2022 (10) TMI 393 - AT - Income Tax

Correct head of income - Income From Other Sources v/s income from business - interest income arising from Bank Fixed Deposit (F.D) - HELD THAT - We find that in Total Commodities India Pvt. Ltd. 2017 (4) TMI 1603 - ITAT MUMBAI after taking note of various judicial precedents held that where out of business necessity if funds are deployed by the assessee in fixed deposits for opening Letter of Credit / procuring Bank Guarantee / margin money etc. as a necessity of business then in that eventuality the interest earned on such funds is to be taxed under the head Income From Business and not under the head Income From Other Sources In the present case it has not been disputed by the Revenue that overdraft facility availed by the assessee was for the purpose of its business. The said interest income has been earned by the assessee in the course of its business and also to raise funds for running the said business hence the said interest income is linked to the business activities of the assessee. Therefore we are of the considered view that interest earned on Bank F.D. is in the nature of income from business - Assessee appeal allowed. Disallowance of remuneration paid to the partners - HELD THAT - AO treated the interest earned on Bank F.D. as Income From Other Sources and accordingly excluded the same for the purpose of working of book profit of the firm. As a result the Assessing Officer disallowed remuneration and added the same to the total income of the assessee. Since we have allowed ground raised in Assessee s appeal and have held that the interest on Bank F.D. is in the nature of Income From Business therefore the Assessing Officer is directed to delete the disallowance out of remuneration paid to the partners. Assessee appeal allowed. Disallowance of expenses to 10% in the absence of any supporting material - HELD THAT - We find that even now the assessee has not substantiated by way of any cogent evidence that these expenses were entirely incurred for the purpose of business. Accordingly we find no infirmity in the impugned order passed by the CIT(A). As a result ground in assessee s appeal are dismissed.

Summary

Issues:
1. Treatment of interest income from Bank Fixed Deposit as "Income From Other Sources"
2. Disallowance of remuneration paid to partners
3. Ad-hoc disallowance of certain expenses

Analysis:

Issue 1: Treatment of interest income from Bank Fixed Deposit as "Income From Other Sources"
The appeal challenged the order treating interest income from Bank F.D. as "Income From Other Sources" instead of "Profits & Gains of Business or Profession." The assessee argued that the interest was earned for business purposes, supported by overdraft facility and security to the bank. The Assessing Officer disagreed and held the interest as "Income From Other Sources." The CIT(A) upheld this decision. However, the Tribunal noted that interest earned on F.D. for business necessities should be taxed as "Income From Business." Citing precedents, the Tribunal ruled in favor of the assessee, allowing the appeal on this issue.

Issue 2: Disallowance of remuneration paid to partners
The Assessing Officer disallowed remuneration to partners based on the treatment of interest income from Bank F.D. as "Income From Other Sources." As the Tribunal allowed the appeal on Issue 1, considering the interest as "Income From Business," the disallowance of remuneration was directed to be deleted. Consequently, the appeal on this issue was allowed.

Issue 3: Ad-hoc disallowance of certain expenses
The Assessing Officer disallowed 15% of various expenses like travelling, sales promotion, telephone, and vehicle expenses due to lack of proper supporting documentation. The CIT(A) reduced the disallowance to 10% as no additional evidence was provided. The Tribunal found that the assessee still failed to substantiate these expenses solely for business purposes. Therefore, the appeal on this issue was dismissed.

The Tribunal dismissed the appeal on grounds not pressed. Overall, the appeal by the assessee was partly allowed, with specific issues ruled in favor of the assessee and others dismissed.