Book profit for partners' remuneration includes cash credits recorded in accounts, and undisclosed material cannot sustain disallowance without cross-verification.

Discount or rebate claimed through credit notes could not be disallowed on the basis of material gathered in remand without first supplying that material to the assessee and allowing effective cross-verification; the matter was therefore sent back for fresh examination. Unexplained cash credits recorded in the books and credited to the profit and loss account were treated as part of book profit for computing partners' remuneration under section 40(b), because book profit is linked to the net profit shown in the profit and loss account as computed under Chapter IV-D. The Assessing Officer was directed to include those credits while working out the permissible remuneration.

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Issues: (i) Whether the disallowance of discount or rebate claimed through credit notes required fresh examination after cross-verification and supply of material collected by the Assessing Officer. (ii) Whether unexplained cash credits recorded in the books and credited to the profit and loss account form part of book profit for allowing partners' remuneration under section 40(b).

Issue (i): Whether the disallowance of discount or rebate claimed through credit notes required fresh examination after cross-verification and supply of material collected by the Assessing Officer.

Analysis: The claim was disallowed on the footing that the credit notes were not genuine, but the appellate authority itself had earlier directed cross-verification and adequate opportunity to prove the expenditure. Since material collected in remand was not furnished to the assessee, the disallowance could not be sustained without affording a fair opportunity to meet that material.

Conclusion: The issue was remitted to the Assessing Officer for fresh examination after supplying the collected information and considering the assessee's claim afresh.

Issue (ii): Whether unexplained cash credits recorded in the books and credited to the profit and loss account form part of book profit for allowing partners' remuneration under section 40(b).

Analysis: The cash credits were recorded in the books and were treated as business income. Book profit under section 40(b) is to be computed on the basis of the net profit shown in the profit and loss account as computed under Chapter IV-D. Since the assessee had no other source of income and the credits had been brought into the profit and loss account, they formed part of book profit for computing permissible remuneration.

Conclusion: The cash credits were held to form part of book profit, and the Assessing Officer was directed to include them while allowing partners' remuneration.

Final Conclusion: The appeal succeeded on the remuneration issue and the discount issue was sent back for reconsideration, resulting in partial relief to the assessee.

Ratio Decidendi: Cash credits recorded in the books and reflected in the profit and loss account constitute part of book profit for the purpose of section 40(b), and a disallowance founded on undisclosed material cannot stand without affording the assessee an effective opportunity of cross-verification.

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