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TMI Blog2010 (2) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... b). The disallowance so made and confirmed by the CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full. 2.2 Alternatively and without prejudice to the above, such income of ₹ 1,76,09,959 be held and directed to be treated as 'profits and gains of business or profession' or in any case as 'business income' to be a part of book profit for the purpose of s. 40(b). 3. ₹ 1,90,762 : The learned CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of the following expenses : Sl. No. Head of expenses Expenses claimed Disallowed by AO Expenses sustained by (CIT(A) 3.1 Telephone expenses ₹ 3,48,861 ₹ 69,772 ₹ 58,244 3.2 Function expenses ₹ 12,58,484 ₹ 1,25,848 ₹ 1,25,848 3.3 Insurance expenses ₹ 33,849 ₹ 6,770 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against ₹ 3,92,48,924 claimed and the excess of ₹ 69,47,476, was disallowed. The learned CIT(A) also confirmed the disallowance, holding as under : I have perused the assessment order, considered submissions of the appellant and carefully studied various decisions mentioned before me, in particular the order of the Hon'ble Tribunal, Jaipur Bench 'A', Jaipur in case of the appellant for asst. yrs. 2002-03, 2003-04 and 2004-05 (ITA Nos. 607, 608 and 161/Jp/2008 dt. 31st July, 2008). The Hon'ble Tribunal observed, 'earning of interest on FDRs or on advances was not the business of the assessee' and the interest earned on FDRs and other advances was not business income but income from other sources as the same cannot be included in computation of remuneration to be paid to the partners under s. 40(b) of the Act'. The Hon'ble Tribunal concluded. 'Under these circumstances of the case we are of the view that the learned CIT(A) has rightly justified the action of the AO in restricting deduction under s. 40(b)(v)(2) for remuneration by taking the interest income under the head income from other sources. The first appellate order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt controversy in as much as it was held, that expression profits and gains as used in s. 2(24), is wider expression, and is not confined to profits and gains of business or profession . Though the decision was in relation to exemption under s. 10B yet the ratio was having a direct bearing on the present case. The learned Authorised Representative submitted that a decision given under the analogous law under s. 115J/JA, in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521: (2002) 255 ITR 273(SC), which was a decision on an almost identical situation, though decided long back to the subjected Tribunal order but perhaps lost sight of. This decision, is the law of the land and the principle propounded therein, is binding upon all the subordinate authorities and the same having been available on the day when the subjected order was passed, should have been considered while deciding the issue in hand. Non-consideration of such a decision also constitutes a mistake rectifiable under s. 154 or 254(2) of the Act. These apart, the Tribunal in its earlier decision has confined itself to only one aspect i.e., the classification of income however, there is absolutely no di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ibunal or there is relevant material before the Tribunal even in the case of the same assessee on the same issue which persuades the Tribunal to come to a different decision. He also placed reliance on the following cases and commentary : (1) Shriram Transport Finance Co. Ltd. vs. Asstt. CIT (1999) 70 ITD 406 (Mad); (2) CIT vs. Brij Lal Lohia Mahabir Prasad Khemka 1974 CTR (SC) 167 : (1972) 84 ITR 273 (SC); (3) CIT vs. L.G. Ramamurthi Ors. 1977 CTR (Mad) 416 : (1977) 110 ITR 453 (Mad), and Coming to the facts of this year, the learned Authorised Representative referred to the law prior to the amendment made by the Finance Act, 1992 w.e.f. asst. yr. 2003-04, wherein any amount paid to the partners whether named as remuneration, bonus, commission etc., was not as allowable deduction under s. 40(b). However to avoid double taxation with effect from asst. yr. 2003-04, amendments were made and deduction on account of payment of remuneration to the partners, was held allowable i.e., under s. 40(b)(v) of the Act. He took us to the provisions of s. 40(b)(v), which permit payment of remuneration to any partner, who is a working partner, if such payment is authorized by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k support from s. 4 of the Partnership Act, 1932. The learned Authorised Representative also took support from the specific provisions contained under s. 28(v) of the Act, which provide that any interest salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm shall be chargeable to income-tax under the head Profits and gains of business or profession under s. 40(b). Therefore, the source being the net profit in the hands of the assessee firm, should also be treated as a business income, by necessary implication. The learned Authorised Representative submitted that the issue in hand is now directly covered by a recent decision of this Bench in the case of S.P. Equipment (supra), which has taken a view that such a classification of income under s. 14 is not required. After a very elaborate discussion and after referring to various decisions, which included Hon'ble Supreme Court decision also, has now held that such interest income is also eligible to be included in the book profit for the purpose of s. 40(b). He placed reliance on the following cases : (1) Asstt. CIT vs. Sheth Brothers (supra); (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a business income and then only the question of making computation in the manner laid in Chapter IV-D shall apply and not otherwise. Since the AO has already treated such income as income from other sources, the assessee cannot be given the benefit of Expln. 3 below s. 40(b), as contented by the learned counsel for the assessee. The learned Departmental Representative relied upon the following cases : (1) CIT vs. Travancore Titanium Products Ltd. (2003) 183 CTR (Ker) 473 : (2003) 131 Taxman 705 (Ker); (2) Thirani Chemicals Ltd. vs. Dy. CIT (2006) 153 Taxman 45 (Del)(Mag) and (3) DLF Universal Ltd. vs. CIT (2008) 306 ITR 271(Del). 6. In the rejoinder however, the learned Authorised Representative submitted that all the cited cases were based on their peculiar facts not available in this case. Moreover, in those cases, neither it was argued nor the Hon'ble Courts considered the later development of law and non-consideration of the Co-ordinate Benches on the same issues. The request of the assessee for a consideration afresh in the interest of justice assume a greater importance now after the decision of Hon'ble Supreme Court in the case of Honda Siel (su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that a pertinent question, which certainly arises in the present case is as to whether the technical classification as done by the authorities below under s. 14 r/w s. 28 or s. 56, was at all required on the facts of the present case and in the law, with which, we are concerned in as much as the present claim of deduction of remuneration to the partners, was made under s. 40(b) of the Act. For this purpose, we shall first refer to the provisions of s. 40(b), the relevant extracts from the said provision are also reproduced hereunder in verbatim : Sec. 40(a) ............. (b) in the case of any firm assessable as such,' (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as 'remuneration') to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4'For the purposes of this clause, 'working partner' means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner; It is not denied that as per sub-s. (2) of s. 40(b), the allowable deduction is to be computed as per given percentage with reference to the amount of 'book profit'. Book profit, which in turn, has been defined under Expln. 3 to mean the net profit as shown in the P L a/c for the relevant pervious year, computed in the manner laid down in the Chapter IV-D as increased by the aggregated amount of remuneration...........A bare reading of the said Expln. 3, 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. In other words, there is no warrant to select the head of income so far as the computation of the permissible amount of dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed (infra). It is not disputed that in the instant case, the remuneration was claimed (paid) only after considering the net profit of the firm in its P L a/c and the required adjustments were also duly made i.e., such net profit was computed in the manner laid down in Chapter IV-D and was increased by the amount of remuneration debited to the P L a/c. We are in agreement with the contention of the learned counsel that the law contained under s. 115J/JA is an analogous law and therefore, the judicial pronouncements or guideline available with reference to the said provision, can very well be used here also for our guidance. For a better appreciation therefore, the relevant extracts from the said provision are also reproduced hereunder in verbatim : 115JA. (1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st April, 1997 but before the 1st April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent of its book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining its net profit for the relevant accounting year has provided for arrears of depreciation in its P L a/c which according to the Revenue is not in accordance with Parts II and III of Sch. VI to the Companies Act, 1956 (the 'Companies Act'). Hence, the AO while considering the case of the assessee-company under s. 115J of the IT Act recomputed the said P L a/c of the company so as to exclude the provision made for arrears of depreciation. The said action of the AO in questioning the correctness of the accounts maintained by the company was challenged by the company before the Tribunal which among other things held that the AO has no authority to reopen the accounts of a company which is certified by the auditors of the company as having maintained in an accordance with the provisions of the Companies Act and which account has been accepted in the general meeting of the company as well as by the RoC. This view of the Tribunal was not accepted by the Hon'ble High Court as it has been pleased to hold that the AO has the authority to examine whether the accounts of the company have been maintained in accordance with the requirement of sub-s. (1A) of s. 115J and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ss. 28 to 44DB, falling under Chapter IV-D titled as profits or gains income from business and profession. Moreover, s. 40(b) starts with the words. 'Notwithstanding anything to the contrary in ss. 30 to 38, the following amounts shall not be deduced in computing the income chargeable under the head 'Profits and gains of business or profession'. Therefore it is presupposed that the AO was already working under the head 'Profits or gains' income from business and profession only and not a different head. Thus, it is not the stage of the selection of a proper head under s. 14 of the Act. At this juncture, we find useful to refer a decision cited by the learned Authorised Representative in CIT vs. Hycron India Ltd. (2008) 219 CTR (Raj) 288: (2008) 13 DTR (Raj) 13, wherein, it was held that exemption under s. 10B'Profit and gains derived from export oriented undertaking'Interest from sister concern'Interest received by assessee from sister concern on advances against purchase goods is 'profits and gains' eligible for exemption under s. 10B'Expression 'profit and gains' as under in s. 2(24), is wider expression, and is not confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of firm. To preciously quote it was held that : 'A firm is not a legal person, even though it has some attributes of personality. In IT law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz.; the employer and the employee, there cannot be a contract of service, in strict law between a firm and one of its partners. Payment of salary to a partner represents a special share of the profit. Salary paid to a partner retains the same character of the income of the firm. Held accordingly, the salary paid to a partner by a firm which gross and sale tea is exempt from tax, under r. 24 of the Indian-tax Rules 1922, to the extent of 60 per cent thereof representing agricultural income and is liable to tax only to the extent of 40 per cent.' Applying this analogy, if the nature of the income has been deemed by the legislature to be the business income by the recipient, the source also should bear the same character i.e., business income. We see no reason not to proceed on this analogy as the legislature has itself deemed such receipts like interest, salary, bonus, com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red though available on the same issue and also cited nor, the Hon'ble Courts considered the aspect that there was a later development of law, requiring a fresh consideration of the issue. Moreover, in the earlier Tribunal order in the case of the assessee as relied upon by the learned Departmental Representative, the assessee filed miscellaneous applications under s. 254(2) of the Act, registered as MA Nos. 133 to 135/Jp/2008 (arising out ITA Nos. 607, 608 and 161/Jp/2008) for asst. yrs. 2002-03 to 2004-05 and the Tribunal has decided the same vide a consolidated order by which, the Tribunal found a mistake, apparent from the record in the order dt. 31st July, 2008 as prayed, for detailed reasons stated therein and held that the deduction as claimed under s. 40(b) by the assessee, computed with reference to the net profit shown in the P L a/c including the interest on bank FDRs etc., should be allowed and the disallowance made by the AO on this account was directed to be deleted. In view of the said order, the above contentions of the learned Departmental Representative have lost relevancy. Hence we agree that judicial proprietary demands to consider the issue afresh whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the purpose of the business only and nominal expenditure was claimed. The assessee has to talk with students and parents of the students, regularly, residing outstation. The AO made disallowance without any basis. The telephone expenses claimed at ₹ 3,13,847 in last assessment year and in the current year at ₹ 3,48,861 only, which is reasonable and justified. With regard to function expenses it was submitted that the assessee firm organized prize distribution function and annual function for the students of the institute. The annual function is celebrated in the holy environment to maintain our ethics, culture, tradition and sprit of true human being. The manner of celebrating annual function is Bhajan Sandhya i.e., worship of the God. This is a part of institute continuous spiritual and motivational activities. Hence there was no question of any personal use or benefit of the assessee or its partners. The assessee has maintained proper bills. However, in few cases, such as purchase of vegetable, fruits, transportation expenses where bills are not received, vouchers of the concerned employee are available. The current year function expenses amounted to ₹ 12,58,4 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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