2009 (7) TMI 917 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening of assessments u/s 147 read with section 148.
2. Computation of deduction on account of salary paid to partners u/s 40(b).

Summary:

Issue 1: Validity of Reopening of Assessments u/s 147 read with section 148
The assessee challenged the validity of reopening assessments for the years 2002-03, 2003-04, and 2004-05. The Assessing Officer (AO) had issued notices u/s 148 and made assessments u/s 147, restricting the deduction u/s 40(b) by excluding interest earned on bank deposits from book profits. The CIT(A) dismissed the assessee's challenge regarding the validity of reopening but allowed relief on merits. The Tribunal upheld the reopening of assessments, referencing the Supreme Court decision in Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500, which clarified that intimation u/s 143(1) does not preclude the AO's right to reopen assessments. The Tribunal found the reopening valid as the AO had not expressed any opinion on the issue during the original assessments.

Issue 2: Computation of Deduction on Account of Salary Paid to Partners u/s 40(b)
The core issue was whether the interest earned on bank deposits should be included in the book profits for computing the deduction u/s 40(b). The assessee argued that the interest was part of professional income, as the deposits were made from client advances, mandated by The Bombay High Court (Original Side) Rules. The Tribunal agreed, stating that the interest on such deposits is assessable under "Profits and gains of business or profession" and not "Income from other sources." This decision was supported by the Bombay High Court's ruling in Manilal Kher Ambalal & Co. v. A.G. Lulla, Seventh ITO [1989] 176 ITR 253, which confirmed that solicitors must deposit client funds in a separate account, and interest from such deposits is professional income. Consequently, the Tribunal upheld the CIT(A)'s decision to allow the deduction, dismissing the revenue's appeals.

Conclusion:
The Tribunal dismissed the cross-objections of the assessee regarding the validity of reopening assessments and upheld the CIT(A)'s decision on merits, confirming that interest earned on client account deposits is part of professional income for the purpose of computing deductions u/s 40(b). The revenue's appeals were dismissed.