2019 (2) TMI 512 - AT - Income Tax

Deduction of remuneration paid to the partners u/s 40(b) - Disallowance of remuneration to partners after recomputing book profit on the basis of adjusted net profit and loss representing profit and gains of business/profession - Held that - This is a settled principle of law that the interest income for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be in the profit and loss account. The interest income, thus, cannot be notionally be excluded for the purpose of determining the allowable of deduction of remuneration paid to the partners u/s 40(b) of the Act. In the case in hand both the shed rent and the interest income assessed as business income for the purpose of computing admissible deduction u/s 40(b). The Learned AO took a different view by not allowing the said deduction. However, in a similar set of facts, the Co-ordinate Bench for A.Y. 2008-09, decided the matter in favour of the assessee

Summary

Issues Involved:
1. Whether the Commissioner of Income Tax (Appeals) was justified in directing the Assessing Officer to include shed rent and interest income for the purpose of computation of book profit.
2. Whether the interest income and shed rent should be considered as business income for the purpose of determining allowable remuneration to partners under Section 40(b)(v) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Inclusion of Shed Rent and Interest Income in Book Profit Computation:

The revenue appealed against the CIT(A)'s order directing the AO to include shed rent and interest income in the computation of book profit. The AO had initially excluded these incomes, considering them as income from other sources and not business income as defined under Section 28 of the Act. The CIT(A) reversed this decision, referencing the jurisdictional High Court's ruling in CIT Vs. J.J. Industries, which held that interest from fixed deposits made out of surplus funds should be included in book profit for determining allowable partner remuneration. The Tribunal upheld the CIT(A)'s decision, confirming that shed rent and interest income should be included in the book profit for the computation of partner remuneration under Section 40(b)(v).

2. Classification of Interest Income and Shed Rent as Business Income:

During assessment, the AO questioned the inclusion of shed rent and interest income in the computation of partner remuneration, asserting these should not be considered business income. The assessee argued that book profit, as per the profit and loss account, includes such incomes, and no provision allows their exclusion under Explanation 3 to Section 40(b)(v). The CIT(A) agreed, citing the Gujarat High Court's decision in J.J. Industries, which supported the inclusion of interest income from FDRs in book profit for partner remuneration calculations. The Tribunal reiterated this stance, emphasizing that interest income and shed rent, being assessed as business income, should not be excluded for determining allowable deductions under Section 40(b).

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s order that included shed rent and interest income in the book profit for computing allowable partner remuneration. This decision was consistent with the jurisdictional High Court's ruling, which treated such incomes as part of business income for the relevant computations under the Income Tax Act.