2012 (8) TMI 104 - HC - Income Tax

Excessive claim of deduction of partners remuneration - notice issued u/s 154 - Held that - It appears from the orders of the AO when notice u/s 154 was issued replies in writing were given explaining how the computation of remuneration of partners were determined and the same were shown in the audited accounts the said explanation was not accepted and AO was of the view that the entire profit of the business of the assessee cannot be a book profit for the purpose of explanation 3 of Section 40(b)(v) - that income from other sources could be taken into consideration for ascertaining book profit for the purpose of computation of allowable remuneration to partners not the income from business alone thus undoubtedly this is a debatable issue and such debatable issue cannot be a ground for rectification u/s 154 - the point which was not examined on fact or in law cannot be dealt with as a mistake apparent on the record this dispute raised a mixed question of fact and law. 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 as it nowhere provides that the net profit as shown in the profit and loss account not the profit computed under the head profit and gains of business or profession - Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company 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.

Issues Involved:
1. Justification of the Tribunal in dismissing the appellant's appeal without affording a reasonable opportunity of being heard.
2. Legality of the Tribunal's upholding of rectification orders under Section 154, rejecting the appellant's contention that the issue was debatable and the proceedings were without jurisdiction.
3. Proper construction of the provisions of Section 40(b)(v) and Explanation 3 thereto concerning whether book profit comprises the entire net profit as shown in the profit and loss account or only profits and gains of business assessed under Chapter IV-D.

Issue-wise Detailed Analysis:

1. Reasonable Opportunity of Being Heard:
The appellant contended that the Tribunal dismissed their appeal for the assessment years 1995-96 to 1998-99 without giving a reasonable opportunity to be heard. The appellant's authorized representative appeared on the date of hearing and was assured that the appeals would be allowed in their favor, leading to no further submissions. However, the Tribunal dismissed the appeals without providing a fair hearing. The court observed that neither the Tribunal nor the Commissioner of Income Tax (Appeals) applied their minds or examined the orders passed by the Assessing Officer under Section 154. The court refrained from remanding the matter due to its age and decided to address it directly.

2. Legality of Rectification Orders under Section 154:
The appellant argued that the issue of interpreting Section 40(b)(v) and Explanation 3 was debatable, making the proceedings under Section 154 without jurisdiction. The court noted that rectification under Section 154 is permissible only for glaring mistakes of fact or law that are apparent from the record. Debatable issues cannot be grounds for rectification. The court referenced several Supreme Court decisions, including CIT v. Hero Cycles Pvt. Ltd. and Deva Metal Powders (P) Ltd. v. Commissioner, Trade Tax, Uttar Pradesh, which established that rectification is not possible for debatable questions. The court concluded that the Assessing Officer's action under Section 154 was inappropriate as the issue was debatable.

3. Construction of Section 40(b)(v) and Explanation 3:
The appellant argued that for the purpose of Explanation 3 to Section 40(b)(v), the net profit as shown in the profit and loss account should include consultancy fees, interest on bank deposits, profit on disposal of assets, and interest on advance tax, even if these were shown under the head 'income from other sources'. The court agreed with this interpretation, noting that Explanation 3 to Section 40(b)(v) does not specify that only profits and gains from business or profession should be considered. The court referenced the Supreme Court decision in Apollo Tyres Ltd. v. Commissioner of Income Tax, which emphasized that the net profit as shown in the profit and loss account should be the basis for computation, not a reassessment by the Assessing Officer. The court concluded that the inclusion of income from other sources in the profit and loss account for computing book profit was valid.

Conclusion:
The court allowed the appeal, setting aside the orders passed by the authorities below. It held that the Tribunal erred in dismissing the appeal without a fair hearing, the issue was debatable and not suitable for rectification under Section 154, and the proper construction of Section 40(b)(v) and Explanation 3 includes income from other sources in the net profit for computing partners' remuneration. There was no order as to costs.

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