1. This is an appeal of the assessee challenging the order dated 29-5-2003 of the CIT(A)-V, Hyderabad, as errioneous.
2. Facts of the case as gathered from the record are briefly these: Assessee is a retail dealer in toys. It filed return of income for the assessment year 2001-02 on 19-11-2001, declaring its total income at Rs. 22,170 under Section 44AF. The assessment was completed under Section 143(3) of the Act on a total income of Rs. 61,696 after making an addition of Rs. 39,526, by way of partial disallowance of the assessee's claim relating to payment of remuneration to the partners.
On appeal, the CIT(A) upheld the disallowance made by the Assessing Officer. Hence, assessee is in second appeal before me.
3. The learned Counsel for the assessee submitted that: The order of the Appellate Commissioner is untenable to the extent of upholding the disallowance out of remuneration to the partners in terms of Section 40(b)(v), when the assessee had in fact declared the income in accordance with Section 44AF being a retail trader in Children toys & games with gross turnover below Rs. 40 lakhs. The Appellate Commissioner has grossly misconstrued the provisions of Section 44AF vis-a-vis the Book Profit, as defined under the provisions of Section 44AB. He failed to note that when the small traders are provided with the option of declaring income at 5 per cent of the total turnover, if it is less than Rs. 40 lakhs, the "Book Profit" would be such 5 per cent of total turnover for the purpose of working out the allowable remuneration to partners in terms of Section 40(b)(v), but not otherwise to be proceeded from net result of P&L Account as in all other cases where the assessee did not opt for Section 44AF or 44AD.Hence, the order of the CIT(A) impugned herein is untenable both on facts and in law.
4. On the other hand, the learned representative for the revenue countered, to say in brief, by defending orders impugned.
5.1 Rival submissions heard and relevant orders read. Assessee has declared an income of Rs. 22,170 in its return, under Section 44AF, after arriving at the profit at 5 per cent of its turnover of Rs. 23,57,320, and deducting there from partners' remuneration of Rs. 89,526, in terms of proviso to Section 44AF. Since the net result as per the books of account of the assessee is a figure of loss, in terms of Sub-clause (2) of Section 40(b)(v), the Assessing Officer held that the allowable amount of remuneration payment to partners is only Rs. 50,000, and consequently disallowed the balance amount of Rs. 39,526.
The said disallowance has been upheld by the CIT(A) by the order impugned herein.
5.2 The contention of the assessee is that when for determination of income for assessment recourse is made to the provisions of Section 44AF by the assessee, being a small trader having a turnover of less than Rs. 40 lakhs, the books of account or the Profit & Loss Account drawn up in accordance therewith are of no relevance, and that it is only the 5 per cent of the turnover declared in terms of Section 44AF which has to be taken into account as Book Profit for purposes of working out allowable deduction towards partners remuneration. In any event, the loss of Rs. 91,430 shown in the Profit & Loss Account has been arrived at, only taking into account the remuneration to partners of Rs. 89,526, which was debited to the above account, and if that is excluded, the loss even as per P&L Account would come down drastically to Rs. 1,904 and, therefore, restriction of allowable remuneration to partners to Rs. 50,000, on the basis of net result as per Profit & Loss Account is not justified. I do not find much force in these contentions of the assessee, which the CIT(A) has elaborately considered before rejecting, duly extracting the relevant provisions of the Act, in para 4 of his order impugned herein, on pages 3 to 5 thereof.
5.3 The proviso to Section 44AF makes it clear that 'where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under Sub-section (1) subject to the conditions and limits specified in clause (b) of Section 40(6)'. There is, therefore, no dispute with regard to the fact that even where the income is determined under Section 44AF, deduction towards salary and interest paid to partners has to be allowed. However, the dispute is with regard to 'the conditions and limits specified in Clause (b) of Section 40'. Therefore, the provisions of clause (b) of Section 40, to the extent relevant for adjudication purpose may be extracted hereunder- (v) any payment of remuneration to any partner who is a working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder: (a) on the first Rs. 75,000 of the book profit, or in case of a loss- Rs. 50,000 or at the rate of 90 per cent, of the book profit, whichever is more; 5.4 The dispute before us relates to interpretation of the term 'book profit' in Clause (a) of Section 40(b)(v)(2) above. According to the assessee, having, returned the income in terms of Section 44AF, it is the 5 per cent of the turnover which is returned, which should be taken as 'book profit' for purposes of computing the allowable amount under Section 40(b). On the other hand, as per the revenue, it is the profit as per the books of account, i.e., Profit & Loss Account, that has to be taken into account.
5.5 The proviso to Section 44AF made the income determined under Sub-section (1) of that section which provided for a deduction towards salary and interest paid to partners, subject to the conditions and limits specified under Section 40. So, for computing the deduction allowable from the income determined under Section 44AF, what is material is 'the conditions and limits specified in Clause (b) of Section 40'. When the proviso to Section 44AF subjects itself to 'conditions and limits specified in Clause (b) of Section 40', there is no basis for the assessee to argue that the term 'book profit' in Sub-clause 2(a) of Section 40(b)(v), in the cases where determination of income is done under Section 44AF, is to such income determined at 5 per cent of the turnover, and not the Book Profit as per the Profit & Loss Account. Further, the income determined as a percentage of turnover in terms of Section 44AF, in the cases of small traders covered by such section, is only a notional figure of income for assessment, and its scope cannot extend to the computation of allowable deduction under Section 40(b) towards partners' remuneration against such income, especially when the proviso to Section 44AF quantified the deduction allowable against such income, as subject to conditions and limits prescribed in Section 40(b) without any qualification. For these and other reasons discussed in the order of the CIT(A) impugned herein, I do not find merit in the contentions of the assessee, which are, therefore, rejected. The order of the CIT(A) impugned herein, is upheld accordingly.