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Issues Involved:
1. Validity of the assessment order under section 143(3) due to jurisdiction and other reasons. 2. Disallowance of remuneration paid to partners under section 40(b)(v)(2) of the IT Act. 3. Disallowance of various expenses (telephone, function, and insurance expenses). 4. Disallowance of interest payment on interest-free advance. Issue-wise Detailed Analysis: Ground No. 1: Validity of the Assessment Order The first ground was general in nature and did not require separate adjudication. Ground No. 2: Disallowance of Remuneration Paid to Partners The appellant had shown receipts of interest on bank FDRs and other sources totaling Rs. 1,76,09,959 and claimed remuneration payable to partners of Rs. 3,92,48,924 under section 40(b) of the IT Act. The AO disallowed Rs. 69,47,476, holding that interest on FDRs and other interest were to be assessed under 'Income from other sources' and hence not part of book profit for section 40(b). The CIT(A) confirmed this disallowance, referencing earlier tribunal decisions which stated that earning interest on FDRs was not the business of the assessee. The assessee argued that the classification of income was irrelevant for computing allowable deduction under section 40(b), citing various judicial precedents, including a recent decision of the Rajasthan High Court and the Supreme Court. The Tribunal, following its decision in the case of S.P. Equipment & Services, concluded that the classification of income under section 14 was not required for section 40(b) purposes. Consequently, the AO was directed to compute the book profit including interest income on FDRs, and the disallowance of Rs. 69,47,476 was deleted, allowing the ground in favor of the assessee. Ground No. 3: Disallowance of Various Expenses The AO made ad hoc disallowances out of telephone, function, and insurance expenses alleging personal use and improper bills. The CIT(A) partly confirmed these disallowances. The assessee argued that the expenses were for business purposes and provided justifications for the claimed amounts. The Tribunal upheld the disallowance of Rs. 58,244 for telephone expenses, finding no improvement in the assessee's case. Regarding function expenses, the Tribunal found the disallowance excessive and reduced it to Rs. 20,000. The disallowance of Rs. 6,770 for insurance expenses was upheld as the possibility of personal use was not denied. Thus, the disallowances were partly confirmed, and the related ground was partly allowed. Ground No. 4: Disallowance of Interest Payment on Interest-free Advance The AO disallowed Rs. 6,000 for interest on an interest-free advance of Rs. 50,000 to a charitable organization, following earlier years' orders. The CIT(A) confirmed this disallowance. The assessee contended that the advance was for social purposes without charging interest. The Tribunal upheld the disallowance, referencing its earlier decision that the interest-free advance was not for business purposes. Hence, the related ground was rejected. Conclusion: The appeal was partly allowed, with the Tribunal directing the deletion of the disallowance under section 40(b) and partly confirming the disallowances of various expenses while rejecting the disallowance of interest payment on interest-free advance.
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