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2021 (5) TMI 200 - AT - Income TaxAllowable deduction of remuneration paid to the partners u/s 40(b) - Disallowance of remuneration of partners - treating interest on FD and interest on income tax refund as income from other sources - HELD THAT - The issue raised by the assessee before us in no longer res integra. The assessee s issue is covered by the judgment of the Jurisdictional Hon'ble Gujarat High in the case of CIT V/s J.J. Industries 2013 (7) TMI 577 - GUJARAT HIGH COURT , wherein it was held. that interest on fixed deposits held. by a firm for its business purpose is part of business income and it will be included in Book Profit . For the purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book profit. Therefore, the interest income earned by the assessee-firm from the fixed deposit receipts should. not be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners' remuneration. For the purpose of ascertaining such ceiling of the partners' remuneration on the basis of book profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income under Section 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable deduction of remuneration paid to the partners under Section 40B of the Act. A bare reading of the Explanation 3 of section 40(b) of the Act, make it evident that selection of the any head of income, more particularly of the head Profit or gain of business or profession , is nowhere required or envisaged by the Legislature. That is, there is no warrant to select the head of income so far as the computation of the permissible amount of deduction of the remuneration under section 40(b) is concerned. As per Explanation 3 of section 40(b) of the Act, Assessing Officer does not get the jurisdiction to go behind the net profit shown in the Profit Loss account except to the extent of the adjustments provided in the Explanation 3, nor he is empowered to decide under which head the income is to be taxed. The net profit as shown, is not to be allocated into different components. Also see MD. SERAJUDDIN BROTHERS VERSUS COMMISSIONER OF INCOME TAX 2012 (8) TMI 104 - CALCUTTA HIGH COURT - Thus we uphold. the contention of the assessee and therefore we delete the addition - Decided in favour of assessee.
Issues Involved:
1. Reopening of assessment under Section 147 of the Income Tax Act. 2. Disallowance of remuneration to partners by treating interest on FD and income tax refund as income from other sources. Issue-wise Detailed Analysis: 1. Reopening of Assessment under Section 147 of the Income Tax Act: The assessee initially challenged the reopening of assessment under Section 147 of the Act. However, during the proceedings, the counsel for the assessee informed the tribunal that they did not wish to press this ground. Consequently, the tribunal dismissed this ground as not pressed. 2. Disallowance of Remuneration to Partners: The primary issue under appeal was the disallowance of remuneration to partners amounting to ?2,24,247 by treating interest on fixed deposits (FD) and interest on income tax refunds as income from other sources rather than business income. Facts of the Case: - The assessee, engaged in manufacturing aromatic chemicals, included various incomes in its total income, such as dividend income, interest on deposits, interest on income tax refunds, and interest on recurring deposits. - The assessing officer treated these incomes as "Income from other sources" and not directly related to the business income of the assessee. Consequently, these amounts were deducted from the net profit to compute the book profit for allowing admissible remuneration as per Section 40(b)(v) of the Act. - The assessing officer determined that the remuneration paid to partners exceeded the permissible amount by ?2,24,247 and added this excess amount back to the total income of the assessee. Submissions by the Assessee: - The assessee contended that the interest income from FDs in Canara Bank, which were pledged against finance obtained from the bank, should be considered as business income. - Similarly, the interest earned on income tax refunds was argued to be business income. - The assessee cited various court decisions to support their claim that these incomes should be included in the business income for computing the book profit. Findings of the Assessing Officer and CIT(A): - The assessing officer rejected the assessee's contention, holding that as per Explanation 3 of Section 40(b)(v) of the Act, only adjustments specified under Sections 28 to 44D should be made, and incomes chargeable under other heads (such as "Income from other sources") should not be part of the book profit. - The CIT(A) upheld the assessing officer's decision, confirming that the interest incomes earned from the deployment of surplus funds in deposits and FDs should be treated as income from other sources, as the firm was not engaged in the business of money lending. Tribunal's Analysis and Conclusion: - The tribunal referred to the judgment of the Jurisdictional Hon'ble Gujarat High Court in the case of CIT vs. J.J. Industries (2013) 358 ITR 531, which held that interest on fixed deposits held by a firm for business purposes is part of business income and should be included in "Book Profit." - The tribunal also cited the Hon'ble High Court of Calcutta's decision in Md. Serajuddin & Bros. vs. CIT, which supported the inclusion of interest income in the book profit for computing partners' remuneration. - The tribunal concluded that for the purpose of Section 40(b)(v) read with Explanation 3, there cannot be a separate method of accounting for ascertaining net profit. The interest income should not be excluded for determining the allowable deduction of remuneration paid to partners. - Respecting the binding precedents, the tribunal upheld the assessee's contention and deleted the addition of ?2,24,247. Final Judgment: The appeal filed by the assessee was allowed, and the addition of ?2,24,247 was deleted. The order was pronounced on 19/10/2020.
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