Akshar Associates (Appellant) vs ACIT (Respondent)
Date of Order: 15-09-2015

ORDER

Per Pramod Kumar AM:
1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 2nd August, 2011 passed by the ld. CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 (‘the Act’ hereinafter) for the Assessment Year 2008-09.

2. In the revised ground of appeal filed by the assessee, the assessee has raised the following grievance:-

“The learned CIT(A) has erred in law and on facts in upholding the disallowance made by the learned Assessing officer, under section 40b of the Income Tax Act, 1961, of Rs.7,03,921/-.”

3. The issue in appeal lies in a narrow compass of material facts. During the course of assessment proceedings, the Assessing officer noticed that the assessee has earned interest income of Rs.20,14,571/- by investing surplus funds and that the interest so earned by the assessee can only be taxed as “income from other sources”. As a corollary to this finding, learned CIT(A) was also of the considered view that interest income is to be excluded from computation of permissible remuneration of partners. It was for these reasons that the Assessing Officer concluded that only Rs.7,03,921/- is permissible as remunerations to partners as against Rs.14,90,000/- claimed by the assessee. Aggrieved by the disallowance of Rs.7,03,921/- so made by the Assessing Officer, assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) upheld the stand of the Assessing Officer by, inter alia, following reasoning :-

“2.2 I have carefully considered the submission of the Ld. Counsel as well as the finding of the Assessing Officer recorded in the assessment order. I have also considered the decisions relied upon by the Ld. Counsel. It can be seen from the assessment order that the assessee has claimed the remuneration to partners from the net profit shown in the profit and loss account whereas the remuneration to partners is allowable to the working partners from the book profit which is authorised by and is in accordance with the terms of the partnership deed. The “book profit” has been defined in Explanation-3 below sec. 40(b) of the Act which reds as under :

Explanation-3 – For the purpose of this clause, “book profit” means 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 as increased by the aggregate amount of remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.” Only from the business income of the firm.

2.3 It is evident from the definition of book profit as given in the aforesaid Explanation-3 that the profit and loss account for the purposes of book profit will be computed in the manner laid down in Chapter IV-D of the Act. As per Chapter IV-D of the Act, the income and expenditure as mentioned in sec. 28 to 44DB will be considered for arriving at the profits and gains of business or profession. The Assessing Officer had noticed that the assessee had shown interest income of Rs.20,14,571/- as business income in the profit and loss account and claimed the partners’ remuneration on the said income. The assessee was enjoying the interest income of Rs.20,14,571/- from M/s Kothari Finance which cannot be considered as part of business income. The Ld. Counsel could not establish as to how the interest from deposits is the business income. It is an admitted fact that the appellant firm is not engaged in the business of money-lending business. Therefore, the interest income earned from deployment of surplus funds of the firm in deposits with other will be income from other sources and not the business income because earning of interest is not the business of the appellant firm. The Hon’ble Rajasthan High Court had held in the case of Murli Investment Co. Vs. CIT 167 ITR 368 (Raj.) that merely investing surplus funds instead of keeping them idle and obtaining interest thereon would not constitute business and therefore, the interest by the assessee would not be assessable as business income but assessable s income under other sources. The Hon’ble Kerala High Court in the case of CIT vs. Venad Conductors (P) Ltd. 326 ITR 513 (Ker.) had held that income from short term deposit cannot be treated as income from business but it is income from other sources. Likewise, in the case of T.O. Abraham & Company vs. Dy. CIT 325 ITR 201 (Ker.) it was held that interest income from bank deposits is assessable under the head “income from other sources” where the assessee is not engaged in money lending business. The Himachal Predesh High Court in the case of Shanta Lal Chopra vs. CIT 214 CTR (HP) 420 had held that the interest on FDR pledged with bank for obtaining loan was assessable as income from other sources and not business income. Similar view was taken by the Hon’ble MP High Court and Hon’ble Madras High Court respectively in the cases of Ferro Concrete Construction (India)(P) Ltd. Vs. CIT 290 ITR 713 (MP) and CIT vs. Monark Tools (P) Ltd. 260 ITR 258 (Mad.). The Hon’ble Delhi High Court in their later on decisions had also taken the view that interest income is assessable as income from other sources. In the case of CIT v. Shri Ram Honda Power Equip. (Delhi) 289 ITR 475 (Delhi), the Hon’ble Delhi High Court had held that where surplus funds are parked with the bank and interest is earned there on it can only be categorised as income from other sources. The other category is where the exporter is required to mandatorily keep monies in fixed deposits in order to avail of credit facility for the export business. Interest earned on fixed deposits for the purpose of availing of credit facility from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income.

2.4 In view of the law laid down by the various High Courts as referred to above, the interest income is considered as “income from other sources” and therefore, no remuneration to partners will be allowable on this interest income. The Ld. Counsel has neither furnished the copy of the partnership deed nor established as to how the decisions relied upon by him are applicable in the facts of appellant’s case. The Hon’ble Amritsar Tribunal had held in the case of Shre Balji Alloys sv. ITO (2010) 127 TTJ 129 (ASR) that a decision of the court is not applicable to the case unless it is clearly demonstrated that there is similarity of the facts. Thus, the Ld. Counsel cannot derive support from the decisions so relied upon.

2.5 Considering the above discussion, I am of the opinion that the Assessing Officer has correctly disallowed the claim of the remuneration to partners on the interest income Rs.20,14,571/-. The remuneration payable to the partners had been correctly worked out by him for Rs.7,86,079/-. The Assessing Officer was thus justified in disallowing the excess remuneration of Rs.7,03,921/- (Rs.14,90,000/- - Rs.7,86,079/-) and his finding is confirmed. The addition so made is sustained. Both the grounds of appeal are accordingly dismissed.”

4. The assessee is still aggrieved, and is in further appeal before us.

5. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable legal position.

6. We find that the issue in appeal is now squarely covered by the judgement of Hon’ble jurisdictional High Court in the case of CIT vs. J J Industries (358 ITR 531) wherein Their Lordships have upheld the Tribunal’s stand to the effect that for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be in the profit and loss account. The interest income, therefore, cannot notionally be excluded for the purpose of determining the allowable deduction of remuneration paid to the partners under Section 40b of the Act. As in the present case, in this case also interest was assessed as business income, and yet, for the purpose of computing admissible deduction under section 40(b), a different path was followed. On these facts, Their Lordships have held a follows :-

“4. Section 40 of the Act pertains to amounts which are not deductible. Relevant portion of Section 40 reads as under :

 "Notwithstanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",-

(a) in the case of any assessee-
(b) in the case of any firm assessable as such,-

(i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner; or

(ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorized by, or is not in accordance with, the terms of the partnership deed; or

(iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorization for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or

(iv) any payment of interest to any 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 in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or

(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 in so far 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. 3,00,000 of the book-profit or in case of a loss Rs. 1,50,000 or at the rate of 90 per Cent of the book-profit, whichever is more;
(b) On the balance of the book-profit At the rate of 60 per cent

5. From the above provision it can be seen that where an assessee is a partnership firm, any payment of salary, bonus, commission or remuneration to its partners under certain circumstances, if it exceeds the limits set out in Clause B, deduction to the extent of excess cannot be claimed. In the present case, such ceiling is prescribed in two slabs. On the first Rs. 30 lacs on the book profit or in case of loss such ceiling is Rs. 1,50,000/- or 90% of the book profit whichever is more. On the balance of the book profit such ceiling prescribed is @ 60%.

6. The question, therefore, arises whether the interest income earned by the assessee-firm from the fixed deposit receipts should be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners' remuneration.

7. The Tribunal has proceeded on the basis that for the purpose of ascertaining such ceiling on the basis of book profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income under Section 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable deduction of remuneration paid to the partners under Section 40B of the Act.

8. Counsel for the revenue vehemently contended that for the purpose of ascertaining the limit, only business income would be relevant and not any other income. In the present case, however, we need not enter into such controversy. The assessee had held out that it is in the business of purchasing raw cotton and ginning the same. It is a seasonal business. The interest income was generated out of spare funds invested in the fixed deposit. Such income was declared as part of the business income and that is how even the Assessing Officer had accepted the same. That being the position, and the Assessing Officer in the assessment taxed such income as business income, we do not see any question of law arising.”

7. We see no reasons to take any other view of the matter than the view so taken by the Hon’ble jurisdictional High Court.

8. Respectfully following the esteemed views of Their Lordships, we uphold the grievance of the assessee. The disallowance of Rs.7,03,921/- thus stands deleted.

9. In the result, appeal is allowed in the terms indicated above. Order pronounced in the open Court on this 15th day of September, 2015.