Book profit for partner remuneration under section 40(b) cannot exclude credited interest income, so the disallowance fails.

For computing the ceiling on partner remuneration under section 40(b), book profit must be taken as reflected in the profit and loss account, and interest income already credited to the accounts cannot be notionally excluded. Applying the binding jurisdictional High Court view, the firm's interest income from surplus funds remained part of book profit for determining the admissible remuneration under the partnership deed. On that basis, the disallowance of partner remuneration was not sustainable and had to be deleted.

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Issues: Whether, for computing the ceiling on remuneration payable to partners under section 40(b), the interest income earned by the firm from surplus funds could be excluded from the book profit and the resulting disallowance sustained.

Analysis: The governing principle is that the ceiling under section 40(b) is to be tested with reference to the book profit as shown in the profit and loss account, and not by notionally excluding income already credited therein. The jurisdictional High Court had held that where interest income was included in the business income and reflected in the accounts, it could not be separately excluded for working out admissible partner remuneration. Following that binding view, the interest income in the present case could not be carved out from the book profit for the purpose of restricting the permissible remuneration under the partnership deed.

Conclusion: The disallowance of partner remuneration was not justified and was required to be deleted.

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