2012 (12) TMI 236 - AT - Income Tax

Computation of salary of partners u/s 40(b)(v) Computation of book profit to compute salary of partnership firm - Assessee treated compensation for use of shared facilities and license fees for use of name under head PGBP as other income in computing book profit AO reduces the same from book profit considering it as income from other sources Whether for the purpose of computation of allowable remuneration to partners, the book profit comprises the entire net profit as shown in the P&L or only profit and gains of business assessed under Chapter IV-D - Held that - 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. In favour of assessee

Summary

Issues Involved:
1. Classification of income from compensation for shared facilities and license fees.
2. Computation of book profit for partner remuneration under section 40(b) of the Income Tax Act, 1961.
3. Consistency in assessing income under the head "Business and Profession."
4. Alternate claim for assessing shared asset income under "Income from House Property."
5. Levy of interest under section 220(2).

Detailed Analysis:

1. Classification of Income:
The primary issue was whether the income of Rs. 30,00,000/- received by the assessee firm from compensation for shared facilities (Rs. 10,00,000/-) and license fees (Rs. 20,00,000/-) should be classified as "Income from Business" or "Income from Other Sources." The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] concluded that this income should be classified as "Income from Other Sources," as it was not derived from professional services. The assessee argued that this income had been consistently assessed as "Income from Business" in previous years and should continue to be treated as such.

2. Computation of Book Profit for Partner Remuneration:
The second issue was related to the computation of book profit for determining the allowable remuneration to partners under section 40(b) of the Income Tax Act. The A.O. excluded the Rs. 30,00,000/- from the book profit, reducing the allowable remuneration to partners. The assessee contended that the entire net profit, including the Rs. 30,00,000/-, should be considered for computing book profit as per section 40(b)(v) read with Explanation 3.

3. Consistency in Assessing Income:
The assessee cited the Supreme Court judgment in Radhasoami Satsang v. Commissioner of Income Tax (193 ITR 321), arguing that a consistent position taken in previous years should not be arbitrarily changed without fresh facts. The assessee emphasized that the income had been consistently assessed under "Business and Profession" for the past ten years.

4. Alternate Claim for Shared Asset Income:
As an alternate argument, the assessee suggested that the shared asset income should be assessed under "Income from House Property" if not considered as "Income from Business." However, this ground was not pressed during the hearing and was subsequently rejected.

5. Levy of Interest under Section 220(2):
The assessee also contested the levy of interest under section 220(2). The tribunal directed the A.O. to allow consequential relief to the assessee in this regard.

Judgment:

Classification of Income:
The tribunal held that the income from compensation for shared facilities and license fees should be included in the book profit for computing partner remuneration. It emphasized that the term "book profit" under section 40(b)(v) includes the net profit as shown in the profit and loss account, which encompasses all income, including income from other sources. This interpretation aligns with the Calcutta High Court's decision in Md. Serajuddin & Bros. v. CIT.

Computation of Book Profit:
The tribunal concluded that the A.O. was not justified in excluding the Rs. 30,00,000/- from the book profit for the purpose of computing partner remuneration. It directed the A.O. to include this amount in the book profit and allow the remuneration as claimed by the assessee.

Consistency in Assessing Income:
The tribunal agreed with the assessee's argument based on the Supreme Court's judgment in Radhasoami Satsang v. Commissioner of Income Tax, emphasizing that a consistent position should not be changed arbitrarily without fresh facts.

Alternate Claim for Shared Asset Income:
The tribunal rejected the alternate claim for assessing shared asset income under "Income from House Property" as it was not pressed by the assessee.

Levy of Interest under Section 220(2):
The tribunal directed the A.O. to allow consequential relief regarding the levy of interest under section 220(2).

Conclusion:
The appeal filed by the assessee was allowed, directing the A.O. to include the Rs. 30,00,000/- in the book profit for computing partner remuneration and to provide consequential relief regarding the levy of interest under section 220(2).