2012 (9) TMI 940 - AT - Income Tax

Summary

Issues involved: Calculation of book profit for remuneration to partners by deducting interest income on FDR.

Summary:
The appeal was filed by the assessee against the order of Ld. CIT(A) for the assessment year 2004-05. The main ground raised was regarding the calculation of book profit for remuneration to partners by deducting interest income on FDR, resulting in excess remuneration to partners. The assessee, engaged in raw cotton ginning and sale of finished cotton and cotton seeds, had filed its return of income declaring total income. The assessment was finalized by the A.O., but due to audit objection, the case was reopened u/s 147 as the book profit for remuneration to partners was calculated without deducting interest income on FDR. The A.O. observed that income under certain heads should be deducted to arrive at only those receipts directly related to the business. The excess remuneration was disallowed accordingly.

Aggrieved by the A.O.'s action, the assessee approached the CIT(A), who upheld the A.O.'s order. The CIT(A) noted that the interest income from FDR was not directly related to the business and confirmed the disallowance of excess remuneration. The assessee then appealed to the ITAT, arguing that since the interest income was accepted as business income in previous assessments, it should be considered for calculating remuneration to partners. The ITAT, after considering relevant decisions, held that the interest income included in the net profit should not be excluded for calculating remuneration payable to partners u/s 40(b). Citing precedents, the ITAT ruled in favor of the assessee, deleting the addition made by the A.O. and allowing the appeal.

In conclusion, the ITAT allowed the appeal of the assessee, emphasizing that the interest income included in the net profit and taxed as business income should be reduced for calculating remuneration payable to partners u/s 40(b.