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Tax Publishers Reopening by PCIT of LLP alleging claim of remuneration to partners out of capital gains *Facts :* Assessee LLP had purchased debentures worth Rs. 50 crores in 2012 which was capital contribution by one of the partners of the LLP. The said partner demanded his money in the year 2014 thus the LLP borrowed money and paid interest of Rs. 6 crores and repaid the partner the Rs. 50 crores. The LLP capitalized the Rs. 6 crores paid as part of the cost of debentures. In FY 2015-16 the LLP sold the debentures and returned a capital gains of Rs. 101 crores by selling the debentures for Rs. 157 crores. There was no other income reported in the hands of the LLP. This was credited to the P&L account of the LLP and then remuneration to partners was claimed for Rs. 22.51 crores as per limits under section 40(b)(v). The AO in a limited scrutiny accepted the return and the findings and allowed the same. The PCIT reopened the case under section 263 alleging that the Rs. 6 crore was not an allowable deduction while computing capital gains besides the fact that the entire income of the LLP had risen from capital gains and thus the remuneration of Rs. 22.51 crores was not available under section 40(b)(v) which is only for profits and gains of business or profession and not for capital gains. Due to the above two points the order of the AO was erroneous and prejudicial to the interests of the revenue. On higher appeal by assessee - Held in favour of the assessee that the AO took one stand on the remuneration point that cannot be faulted especially when the topic is debatable. The 6 crore interest paid was an allowable expenditure and the same cannot be faulted with. Reopening was thus held to be bad. *Applied :* Sec. 40(b)(v) remuneration to partners is only on business profits - CIT v. Allen Career Institute (2018) 403 ITR 375 (Rajasthan) : 2017 TaxPub(DT) 4812 (Raj-HC). Sec. 40(b)(v) remuneration to partners computation is to be done taking into account income from other heads - Md. Serajuddin & Brothers v. CIT (2012) 210 Taxman 84 (Calcutta) : 2012 TaxPub(DT) 2885 (Cal-HC) (from other sources thus it was held in this case) *Ed. Note :* The scheduler system of taxation exists to avoid incomes getting into a case of pot pourri and the enshrining of Section 40(b)(v) is also within Income from business or profession. If it were to be read that the remuneration is to be paid on all the incomes the need for the scheduler system itself would look farcical and entity structuring cannot override the scheduler system as per law as one may claim salary/remuneration even from house property income forming part of a LLP/firm. This is one stand point of view as if the intent of the law was otherwise Section 40(v)(b) need not have remained under that chapter. To confuse things, the chapter is called IV Computation of income in which IV-D is computation from business or profession and IV-E is Capital gains. The meaning of book profit under the explanation to Section 40(b)(v) makes a categorical mention of Chapter IV-D, which is computation of income from business or profession and the book profit in this case would mean book profit as per business or profession. One may also make a case to include income from other sources or capital gains provided they are able to manifest that there was an inextricable connection to such incomes/gains. But the proposition needs more to be succeeded only on facts and the case is dicey beyond doubt. *Case :* Bharatnagar Buildcon LLP v. Pr. CIT 2023 TaxPub(DT) 5486 (Pun-Trib)

Tax Publishers

Reopening by PCIT of LLP alleging claim of remuneration to partners out of capital gains

Facts :

Assessee LLP had purchased debentures worth Rs. 50 crores in 2012 which was capital contribution by one of the partners of the LLP. The said partner demanded his money in the year 2014 thus the LLP borrowed money and paid interest of Rs. 6 crores and repaid the partner the Rs. 50 crores. The LLP capitalized the Rs. 6 crores paid as part of the cost of debentures. In FY 2015-16 the LLP sold the debentures and returned a capital gains of Rs. 101 crores by selling the debentures for Rs. 157 crores. There was no other income reported in the hands of the LLP. This was credited to the P&L account of the LLP and then remuneration to partners was claimed for Rs. 22.51 crores as per limits under section 40(b)(v). The AO in a limited scrutiny accepted the return and the findings and allowed the same. The PCIT reopened the case under section 263 alleging that the Rs. 6 crore was not an allowable deduction while computing capital gains besides the fact that the entire income of the LLP had risen from capital gains and thus the remuneration of Rs. 22.51 crores was not available under section 40(b)(v) which is only for profits and gains of business or profession and not for capital gains. Due to the above two points the order of the AO was erroneous and prejudicial to the interests of the revenue. On higher appeal by assessee -

Held in favour of the assessee that the AO took one stand on the remuneration point that cannot be faulted especially when the topic is debatable. The 6 crore interest paid was an allowable expenditure and the same cannot be faulted with. Reopening was thus held to be bad.

Applied :

Sec. 40(b)(v) remuneration to partners is only on business profits - CIT v. Allen Career Institute (2018) 403 ITR 375 (Rajasthan) : 2017 TaxPub(DT) 4812 (Raj-HC).

Sec. 40(b)(v) remuneration to partners computation is to be done taking into account income from other heads - Md. Serajuddin & Brothers v. CIT (2012) 210 Taxman 84 (Calcutta) : 2012 TaxPub(DT) 2885 (Cal-HC) (from other sources thus it was held in this case)

Ed. Note : The scheduler system of taxation exists to avoid incomes getting into a case of pot pourri and the enshrining of Section 40(b)(v) is also within Income from business or profession. If it were to be read that the remuneration is to be paid on all the incomes the need for the scheduler system itself would look farcical and entity structuring cannot override the scheduler system as per law as one may claim salary/remuneration even from house property income forming part of a LLP/firm. This is one stand point of view as if the intent of the law was otherwise Section 40(v)(b) need not have remained under that chapter. To confuse things, the chapter is called IV Computation of income in which IV-D is computation from business or profession and IV-E is Capital gains. The meaning of book profit under the explanation to Section 40(b)(v) makes a categorical mention of Chapter IV-D, which is computation of income from business or profession and the book profit in this case would mean book profit as per business or profession. One may also make a case to include income from other sources or capital gains provided they are able to manifest that there was an inextricable connection to such incomes/gains. But the proposition needs more to be succeeded only on facts and the case is dicey beyond doubt.

Case : Bharatnagar Buildcon LLP v. Pr. CIT 2023 TaxPub(DT) 5486 (Pun-Trib)