M/S ELECTRIC INVESTMENT & ENTERPRISES,SILIGURI vs. THE DCIT, CIR-1, SILIGURI, SILIGURI

The Assessee is a partnership firm. The assessee filed return of income for A.Y.2010-11 declaring total income of Rs.16,30,840/-. The entire total income declared by the assessee comprised of income under the head ‘income from business’ of Rs.16,30,840/-. The assessee also included interest income of Rs.3,06,368/- as part of its income from business. An order of assessment u/s 143(3) of the Income Tax Act, 1961 (Act) dated 14.02.2013 was passed by the AO accepting the total income returned by the assessee.

Thereafter the AO issued a notice dated 16.10.2014 u/s 154 of the Act. According to the AO the interest income of Rs.3,06,368/- ought to have been assessed under the head “income from other sources “. According to the AO if the aforesaid interest income is excluded from the income under the head ‘income from business’ then the salary and remuneration that could be allowed to the partners u/s 40(b) r.w.

In reply to the show cause notice u/s 154 of the Act the assessee pointed out that the interest income in question was earned on deposit of Rs.22.40 lakhs which was offered as security to the Government department as Performance Guarantee Money/Earnest Money. Therefore the interest earned on such deposit has direct nexus with the business of the assessee viz. execution of electrical contract job and therefore such interest income has to be regarded as business income. The assessee also pointed out that another sum of Rs.14.77 lakhs was kept as deposit with the bank and that deposit was offered as security for the bank loan availed by the assessee for the purpose of the business of the assessee. Interest was also earned on loan given to the partners and since loan was given out of the capital the said interest was also to be regarded as business income.

The AO however was not convinced with the aforesaid explanation offered by the assessee. He was of the view that interest income had to be assessed under the head ‘income from other sources’ and consequently there would be a reduction in the book profits for the purpose of allowing remuneration to the partners. The AO accordingly worked out the total income of the assesse as follows :- “In view of the above discussion the assessee’s explanation is not acceptable and therefore, the book profit of the firm should be calculated out of business profits only and not by including the interest income. Accordingly, the book profit and remuneration allowable u/s 40(b) of the Income Tax Act is worked out hereunder :

On appeal by the assessee the CIT(A) confirmed the order of AO. Hence this appeal by the assessee before the Tribunal.

One of the arguments advanced by the ld. Counsel for the assessee is that the issue as to whether interest income has to be regarded as income from business or income from other sources was highly a debatable issue and therefore could not have been decided by the AO in the proceedings u/s 154 of the Act. He brought to our notice the decision of the Hon’ble ITAT ‘B’Bench in the case of DCIT vs M/s Mcleod Russel India Ltd in order dated 15.02.2013. In the aforesaid decision the Hon’ble ITAT after considering the decision of the Hon’ble Calcutta High Court in the case of Everady Industries (I)Ltd.inITA No.123 of 2000 came to the conclusion that interest income earned by investing surplus funds is to be regarded as income from business and not income from other sources. The ld. DR relied on the order of the AO and CIT(A).

After considering the rival submissions we are of the view that the issue as to whether interest income has to be regarded as income under the head income from 4 M/s Electric Investment & Enterprises A.Yr.2010-11 business or income from other sources was a debatable issue. In the case of Eveready Industries (I) Ltd (supra) the Hon’ble Calcutta High Court took the following view : "As we have already narrated above that the assessee in this case procured loans from banks and other financial institutions for its tea growing and manufacturing business and part of such fund remain temporarily unutilized. The assessee, instead of keeping the amount idle, invested the surplus fund in short-term interest hearing fixed deposits and earned interest. The main activity of the assessee is growing, manufacturing and selling of teas and not that of earning interest by investing in short-term fixed deposits. The assessee earned interest on such short-term fixed deposits made out of the business fund available with the assessee before they were utilized for actual business and, therefore, the same was incidental to the business activity of the assessee-company and interest on such short-term deposit must be treated as the business income. The assessee, a tea growing and manufacturing company, was left with surplus funds. The assessee invested such surplus funds in short-term deposits to exploit the business funds of the company and earned interest. Therefore, interest income of the assessee is business income and not income from other sources.

As we have already seen the AO has not disputed the nexus between the interest income earned by the assessee and the nexus with business of the assessee earning interest Income. In such circumstances, it cannot be said that interest income ought to have assessed under the head ‘income from other sources’. I am of the view that in the given facts and circumstances of the case the AO ought not to have exercised his jurisdiction u/s 154 of the Act as the issue was debatable. I accordingly delete the addition made by the AO in the proceedings u/s 154 of the Act. 4