2009 (9) TMI 637 - AT - Income Tax

Reopening - Income escaping assessment - Disallowance u/s 40(b) - Computation of book profit for the payment of remuneration to partners - Inclusion of Interest on IT refund and FDR - Business income or other sources - Held that - we are satisfied that the AO could have had such belief and therefore, the learned CIT(A) rightly has upheld the action under s. 147, with which, we are also in agreement as this Bench has already been taking a consistent view that any interest income on the funds placed with the banks and the interest earned thereon, should be taxed only under the head income from other sources and not as business income especially when earning of interest is undisputedly not the business of the assessee. - Reopening of assessee held as valid Regarding remuneration made under s. 40(b) - computation of book profit - The AO was required to have computed the book profit as per the specific definition given under Expln. 3 below s. 40(b). Consequently therefore, the interest income of Rs. 7,63,997 be not excluded and the net profit as declared by the appellant be considered. - decided in favor of assessee. Regarding dis allwance of traveling expenses - What the learned AO alleged appears to be a suspicion without substantiating it. No specific instance of disallowable nature in the claimed travelling expense, has been shown. The impugned disallowance is hereby deleted.

Issues Involved:
1. Validity of action under sections 147/148 by the AO.
2. Partial disallowance of remuneration claim under section 40(b).
3. Disallowance of travelling expenses.
4. Addition of accrued interest.
5. Disallowance of business promotion expenses.
6. Disallowance out of staff welfare and entertainment expenses.

Detailed Analysis:

Issue 1: Validity of action under sections 147/148 by the AO
The assessee challenged the action taken under sections 147/148 by the AO. The AO issued a notice under section 148 on the grounds that the interest income included in the book profit was chargeable under "Income from other sources" and not as business income, leading to escaped assessment. The learned Authorised Representative argued that the AO's action was based on mere suspicion without establishing any reasonable belief of income escapement. The Tribunal found substance in the Departmental Representative's contentions that a prima facie belief of escapement suffices for action under section 147. The Tribunal upheld the action under section 147, agreeing with the CIT(A) that interest income on FDRs should be taxed under "Income from other sources" and not as business income.

Issue 2: Partial disallowance of remuneration claim under section 40(b)
The assessee contested the disallowance of Rs. 2,70,700 from the remuneration claim under section 40(b). The AO excluded interest income from the net profit, asserting it should be taxed under "Income from other sources". The CIT(A) confirmed this view. The learned Authorised Representative argued that the interest income should be considered as business income as the FDRs were kept for business purposes. The Tribunal agreed with the assessee, emphasizing that the definition of "book profit" under Explanation 3 to section 40(b) does not necessitate classification under a specific head of income. The Tribunal concluded that the AO's exclusion of interest income was unwarranted, and the disallowance was deleted.

Issue 3: Disallowance of travelling expenses
The AO disallowed 20% of the travelling expenses, later reduced to 10% by the CIT(A), due to the involvement of non-partners and non-employees. The learned Authorised Representative argued that all expenses were business-related and fully supported by vouchers. The Tribunal found no specific instances of disallowable expenses and deleted the disallowance, accepting the assessee's contention that the expenses were legitimate business expenditures.

Issue 4: Addition of accrued interest
The AO added Rs. 4,000 as accrued interest for March 2003. The CIT(A) upheld this addition. The learned Authorised Representative argued that the interest accrued in April 2003 and was declared in the subsequent assessment year, resulting in double taxation. The Tribunal agreed with the assessee, finding that the interest income accrued in the next assessment year and directed its deletion.

Issue 5: Disallowance of business promotion expenses
The AO disallowed the entire business promotion expenses, which the CIT(A) reduced to 50%. The learned Authorised Representative justified the expenses as business-related, including gifts and necessary items for employees. The Tribunal allowed a further relief of Rs. 3,800 for shoes purchased for employees' specific use at work sites but upheld the remaining disallowance due to insufficient evidence linking the expenses to business purposes.

Issue 6: Disallowance out of staff welfare and entertainment expenses
The AO disallowed Rs. 3,600 out of staff welfare and entertainment expenses due to non-availability of vouchers. The CIT(A) reduced the disallowance to Rs. 2,000. The learned Authorised Representative argued that the expenses were business-related and supported by internal vouchers. The Tribunal found the CIT(A)'s decision reasonable and sustained the disallowance of Rs. 2,000.

Conclusion:
The Tribunal partly allowed the appeal, providing relief on several grounds while upholding certain disallowances due to lack of sufficient evidence. The primary relief was granted concerning the classification of interest income and the related remuneration claim under section 40(b).

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