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“We have given a thoughtful consideration to the orders of the authorities below qua the issue. The book profit has been defined in Explanation 3 below section 40(b) of the Act and the same reads asunder:-

“Explanation-3 – For the purpose of this clause, “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 remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit” Only from the business income of the firm.”

A perusal of the above clearly shows that the book profit as shown in the Profit and Loss account has to be computed in the manner laid down in Chapter IV-D. Therefore, in our considered opinion, both the lower authorities have erred in setting off brought forward losses first in computing the book profit for the allowability of remuneration to partners. In our understanding of the law, the remuneration to partners should be first allowed and thereafter brought forward business losses should be set off. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.O. to delete the disallowance of Rs. 5,13,714/-.”

 

Tag: Explanation 3 below section 40(b), section 40(b), book profit, remuneration to partner, set off brought forward business losses, set off business losses, setting off brought forward losses, Section 72, Section 75,  Section 32(2)

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “SMC” BENCH

(BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI MAHAVIR PRASAD, JUDICIAL MEMBER)

 

M/s Shree Yogeshwar Developers 16, Vasudha Society, Sardar Patel Colony, Naranpura, Ahmedabad	V/S	Income Tax Officer, Ward- 9 (1), Ahmedabad
(Appellant)		(Respondent)

 ORDER

Date of hearing : 06 -04-2017

Date of Pronouncement : 13 -04-2017

PER N.K. BILLAIYA, ACCOUNTANT MEMBER:

2. Being aggrieved by the order of the Ld. CIT(A)-XX, Ahmedabad dated 04.03.2014 pertaining to A.Y. 2005-06, the assessee has preferred this appeal before
3. The sum and substance of the grievance of the assessee is that the ld.  CIT(A) erred in confirming the disallowance of partners remuneration of Rs. 5,13,714/-.

 

3. The assessee contends that the ld. CIT(A) erred in holding that brought forward business loss is first to be taken into consideration for the purpose of computing book profit u/s. 40(b) of the

 

4. While scrutinizing the return of income for the year under consideration,  the A.O. noticed that the firm has claimed remuneration to partners at Rs. 7,73,486/-. The A.O. was of the firm belief that the correct remuneration allowable is Rs. 2,59,772/- and hence the income to the tune of Rs. 5,13,714/- has escaped

 

5. The assessment was reopened and accordingly statutory notices were issued and served upon the assessee. The assessee was show caused as to why the excess remuneration to the tune of Rs. 5,13,714/- should not be disallowed as there were brought forward losses which were to be adjusted before computing the book profit for the allowability of remuneration to partners.

 

6. The assessee furnished a detailed reply stating that the brought forward business losses will not be deducted from book profit and the net profit after allowing remuneration and interest to partners should be considered for the calculation of set off against brought forward business

 

 

7. This contention of the assessee did not find any favour with the A.O. who was of the opinion that Section 32(2) is governed by section 72(2) of the  Act. Therefore, to determine book profit for the purpose of remuneration paid to partners’ effect of section 72(2) should be given first before giving effect to the unabsorbed depreciation u/s. 32(2) of the Act. The A.O. accordingly re-computed the book profit for the purpose of  remuneration to partners and disallowed the remuneration to the tune of Rs.5,13,714/-.

 

8. Assessee carried the matter before the ld. CIT(A) but without any

 

 

9. Before us, the ld. counsel for the assessee reiterated what has been stated before the lower authorities. Per contra, the ld. D.R. supported the findings of the revenue

 

10. We have given a thoughtful consideration to the orders of the authorities below qua the issue. The book profit has been defined in Explanation 3 below section 40(b) of the Act and the same reads asunder:-

“Explanation-3 – For the purpose of this clause, “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 remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit” Only from the business income of the firm.”

 

 

11. A perusal of the above clearly shows that the book profit as shown in the Profit and Loss account has to be computed in the manner laid down in Chapter IV-D. Therefore, in our considered opinion, both thelower

 

 

authorities have erred in setting off brought forward losses first in computing the book profit for the allowability of remuneration to partners. In our understanding of the law, the remuneration to partners should be first allowed and thereafter brought forward business losses should be set off. We, therefore, set aside the findings of the ld. CIT(A) and direct the A.

1. to delete the disallowance of Rs. 5,13,714/-.

 

 

 

12.Appeal filed by the Assessee is allowed.
Order pronounced in Open Court on	13	– 04- 2017
Sd/-		Sd/-
(MAHAVIR PRASAD) JUDICIAL MEMBER True Copy		(N. K. BILLAIYA) ACCOUNTANT MEMBER

Ahmedabad: Dated 13 /04/2017

 

 

Rajesh

Copy of the Order forwarded to:–

1. The
2. The Respondent.
3. The CIT (Appeals)–
4. The CIT
5. The DR., ITAT,
6. Guard

By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad