Almac Corporation, Ahmedabad vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " B " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 2115/AHD/2011 (Assessment Year: 2008-09)

M/s. Almac Corporation 10, V/S DCIT, Circle-10, Suflam Flats, Nr. Jaihind Ahmedabad Press, Ashram Road, Ahmedabad -380009

(Appellant) (Respondent)

PAN: AAHFA 1695E

Appellant by : Shri Smt. Urvashi Shodhan, A.R. Respondent by : Shri Roop Chand, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 25-03-2015 Date of Pronouncement : 10 -04-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-XVI, Ahmedabad dated 04.07.2011 for A.Y. 2008-09.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a partnership firm stated to be engaged in the business of Commission Agent. Assessee filed its return of income for A.Y. 2008-09 on 25.09.2008 declaring total income of Rs. 28,48,230/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) 2 ITA No 2115/AHD/2011 . A.Y. 2008-09 vide order dated 28.04.2010 and the total income was determined at Rs.31,82,150/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who vide order dated 04.07.2011 dismissed the appeal of the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following effective ground;-

1. Ld. CIT (A) erred in law and on facts in confirming disallowance by AO of Rs. 3,28,920/- treating remuneration paid to the partners under the provisions of section 40(b)(v) of the Act as excessive. Both the lower authorities erred in not appreciating the language of the explanation 3 to section 40(b)(v) that book profit means net profit as per the profit & loss account for the purpose of computing remuneration payable to the partners. The Id. CIT (A) ought to have deleted the disallowance.

4. During the course of assessment proceedings, A.O noticed that Assessee had earned interest income of Rs. 9,83,256/- which included interest of Rs. 1,52,277/- earned from Neo Plast Engg. Pvt. Ltd. He was of the view that the remaining interest of Rs. 8,30,979/- was in the nature of non business income and taxable under the head " income from other sources" and was to be excluded for the purpose of calculation of remuneration payable to partners. He therefore, after excluding the aforesaid interest of Rs.8,30,979/-, worked out the remuneration payable to the partners as per the provisions of Section 40(b)(v) of the Act at Rs. 16,54,280/- as against the remuneration of Rs. 19,83,200/- claimed by the Assessee and the excess remuneration of Rs. 3,28,920/- (Rs. 19,83,200 less Rs. 16,54,280) was disallowed. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who after considering the submissions of the Assessee upheld the order of A.O and dismissed the appeal of the Assessee by holding as under:-

2.2 I have carefully considered the submission of the Ld. Counsel as well as the finding of the Assessing Officer recorded in the assessment order. I have also considered the decisions relied upon by the Ld. Counsel. It can be seen from the assessment order that the assessee has claimed the remuneration to partners from the net profit shown in the 3 ITA No 2115/AHD/2011 . A.Y. 2008-09 profit and loss account whereas the remuneration to partners is allowable to the working partners from the book profit which is authorized by and is in accordance with the terms of the partnership deed. The "book profit" has been defined in Explanation-3- below sec.

40(b) of the Act which reads as under:

Explanation-3 - For the purpose of this clause, "book profit" means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of remuneration paid or payable to all the partmers of the firm if such amount has been deducted while computing the net profit." only from the business income of the firm. 2.3 It is evident from the definition of book profit as given in the aforesaid Explanation-3 that the profit and loss account for the purposes of book profit will be computed in the manner laid down in Chapter IV-D of the Act. As per Chapter IV-D of the Act, the income and expenditure as mentioned in sec. 28 to 44DB will only be considered for arriving at the profits and gains of business or profession. The Assessing Officer had noticed that the assessee had shown interest income of Rs. 9,83,256/- as business income in the profit and loss account and claimed the partner's remuneration on the said income. He had considered the interest income of Rs. 1,52,277/- received from deposits with Neo Plast Engg. Pvt. Ltd. as business income as per the agreement.

However, the remaining interest income was , treated as non-business income as taxable under the head income from other sources. The assessee was enjoying the interest income of Rs. 9,83,256/- out of which Rs. 8,30,979/- the as interest from deposits and interest on FDs cannot be considered as part of business income. The Ld. Counsel could not establish as to how the interest from deposits and interest on FDs is the business income. It is an admitted fact that the appellant firm is not engaged in the business of money- lending business. Therefore, the interest income earned from deployment of surplus funds of the firm in deposits with others and in FDs will be income from other sources and not the business income because earning of interest is not the business of the appellant firm. The Hon'ble Rajasthan High Court had held in the of Murli Investment Co vs. CIT 167 ITR 368 (Raj.) that merely investing surplus funds instead of keeping them idle and obtaining interest thereon would not constitute business and therefore, the interest by the assessee would not be assessable as business income but assessable as 4 ITA No 2115/AHD/2011 .

A.Y. 2008-09 income under other sources. The Hon'ble Kerala High Court in the case of CIT vs. Venad Conductors (P) Ltd. 326 ITR 513 (Ker.) had held that income from short term deposit cannot be treated as income from business but it is income from other sources. Likewise, in the case of T.O. Abraham & Company vs. Dy.CIT 325 ITR 201 (Ker,) It was held that interest income from bank deposits is assessable under the head "income from other sources" where the assessee is not engaged in money lending business. The Himachal Pradesh High Court in the case of Shanta Lat Chopra vs. CIT 214 CTR (HP) 420 had held that the interest on FOR pledged with bank for obtaining loan was assessable as income from other sources and not business income. Similar view was taken by the Hon'ble M.P High Court and Hon'ble Madras High Court respectively in the cases of Ferro Concrete Construction (lndia)(P) Ltd. vs CIT 290 ITR 713 (MP) and CIT vs. Monark Tools (P) Ltd. 260 ITR 258 (Mad.). The Hon'ble Delhi High Court in their later on decisions had also taken the view that, interest income is assessable as income from other sources.

In the case of CIT v. Shri Ram Honda Power Equip. (Delhi) 289 ITR 475 (Delhi), the Hon'ble Delhi High Court had held that where surplus funds are parked with the bank and interest is earned there on it can only be categorized as income from other sources. The other category is where the exporter is required to mandatorily keep monies in fixed deposits in order to avail of credit facility for the export business. Interest earned on fixed deposits for the purpose of availing of credit facility from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income.

2.4 In view of the law laid down by the various High Courts as referred to above, the interest income is considered as "income from other sources" and therefore, no remuneration to partners will be allowable on this interest income. The Ld. Counsel has neither furnished the copy of the partnership deed nor established as to how the decisions relied upon by him are applicable in the facts of appellant's case. The-Hon'ble Amritsar Tribunal had held in the case of Shree Balaji Alloys vs. ITO [2010] 127 TTJ 129 (ASR) that a decision of the court is applicable to the case unless it is clearly demonstrated that there is similarity of the facts. Thus, the Ld. Counsel cannot derive support from the decisions so relied upon.

5 ITA No 2115/AHD/2011 . A.Y. 2008-09

2.5 Considering the above discussion, I am of the opinion that the Assessing Officer has correctly disallowed the claim of the remuneration to partners on the interest income Rs. 8,30,979/-. The remuneration payable to the partners had been correctly worked out by him for Rs. 16,64,280/-. The Assessing Officer was thus justified in disallowing the excess remuneration of Rs. 3,28,920/- (Rs. 19,83,200/- - Rs. 16,54,280/-) and his action to this extent is confirmed. The addition so made is sustained. All the grounds of appeal are accordingly dismissed.

5. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

6. Before us, ld. A.R. reiterated the submissions made before lower authorities and further submitted that interest income has to be considered for the purpose of working out remuneration to the partners because it is part of business income. She submitted that though the A.O in the order has noted that the income has to be considered as non business income but finally he has considered the total income as per the computation filed by the Assessee and has not treated the same as other income meaning thereby that interest income has indeed been accepted by him as business income. She further submitted that on identical facts, similar addition was made by A.O with respect to the interest income in A.Y. 2007-08 & 2009-10 but the addition made by A.O were deleted by ld. CIT(A) and the order of ld. CIT(A) has not been challenged by the Revenue. She placed on record at page 6 to 17 the copy of the order of CIT(A) for A.Y. 07-08 & A.Y. 09-10. She further placed reliance on the decision of Ahmedabad Tribunal in the case of DCIT vs. Ajay Engineers (ITA No. 2772/A/2012 order dated 07.06.2013). She therefore submitted that when facts of the case in the year under appeal are identical to that of earlier year and subsequent year and when the order of ld.

6 ITA No 2115/AHD/2011 . A.Y. 2008-09

CIT(A) has been accepted by Revenue, there was no reason for the Revenue to take a different view in the year under consideration. She therefore submitted that the addition needs to be deleted. Ld. D.R. on the other hand supported the order of A.O and ld.CIT(A).

7. We have heard the rival submissions and perused the material on record. The issue in the present ground is whether the interest income is to be considered for the purpose of calculation of remuneration to the partners. On perusing the assessment order, we find that though the A.O has stated that the interest of Rs. 8,30,979/- is in the nature of non business income and taxable under the head "income from other sources" but no such adjustment has been made by him while computing the income from business meaning thereby that he has accepted interest income as business income. We further find that interest receipts in A.Y. 07-08 & 09-10 were considered as non business income by the A.O. and thereafter after excluding it, the remuneration was worked u/s. 40(b)(v) but the addition made by the A.O was deleted by ld. CIT(A) . Before us, no material has been placed on record by the Revenue to demonstrate that the decision of the ld. CIT(A) for A.Y.20 07-08 & 2009-10 has not been accepted by the Revenue. We further find that on identical issue Hon'ble Calcutta High Court in the case of Md. Serajuddin & Brothers (2012) 24 Taxman.com 46 (Calcutta) has decided the issue in favour of Assessee by holding as under:-

"The said chapter nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of the said Act that total incomes of any previous years includes all income from whatever source derived. Thus 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. The said section nowhere provides as rightly 7 ITA No 2115/AHD/2011 . A.Y. 2008-09 pointed by Mr. Khaitan, learned Senior Advocate that the net profit as shown in the profit and loss account not the profit computed under the head profit and gains of business or profession."

8. Before us, Revenue has not brought any contrary binding decision in its support nor could demonstrate as to how the ratio of aforesaid decision of Hon'ble Calcutta High Court was not applicable to the present case. In view of the aforesaid facts, we are of the view that A.O was not justified in working out the claim of remuneration after excluding the interest income. We thus direct the A.O to include the interest income while calculating the remuneration payable to partner u/s. 40(b)(v) of the Act. In the result this ground of Assessee is allowed.

9. In the result, the appeal of Assessee is allowed.

Order pronounced in Open Court on 10 - 04 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad