Book profit for partner remuneration includes interest income shown in the profit and loss account, supporting the assessee's claim.

Interest income credited in the firm's profit and loss account was included in the starting point for computing book profit for partner remuneration under section 40(b)(v), because Explanation 3 requires net profit as shown in the accounts unless a valid adjustment is made. On the facts, the Assessing Officer had not separately excluded the interest as non-business income while determining business income, and no contrary binding authority was shown to justify its exclusion. The reduction in partners' remuneration was therefore not supported, and the disallowance was deleted in favour of the assessee.

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Issues: Whether interest income earned by the firm was to be included while computing book profit for the purpose of allowing remuneration to partners under section 40(b)(v) of the Income-tax Act, 1961.

Analysis: The relevant computation for partner remuneration under section 40(b)(v) depends on book profit as defined in Explanation 3 to that provision. The Tribunal noted that the assessee had shown the interest income in its profit and loss account and that, on the facts, the Assessing Officer had not made any separate adjustment to treat the interest as non-business income while computing business income. It was further noted that the Revenue did not place any contrary binding authority to displace the view that net profit as shown in the profit and loss account remains the starting point for computing book profit for section 40(b)(v). In the absence of a basis to exclude the interest income, the reduction made in partner remuneration was not justified.

Conclusion: The interest income had to be included while calculating the remuneration payable to partners under section 40(b)(v), and the disallowance was deleted in favour of the assessee.

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