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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI D.KARUNAKARA RAO, AM & SHRI VIKAS AWASTHY, JM
आदेश / ORDER आदेश आदेश आदेश
PER D. KARUNAKARA RAO, AM :
This is the appeal filed by the assessee against the order of CIT(A)-1, Nashik, dated 03-11-2016 for the Assessment Year 2013-14.
Grounds raised by the assessee are extracted as under : “1. On the facts and in the circumstances of the case and in law Lower Authorities have erred in treating the interest earned on business advances as income taxable under the head income from other sources thereby rejected appellant’s claim that this interest is earned out of business activity of the appellant and therefore correctly treated under the head Profits and Gains from Business and Profession. 2. On the facts and in the circumstances of the case and in law Learned Assessing Officer further erred in disallowing remuneration paid to partners by invoking provisions of section 40(b) of the Income Tax Act, 1961, to the extent of Rs.13,98,503/- by rejecting the appellant’s contention that interest earned on business advances is also part of business income of the appellant.”
2 ITA No.164/PUN/2017 M/s. Agrawal Business Corporation
From the above, it is evident that the Ground No.2 is consequential to
Ground No.1 that relates to the proper head of income for taxing the interest
income received by the assessee.
Briefly stated relevant facts of the case include that the assessee
is a firm engaged in the business of Builders/Developers and Estate
Agent. Assessee filed the return of income on 23-09-2013 declaring
total income of Rs.23,30,840/-. During the year under consideration,
the assessee firm earned interest income of Rs.23,61,817/- and
credited the same to the profit and loss account. As a result, the net
profit as per books of account works out to Rs.60,52,097/-. Assessee
treated the same as business income and computed the allowable
remuneration on the said increased profits. In the assessment
proceedings, the AO treated the interest income as taxable u/s.56 of
the Act and therefore, the allowable remuneration is reduced
proportionately. In effect, against the assessee’s claim of deduction on
account of remuneration at Rs.37,21,258/-, the same is reduced by the
AO to Rs.23,22,755/-. It is the claim of the assessee that he is also into
the money lending business and therefore, the interest income
constitutes the business income of the assessee. In this regard, the
assessee relied on various decisions in this regard. Relying on the
judgment of Hon’ble Apex Court in the case of East India Housing and
Land Development Trust Ltd. reported in 42 ITR 49, the AO held that
mere object of formation of a company or a firm does not define the
character of income. He accordingly disallowed the claim of
remuneration to the extent of Rs.13,98,503/- and the same is added to
the income of the assessee. CIT(A) confirmed the same. In para No.5 of
her order, the CIT(A) concluded that the assessee does not possess
3 ITA No.164/PUN/2017 M/s. Agrawal Business Corporation
licence for money lending activity and the transactions of lending are
not substantial. Relying on various decisions mentioned in the said
para, the CIT(A) confirmed the disallowance made by the AO. CIT(A)
also dismissed the contention of the assessee relating to the principle of
consistency stating that the assessee’s claim of said income as business
income was not disturbed in the earlier assessment years.
Aggrieved with the same, the assessee is in appeal before us with
the above referred grounds.
Ld. Counsel for the assessee explained the above facts of the case
and submitted that the interest income is taxable as business income
when the assessee earned the same from the fixed deposits. In support
of his case, Ld. Counsel relied on the judgment of Hon’ble Bombay High
Court in the case of CIT Vs. Paramount Premises (P) Ltd. 190 ITR 259
(Bom.). He also relied on certain decisions the copies of which are filed
in the paper book from pages 32 to 34 of the paper book.
On the other hand, Ld. DR for the Revenue mentioned that the
interest earned on Fixed Deposits is unrelated to the business activity
of the assessee when the same could not be part of the book profits of
the firm for the purpose of computation of allowable salary, interest
payable to the partners etc. He therefore prayed for affirming the order
of Ld.CIT(A).
We heard both the parties on this issue of treating the interest
income as business income of the assessee and consequently the
inclusion of the same in the business profits for the purpose of
computing deduction u/s.40(b) of the Act. Undisputedly, the facts
4 ITA No.164/PUN/2017 M/s. Agrawal Business Corporation
include that the interest income is reflected by the assessee as business
income of the assessee over the years. It is the claim of the assessee
that the said entries are undisputed by the AO in the past as well as in
the current assessment year. Further, it is the claim of the assessee
that the assessee-firm is into money lending activity and the same is in
accordance with the amended objects of the supplementary partnership
deed of the assessee. Assessee relies on the supplementary deed dated
01-04-2010 (page 3 of the paper book) to substantiate the claim and
stated that this document was not available on 05-02-2016 when the
assessment is made. Therefore, we are of the opinion that there is a
requirement of examining the genuineness of the supplementary deed
of partnership. The availability of surplus funds is the another issue
which requires examination at the end of the AO. Further, the
exclusion of such interest receipts for the purpose of section 40(b) of the
Act was affirmed by the Hon’ble Rajasthan High Court in the case of
CIT Vs. Allen Career Institute reported in 403 ITR 375 (Rajasthan).
Therefore, we are of the view that this issue should be remanded
to the file of AO for fresh adjudication on the correctness of the
returned income for taxing the interest receipts after determining the
facts relating to the availability of excess funds and the scope of the
objects of the assessee if the money lending activity is authorised by the
partnership deed. AO is also required to examine the number of
transactions if they constitute substantial business of the assessee or
otherwise. AO shall grant reasonable opportunity of being heard to the
assessee in accordance with the set principles of natural justice.
Accordingly, the grounds of appeal raised by the assessee are allowed
for statistical purposes.
5 ITA No.164/PUN/2017 M/s. Agrawal Business Corporation
In the result, the appeal of the assessee is allowed for statistical
purposes.
Order pronounced on 03rd day of August, 2018.
Sd/- Sd/- (VIKAS AWASTHY) (D. KARUNAKARA RAO) �याियक �याियक सद�य �याियक �याियक सद�य सद�य /JUDICIAL MEMBER लेखा सद�य लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य
पुणे Pune; �दनांक Dated : 03rd August, 2018 सतीश आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत
अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. 3. The CIT(A)-1, Nashik 4. The Pr.CIT-1, Nashik िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, “SMC Bench” 5. Pune; गाड� फाईल / Guard file. 6.
आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार
स�यािपत �ित //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune