1. This is an appeal filed by the assessee against the order of learned CIT(A), dt. 22nd Nov., 2004, for the asst. yr. 2001-02.
2. The first grievance of the assessee is against the disallowance of remuneration amount of Rs. 1,79,005 paid to the working partners of the assessee-firm. The AO during the assessment proceedings observed that the assessee has not reduced the unabsorbed brought forward depreciation of the earlier years from the profit of the year under reference before working out the remuneration payable to the partners.
In view of this, the AO reduced the unabsorbed depreciation of earlier (year) from the profit of the assessee-firm. As the resultant was a negative figure, the AO disallowed the remuneration paid to the partners. The CIT(A) has confirmed the order of the AO.3. With this background, the learned Authorised Representative submitted that unabsorbed depreciation is allowed under Section 32(2) only because of a fiction and it is subject to Section 72(2). Hence, unabsorbed depreciation should not be considered for computation of net profit in Chapter IV-D. Alternatively, he submitted that Section 28(v) provides that remuneration not allowed to be deducted shall not be taxed in the hands of partners to that extent. Further, even as per AO, the allowable remuneration after the decision of CIT(A) works out to Rs. 76,433.
4. On the other hand, the learned Departmental Representative supported the orders of the lower authorities by submitting that unabsorbed depreciation of earlier years is a part of current year's depreciation under Section 32(2), which falls in Chp. IV-D and, therefore, for computation of book profit, unabsorbed depreciation has to be necessarily taken into account. Lastly, he justified the orders of the lower authorities.
5. After hearing rival submissions at length and on perusal of material available on record, we are of the view that remuneration paid to working partners will have to be allowed as per provisions of Section 40(b)(v) of the IT Act. The Expln. 3 provides the definition for the book profit, which is already discussed by the CIT(A) in his order at p. 6. Without repeating, we agree with the order of the CIT(A) in this regard. The CIT(A) has already discussed a number of case laws to support his order. So, regarding set off of the carried forward unabsorbed depreciation, the claim of the assessee is not sustainable.
However, about the alternative prayer of the assessee, we are of the view that the remuneration will have to be paid to the working partners as per Section 40(b) and it will have to be provided, even in the case of loss, a minimum of Rs. 50,000. Further, it may be mentioned that the remuneration received by the partners will have to be taxed either in the hands of the firm or in the hands of the partners. It cannot be taxed twice. Therefore, we modify both the orders of the lower authorities and direct the AO to allow the claim of the assessee as per Section 40(b)(v). Further, he is directed not to tax the excess remuneration paid to the partners, which was already disallowed in the hands of the firm, just to avoid the double taxation. Thus, this issue is restored back to the AO who will decide the same in the light of above discussion but by providing opportunity to the assessee.
6. Ground No. 2 of the assessee is pertaining to the disallowance of brokerage of Rs. 90,577.
7. After hearing both the parties and on perusal of material available on record, it appears that the brokerage was due in the previous assessment year but was paid and settled during the assessment year under consideration. The lower authorities have disallowed the same as the same was not related to the assessment year under consideration.
8. By considering the totality of facts and circumstances of the case, we are of the view that the said brokerage was settled and finalised and paid during the assessment year under consideration. The assessee is following the mercantile system. Therefore, the same is allowable during the assessment year under consideration and we delete the addition of Rs. 90,577. This ground is allowed in favour of the assessee.
9. The third ground is pertaining to disallowance of Rs. 18,356 pertaining to differential amount of interest of M/s Data Enterprises.
10. After considering the rival submissions, we agree with the orders of the lower authorities for the reasons mentioned therein. Thus, this ground has no merit and the same is dismissed.
11. Ground Nos. 4 and 5 are withdrawn by the learned Authorised Representative, so the same are dismissed as withdrawn.
12. In the result, appeal filed by the assessee is partly allowed as stated above and announced in the open Court.