Case Law Details
RELEVANT PARAGRAPH
10. We have ” considered the arguments advanced by the parties in the view of the various judicial pronouncements cited at bar and with reference to the material placed on record and referred to. Firstly, we shall advert to the issue whether the controversy in hand that in the facts and circumstances of the case, the subjected amounts of interest could be treated as business income or income from other sources is essentially required to resolve the main dispute relating to the allowability or otherwise the claim of deduction made u/s 40(b) on the net profit, which also included the subjected amount of interest. We agree with the contention of the Id. Counsel, for the assessee that a pertinent question, which certainly arises in the present case is as to whether the technical classification as done by the authorities below u/s 14 r/w Sec.28 or Sec.56, was at all required on the facts of the present case and in the law, with which, we are concerned’ in as much as the present claim of deduction of remuneration to the partners, was made u/s 40(b) of the Act. For this purpose, we shall first refer to the provisions of Sec.40(b), the relevant extracts from the said provision arc also reproduced here under in verbatim:
S40(a) XXX — XXX XXX
fb) in the cose of any firm asses sable as such,—
i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as “remuneration” ) to any partner who is not a working partner;
or
ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorized by. or is not in accordance with, the terms of the partnership deed; or
(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by. or is not in accordance with any earlier partnership deed. so. however, that the. period of authorization for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or
(iv) any payment of interest to any partner which is authorized by. and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve/ per cent simple interest per annum; or
(v) any payment of remuneration to any partner who is a working partner, which is authorized by. and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of suck payment to all the partners during the previous year exceeds the aggregate amount computed as here under;—
(J) in case of a firm carrying on a profession referred to in section 44AA or which is notified for the purpose of that section—
(a) on the first Rs. 1,00,000 of Rs. 50.000 or at the rate of the book-profit or in case 90 per cent of the book of a loss profit, whichever is more;
(b) on the next Rs. J, 00,000 of at the rate of 60 per cent; the book-profit
(c) on the balance of the at the rate of 40 per cent; book-profit (2) in the case of any other firm-
(a) on the first Rs. 75,000 of Rs. 50,000 or at the rate of the book-profit, or in case 90 per cent of the book of a loss profit, whichever is more;
(b) on the next Rs. 75,000 of at the rate of 60 per cent; the book-profit
(c) on the balance of the at the rate of40 per cent; book-profit
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.
Explanation! .- XXX XXX – – XXX
Explanation 2.~ XXX XXX — XXX
Explanation 3.—For the purposes 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 JV-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.
Explanation 4.—For the purposes of this clause, “working partner ” means an individual who is actively engaged in conducting the affairs. of the business or profession of the firm of which he is a partner;)
It is not denied that as per sub section (2) of Sec.40(b ) the allowable deduction is to be computed as per given percentage with reference to the amount of “book profit”. Book profit, which in turn, lias been defined under Explanation 3 to mean the net profit as shown in the profit & loss account for the relevant previous year, computed in the manner laid down in the Chapter IV- D as increased by the aggregated amount to remuneration A bare reading of the said Explanation 3, make it evident (hat 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. In other words, there is no warrant to select the head of income so far as the computation of the permissible amount of deduction of the remuneration u/s 40(b) is concerned. It is not basically tire dispute between the parties to tax the receipts mulct a particular head. The Legislature in its wisdom, having given a specific definition of book profit in Explanation 3, there is no warrant to go beyond die definition. The book profit has been defined to mean the net profit as shown by the assessee in its Profit & Loss a/c for the relevant previous year and after making certain adjustments i.e. to adjust such net profit 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. In other words, the net profit as shown has been subjected to two adjustments i.e. one, to be computed in the manner laid in the Chapter IV-D viz the disallowable expenditure to be added and second, such net profit to be increased by the amount of remuneration, if already debited in the Profit & Loss a/c. We do not find in the contention of the Id. DR that simply because the profit has to be computed in the manner laid down in the Chapter IV- D, do not mean that a part of the receipt credited to the Profit & Loss a/c should be assessed under a particular head of income as classified u/s 14. On the contrary, the Explanation does not at all require the selection of a head of income u/s 14 for this purpose. Therefore, once the assessee has shown net profit in its Profit & Loss a/c, what is required is only a few adjustments thereto as required/permitted by law. This should not be confused with the selection of the head/s of income. The qualifying words used in the said Explanation 3 computed in the manner hid down in the Chapter IV- D has been purportedly used by the legislature so as to ensure that all the inadmissible expenditure though debited to the Profit & Loss a/c should be added back so that the real operational profits earned by the assessee firm In the collective efforts of the partners.* be made a basis to compute the allowable remuneration with reference there to only, it is under this background, the legislature has not authorized exclusion of such receipts from the Profit & Loss a/c even though may be non business receipts. This theory also fit in the under of forming a partnership firm and the relations defined u/s 4 of the Partnership Act, as discussed (infra). Ii is not disputed that in the instant case, the remuneration was claimed (paid) only after. considering the net profit of the firm in its Profit &” Ioss and the required adjustments were also duly made i.e. such net profit was computed in the manner laid down in Chapter IV- D and was increased by the amount of remuneration debited to the Profit & Loss a/c. We arc iii agreement with the contention of the Id. Counsel that the law contained u/s 115J/JA is a analogous law and therefore, the judicial pronouncements or guideline available with reference to the said provision, can very well be used here also for our guidance. For a better appreciation therefore, the relevant extracts from the said provision are also reproduced hereunder in verbatim 15JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee. being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the Jst day of April, 1997 52[bvt before- the 1st day of April, 2001] (hereafter in this section referred to as the relevant previous year} is less than thirty per cent of Us book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit (2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts 11and III of Schedule V153 to the Companies Act. 1956 (t of 1956): Provided that while preparing profit and loss account^ the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of1956) :
xxx xxx xxx”
Explanation.— For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (2), as increased by-
xxx xxx xxx”
The said provision is popularly known as Minimum Alternate Tax and it is a case of taxation of deemed income in the cases of Limited Companies where, after reducing permissible deductions in accordance with law, the income of the assessee, results into loss or results into a NIL income, the legislature has presumed some minimum deemed income on which, the assessee company has been made to make payment of tax. Accordingly, 30% of book profits, if found less than the total income declared by that assessee company shall be deemed to be the total income for the year. For the purpose of computation, book profit has been defined in the Explanation below Sec.ll5J/JA( !)as “book profit” means the net profit as shown in the profit and loss account for the relevant previous year, as increased by certain amounts mentioned in clauses (a) to (if) there below and similarly to be reduced by the various amounts as mentioned under clauses (i) to (ix) (the positions of the law as stood in A.Y.2008-09, has been considered here). We find that the highlighted portion in the said Explanation u/s II5 J/J A has been worded exactly in the same manner in the Explanation 3 below Sec.40(b) also. We may now refer to the decision in the case of Apollo Tyres Ltd. v/s CIT [2002] 255 ITR 273 (SC). The brief facts necessary for the disposal of first of the above Questions are as follows: The assessee-company while determining its net profit for the relevant accounting year has provided for arrears of depreciation in its profit and loss accounts which according to the revenue is not in according to the Revenue is not in accordance with Parts II and HI “of Schedule VI to the Companies Ac,1956 (the “Companies Act”). Hence, the Assessing Officer while considering the case of the assessee-company under U5J of the Income Tax Act recomputed to said profit and loss account of the company so as to exclude the provision made for arrears of depreciation. The said action of the Assessing Officer in questioning the correctness of the accounts maintained by the company was challenged by the company before the Income-tax Appellate Tribunal (“the Tribunal”) which among other things held that the Assessing Officer has no authority to reopen the accounts of a company which is certified by the auditors of the company have maintained in accordance with the provisions of the Companies Act and which account has been accepted in the general meeting of the company as well as by the Registrar of Companies. This view of the Tribunal was not accepted by the High Court that the Assessing° Officer has the authority to examine whether the accounts of the company have been maintained in accordance with the requirement of sub-section (1A) of section i 15J and in that process if he finds that the accounts of the company are not in accordance with the provision 0f has Companies Act. he could make the necessary changes before proceeding to assess the company for tax under the Explanation to section 115J of the Income-tax Act. It is under this background, the Hon’ble Supreme Court has held that the Assessing Officer while computing the income under section H5J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained- in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act’ was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act « which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the. Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. On similar analog)’, here also by defining book profit in a similar phraseology, the legislature only wanted to arrive at a particular figure of net profit for the purpose of Sec.40(b) and not more than that. .The Explanation 3 nowhere empowers the AO or the AO 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. The dispute relating to the allowablity of deduction of remuneration u/s 40(b) falls within the group of See.28 to 44DB, falling under Chapter 1V-D titled as profits or gains income from business & profession. Moreover, Sec.40(b) starts with the words,” Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deduced in computing the income chargeable under (he head “Profits and gains of business or profession “. Therefore, it is presupposed that the AO was already working under the head profits or gains income from business & profession only and not under a different head. Thus, it is not the stage of the selection of a proper head u/s 14 of the Act. At this juncture, we find useful to refer a decision cited by the Id. AR in CIT v/s Hycron India Ltd. (2008) 219 CTR 288 (Raj.) wherein, it was held that Exemption under s. JOS – Profits and gains derived from Export Oriented Undertaking – Interest from sister concern – Interest received by assessee from sister concern on advances against purchase of goods is ‘profits and gains’ eligible for exemption under s. I OB – Expression “profits and gains ” as used in s 2(24), is wider expression, and. is not confined to “profits and gains of business or profession”. Para 8 onward of the decision may be referred for an elaborate discussion.
Our above view also find support from the definition of partnership provided u/s 4 of the Indian Partnership Act, 1932, which reads that ^Partnership is the relation between the persons who have agreed to share the profit of a business carried on by nil or any at item acting for all”. The computation of the remuneration to the partners concerns the relationship of the partners. The net profit declared in the Profit & Loss a/c by the partners is the result of the profit of a business carried on by all or any of them acting for all. Since the book profit has been defined to be the net profit shown by the partners in the Profit & Loss a/c of the line, ii is the profits which the partners have agreed to share and therefore, also such net profit has to be considered as business income and in any case at least for the purpose of Sec.40(b).
The provisions contained u/s 28 (v), also support our view which, tot a better appreciation is also reproduced hereunder in verbatim:
“28(vJ The following income shall be chargeable to income-tax under the head “Profits and gains of business or profession u/s 40 (b).
(v) any interest salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm.
Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under clause (b) of section 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted,” As can be seen that any interest salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm, despite their name and nature, shall be chargeable to income-tax under the head “Profits and gains of business or profession ” u/s 40 (b). Needless to say, what a partner share, is only share out of the very net profit as shown by the firm in the Profit & Loss a/c and with which, we are presently concerned u/s 40 (b). The ratio laid by Hon’ble Supreme Court held in CIT v/s R.N. Chidambaram Pillai (1977) 106 ITR 292 (SC) held that salary paid to a partner of a firm shall continue the same character, as was in the hands of firm. To preciously quote it was held that “A firm is not a legal person, even though it has some attributes of personality. In Income-tax law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz; the employer and the employee, there cannot be a contract of service, in strict law between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm. Held accordingly, the salary paid to a partner by a firm which grows and sells tea is exempt from tax, under rule 24 of the Indian-tax Rules, 1922, to the extent of 60 percent thereof, representing agricultural income and is liable to tax only to the extent of 40 percent”. Applying this analogy, if the nature of the income has been deemed by the legislature to be the business income by the recipient, the source also should bear the same character i.e. business income. We sec no reason not to proceed on this analogy in as much as the legislature has itself deemed such receipts like . interest salary, bonus, commission or remuneration as a business income, being a part of profit of the firm. The Id. AR rightly submitted and appraised the crux of the pre-amended position law relating to the taxation of the firm vis a vis the partners. A golden rule of interpretation is the contextual interpretation. A word has always to be interpreted only with the context with which, one is seized. Here we are concerned with the provisions of Sec.40(b) hence, the interpretation has to be done accordingly. Interpretation of the provisions otherwise or the way the Id. AO has done, if accepted, has the effect of rendering the very Explanation 3 totally nugatory or purposeless. Needless to say, that every word used by the legislature, is significant and cannot be lost sight of.
11. We are thus, fully concur with the contention of the Id. Counsel For the assessee, Shri Gargieya that it is not the case where the matter of classification is required. The AO was required to have computed the book profit as per the specific definition given under Explanation 3 below Sec.40(b). Consequently therefore, the interest income of Rs.7,63,997/ – be not excluded and the net profit as declared by the appellant be considered. In other words, the impugned dis allowance made because of a different approach adopted by the AO and confirmed by the Id. CIT(A), is hereby deleted. Hence, this ground is decided in the favor of the assessee.
