TaxTMI 
TaxTMI 
2026 (9) TMI 922
X X X X Extracts X X X X
X X X X Extracts X X X X
....rcantile system of accounting. For the assessment year under consideration, it electronically filed its return of income on 16.09.2016 declaring a total income of Rs. 63,35,286/-. The return was selected for scrutiny through CASS. 3. During the relevant previous year, the assessee disclosed a book profit of Rs. 1,67,55,910/- on a turnover of Rs. 30,53,98,623/-, before deduction of remuneration payable to its partners. The aforesaid book profit included profit of Rs. 1,14,99,999/- arising from the sale of shop premises situated at B/3, Suyog Row House, Mulund. The shop was sold under a sale deed dated 26.03.2016 for a consideration of Rs. 1,15,00,000/-. The shop premises was a depreciable asset of the assessee firm and formed part of its block of assets. Its written down value at the beginning of the relevant previous year was stated to be Rs. 1/-. The assessee credited the resulting profit of Rs. 1,14,99,999/- to its Profit and Loss Account and included the same while computing the book profit for the purpose of determining the remuneration payable to its working partners. 4. The Assessing Officer was of the view that, since the shop was a depreciable asset, the gain arising ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th the net profit disclosed in the Profit and Loss Account and that there was no specific provision requiring exclusion of capital gains or segregation of operational and non-operational income. The profit on the sale of the shop premises had been credited to the Profit and Loss Account, was reflected in the audited financial statements, and formed part of the commercial profit of the firm. 10. The assessee further submitted before the CIT(A) that section 50 only prescribed the manner in which gain arising from the transfer of a depreciable asset was to be computed and assessed. It did not alter the commercial character of the profit credited to the Profit and Loss Account or require its exclusion from book profit under section 40(b). The assessee also reiterated that the remuneration was authorised by the partnership deed, had actually been paid, and had been offered to tax by the partners in their individual returns. 11. The CIT(A) rejected the contentions of the assessee. He held that Explanation 3 to section 40(b) required book profit to be computed in the manner laid down in Chapter IV-D and, therefore, the net profit disclosed in the Profit and Loss Account could not be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed Authorised Representative (AR) submitted that Ground Nos. 1 and 2 involved the interpretation of the expression "book profit" as defined in Explanation 3 to section 40(b). It was submitted that the provision adopts the net profit disclosed in the Profit and Loss Account as its starting point and does not contemplate reconstruction of that profit by excluding every item which may separately be assessable under a different head of income. 15. The learned AR submitted that the profit of Rs. 1,14,99,999/- arose from the sale of the assessee's own shop premises, which was used in its distribution business and formed part of the block of business assets. The resulting profit was admittedly credited to the audited Profit and Loss Account. The learned AR invited our attention to the profit and loss account placed on paper book page No. 56. The learned AR further submitted that Section 50 merely deemed the resultant gain to be short-term capital gain for the limited purpose of computing and taxing the capital gain. It neither altered the commercial profit disclosed in the books nor governed the computation of book profit for the distinct purpose of section 40(b). 16. The learned AR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vant previous year, computed in the manner laid down in Chapter IV-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." 21. The statutory definition has three material components. First, the starting point is the net profit as shown in the Profit and Loss Account for the relevant previous year. Secondly, such net profit must be computed in the manner laid down in Chapter IV-D. Thirdly, where remuneration paid or payable to the partners has already been deducted while arriving at the net profit, the same is required to be added back. Significantly, the Legislature has not defined book profit to mean only the income assessed under the head "Profits and gains of business or profession". Nor does Explanation 3 contain an express direction to exclude from the net profit every receipt which may ultimately be assessable under another head of income. 22. The words "computed in the manner laid down in Chapter IV-D" require such statutory adjustments as are contemplated while computing the profits of the firm. They do not substitute the head-wise computation of total ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Profit and Loss Account for the purpose of section 40(b). He selectively excluded only the profit on sale of the shop premises because section 50 classified the gain as short-term capital gain. 26. The treatment adopted by the Assessing Officer is internally inconsistent. If the head under which a receipt is ultimately assessed were the conclusive test for determining book profit under Explanation 3, the Assessing Officer would also have been required to examine and exclude the dividend, interest and rental receipts credited to the same Profit and Loss Account. No such exercise was undertaken. The selective exclusion of the profit on sale of the shop premises is neither supported by the language of Explanation 3 nor consistent with the treatment accorded by the Assessing Officer to the other credits appearing in the Profit and Loss Account. 27. There is also a material distinction between the computation of total income under the different heads specified in section 14 and the computation of book profit for determining the statutory ceiling under section 40(b)(v). While computing total income, the assessee removed the gross rent of Rs. 3,88,000/- from the business computat....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 fro mother 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 accounti....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion 40(b)(v) works out to Rs. 99,02,526.60. The remuneration of Rs. 99,02,526/- claimed by the assessee is, therefore, within the statutory ceiling. 35. The computation also demonstrates that the separation of the rental receipt for the purpose of assessing it under the head "Income from house property" cannot be imported into the computation of book profit under Explanation 3. For the purpose of determining the ceiling under section 40(b)(v), the net profit disclosed in the Profit and Loss Account continues to include the rental receipt. At the same time, allowable interest payable to the partners is deducted because it is not remuneration required to be added back under Explanation 3. This interpretation reconciles the audited Profit and Loss Account, the computation of total income and the remuneration of Rs. 99,02,526/- actually claimed by the assessee. 36. We accordingly hold that the Assessing Officer was not justified in reducing the disclosed profit by Rs. 1,14,99,999/- merely because the gain on the sale of the depreciable shop premises was assessable as short-term capital gain under section 50. The learned CIT(A) also erred in treating the words "computed in the man....