THE issues before the Bench are - Whether while computing the amount allowable u/s 40(b)(v) as remuneration to partners, the net profit will include the income from other sources also and not the income from business alone and Whether when the issue of determination of the net profit is a debatable, the assessing officer exceeded his jurisdication by making rectification u/s 154 of the Income tax Act. And the verdict goes in favour of the assessee.
Facts of the case
Assessee is a partnership firm. Four assessment were completed u/s 143(1)(a). AO issued notice u/s 154 for all the years
Assessee is a partnership firm. Four assessment were completed u/s 143(1)(a). AO issued notice u/s 154 for all the years
alleging that assessee had claimed excessive deduction on account of partners’ remuneration stating 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 computation of allowable partners’ remuneration. Assessee objected to reopening of the same raising the question of jurisdiction as the point raised in the notice was debatable and arguable. AO did not accept the appellant’s contention and passed the orders. The CIT (A) also rejected the appeals of the assessee. ITAT also disallowed the appeal of the assessee.
On appeal before the HC, the assessee contended that the appeals were dismissed without giving any resonalbe opportunity of being heard as the assessee’s representative appeared before the tribunal without receiving any notice and the tribunal assured that the appeals arose out of rectification of the intimation issued u/s 143(1)(a) could be allowed in assessee’s favour and as such the assessee did not make any submission.
Assessee contended that the matter being old should be considered on merits. For the purpose of Explanation 3 to Section 40(b)(v), the assessee took into consideration its net profit as shown in the profit and loss account which included granting consultancy fees, interest on bank and company deposit, profit on disposal of cars used in the business and interest on advance tax and those items were shown in the return under heading ‘income from other sources’. In terms of Explanation 3 of Section 40(b)(v), the said explanation provides for taking the net profit as shown in the profit and loss account and not the profit computed under the head ‘profit and gains on business or profession’. 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. If it was intended to only profit computed under the head ‘profits and gains on business or professions, the expression “profit as computed under the head ‘profit and gains on business or profession” used in Explanation 33A to Section 80HHC and Section 33AB would had also found place in Explanation 3. Section 29 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’. Further AO lacked the jurisdiction to act u/s 143(1)(a) or u/s 154 as interpretation of Explanation 3 to Section 40(b)(v) requires decision on a debatable question of law which cannot be dealt with as a prima facie adjustment u/s 143(1)(a) or as mistake apparent from the records u/s 154. Section 143(1)(a) conferred a very limited power to an AO to make an adjustment only in respect of what was obvious or deducible from the return as filed without doubt or debate. If no prima facie adjustment could be made on an issue u/s 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 u/s 154 for rectifying such an intimation.
Revenue contended that from the plain reading of Section 40(b)(v) Explanation 3 of the Act it was manifestly clear that the book profit meant only that net profit computed in the manner laid down in Chapter IV-D of the Act which dealt with profit and gains on business or profession. It did not include profits chargeable in Chapter IV-F that dealt with income from other sources. Further Section 154(1)(b) provided that with view to rectify any mistake apparent from the record an income-tax authority referred to under Section 110 may amend any intimation or deemed intimation under which of subsequent of Section 143 of Act, therefore, Section 154(1)(b) of the Act specifically included amendment of any intimation u/s 143(1). Since the provisions of Section 40(b)(v) Explanation 3 of the Act is very clear and unambiguous and the only inescapable conclusion as that income falling under the head income from other sources under Chapter IV-F cannot be included under the term book profits, the mistake in calculation by the appellant is a mistake apparent from the records and AO has rightly invoked the provisions of Section 154.
After hearing both the parties, the High Court held that,
++ undoubtedly this is a debatable issue and such debatable issue cannot be a ground for rectification u/s 154. 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 of having concurrent jurisdiction exercising power under Section 154 of the said Act. Clause (v) of section 40 nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of the said Act that total incomes of any previous years includes all income from whatever source derived;
Assessee contended that the matter being old should be considered on merits. For the purpose of Explanation 3 to Section 40(b)(v), the assessee took into consideration its net profit as shown in the profit and loss account which included granting consultancy fees, interest on bank and company deposit, profit on disposal of cars used in the business and interest on advance tax and those items were shown in the return under heading ‘income from other sources’. In terms of Explanation 3 of Section 40(b)(v), the said explanation provides for taking the net profit as shown in the profit and loss account and not the profit computed under the head ‘profit and gains on business or profession’. 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. If it was intended to only profit computed under the head ‘profits and gains on business or professions, the expression “profit as computed under the head ‘profit and gains on business or profession” used in Explanation 33A to Section 80HHC and Section 33AB would had also found place in Explanation 3. Section 29 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’. Further AO lacked the jurisdiction to act u/s 143(1)(a) or u/s 154 as interpretation of Explanation 3 to Section 40(b)(v) requires decision on a debatable question of law which cannot be dealt with as a prima facie adjustment u/s 143(1)(a) or as mistake apparent from the records u/s 154. Section 143(1)(a) conferred a very limited power to an AO to make an adjustment only in respect of what was obvious or deducible from the return as filed without doubt or debate. If no prima facie adjustment could be made on an issue u/s 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 u/s 154 for rectifying such an intimation.
Revenue contended that from the plain reading of Section 40(b)(v) Explanation 3 of the Act it was manifestly clear that the book profit meant only that net profit computed in the manner laid down in Chapter IV-D of the Act which dealt with profit and gains on business or profession. It did not include profits chargeable in Chapter IV-F that dealt with income from other sources. Further Section 154(1)(b) provided that with view to rectify any mistake apparent from the record an income-tax authority referred to under Section 110 may amend any intimation or deemed intimation under which of subsequent of Section 143 of Act, therefore, Section 154(1)(b) of the Act specifically included amendment of any intimation u/s 143(1). Since the provisions of Section 40(b)(v) Explanation 3 of the Act is very clear and unambiguous and the only inescapable conclusion as that income falling under the head income from other sources under Chapter IV-F cannot be included under the term book profits, the mistake in calculation by the appellant is a mistake apparent from the records and AO has rightly invoked the provisions of Section 154.
After hearing both the parties, the High Court held that,
++ undoubtedly this is a debatable issue and such debatable issue cannot be a ground for rectification u/s 154. 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 of having concurrent jurisdiction exercising power under Section 154 of the said Act. Clause (v) of section 40 nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of the said Act that total incomes of any previous years includes all income from whatever source derived;
++ thus for the purpose of Section 40(b)(v) read with Explanation there cannot be a 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 head profit and gains of business or profession. Even if the income from other sources is included in the profit and loss accounts to ascertain the net profit qua book-profit for computation of the remuneration of the partners the same cannot be discarded.
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