. The Tribunal opined that both lower authorities erred in setting off brought forward losses before allowing remuneration to partners. The Tribunal held that remuneration to partners should be first allowed, followed by the set-off of brought forward business losses. Consequently, the Tribunal directed the A.O. to delete the disallowance of ?5,13,714, allowing the appeal filed by the assessee. The judgment was pronounced in open court on 13-04-2017.