2015 (11) TMI 1789 - AT - Income Tax

Disallowance of remuneration paid to working partners us 40(b)(v)(2) - Both the authorities below have deducted the same from book profits as well as remuneration to partners on the ground that the same is not business income resulting in the impugned section 40(b)(v)(2) disallowance - HELD THAT - There is no quarrel that assessee s interest income has arisen from parking of surplus funds. AO treated this interest sum as business income in regular assessment framed on 21/07/2008. He has nowhere disturbed this crucial view and merely excludes the same from net profits in computing book profits as well partner s remuneration. A co-ordinate bench of the tribunal in Akshar Associates vs. ACIT 2015 (12) TMI 123 - ITAT AHMEDABAD deleted identical disallowance by following hon ble jurisdictional high court s decision CIT vs. JJ Industries 2013 (7) TMI 577 - GUJARAT HIGH COURT holding that for the purpose of ascertaining ceiling on the basis of book profits, the profit shall be that stated in P L account. We draw support therefrom and conclude that assessee s income cannot be notionally excluded for the purpose of determining allowable deduction of partner s remuneration u/s. 40(b) - delete the impugned section 40(b)(v)(2) disallowance - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of remuneration paid to working partners under section 40(b)(v)(2).
2. Validity of reopening assessment.

Analysis:
1. The appellate tribunal heard two appeals for the assessment years 2006-07 and 2008-09, challenging the disallowance of remuneration paid to working partners under section 40(b)(v)(2). The Assessing Officer disallowed a specific amount as excessive remuneration paid to partners. The tribunal noted that the interest income credited to the P & L account was also included in the remuneration calculation. The tribunal reviewed the partnership deed and the nature of the business activities to determine whether the interest income was part of the business income. The tribunal concluded that the interest income from surplus funds could not be excluded from business income for the purpose of computing allowable deductions under section 40(b). Citing a previous tribunal decision and a high court ruling, the tribunal allowed the appeal and deleted the disallowance of remuneration.

2. The second issue involved the validity of reopening the assessment. The tribunal noted that the validity of reopening was challenged but not pressed during the hearing. As a result, the tribunal did not delve into this issue further, focusing instead on the primary issue of disallowance of remuneration. The tribunal's decision was based on the interpretation of relevant provisions of the Income Tax Act and established legal precedents. The tribunal provided a detailed analysis of the facts, arguments presented, and legal reasoning behind its decision to allow the appeal and delete the disallowance of remuneration.