2012 (6) TMI 537 - AT - Income Tax

Re-opening of its assessment - change of opinion by the Assessing Officer - assessment having been completed in the first instance u/s. 143(3) of the Act by examining all the relevant aspects; the profit and loss account as well as the tax audit report u/s. 44AB of the Act, filed along with the return of income, duly disclosing both the interest received from the bank as well as the quantum of remuneration allowed to the partners, i.e., the two facts which constitute the basis of the re-opening of the assessment - held that - the assessment stands re-opened within four years of the commencement of the relevant assessment year, so that the assessee s insistence on proper disclosure would not be of any relevance. Interest received from the bank - Applicability of section 40(b)(v) - remuneration of working partner - book profit - held that - it would be entitled to deduction qua remuneration allowed to working partner/s by considering the said income as part of the book profit under Explanation 3 to s. 40(b)(v). Book profit - consideration of income chargeable under the head income from other sources - held that - The deduction qua the partner s remuneration is being claimed and, therefore, would stand to be allowed only in determining the income assessable u/c. IV-D, in which case it would automatically fall to be included in the book profit , and the assessee allowed its claim for remuneration allowed to the working partner/s with reference thereto - at the claimed/exigible amount, else not. The condition with reference to book profit , it may be appreciated, does not lay down any qualitative test, but only a quantitative one, so that the deduction, being in respect of expenditure to persons constituting the firm itself, is sought to be regulated by the Act. - The question as to whether book profit would include income assessable under head of income other than that assessable Chapter IV-D, thus, does not arise for consideration, and the assessee s alternate ground is misconceived and misdirected.

Summary

Issues Involved:
1. Legitimacy of reopening the assessment under section 147 of the Income-tax Act, 1961.
2. Disallowance of excess remuneration to working partners under section 40(b)(v) of the Act.

Issue-wise Detailed Analysis:

1. Legitimacy of Reopening the Assessment:
The first issue raised by the assessee challenges the reopening of its assessment under section 147 of the Income-tax Act, 1961. The assessee argued that the reopening was based on a change of opinion by the Assessing Officer (AO), as the original assessment under section 143(3) had already examined all relevant aspects, including the interest received from the bank and the remuneration allowed to partners. However, the Tribunal found no substance in the assessee's claim, noting that the interest income on bank deposits had escaped the AO's attention during the original assessment, and thus, there was no change of opinion. Additionally, the reopening was within four years of the relevant assessment year, making the assessee's insistence on proper disclosure irrelevant. The Tribunal also noted another ground for reopening related to a disallowance under section 36(1)(iii), which the assessee had accepted. Therefore, the challenge to the reopening was without merit, and the assessee's ground was dismissed.

2. Disallowance of Excess Remuneration to Working Partners:
The second issue pertains to the disallowance of Rs. 1,88,644/- in respect of excess remuneration to the working partners under section 40(b)(v) of the Act. The AO had limited the allowance by excluding the interest income on bank deposits from the 'book profit,' considering it assessable under 'income from other sources' and not as business income. The Tribunal examined the facts and legal precedents, including the decisions by the apex court in CIT v. Govinda Choudhury & Sons and CIT v. B.N. Aggarwala & Co., which emphasized that the character of the income should be determined based on the specific facts of each case. The Tribunal concluded that the bank deposits in the present case were necessitated for availing credit from suppliers and thus constituted business assets. Consequently, the interest income was assessable as business income, making it part of the 'book profit' for calculating the remuneration to working partners under section 40(b)(v). The assessee's appeal on this ground was allowed.

Alternative Contentions:
The assessee also raised alternative contentions. One was that even if the interest income was assessable as 'income from other sources,' it should still be included in the 'book profit' for calculating partner remuneration. However, the Tribunal held that deductions for business expenditure could only be allowed against business income, and the term 'book profit' should not include income assessable under other heads. Therefore, this alternative contention was dismissed.

Another alternative contention was that the remuneration to working partners should be allowable under section 57(iii) if the interest income was assessed under 'income from other sources.' However, this ground was not argued before the Tribunal or raised before the authorities below. The Tribunal, having already decided that the interest income was assessable as business income, dismissed this alternate claim as well.

Conclusion:
The assessee's appeal was allowed on the principal issue of the disallowance of excess remuneration to working partners, with the interest income being assessed as business income. The challenge to the reopening of the assessment and the alternative contentions were dismissed.