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2023 (12) TMI 55 - AT - Income TaxRevision u/s 263 - as per CIT there is Default computing deduction u/s 40(b)(v) towards partners remuneration - Interest income be excluded from book profit while computing permissible remuneration u/s 40(b)(v) - CIT setaside the assessment for misplacing explanation 3 in arriving eligible amount of book profit for the purpose of clause (v) of sub-section (b) of 40 - HELD THAT:- Section 40(b)(v) restricts a partnership firm from claiming deduction towards remuneration paid to its working partner exceeding certain limits of ‘book profit’. The explanation 3 defines the term ‘book profit, means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.’ The present issue is squarely covered by the judgement of CIT Vs J J Industries [2013 (7) TMI 577 - GUJARAT HIGH COURT] and Md. Serajuddin & Bros. [2012 (8) TMI 104 - CALCUTTA HIGH COURT] any interest earned from the funds deployed which arose out business activity by no stretch of imagination can it be categorized under the head income from other sources. Further in similar facts and circumstance in Lok Holdings’ [2008 (1) TMI 365 - BOMBAY HIGH COURT] has categorically held that interest earned from deposit of funds linked to any business activity is income from business & profession and thus, cannot be categorized as income arising from other sources. It is a settled principle of law now that, income for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be as appearing in the profit and loss account. The interest income, thus, cannot notionally be excluded while determining allowable of deduction of remuneration to partners u/s 40(b)(v) of the Act. In the extent case, the interest income shall form part of business income for the purpose of computing admissible deduction u/s 40(b)(v) of the Act. CBDT vide para (iv) of Circular No. 12/2019 dt. 19/06/2019 instruction ‘to exclude all incomes such as capital gain, interest, rental income, income from other sources etc. which do not fall under the head 'profit or gain of business or profession', from the figure of book profit for the purpose of section 40(b)(v)’ shall failed make its application in the present case for two reasons that; (1) Firstly, circular although binding but in no case shall override aforestated judicial precedents (2) Secondly, assessment as well impugned revisionary order were framed anterior to circular coming into effect. Decided in favour of assessee.
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