IN INCOME TAX APPELLATE TRIBUNAL B BENCH AHMEDABAD (BEFORE S/SHRI P. K. BANSAL, AM AND MAHAVIR SINGH, JM) ITA No. 827/Ahd/2007 A. Y.: 2003-04 M/s. Kathiawadi Hotel, Vs Income Tax Officer, Opp. Art Glass Factory, Ward - 2, N.H. No. 8, Valsad Abrama, Valsad PA No. AAFFK 5274 M (Appellant) (Respondent) Appellant by Shri Ankit Talsania, AR Respondent by Smt. Neeta Shah, DR ORDER PER P. K. BANSAL: This appeal has been filed by assessee against order of CIT(A), Valsad dated 29-11-2006 relating to assessment year 2002-03. 2. Grounds No.1 and 2 are not pressed and hence stands as not pressed. 3. Ground No.4 of appeal is general in nature and hence requires no separate adjudication by us. 4. Ground No. 3 of appeal reads as under: [3] Learned CIT (Appls) wrongly interpreted additional ground of enhanced remuneration to working partners which was alternative for confirming addition made by ITO . 5. Brief facts of case are that survey u/s 133A of Income Tax Act, 1961 was carried out at business premises of assessee in which two receipts showing amount of Rs.2,00,000/- and Rs.1,00,000/- paid in cash by Smt. Narmadaben D. Joshi to Param ITA No.827/Ahd/2007 2 Kathiawadi Hotel Associates was found. In addition two vouchers of Rs.19,000, Rs.16,000 and receipt of Rs.19,000/- as detailed in assessment order were found. One of partners admitted sum of Rs.3,54,000/- as unexplained income/ investment, but said income was not offered in return filed by assessee. AO made addition of Rs. 3,54,000/-. assessee went in appeal before CIT(A) who confirmed addition vide order dated 12-12-2005. On appeal before Tribunal, Tribunal vide order dated 4-5-2006 set aside assessment and restored matter back to file of CIT(A) with direction to provide reasonable opportunity of hearing in respect of remand report submitted by AO to assessee. CIT(A) accordingly gave copy of remand report to assessee and invited submissions of assessee. submissions of assessee were noted by CIT(A) under Para 4 of his order and after considering same confirmed addition pointing out that addition has not been made merely on basis of statement of one of partners, but there are evidences found at time of survey showing undisclosed investment of income of assessee. On issue of remuneration being allowed to partners on income has been worked out after making said addition. CIT(A) again decided matter against assessee and rejected additional ground of assessee. 6. We have heard rival submissions and carefully considered same. Although learned DR before us vehemently contended that salary to partners should be allowed on income as may be arrived at after making addition of Rs.3,54,000/-. But when we went through provisions of Income Tax Act especially provisions of section 40B read with Explanation 3, we noted that we cannot accept plea of assessee. Section 40B no doubt allowed remuneration to working partner which is authorized by and in accordance with terms of partnership deed and related to period during assessment year ITA No.827/Ahd/2007 3 Kathiawadi Hotel provided aggregate of such remuneration should not exceed limit as has been laid down u/s 40 (b) (v) (2) of Act. But question before us is whether limit as has been prescribed u/s 40 (b) (v) (2) of Act be applied to t4he assessed income or to book profit; whether assessed income will be book profit. Explanation 3 to section 40(b) defines book profit for purpose of those clauses to mean net profit as shown in profit & loss account for relevant previous year computed in manner laid down in Chapter XIV D as increased by aggregate amount of remuneration paid or payable to all partners of firm if such amount has been deducted while computing net profit. work may compute in manner laid down in Chapter XIV D is very important. Chapter XIV D lays down provisions how income under head profit & gains of business or profession has to be computed. We would have agreed with contention of learned DR if net profit as shown in profit & loss account for relevant previous hear would not have been qualified with word computed in manner laid down in Chapter XIV D . In view of this fact, we are of view that if we will give meaning to book profit to mean net profit as shown in profit & loss account, embargo put under Explanation computed in manner laid down in Chapter XIV D will become redundant. We cannot interpret Explanation 3 in this manner. Therefore, we are of view that book profit for purpose of computation of limit of remuneration allowable to partners will be book profit as shown in profit & loss account after making adjustment for income computed under head profit & gains of business. We have also gone through case laws as has been cited by learned AR of assessee before us in case of ITO Vs Jamnadas 99 TTJ 197 (Rajkot). In our opinion, this case law will not assist assessee because in this case we noted that assessee himself has declared excess stock difference during survey as his income and credited to profit & loss ITA No.827/Ahd/2007 4 Kathiawadi Hotel account. Due to this agreed net profit as per profit & loss account has gone increased by said undisclosed income. In case of assessee, addition made has not been credited by assessee in its profit & loss account. In view of our aforesaid discussions, we accept contention of assessee and direct AO to allow remuneration to partners out of income as has been assessed under head income from business in case of assessee subject to restrictions as laid down u/s 40 (b) (v) (2) of Act. 7. In result, appeal of assessee is partly allowed. Order pronounced in open court on 9.10.09 Sd/- Sd/- (MAHAVIR SINGH) (P. K. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Date : 9/10/09 Lakshmikant/- Copy of order forwarded to: 1. Appellant 2. Respondent 3. CIT concerned 4. CIT(A) concerned 5. DR, ITAT, Ahmedabad 6. Guard File BY ORDER Dy. Registrar, ITAT, Ahmedabad M/s. Kathiawadi Hotel v. Income Tax Officer. Ward-2