Md. Serajuddin & Brothers vs. CIT (Calcutta High Court)

For s. 40(b)(v) limits, P&L A/c profits (including non-business income) have to be taken & not only “profits & gains of business” as computed u/s 28 to 43D

S. 40(b)(v) permits a firm to claim deduction of remuneration paid to a working partner upto certain limits of the “book profit“. The term “book profit” is defined in Explanation 3 to mean “the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D … “. The High Court had to consider whether the term “book profit” meant the profit as per the P&L A/c (which included non-business income) or the “Profits & gains of business as computed under Chapter IV-D“. HELD by the High Court:

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. S. 29 provides how the income from profits and gains of business should be computed and this has to be done as provided u/s 30 to 43D. By virtue of s. 5 that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of s. 40(b)(v) read with the Explanation, there cannot be a separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides that the net profit as shown in the P&L A/c is not the profit computed under the head profit and gains of business. Following the principle laid down in Apollo Tyres Ltd 255 ITR 273 (SC), the AO is not entitled to recompute the P&L profits. Even if income from other sources is included in the P&L A/c, to ascertain the net profit qua book-profit for computation of remuneration of the partners the same cannot be discarded.