2015 (9) TMI 656 - AT - Income Tax

Disallowance treating remuneration paid to the partners under the provisions of section 40(b)(v) as excessive - whether the interest income is to be considered for the purpose of calculation of remuneration to the partners? - Held that - On perusing the assessment order, we find that though the A.O has stated that the interest of ₹ 8,30,979/- is in the nature of non business income and taxable under the head income from other sources but no such adjustment has been made by him while computing the income from business meaning thereby that he has accepted interest income as business income. We further find that interest receipts in A.Y. 07-08 & 09-10 were considered as non business income by the A.O. and thereafter after excluding it, the remuneration was worked u/s. 40(b)(v) but the addition made by the A.O was deleted by ld. CIT(A) . Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the ld. CIT(A) for A.Y.20 07-08 & 2009-10 has not been accepted by the Revenue. See case of Md. Serajuddin & Brothers 2012 (8) TMI 104 - CALCUTTA HIGH COURT A.O was not justified in working out the claim of remuneration after excluding the interest income. We thus direct the A.O to include the interest income while calculating the remuneration payable to partner u/s. 40(b)(v) of the Act - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of remuneration paid to partners under section 40(b)(v) of the Act.
2. Treatment of interest income for calculating remuneration to partners.

Issue 1: Disallowance of remuneration paid to partners under section 40(b)(v) of the Act:
The Assessee, a partnership firm engaged in the business of Commission Agent, filed its return of income for A.Y. 2008-09. The assessment framed under section 143(3) determined the total income at a different amount than declared by the Assessee. The dispute arose regarding the disallowance of remuneration paid to partners under section 40(b)(v) of the Act. The Assessee contended that the remuneration was calculated based on net profit as per the profit & loss account, while the authorities argued it should be based on book profit as defined in Explanation-3 to section 40(b). The disagreement led to the appeal before the Tribunal. The Tribunal analyzed the definition of "book profit" and relevant case laws to conclude that the remuneration should be calculated including all income, thereby allowing the Assessee's appeal.

Issue 2: Treatment of interest income for calculating remuneration to partners:
The Assessing Officer (A.O) excluded a portion of interest income earned by the Assessee from the calculation of remuneration payable to partners under section 40(b)(v) of the Act. The A.O considered a part of the interest income as non-business income taxable under "income from other sources." The A.O's decision was upheld by the CIT(A) based on the definition of book profit and precedents from various High Courts. However, the Tribunal, after considering the arguments presented by both parties, ruled in favor of the Assessee. The Tribunal noted that the A.O had accepted the interest income as business income in previous years and failed to demonstrate any inconsistency in the CIT(A)'s decisions for those years. Citing a decision of the Calcutta High Court, the Tribunal directed the A.O to include the interest income while calculating the remuneration payable to partners. Consequently, the Tribunal allowed the Assessee's appeal, overturning the disallowance of remuneration based on interest income.

In conclusion, the Tribunal's judgment favored the Assessee on both issues, allowing the appeal and directing the A.O to calculate the remuneration payable to partners by including all income, including interest income.