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TMI Blog2021 (5) TMI 200X X X X Extracts X X X X X X X X Extracts X X X X ..... k profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income under Section 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable deduction of remuneration paid to the partners under Section 40B of the Act. A bare reading of the Explanation 3 of section 40(b) of the Act, make it evident that selection of the any head of income, more particularly of the head Profit or gain of business or profession , is nowhere required or envisaged by the Legislature. That is, there is no warrant to select the head of income so far as the computation of the permissible amount of deduction of the remuneration under section 40(b) is concerned. As per Explanation 3 of section 40(b) of the Act, Assessing Officer does not get the jurisdiction to go behind the net profit shown in the Profit Loss account except to the extent of the adjustments provided in the Explanation 3, nor he is empowered to decide under which head the income is to be taxed. The net profit as shown, is not to be allocated into different components. Also see MD. SERAJUDDIN BROTHERS VERSUS COMMISSIONER OF INCOME ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 42,602/-, which were covered under the head Income from other sources . The assessing officer noted that these incomes were not directly related to business income of the assessee but derived from other sources, therefore these amounts, aggregating to ₹ 5,23,121/-, were required to be deducted from the net profit to compute book profit. Thus, the book profit was to be derived to ₹ 7,89,025/- from which admissible remuneration as per u/s. 40(b)(v) of the Act would. be at ₹ 3,68,110/-. However, assessing officer noticed that the remuneration paid to partner was ₹ 5,92,357/-. So, there was an excess payment of remuneration amounting to ₹ 2,24,247/- (₹ 5,92,357 ₹ 3,68,110). The assessee was asked to explain the said excess amount of ₹ 2,24,247/-. 4. In response, the assessee submitted written submissions before the assessing officer which is reproduced below: 1.In the letter filed on 21.11.2013, we have already mentioned our contention that interest income were derived from FDs in Canara bank which were pledged with Canara bank against finance obtained from bank. A copy of sanction letter was also submitted to your o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4,51,820/- (3) Interest on Income tax Refund ₹ 28,322/- (4) Interest on recurring deposit ₹ 42,602/- The assessing officer was of the view that above incomes were not directly related to the business income of the assessee therefore assessing officer treated the above incomes as income from other sources. Accordingly, the assessing officer had deducted the above amounts totaling ₹ 5,23,119/- (₹ 377 + ₹ 4,51,820 + ₹ 28,322 + ₹ 42,602) from the net profit to compute the book profit for allowing the admissible remuneration as per Section 40(b)(v) of the Act. By doing this, he arrived at the figure of remuneration at ₹ 3,68,110/- instead of ₹ 5,92,357/- claimed by the assessee and the difference of these two figures at ₹ 2,24,247/- (₹ 5,92,357 - ₹ 3,68,110) was added to the total income of the assessee. On appeal, ld. CIT(A) held. that since assessee firm is not engaged in the business of money lending business. Therefore, these interest incomes earned from deployment of surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on fixed deposits which came to ₹ 11.82 lacs (rounded off). He thus concluded that there was excess remuneration to the partners to the extent of ₹ 4.90 lacs (rounded off). He made disallowances accordingly. 3.2 The assessee carried the matter in appeal. CIT(A) rejected the assessee's appeal and confirmed the view of the Assessing Officer upon which, the assessee approached the Tribunal. The Tribunal, by the impugned judgment, reversed the decision of the revenue- authorities and allowed the assessee's appeal making following observations: 9. We have heard the rival submissions and perused the material on record. It is an undisputed fact that assessee has earned interest of ₹ 22,23,006/- on F.D.'s and paid interest of ₹ 10,40,234/- on money borrowed. The net interest income of ₹ 11,82,769/- has been credited to P L account and included in the net profit and the same has been considered as business income while framing assessment order u/s. 143(3). The co-ordinate Bench in the case of S.P. Equipment Services (supra) after considering the various decisions has held. as under:- 4. Section 40 of the Act pertains to amounts w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent 5. From the above provision it can be seen that where an assessee is a partnership firm, any payment of salary, bonus, commission or remuneration to its partners under certain circumstances, if it exceeds the limits set out in Clause B, deduction to the extent of excess cannot be claimed. In the present case, such ceiling is prescribed in two slabs. On the first ₹ 3 lacs on the book profit or in case of loss such ceiling is ₹ 1,50,000/- or 90% of the book profit whichever is more. On the balance of the book profit such ceiling prescribed is @ 60%. 6. The question, therefore, arises whether the interest income earned by the assessee-firm from the fixed deposit receipts should. be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners' remuneration. 7. The Tribunal has proceeded on the basis that for the purpose of ascertaining such ceiling on the basis of book profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income under Section 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofession', the Explanation 3 to Section 40(b)(v) does not refer to any head of income but maintains profit as shown in the profit and loss account however it was intended that for the purpose of Explanation 3 only profit computed under head 'profits and gains on business or professions' were to be considered, the expression used in Explanation 33A to Section 80HHC and Section 33AB would. have also found place in Explanation 3. 6. He contends that stipulation for the net profit should. be computed in the manner laid down in Chapter IV- D requires that computation provision of Chapter IV-D namely those contained in Sections 30 to 33D should. have been followed in computing the net profit. Section 29 of the Act contained in Chapter IV-D deals with computation of income under the head 'profits and gains on business or profession'. Sections 30 to 43D provide for various deductions. None of the said sections provide for exclusion of any item of income because it does not fall under the head of 'profits and gains of business or profession'. The reasons for making the computation provisions of Chapter IV-D applicable for computing the book profit is only t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Section 154 and logically, he submits if no prima facie adjustment could. be made on an issue under Section 143(1)(a) intimation issued under the said provision did not suffer from any mistake apparent from the record and there can be no question of exercising the power under Section 154 for rectifying such an intimation. 10. He reminds us referring to the decisions of the Supreme Court in case of CIT v. Hero Cycles (P.) Ltd. [1997] 228 ITR 463 / 94 Taxman 271 and Deva Metal Powders (P.) Ltd. v. Commissioner, Trade Tax [2008] 2 SCC 439 that rectification under Section 154 can only be made if there is a glaring mistake of fact and law but not if the question is debatable. A point which was not examined on fact or in law cannot be dealt with as a mistake apparent from the record within the meaning of Section 154. 11. Learned counsel for the respondent contends that in the returns filed by the assessee, the book profit for the purpose of computation of remuneration paid to partners has been taken as ₹ 9,79,081/- which includes income under the heads 'granting consultancy fees' and 'interest on bank deposit' totaling to ₹ 18,77,749/-. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this Court to remand the matter to the file of the learned Tribunal for fresh decision on the contention raised before us. 14. However, having regard to the age of the matter we refrained ourselves from remanding the matter and we decide the matter by ourselves. 15. As we have already observed learned two authorities below have not decided anything else, we therefore, examined the order passed by the Assessing Officer in relation to aforesaid two assessment years. Three several orders were passed with identical reasons and even language. It appears from the orders of the Assessing Officer when notice under Section 154 was issued replies in writing were given to the Assessing Officer 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. The Assessing Officer 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). It is better to quote the language used by the Assessing Officer in three assessment orders as follows:- Thus, clearly income from other sources is not to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is an error, a fault, a misunderstanding, a misconception. Apparent means visible; capable of being seen; obvious; plain. It means open to view, visible, evident, appears, appearing as real and true, conspicuous, manifest, obvious, seeming . A mistake which can be rectified under Section 22 is one which is patent, which is obvious and whose discovery is not dependent on argument or elaboration. 21. It is appropriate to quote also paragraph 15 of the said report- 15. Mistake is an ordinary word but in taxation laws, it has a special significance. It is not an arithmetical error which, after a judicious probe into the record from which it is supposed to emanate is discerned. The word mistake is inherently indefinite in scope, as to what may be a mistake for one may not be one for another. It is mostly subjective and the dividing line in border areas is thin and indiscernible. It is something which a duly and judiciously instructed mind can find out from the record. In order to attract the power to rectify under Section 22, it is not sufficient if there is merely a mistake in the order sought to be rectified. The mistake to be rectified must be one apparent from the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.- Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as partner in a representative capacity and person so represented , respectively), - (i) interest paid by the firm to such individual otherwise than a partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.- Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should. be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company's income, then it would. have stated in section 115J that income of the company as accepted by the Assessing Officer . In the absence of the same and on the language of section 115J, it will have to held. that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal. 26. At page 282 of the said report the Supreme Court has also observed amongst other- The fact that it is shown under a different head of income would. not deprive the company of its benefit under section 32AB so long as it is held. that the investment in the units of the UTI by the assessee-company is in the course of its eligible business . Therefore, in our opinion, the dividend income earned by the assessee-company from its investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, make it evident that selection of the any head of income, more particularly of the head Profit or gain of business or profession , is nowhere required or envisaged by the Legislature. That is, there is no warrant to select the head of income so far as the computation of the permissible amount of deduction of the remuneration under section 40(b) is concerned. As per Explanation 3 of section 40(b) of the Act, Assessing Officer does not get the jurisdiction to go behind the net profit shown in the Profit Loss account except to the extent of the adjustments provided in the Explanation 3, nor he is empowered to decide under which head the income is to be taxed. The net profit as shown, is not to be allocated into different components. As the issue is squarely covered in favour of the assessee by the judgment of the Jurisdictional High Court of Gujarat in the case of CIT V/s J.J. Industries (supra), and by the judgment of the Hon`ble High Court of Calcutta in the case of Md. Serajuddin Bros (supra) and ld. DR for the Revenue is unable to produce any material to controvert the aforesaid findings of the above noted binding precedents. Respectfully following the above bind ..... X X X X Extracts X X X X X X X X Extracts X X X X
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