Case Law Details
M/s. Feelings Vs PCIT (ITAT Panaji)
Assessee firm had claimed deduction of partners remuneration u/s 40(b)(v) . book profit comprised of income from operation of ₹3,00,000/- and balance of ₹4,66,45,829/- represented by interest income earned/accrued. AO accepted the claim in 143(3) order. However, PCIT u/s 263 set aside the assessment for misplacing explanation 3 in arriving eligible amount of book profit for the purpose of clause (v) of sub-section (b) of 40 .
Revenue’s contention was that assessee earned interest income by investing its surplus business funds and interest so earned was to be taxed under the head ‘Income From Other Sources’ and hence such interest income was to be excluded from book profit while computing permissible remuneration u/s 40(b)(v) .
Tribunal relied on CIT Vs J J Industries [ 358 ITR 531-Guj HC] which followed Apollo Tyres Ltd 255 ITR 273 (SC) and held that the AO is not entitled to re-compute the P&L profits. Even if income from other sources is included in the P&L A/c, to ascertain the net profit qua book-profit for computation of remuneration of the partners the same cannot be discarded’.
Tribunal also noted in Md. Serajuddin & Bros. Vs CIT [ 80 DTR 46 Cal HC ] and in CIT Vs Paramount Premises Ltd. [190 ITR 259 Mum HC ] had held that, any interest earned from the funds deployed which arose out business activity by no stretch of imagination can it be categorized under the head income from other sources. In CIT vs. Lok Holdings [308 ITR 356 Mum HC ] it was held that interest earned from deposit of funds linked to any business activity is income from business & profession & thus, cannot be categorized as income from other sources.
Tribunal finally set aside the 263 order ruling that income for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be as appearing in the P & L a/c. The interest income, thus, cannot notionally be excluded while determining allowable of deduction of remuneration to partners u/s 40(b)(v) .
Interestingly Tribunal observed that though the CBDT vide para (iv) of Circular 12/2019 dt. 19/06/2019 instruction ‘to exclude all incomes such as capital gain, interest, rental income, income from other sources etc. which do not fall under the head ‘profit or gain of business or profession’, from the figure of book profit for the purpose of section 40(b)(v)’ would not be applicable in the present case for two reasons that;
- circular although binding but in no case shall override judicial precedents
- assessment as well impugned 263 order were framed anterior to circular coming into effect.
FULL TEXT OF THE ORDER OF ITAT PANAJI
Present appeal is instituted u/s 253(1) of the Act against order of Principal Commissioner of Income Tax, Panaji [‘CIT(A)’ in short] dt. 29/03/2019 passed u/s 263 of the Income-tax Act, 1961 [‘the Act’ in short] which in turn ascended out of assessment order dt. 30/11/2016 passed u/s 143(3) of the Act by the Income Tax Officer, Ward-5, Margao-Goa [‘AO’ in short].
2. Pithily stated facts borne out of case records are;
2.1 The assessee is a partnership firm engaged in the business as real estate developers & civil contractors etc., had e-filed its return declaring total income of ₹3,81,79,160/- after claiming a deduction of ₹84,00,000/-u/s 40(b)(v) of the Act towards partners remuneration.
2.2 The assessee’s version of computation of book profit was comprised of income from operation of ₹3,00,000/- and balance of ₹4,66,45,829/- represented by interest income earned/accrued, which was accepted by the Ld. AO by an order of assessment dt. 30/11/2016 framed u/s 143(3) of the Act.
2.3 Finding fault therewith, the Ld. PCIT invoked revisionary jurisdiction u/s 263 of the Act and has set-aside the assessment for misplacing explanation 3 in arriving eligible amount of book profit for the purpose of clause (v) of sub-section (b) of 40 of the Act.
2.4 Aggrieved by the revisionary order assessee set-up its case on legal as well merit are grounds.
3. The present issue lies in a narrow compass of material facts that, the assessee earned interest income by investing its surplus business funds and interest so earned was to be taxed under the head ‘Income From Other Sources’. As a corollary to this finding, Ld. PCIT was of the view that such interest income was to be excluded from book profit while computing permissible remuneration u/s 40(b)(v) of the Act.
4. Heard respective rival contentions; in the light of rule 18 of ITAT-Rules, 1963 perused relevant materials placed on record and case law relied. We note that, section 40(b)(v) restricts a partnership firm from claiming deduction towards remuneration paid to its working partner exceeding certain limits of ‘book profit’. The explanation 3 defines the term ‘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 the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.’
5. We find that the present issue is squarely covered by the judgement of Hon’ble Gujarat High Court in the case of ‘CIT Vs J J Industries’ reported in 358 ITR 531’ wherein their Lordships have held that;
‘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. S. 29 provides how the income from profits and gains of business should be computed and this has to be done as provided u/s 30 to 43D. By virtue of s. 5 that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of s. 40(b)(v) read with the Explanation, there cannot be a separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides that the net profit as shown in the P&L A/c is not the profit computed under the head profit and gains of business. Following the principle laid down in Apollo Tyres Ltd 255 ITR 273 (SC), the AO is not entitled to recompute the P&L profits. Even if income from other sources is included in the P&L A/c, to ascertain the net profit qua book-profit for computation of remuneration of the partners the same cannot be discarded’.
6. A similar ratio also found laid by the Hon’ble Calcutta High Court in ‘Md. Serajuddin & Bros. Vs CIT’ reported in 80 DTR 46 [equivalent citation 24 com 46] and by the Jurisdictional Bombay High Court in ‘CIT Vs Paramount Premises Ltd.’ reported in 190 ITR 259, wherein their lordship have held that, any interest earned from the funds deployed which arose out business activity by no stretch of imagination can it be categorized under the head income from other sources. Further in similar facts and circumstance the Hon’ble Jurisdictional Bombay High Court ‘CIT vs. Lok Holdings’ reported in 308 ITR 356 [equivalent citation 189 taxman 452], has categorically held that interest earned from deposit of funds linked to any business activity is income from business & profession and thus, cannot be categorized as income arising from other sources.
7. It is a settled principle of law now that, income for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be as appearing in the profit and loss account. The interest income, thus, cannot notionally be excluded while determining allowable of deduction of remuneration to partners u/s 40(b)(v) of the Act. In the extent case, the interest income shall form part of business income for the purpose of computing admissible deduction u/s 40(b)(v) of the Act.
8. In the light of aforestated judicial binding precedents, we see no reasons to deviate therefrom. Resultantly in the impugned revisionary order passed setting-aside the assessment order in our considered view deserves to be quashed, therefore order accordingly.
9. Before parting, we are heedful to state that, the CBDT vide para (iv) of Circular No. 12/2019 dt. 19/06/2019 instruction ‘to exclude all incomes such as capital gain, interest, rental income, income from other sources etc. which do not fall under the head ‘profit or gain of business or profession’, from the figure of book profit for the purpose of section 40(b)(v)’ shall failed make its application in the present case for two reasons that; (1) Firstly, circular although binding but in no case shall override aforestated judicial precedents (2) Secondly, assessment as well impugned revisionary order were framed anterior to circular coming into effect.
10. In result, the appeal is ALLOWED in above terms.
u/r 34 of ITAT Rules, order pronounced in open court on this Friday 01st day of Sept., 2023.
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