TMI Blog2005 (8) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to fulfilment of specified conditions. After allowing such payments to partners upto specified limits, the balance of income of the firm is subject to maximum marginal rate of tax. The earlier distinction between the rates of income-tax for professional and nonprofessional firms has been removed The partners are now not liable to tax in respect of the share, of income from the firm. However remuneration and interest allowed to partners are to be charged to income-tax in their respective hands under the head 'Income from business or profession'. Thus, s. 40(b) imposes conditions and financial limitations for deduction of remuneration to partners. The section adopts the net profit as shown in the P L a/c of the firm as the base for working out the financial limits for deduction. It is in consonance with the provisions of the IT Act as well as the provisions of the Indian Partnership Act that for assessment of income from other sources which are assessable under other heads are also embedded in such 'net profit'. In order to ensure that the figure of 'net profit' is not artificially reduced by claiming deduction far in excess of limits permissible under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s deduction on account of payment of remuneration to partners was allowed in the course of original assessment. The AO stated that the assessee was having business profit as well as interest on bank deposit. While computing the maximum amount of remuneration to be allowed to partners only business profit is to be taken into account and not interest on bank deposit which is to be taxed as income from other sources, The AO also observed that with regard to reopening of the assessment, there was a direct decision of jurisdictional High Court in the case of Praful Chunilal Patel Ors. vs. M.J. Makwana, Asstt. CIT (1998) 148 CTR (Guj) 62 : (1999) 236 ITR 832 (Guj) according to which the cases where an error or mistake is detected, it can never be said that there is only a mere change of opinion. The mistake or error which is detected and which constituted a valid decision or cause to form a belief that in the first assessment as a result of which the income has escaped assessment, would constitute a reason to believe that income had escaped assessment and such cases where mistakes and errors are detected and which constitute a valid justification or cause to form a belief sought to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me on bank deposits had to be assessed under the head 'Business income'. Considering this opinion of law, the CIT(A) concluded that the AO was not justified in treating the interest income from surplus deposit invested in the bank as 'income from other sources'. He, therefore, directed the AO to assess interest income under the head 'Income from business' and to consider this income for the purpose of allowing remuneration to the partners. 5. Aggrieved by the above order of the CIT(A), the Department is in appeal before us. It was argued by the learned Departmental Representative that interest income, by no stretch of imagination, can be treated as 'income from business or profession' as per the verdict of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. Therefore, the CIT(A) is not justified in directing the AO to treat such interest income as income from business and profession for allowing deduction on account of remuneration paid to partners. 6. On the other hand, it was argued by the learned Authorised Representative that the Department is consistently allowing payment of remuneration to partners on the entire income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of the proposition that deposit made by the assessee with bank was capital employed for the purpose of business which would become part of the capital of the industrial undertaking and any income earned by the capital employed would automatically become business income of the assessee, he relied on the decision of the Madras High Court in the case of Madras Refineries Ltd. By taking recourse to r. 27 of the IT AT Rules, the learned Authorised Representative submitted that the CIT(A) was not justified in holding that reopening of assessment as valid under s. 147, when undisputedly scrutiny assessment was framed under s. 143(3) in which entire material was before the AO while allowing the claim for remuneration. For this purpose, he relied on the decision of the Kerala High Court in the case of CIT vs. BPL Systems Projects Ltd. (1997) 137 CTR (Ker) 98 : (1997) 227 ITR 779 (Ker), wherein it was held that the respondent, though may not have appealed, can support the order appealed against on any of the grounds decided against him. The learned Authorised Representative relied on the decision of the Full Bench of the Tribunal in the case of CIT vs. Kalvinator of India Ltd. (2002) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of any other firm- (a) on the first Rs. Rs. 50,000 or at 75,000 of the book the rate of 90 per profit, or in-case cent of the book of a loss profit, whichever is more; (b) on the next Rs. at the rate of 60 75,000 of the book per cent; profit (c) on the balance at the rate of 40 of the book profit per cent; Provided 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. The term 'book profit' has been defined in Expln. 3 below s. 40(b)(v) as under: Explanation 3.- For the purposes of this clause, 'book profit' means the net profit, as shown in the P L a/c 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. 8. It is crystal clear from the plain reading of the above provision that allowability of deduction of remuneration is dependent on provisions in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t' have been defined for this purpose in Expln. 3 as 'net profit' as shown in the P L a/c for the relevant previous year. This brings not only the income computed under the head 'Business' but the 'net profit' as shown in the P L a/c to the centrestage of s. 40(b). This definition is, no doubt, further qualified by the words computed in the manner laid down in Chapter IV-D . These qualifying words have been advisedly used in order to ensure that inadmissible or excessive claims relating to income to be computed under the head 'Business' which are embedded in the book profit are excluded from the base for limiting remuneration to partners. Prima facie, under s. 40(b) the legislature did not authorize exclusion of non-business receipts and expenditure recorded in the P L a/c. The legislature knew that in the scheme of the IT Act, the whole income of the firm under different heads is liable to be assessed in the hands of the firm and that remuneration to partners debited to P L a/c cannot be broken down into different components, to be allocated to the income computed under different heads. Such exercise for breaking down remuneration to partner wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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