Q: Whether for the purpose of calculation of partners remuneration , Interest earned on FDRs etc to be excluded as this income will come under the “head income from other sources” ?
Q Partners remuneration has to be calculated on the income shown under the head “Income from Business or Profession” or on Net profit shown in the Profit and Loss account (Which includes incomes shown under Business or profession and income which are shown under the head other sources ) ?
Partner’s remuneration to be on net profit inclusive of income from other sources .For purpose of computation of allowable remuneration to partners under Section 40(b) net profit includes not only income of business but also income from other sources
HIGH COURT OF CALCUTTA
Md. Serajuddin & Bros.
Commissioner of Income-tax
KALYAN JYOTI SENGUPTA AND JOYMALYA BAGCHI, JJ.
IT APPEAL NO. 201 OF 2003
MAY 17, 2012
- The assessee, a partnership firm, filed its return of income for the relevant assessment years. The Assessing Officer issued intimation under section 143(1)(a).
- The Assessing Officer issued notice under section 154 for all the years alleging that the assessee had claimed excessive deduction on account of partner’s remuneration which had been wrongly allowed by the intimations under section 143(1)(a).
- It was alleged in the said notice that income by way of consultancy fees, interest on bank deposit, profit on disposal of assets and interest on advance tax which had been shown as income under the head ‘other sources’ could not be considered as part of the book profit for the purpose of computation of allowable partners’ remuneration. Hence, the Assessing Officer rectified the said alleged mistake under section 154 by adding back the deduction allowed in excess.
- The Commissioner (Appeals) rejected the appeal of the assessee.
- On further appeal, the Tribunal without giving any reasonable opportunity to the assessee, dismissed the appeal.
- On appeal to the High Court:
In the respective intimations under section 143(1)(a ), it was specifically conveyed that while determining the net profit, rather book profit as mentioned in the said Explanation 3, the income from other sources was accepted. But in the order it appears the Assessing Officer was of the view that for the purpose of computation of allowable remuneration to partners the book profit has to be ascertained from the income of the business alone and not from other sources. [Para 16]
Thus, it clearly appears that on earlier occasion it was decided 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. [Para 17]
Undoubtedly this is a debatable issue and such debatable issue cannot be a ground for rectification under section 154. [Para 18]
It has been appropriately urged by the assessee that it is not within the purview of section 154; rather it could have been an action either by way of revision or by appeal, not by a authority having concurrent jurisdiction exercising power under section 154. [Para 22]
The contention of the revenue cannot be accepted that it is sheer computation mistake based on law. This submission has no force at all in view of the legal position of the Act. [Para 23]
Chapter IV-D nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from any other source of income. Section 29 provides how the income from profits and gains of business or profession should be computed. It is to be done as provided under sections 30 to 43D. By virtue of section 5 total income of any previous year includes all income from whatever source derived. Therefore, for the purpose of section 40(b)(v ), read withExplanation there cannot be separate method of accounting for ascertaining net profit and/ or book-profit. The said section nowhere provides that the net profit as shown in the profit and loss account not the profit computed under the heads ‘profit and gains of business or profession’ (sic ). [Para 24]
Thus, it is to be held that, even if the income from other sources is included in the profit and loss accounts to ascertain the net profitqua book-profit for computation of the partner’s remuneration, the same cannot be discarded. [Para 27]