2006 (2) TMI 227 - AT - Income Tax

Summary

Issues:
1. Disallowance of remuneration to partners under section 40(b)(v)
2. Interpretation of 'book profit' in clause (a) of section 40(b)(v)(2)

Issue 1: Disallowance of remuneration to partners under section 40(b)(v):
The case involves an appeal by the assessee against the order of the CIT(A)-V, Hyderabad, challenging the disallowance of the claim relating to payment of remuneration to partners under section 40(b)(v). The assessee, a retail dealer in toys, filed its income tax return for the assessment year 2001-02 under section 44AF, declaring total income at Rs. 22,170. However, the assessment was completed under section 143(3) with a total income of Rs. 61,696 after a partial disallowance of Rs. 39,526 related to partners' remuneration. The dispute centered around the interpretation of provisions under section 44AF and section 40(b)(v) regarding the allowable remuneration to partners. The contention of the assessee was that the CIT(A) misunderstood the provisions and wrongly upheld the disallowance. The Assessing Officer and CIT(A) determined the allowable remuneration based on the net result as per the books of account, leading to the disallowance. The Tribunal rejected the assessee's arguments, upholding the order of the CIT(A) and allowing the revenue's representative's defense.

Issue 2: Interpretation of 'book profit' in clause (a) of section 40(b)(v)(2):
The second issue revolved around the interpretation of the term 'book profit' in clause (a) of section 40(b)(v)(2). The assessee contended that the 'book profit' should be considered as 5 per cent of the turnover declared under section 44AF for computing the allowable deduction towards partners' remuneration. On the contrary, the revenue argued that the 'book profit' should be based on the profit as per the books of account, specifically the Profit & Loss Account. The Tribunal analyzed the provisions of section 44AF, which allow for a deduction towards salary and interest paid to partners subject to the conditions and limits specified in section 40. It concluded that the term 'book profit' in section 40(b)(v)(2)(a) should be based on the profit as per the Profit & Loss Account, not the income determined at a percentage of turnover under section 44AF. The Tribunal upheld the order of the CIT(A) on this issue, rejecting the contentions of the assessee and ruling in favor of the revenue.

In conclusion, the Appellate Tribunal ITAT Hyderabad-B ruled in favor of the revenue, upholding the disallowance of remuneration to partners under section 40(b)(v) and interpreting 'book profit' in clause (a) of section 40(b)(v)(2) to be based on the Profit & Loss Account rather than the income determined under section 44AF.