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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.
M/S. MAC INDUSTRIES VERSUS INCOME TAX OFFICER, WARD-6, VAPI.
Short Overview of the case:
The issue involved was with regard to computation of book profit for section 40(b) and allowability of deduction towards remuneration.
Court opined that for the purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book profit.
Therefore, the interest income earned by the assessee-firm from the fixed deposit receipts should not be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners’ remuneration.
For the purpose of ascertaining such ceiling of the partners’ remuneration 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 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.
Court also noted the case of MD. SERAJUDDIN & BROTHERS VERSUS COMMISSIONER OF INCOME TAX [2012 (8) TMI 104 – CALCUTTA HIGH COURT] –
Thus we uphold the contention of the assessee and therefore we delete the addition
Decided in favour of assessee.