VIMAL AND SONS,,PUNE vs. INCOME-TAX OFFICER, WARD - 3(1),, PUNE

PER D. KARUNAKARA RAO, AM :

This is the appeal filed by the assessee against the order of CIT(A)-3, Pune, dated 31-05-2017 for the Assessment Year 2010-11.

“1. The Ld.CIT(A) erred in law and on facts in confirming disallowance of Rs.5,44,540/- towards remuneration to partners u/s.40(b) in respect of interest income on Fixed Deposit with Bank and credited to Profit and Loss Account as business income. 2. The Ld.CIT(A) erred in law and on facts in not appreciating that the interest income was earned from Fixed Deposit with Bank kept for the working capital requirements of the business and was business income forming part of the book profit for the purpose of section 40(b) of the Act.”

profit” for the purpose of computing the allowable remuneration paid to

partners u/s.40(b) of the Act.

filed the return of income originally on 26-09-2010 declaring total

income of Rs.22,49,680/-. In the proceedings u/s.143(3) of the Act, the

assessed income is determined at Rs.27,94,218/-. In the assessment

proceedings, on finding that assessee earned interest income of

Rs.22,40,578/- which was considered as business income both for

specifying the head of income for taxing it as well as for the purpose of

section 40(b) of the Act, AO recomputed the allowable remuneration to

partners by rejecting the assessee’s claim of treating the interest income

as “business income” of the assessee. The said income was treated as

“income from other sources” and the remuneration paid to the partners

was recomputed and restricted to Rs.10,55,460/- as against the claim

of Rs.16 lakhs.

who dismissed the appeal of the assessee. The CIT(A) confirmed the

AO’s finding treating the income as “income from other sources’ and

also restricting the allowable remuneration to the partners to a sum of

Rs.10,55,460/- only.

the Tribunal with the grounds extracted above.

assessee is a broker in the National Stock Exchange (in short “NSE”)

and is required to keep the deposit of Rs.76 lakhs with HDFC Bank as

per the requirement of NSE. Further, assessee was also to maintain

other deposits of Rs.2.07 crores (Rounded off) as security for obtaining

the overdraft facility. In effect, as per assessee, the said deposits are

maintained for the purpose of business of the assessee and also for

meeting the working capital of the firm. Assessee claimed that the

interest earned on the said deposits constitutes “business income”.

Therefore, the claim of the assessee qua the determination of

remuneration payable to the partners u/s.40(b) of the Act is valid. In

this regard, Ld. Counsel filed the copies of the following

judgments/decisions which were relied upon by the Ld. Counsel for the

assessee in support his case :

CIT(A).

case, orders of the Revenue and the judgments/decisions relied on by

the Ld. Counsel for the assessee. I find in the case of Md. Serajuddin &

Brothers Vs. CIT 210 taxman 0084, the Hon’ble Calcutta High Court

held that for the purpose of section 40(b)(v) there cannot be separate

method of accounting for ascertaining net profit and/or book profit.

The net profit is shown in the profit and loss account is relevant.

According to the said judgment, if the said net profit includes the

interest earned by the assessee from the banks the same should not be

excluded for computing the allowable remuneration u/s.40(b) of the

Act. The conclusion from the judgment is extracted as under:

“Conclusion : For purpose of computation of allowable remuneration to partners, book profit has to be ascertained not only from income from business alone but also from income from other sources. In calculation of allowable remuneration profit means profit as per profit and loss account.”

Further, in the case of CIT Vs. J.J. Industries 216 Taxman 0162

(Gujarat), the Hon’ble Gujarat High Court held that the interest income

earned by the assessee firm from the fixed deposit receipts cannot be

ignored for the purpose of working the book profit to ascertain the

ceiling of the partner’s remuneration.

Further also, in the case of M/s. P.G. Bhagwat Vs. ITO – ITA

No.1562/PN/2007, dated 15-04-2009, the Coordinate Bench of the

Tribunal answering a similar question has explained the book profits

occurred in section 40 (b) of the Act held and allowed the appeal in

favour of the assessee. While holding so, the Tribunal relied on the

decision of the Coordinate Bench of the Tribunal in the case of ACIT Vs.

Sheth Brothers 99 TTJ 189. Para No. 6 of the order of Tribunal is

relevant and therefore the same is extracted below for the sake of

completeness :

“6. We see no reasons to take any other view of the matter than the view so taken by the Coordinate Bench. The bank interest income was admittedly included in the profit and loss account in the case before us. Respectfully following the Coordinate Bench, we hold that the said interest income should have been taken into account for the purpose of computing allowable remuneration u/s.40(b) of the Act. The Assessing Officer is directed to recompute the allowable remuneration u/s.40(b) accordingly and grant the assessee admissible relief on that basis.”

Further, the Hon’ble Bombay High Court in the case of CIT Vs.

Green Infra Ltd., 78 taxmann.com 340 (Bombay) held that the interest

income earned by the assessee from the short term fixed deposits for

commercial consideration constitutes “business income” of the

assessee.

Thus, relying on the above decisions, various High

Courts/Tribunal, the Ld. Counsel for the assessee demonstrated that

the interest income in this case is earned by the assessee from banks

from the deposits made for the purpose of brokerage business. The

assessee, who is a broker in National Stock Exchange is required to

comply with the guidelines of the regulating body and then the income

constitutes “business income”.

The same being an integral part of the net profits for the purpose

of section 40(b) of the Act, the remuneration of Rs.16 lakhs should be

allowed in full without any restrictions as done by the AO and the

CIT(A).

appeal, I find the judgments discussed above are self explanatory. In

the instant case, it is a fact that the fixed deposits are kept with the

banks for the purpose of brokerage business and for commercial

consideration. Hence, the same is required to be taxed as “business

income” of the assessee. Further, the net profit as defined by various

decisions above, for the purpose of section 40(b) of the Act, the

exclusion of interest income from the same as done by the AO for the

purpose of restricting the allowable remuneration, is unsustainable in

law. Accordingly, I am of the opinion that the grounds raised by the

assessee are required to be allowed and in favour of the assessee.

Order pronounced on this 13th day of March, 2018.

Sd/- (D.KARUNAKARA RAO) लेखा सद� / ACCOUNTANT MEMBER पुणे / Pune; �दनांक Dated : 13th March, 2018. Satish आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to : अ�ेिषत

अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / The CIT(A)-3, Pune 3. आयकर आयु� / The CIT-3, Pune 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “SMC” / 5. DR ‘SMC’, ITAT, Pune; गाड� फाईल / Guard file. 6.

आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER,स आदेशानुसार

स�यािपत �ित //True Copy// //True Copy// Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune