IN THE ITAT MUMBAI BENCH ‘J’
Suresh A. Shroff & Co.
Joint Commissioner of Income-tax 11 (3)
IT Appeal No. 4140 (Mum.) of 2008
[Assessment year 2005-06]
SEPTEMBER 7, 2012
Dinesh Kumar Agarwal, Judicial Member
This appeal preferred by the assessee is directed against the order dated 21.04.2008 passed by the ld. CIT(A) for the A.Y. 2005-06.
2. Briefly stated the facts of the case are that the assessee firm derives income from profession as an Advocate on record of the Hon’ble Supreme Court of India. The return was filed declaring total income of Rs. 90,27,232/-. During the course of the assessment, on examination of the profit and loss account, it was observed by the A.O. that the assessee has credited a sum of Rs. 30,00,000/- as other income which comprises of (i) Compensation for use of shared facilities of Rs.10,00,000/- and (ii) License fees of Rs. 20,00,000/-. The A.O. further observed that while computing the remuneration payable to the partners u/s.40(b) of the Income Tax Act, 1961 (the Act), the assessee has included the above sum of Rs. 30,00,000/- in the book profit. The assessee was asked to explain as to why the other income of Rs. 30,00,000/- be not reduced for computing the book profit. In response, the assessee stated that “the amount is received from M/s. Amarchand and Mangaldas and Suresh A Shroff and Company for use of name /license fee and use of assets. The word other income does not mean that it is income from other sources, but the same is not a receipt as professional fees. We as a auditor use the term as other income and the same is taxable under the head business and profession and it is to be considered as part of Chapter IV D income.” It was further observed by the A.O. that as per agreements dated 01.04.2002 entered into between the assessee and the licensee, the assessee received compensation/license fee of Rs. 30,00,000/- for sharing the assets and as user of premises. According to the A.O. the compensation/license fees are not received for rendering any professional services, therefore, these receipts cannot be considered as professional income. The A.O. further observed that the assessee, in his letter dated 30.11.2007 has also stated that “but the same is not a receipt as professional fees.” According to the A.O. since the assessee himself has admitted that this is not professional income, the same cannot form part of ‘book profit’ for computation of allowable remuneration to partners u/s.40(b) of the Act. Therefore, the A.O. treated the other income of Rs. 30,00,000/- as assessee’s income from other sources u/s.56 of the Act, and consequently he reduced the same from the ‘book profit’ for the purpose of section 40(b) of the Act and allowed remuneration to partners at Rs. 41,76,580/- as against Rs.53,76,580/- claimed by the assessee firm. Accordingly, he completed the assessment at an income of Rs. 1,02,27,240/- vide order dated 26.12.2007 passed u/s.143(3)(ii) of the Act.
3. On appeal, the ld. CIT(A) observed that from the nature of receipts, it cannot be concluded that the same has any nexus with the professional activities carried out by the assessee. He further observed that it is not the business or the profession of the assessee to share the business assets with others as a business or a professional activity neither the licence fee is being received for rendering any such professional activity. It is more akin to leasing activity rather than a professional activity and such income though not in the strict sense a lease rent would be taxable under the residuary head of Other Sources as it would not fall either under the head House Property or business/profession income and accordingly he held that the A.O. was justified in excluding such income for the purposes of working out the remuneration payable to working partners in terms of section 40(b) of the Act, and, hence, upheld the order passed by the A.O.
4. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us taking the following revised grounds of appeal:
“1. The Learned Commissioner of Income Tax (Appeal) erred in treating amount received for name license fees of Rs. 20 Lakh as Income from Other Source instead of Income from Business.
2. The Learned Commissioner of Income Tax (Appeal) erred in treating amount of Rs. 10 Lakhs received on account of shared Assets as Income from Other sources instead of income from Business.
3. The Learned Commissioner of Income Tax (Appeal) failed to appreciate that the name license fee and shared assets amount had been consistently assessed under the head Business since the last 10 years and therefore ought to have been assessed as Business Income following Supreme Court judgment in case of Radhasoami Satsang v. Commissioner of Income Tax reported in 193 ITR Page 321.
5. Alternate to ground above learned CIT has not appreciated that the tax on salary allowed to the firm has been paid by the partner personally hence there is no loss of revenue either to the Assessee or to the department.”
5. At the time of hearing the ld. Counsel for the assessee after referring certain clauses of agreements dated 01.04.2002, income and expenditure account appearing at page 41, chart of income appearing at page 33, copy of scrutiny assessment orders for the A.Yrs 2001-02, 2002-03 and 2003-04 passed u/s.143(3) allowing the remuneration to partners as claimed by the assessee submits that the assessee firm is regularly receiving the amount on account of compensation for use of shared assets and license fees for the use of name from M/s. Amarchand A. Shroff & Co. since 01.04.1995 i.e. AY 1996-1997. In all these years, the said income was offered for tax under the head Income from Business and Profession. She further submits that in the Profit and Loss account, the said receipts were shown under the account head Other Income, as the said income not being received as Professional Fees. She further submits that the A.O. casually asked the nature of other income and why it is not shown as income from other sources. In reply to this query of A.O., a letter was filed saying that the income was not receipt as Professional Fees, hence it was shown as Other Income but it is definitely income from Business & Profession and hence chargeable under the head Income from Business and Profession and so the same could not be considered as Income from Other Source. The A.O. has wrongly interpreted the spirit of the letter and taxed Rs.30 lakhs as Income from Other Source and denied the partners remuneration on the said amount.
6. The ld. Counsel for the assessee further submits that though the finding in the previous years does not constitute re-judicata for the following year, however, this general rule is subject to the qualification that finding reached in the assessment year proceeding for earlier year, after due enquiry would not be reviewed in the subsequent year, if no fresh facts are found in subsequent year. Therefore, finding of the facts on a similar circumstance will have to be followed in the later year as a relevant piece of evidence and therefore it cannot be arbitrarily departed from. In the case of Radhasoami Satsang v CIT  193 ITR 321, the Hon’ble Apex court held that “strictly speaking, res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.” According to the ld. counsel for the assessee since the factual position of the case remains same, the said income has been considered as Income from Business & Profession, the A.O., without understanding the nature of the transaction has treated the income as income for Other Sources, instead of income from Business and Profession.
7. She further submits that both the partners in their returns have also shown the equal amount of remuneration as claimed in the return of income of the firm i.e. in the hands of Shri Shardul A. Shroff Rs. 26,88,290/- and in the hands of Shri Cyril Suresh Shroff Rs. 26,88,290/- vide chart of income appearing at page 59 and 63 of the assessee’s paper book respectively, therefore, there is no loss to the revenue. She, therefore, submits that the amount of remuneration claimed by the assessee firm be allowed in full.
8. On the other hand, the ld. DR while relying on the order of the A.O. and the ld. CIT(A) further submits that since the assessee itself has admitted that the amount of Rs. 30,00,000/- is not the professional income as observed by the A.O. at page 2 of the assessment order and keeping in view that in the earlier assessment years no such enquiry was made by the A.O. and also keeping in view that the principle of resjudicata does not apply to the income tax proceedings, the ld. CIT(A) was fully justified in confirming the order of the A.O. in treating the license fees of Rs. 30,00,000/- as income from other sources not eligible for remuneration to partners. Reliance was also placed on decision of Hon’ble High Court of Bombay in the case of Piaggio Vehicles (P.) Ltd. v. Dy. CIT  290 ITR 377 and on the decision of Hon’ble High Court of Delhi in the case of Consolidated Photo & Finvest Ltd. v. Asstt. CIT  281 ITR 394. He, therefore, submits that the order passed by the A.O. and confirmed by the Ld. CIT(A) be upheld.
9. In the rejoinder, the ld. Counsel for the assessee submits that since the A.O. after application of mind has consistently accepted the claim of remuneration payable to partners as claimed by the assessee firm for the assessment years 2001-02, 2002-03, 2003-04 & 2004-05, therefore, the A.O. was not justified in disallowing the same in the year under consideration. The ld. counsel for the assessee while distinguishing the decisions relied on by the ld. DR placed reliance on the decision of Hon’ble High Court of Delhi in the case of CIT v. Kelvinator of India Ltd.  256 ITR 1, wherein it has been observed at page 19 as under:-
“We also cannot accept the submission of Mr. Jolly to the effect that only because in the assessment order, detailed reasons have not been recorded an analysis of the materials on the record by itself may justify the Assessing Officer to initiate a proceeding under section 147 of the Act. The said submission is fallacious. An order of assessment can be passed either in terms of sub-section (1) of section 143 or sub-section (3) of section 143. When a regular order of assessment is passed in terms of the said sub-section (3) of section 143 a presumption can be raised that such an order has been passed on application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act judicial and official acts have been regularly performed. If it be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the Assessing Officer to reopen the proceeding without anything further, the same would amount to giving a premium to an authority exercising quasi-judicial function to take benefit of its own wrong.”
She, therefore, submits that the disallowance of partners remuneration made by the A.O. and sustained by the Ld. CIT(A) be deleted.
10. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that the facts are not in dispute inasmuch as it is also not in dispute that the assessee firm as per agreements dated 01.04.2002 has shown an aggregate sum of Rs. 30,00,000/- as “other income” comprising of compensation for use of shared facilities of Rs. 10,00,000/- and license fees of Rs. 20,00,000/-. However, while computing the income, the assessee treated the same as part of “income from business and profession” in computing the ‘book profit’ and claimed partners remuneration allowable as per section 40(b)(v) Rs. 53,76,580/- which has been equally divided and shown by the partners of the firm namely Shri Shardul A. Shroff Rs. 26,88,290/- and Shri Cyril Suresh Shroff Rs. 26,88,290/- as salary income from the firm. However, the A.O. while working out the ‘book profit’ eligible for partners remuneration has considered the professional income of Rs. 91,19,055/- and profit on sale of premises of Rs. 40,35,453/- as ‘book profit’ and excluded the dividend and interest income of Rs. 14,04,182/- and other income of Rs. 30,00,000/- in computing the ‘book profit’ for the purpose of partners remuneration.
11. The question before us as to whether for the purpose of computation of allowable remuneration to partners, the ‘book profit’ comprises the entire net profit as shown in the profit and loss account or only profit and gains of business assessed under Chapter IV-D of the Act.
12. Under clause (v) of section 40(b) read with Explanation 3, the remuneration allowable to working partners upto Rs. 50,000/- is fully allowable in the hands of the firm. In case the aggregate payment exceeds the limit of Rs. 50,000/-, certain monetary limits have been prescribed under section 40(b)(v) in the form of a percentage of “book-profit”. For the purposes of this clause, according to Explanation 3, the ‘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 IVD) 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. The said chapter nowhere provides that net profit should be the only income from business or profession 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. Thus 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. In other words, according to the said Explanation ‘book profit’ means the net profit as shown in the profit and loss account including income from other sources not the profit computed under the head profit and gains of business or profession.
13. This view also finds support from the recent decision of Hon’ble Calcutta High Court in the case of Md. Serajuddin & Bros. v. CIT  210 Taxman 84/24 taxmann.com 46, wherein their lordships while considering the similar issue under the relevant provisions of section 40(b)(v) of the Act have observed and held as under :-
“The said chapter 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 separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides as rightly pointed by Mr. Khaitan, learned Senior Advocate 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.
The decision of the Supreme Court in the case of Apollo Tyres Ltd. v. Commissioner of Income Tax reported in  255 ITR 273 (SC) is an appropriate guidance of this point as to what should be done in order to ascertain the net profit in case of this nature. At page 280 in the first paragraph of the report the Supreme Court observed as follows:-
“Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of the Companies Act and another for the purpose of income-tax both maintained under the same Act. If the Legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in section 115J that “income of the company as accepted by the Assessing Officer”. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.”
At page 282 of the said report the Supreme Court has also observed amongst other-
“The fact that it is shown under a different head of income would not deprive the company of its benefit under section 32AB so long as it is held that the investment in the units of the UTI by the assessee-company is in the course of its “eligible business”. Therefore, in our opinion, the dividend income earned by the assessee-company from its investment in the UTI should be included in computing the profits of eligible business under section 32AB of the Act.”
Thus it emerges as follows:
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.
In view of the aforesaid discussion as above we, therefore, allow this appeal and we set aside all the orders passed by all authorities below. There will be no order as to costs.”
14. As regards alternate claim of the assessee that on the remuneration received by the partners of the firm, the partners have paid tax, which was not controverted by the Revenue, we are of the view that it cannot be taxed twice. This view also finds support from the decision of the Tribunal in Vikas Oil Mill v. ITO  95 TTJ (JP) 1126, wherein it has been held as under :-
“We are of the view that remuneration paid to working partners will have to be allowed as per provisions of Section 40(b)(v) of the IT Act. The Expln. 3 provides the definition for the book profit, which is already discussed by the CIT(A) in his order at p. 6. Without repeating, we agree with the order of the CIT(A) in this regard. The CIT(A) has already discussed a number of case laws to support his order. So, regarding set off of the carried forward unabsorbed depreciation, the claim of the assessee is not sustainable. However, about the alternative prayer of the assessee, we are of the view that the remuneration will have to be paid to the working partners as per Section 40(b) and it will have to be provided, even in the case of loss, a minimum of Rs. 50,000. Further, it may be mentioned that the remuneration received by the partners will have to be taxed either in the hands of the firm or in the hands of the partners. It cannot be taxed twice.”
15. In Piaggio Vehicles (P.) Ltd. (supra) it has been held as under (head note) :
“Held, dismissing the petition, that depreciation on intangible assets became available under section 32 of the Act only if the intangible assets were acquired after April 1, 1998. In other words, depreciation was not allowable where the intangible assets were acquired prior to April 1, 1998. Though the goodwill was acquired under the agreement dated March 30, 1998, in the return of income the petitioner claimed that the goodwill was effectively acquired on April 1, 1998. During the assessment proceedings, the Assessing Officer by a letter dated December 5, 2001, had called upon the petitioner to furnish details of Rs. 4.29 crores shown as goodwill in the books. The petitioner informed the Assessing Officer that the stamp duty on transfer of goodwill was paid on April 1, 1998, and that the goodwill was effectively transferred on June 25, 1998. Accordingly, depreciation on goodwill was allowed on the footing that it was acquired on or after April 1, 1998. However, from the agreement dated March 30, 1998, it was seen that the petitioner had agreed to purchase the B unit as a going concern on an as is where is basis for Rs. 23 crores plus goodwill amounting to Rs. 4.30 crores with effect from the specified transfer date, that is from March 31, 1998. It was recorded in the agreement that if any of the conditions precedent were not fulfilled, the transfer date shall be shifted to April 30, 1998. It was not known whether the transfer date was shifted to April 30, 1998, on account of non-fulfilment of the conditions precedent set out in the agreement. In any event, in the tax audit report relating to the financial year April 1, 1998, to March 31, 1999 (assessment year 1999-2000), the goodwill at Rs. 4.30 crores was shown in the opening block of fixed assets, which obviously meant that the goodwill was acquired prior to April 1, 1998, and accordingly in the tax audit report for the assessment year 1999-2000, no depreciation was claimed on the goodwill. Thus, there were mutual contradictions in the tax audit report and the return of income filed by the petitioner regarding the date of acquisition of the goodwill. The argument that the Assessing Officer had taken a conscious decision to grant depreciation after accepting the contention of the petitioner that the goodwill was acquired after April 1, 1998, could not be accepted because, in his letter there was no reference to the inconsistencies in the tax audit report and the return of income regarding the date of acquisition of the goodwill. The fact that there were mutual inconsistencies in the tax audit report and the return of income which were not noticed by the Assessing Officer at the time of assessment under section 143(3) of the Act was sufficient reason to reopen the assessment.”
16. In Consolidated Photo and Finvest Ltd. (supra) it has been held as under (head note) :
“Held, dismissing the petition, (i) that the proviso to section 147 envisages action in the ordinary course within a period of four years from the end of the relevant assessment year. However, that limitation does not apply to cases where income chargeable to tax has escaped assessment on account, inter alia, of the failure of the assessee to disclose fully and truly all material facts. Production of the books of account and other documentary evidence relevant for assessment did not imply a full and true disclosure in the light of Explanation 1 to section 147. Therefore, the action initiated by the Assessing Officer did not suffer from any error of jurisdiction to warrant interference from the court.
(ii) That the order passed by the Assessing Officer indicated the basis on which income exigible to tax had in his opinion escaped assessment. The assessment order did not address itself to the question which the Assessing Officer proposed to examine in the course of reassessment proceedings. There may be a presumption that the assessment proceedings had been regularly conducted but there could be no presumption that even when the order of assessment was silent, all possible angles and aspects of a controversy had been examined and determined by the Assessing Officer. The principle that a mere change of opinion could not be a basis for reopening completed assessments would be applicable only to situations where the Assessing Officer had applied his mind and taken a conscious decision on a particular matter in issue. It would have no application where the order of assessment did not address itself to the aspect which was the basis for reopening of the assessment. Therefore, it was inconsequential whether or not the material necessary for taking a decision was available to the Assessing Officer either generally or in the form of a reply to the questionnaire served upon the assessee. What is important was whether the Assessing Officer had, based on the material available to him taken a view. Since he had not done so, the reassessment could not be challenged on the ground that it was based on a change of opinion.”
17. There is no quarrel with the principles enunciated in the aforesaid decisions. However, the case before us is not under the provision of section 147/148 of the Act but under the different provisions of the Act. i.e. u/s.40(b)(v) read with Explanation 3, therefore, for the reasons as discussed hereinabove, both the decisions relied on by the ld. DR are distinguishable and not applicable to the facts of the present case.
18. For the reasons as discussed above we are of the view that 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 and the ld. CIT(A) was not justified in upholding the order of the A.O. in excluding the other income i.e. compensation for use of shared facilities of Rs. 10,00,000/- and license fees of Rs.20,00,000/-, aggregating to Rs. 30,00,000/- from the ‘book profit’ for the purpose of partners remuneration and accordingly, we direct the A.O. to include the above sum of Rs. 30,00,000/- in the ‘book profit’ for computation of the remuneration of the partners in terms of section 40(b)(v) of the Act and allow partners remuneration as claimed by the assessee. The grounds taken by the assessee are, therefore, allowed.
19. Ground no. 4 reads as under :-
“4. Alternate to Ground above the shared asset amount be assessed under the Income from House Property, as property on which income is received is owned by Assessee firm.”
20. At the time of hearing, the ld. counsel for the assessee submits that she does not want to press the above ground which was not objected to by the ld. DR.
21. That being so and in the absence of any supporting material placed on record by the ld. counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.
22. Ground no. 6 reads as under :-
“The learned CIT(A) erred in confirming levy of interest under-section 220(2).”
23. After hearing the rival parties and perusing the material available on record, we direct the A.O. to allow consequential relief to the assessee in this regard. The ground taken by the assessee is, therefore, allowed.
24. In the result, the appeal filed by the assessee stands allowed.