2015 (12) TMI 123 - AT - Income Tax

Disallowance u/s 40(b) - remuneration paid to partners - AO held that interest so earned by the assessee can only be taxed as income from other sources - CIT(A) held that interest income is to be excluded from computation of permissible remuneration of partners - Held 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 (2013 (7) TMI 577 - GUJARAT HIGH COURT) 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 - Decided in favour of assessee.

Summary

Issues:
Challenge to correctness of order under section 143(3) for Assessment Year 2008-09 regarding disallowance under section 40b.

Analysis:
The appeal challenges the correctness of an order dated 2nd August, 2011, concerning the assessment under section 143(3) for the Assessment Year 2008-09. The appellant disputes the disallowance made by the Assessing Officer under section 40b of the Income Tax Act, 1961, amounting to Rs. 7,03,921. The primary issue revolves around the treatment of interest income earned by the appellant, which the Assessing Officer determined as "income from other sources," leading to a reduced permissible remuneration to partners. The dispute centers on whether the interest income should be considered business income for calculating partner remuneration.

During the assessment, it was observed that the appellant earned interest income of Rs. 20,14,571 by investing surplus funds, which the Assessing Officer categorized as "income from other sources." Consequently, the allowable remuneration to partners was reduced. The learned CIT(A) upheld this decision, emphasizing that interest income should not be included in the computation of partner remuneration based on the definition of "book profit" under Explanation-3 of section 40(b). The CIT(A) referenced various High Court judgments supporting the treatment of interest income as "income from other sources" when not related to the core business activity.

In the subsequent appeal, the Tribunal analyzed the issue in light of a judgment by the jurisdictional High Court, which clarified that interest income should not be excluded when determining the permissible deduction of partner remuneration under section 40(b). The Tribunal aligned with the High Court's interpretation, emphasizing that interest income, even if assessed as business income, should not be disregarded for calculating allowable partner remuneration. As the interest income was declared as part of the business income, the Tribunal ruled in favor of the appellant, deleting the disallowance of Rs. 7,03,921.

In conclusion, the Tribunal allowed the appeal, overturning the disallowance under section 40(b) and emphasizing that interest income should not be excluded from the calculation of partner remuneration. The decision was based on the interpretation provided by the jurisdictional High Court, ensuring that interest income earned by the appellant was considered for determining the allowable deduction of partner remuneration.