TMI Blog2009 (9) TMI 637X X X X Extracts X X X X X X X X Extracts X X X X ..... et profit as declared by the appellant be considered. - decided in favor of assessee. Regarding dis allwance of traveling expenses - What the learned AO alleged appears to be a suspicion without substantiating it. No specific instance of disallowable nature in the claimed travelling expense, has been shown. The impugned disallowance is hereby deleted. - IT APPEAL NO. 464 (JP.) OF 2007 - - - Dated:- 30-9-2009 - Member(s) : I. C. SUDHIR., B. P. JAIN. ORDER-I.C. SUDHIR, J.M.: The assessee has questioned first appellate order on various grounds of appeal. Ground No. 1 2. The first ground taken by the assessee challenges the action under s. 147/148 taken by the AO. 3. The brief facts as stated are that the appellant filed return of income on dt. 24th Nov., 2003 at total income of Rs. 40,12,094. The appellant firm claimed payment of remuneration of Rs. 27 lakhs to the partners under s. 40(b), on the basis of book profit, which also included interest of Rs. 7,752 on IT refund and interest on FDR of Rs. 7,56,245 totalling to Rs. 7,63,997. The AO was of the opinion that such interest, which was included in the book profit, was chargeable to tax under the head "Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and reasonably notice that there was some understatement of income/excessive claim made without any reasonable doubt/dispute or availability of relevant facts. He further submitted that a perusal of the reasons recorded, as stated in the assessment show that the AO simply made a suspicion that such interest income was to be assessed as income from other sources and not from business income. Notably the assessee had already filed with the return of income, various details i.e., the interest account, the audited balance sheet, P L a/c, the tax audit report and notably the learned tax auditor in his report in Form 3CA has clearly certified that the P L a/c and the balance sheet furnished before them shows a true and fair view of the profits/loss earned from the business. The learned tax auditor has not made any qualification that the net profit of Rs. 40.05 lakhs (which inter alia also included the subjected amount of the interest of Rs. 7.63 lacs), was not income from the business. That apart, in the past also the appellant continued giving the same accounting treatment and made a claim of the deduction and the Department duly accepted the claim so made i.e., the similar interest on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escapement of income through excessive claim etc. Hence, it cannot be a case of deemed escapement under the Explanation. He also submitted that the bedrock condition or words, which continued right since inception till date, are "reason to believe" and not "reason to suspect". The word "believe" has to be understood in contradistinction of suspicion or opinion. Belief indicates something concrete or reliable. He further submitted that the belief must be of an honest and reasonable person based upon reasonable grounds and relied upon Ganga Saran Sons (P) Ltd. vs. ITO (1981) 22 CTR (SC) 112 : (1981) 130 ITR 1 (SC), ITO vs. Lakhmani Mewal Das 1976 CTR (SC) 220 : (1976) 103 ITR 437(SC) and Sheo Nath Singh vs. AAC 1973 CTR (SC) 484 : (1971) 82 ITR 147 (SC). Finally, he prayed that the very action taken under s. 147 r/w s. 148 be quashed. 5. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the authorities below. 6. We after considering the submissions of the parties in view of the decisions cited find substance in the contentions of the learned Departmental Representative for the reason that to judge the validity of the assumption of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, excluded interest income of Rs. 7,63,997 from the net profit and accordingly, the AO disallowed the excess of Rs. 2,70,700. When challenged, the learned CIT(A) also confirmed, holding as under: "I have considered the argument of the appellant and perused the assessment order. The issue under consideration is that the appellant has been earning interest income on FDR. The business of the appellant is trading of specialized electronic equipments and providing services for repair etc. for the specialized equipment which are mainly used in atomic power plants or thermal power plants, etc. Obviously, earning of the interest is not the business of the appellant. Accordingly the interest earned on the FDR cannot normally be considered as 'income earned from business or profession'. It is very clear that interest income is earned on investment made in the FDR." 8. The learned Authorised Representative, firstly, submitted the relevant facts being that the appellant represented some overseas companies in India on 'exclusive' basis and marked their special products to large Indian engineering industries. While importing the equipments from overseas suppliers, the appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 88 ITR 192 (SC) followed in CIT us. Multi Metals Ltd. (1990) 89 CTR (Raj) 240 : (1991) 188 ITR 151 (Raj). Therefore, such interest income treated as a business income for the purpose of s. 40(b). However thereafter, the learned Authorised Representative raised a query to himself, as to whether the technical classification as done by the authorities below under s. 14 r/w s. 28 or s. 56, was at all required on the facts of the present case and in the law, with which we are concerned. He submitted that the present claim of deduction of remuneration to the partners, was made under s. 40(b) of the Act. The learned Authorised Representative explained that the law prior to the amendment made by the Finance Act, 1992 w.e.f. asst. yr. 2003-04, was that any amount paid to the partners whether named as remuneration, bonus, commission etc., was always treated to be nothing but a part of profit and such a payment was only a mode of distribution of the profits. Therefore, the same was not a allowable deduction under s. 40(b). He drew our attention to the decision in the case of CIT vs. R.M. Chidambaram Pillai 1977 CTR (SC) 71 : (1977) 106 ITR 292 (SC). He further submitted that however to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence to which the remuneration is payable, is only the net profit as shown in the P L a/c and computed in a particular manner. The learned Authorised Representative further took us to the provisions of s. 80HHC Expln. (baa) and submitted that if a comparison is made with s. 40(b), it will be seen that the legislature has specifically defined the business profits for that purpose of earlier provisions, to be the profits as computed under the head "Income from business or profession", which is not the case under s. 40(b). The learned Authorised Representative also drew our attention towards the analogous law contained under Expln. 115J/l15JA, which uses the words net profit, shown in the P L a/c and thus, phraseology used in s. 40(b) and s. 115J/l15JA are almost similar as against those used in s. 80HHC(baa). He invited our attention to a decision of Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC), to the effect that the AO has limited power to make the permitted adjustments only and except that it is only the profit as shown by the assessee in the P L a/c, must be treated as book profit for the purpose of s. 115J/l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s essentially to be a business income. It cannot at all have any other character than business income. Whatever activities the partners may carry on, the resultant income has to be treated income of the firm in as much as all those persons had jointed together to carry on a business, with a view to earn profits jointly. He submitted that the legislature has not used the words business income/business profit but only net profit as shown in P L a/c which simply means the profit of the firm. The learned CIT(A) thus, proceeded on a serious misconception of law. To support his contention that in the case of a firm, it was in any case a business income, the learned Authorised Representative relied upon a decision of the Hon'ble Supreme Court in the case of CIT vs. R.M. Chidambaram Pillai, which held that salary paid to a partner of a firm shall continue to carry the same character as was in the hands of the firm. In other words, if it is treated as a business income in the hands of the firm it will remain to continue as business income in the hands of the partners also. In that particular case, the character of the income was of agriculture which elaborate, the Court held shall continu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that profit as shown in the P L a/c has to be computed in the manner laid down in Chapter IV-D and therefore, one has to essentially compute the profit if it falls under Chapter IV-D and not otherwise. In other words, Chapter IV-D will come into picture only if such income is treated to be a business income and then only the question of making computation in the manner laid in Chapter IV-D shall apply and not otherwise. Since the AO has already treated such income as income from other sources, the assessee cannot be given the benefit of Expln. 3 below s. 40(b), as contented by the learned counsel for the assessee. 10. We have considered the arguments advanced by the parties in the view of the various judicial pronouncements cited at Bar and with reference to the material placed on record and referred to. Firstly, we shall advert to the issue whether the controversy in hand that in the facts and circumstances of the case, the subjected amounts of interest could be treated as business income or income from other sources is essentially required to resolve the main dispute relating to the allowability or otherwise the claim of deduction made under s. 40(b) on the net profit, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as hereunder: (1) in case of a firm carrying on a profession referred to in s. 44AA or which is notified for the purpose of that section- (a) on the first Rs. 1,00,000 Rs. 50,000 or at the rate of of the book profit or in case 90% of the book profit, of a loss whichever is more; (b) on the next Rs. 1,00,000 at the rate of 60%; of the book profit (c) on the balance of the at the rat of 60%; book profit (2) in the case of any other firm- (a) on the first Rs. 75,000 Rs. 50,000 or at the rate of of the book profit, or in 90% of the book profit, case of a loss whichever is more; (b) on the next Rs. 75,000 at the rate of 60%; of the book profit (c) on the balance of the at the rate of 40%; book profit book profit Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such, payment. Explanation 1............. Explanation 2............. Explanation 3.: For the purposes of this clause, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit has to be computed in the manner laid down in the Chapter IV-D, does not mean that a part of the receipt credited to the P L a/c should be assessed under a particular head of income as classified under s. 14. On the contrary, the Explanation does not at all require the selection of a head of income under s. 14 for this purpose. Therefore, once the assessee has shown net profit in its P L a/c, what is required is only a few adjustments thereto as required/permitted by law. This should not be confused with the selection of the head/s of income. The qualifying words used in the said Expln. 3 computed in the manner laid down in the Chapter IV-D has been purportedly used by the legislature so as to ensure that all the inadmissible expenditure though debited to the P L a/c should be added back so that the real operational profits earned by the assessee firm by the collective efforts of the partners, be made a basis to compute the allowable remuneration with reference thereto only. It is under this background, the legislature has not authorized exclusion of such receipts from the P L a/c even though may be non-business receipts. This theory also fits in the underlying purpose of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible deductions in accordance with law, the income of the assessee results into loss or results into a nil income, the legislature has presumed some minimum deemed income on which the assessee company has been made to make payment of tax. Accordingly, 30 per cent of book profits, if found less than the total income declared by that assessee company shall be deemed to be the total income for the year. For the purpose of computation, book profit has been defined in the Explanation below s. 115J/115JA(1) as "book profit" means the net profit as shown in the P L a/c for the relevant previous year, as increased by certain amounts mentioned in cls. (a) to (f) there below and similarly to be reduced by the various amounts as mentioned under cls. (i) to (ix) (the positions of the law as stood in asst. yr. 2008-09, have been considered here). We find that the highlighted portion in the said Explanation under s. 115J/115JA has been worded exactly in the same manner in the Expln. 3 below s. 40(b) also. We may now refer to the decision in the case of Apollo Tyres Ltd. vs. CIT. The brief facts necessary for the disposal of first of the above questions are as follows: The assessee-company whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinized and certified by the statutory auditors and will have to be approved by the company in its general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. On similar analogy, here also by defining book profit in a similar phraseology, the legislature only wanted to arrive at a particular figure of net profit for the purpose of s. 40(b) and not more than that. The Expln. 3 nowhere empowers the AO or the AO does not get the jurisdiction to go behind the net profit shown in the P L a/c except to the extent of the adjustments provided in the Expln. 3, nor he is empowered to decide under which head the income is to be taxed. The net profit as shown, is not to be allocated into different components. The dispute relating to the allowability of deduction of remuneration under s. 40(b) falls wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm: Provided that where any interest, salary, bonus, commission or remuneration, by whatever name called, or any part thereof has not been allowed to be deducted under cl. (b) of s. 40, the income under this clause shall be adjusted to the extent of the amount not so allowed to be deducted." As can be seen that any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm, despite their name and nature, shall be chargeable to income-tax under the head "Profits and gains of business or profession" under s. 40(b). Needless to say, what a partner shares, is only share out of the very net profit as shown by the firm in the P L a/c and with which, we are presently concerned under s. 40(b). The ratio laid by Hon'ble Supreme Court held in CIT vs. R.M. Chidambaram Pillai held that salary paid to a partner of a firm shall continue the same character, as was in the hands of firm. To preciously quote it was held that: "A firm is not a legal person, even though it has some attributes of personality. In IT law, a firm is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleted. Hence, this ground is decided in the favour of the assessee. Ground No. 3 12. The appellant in ground No. 3 has challenged the disallowance out of travelling expenses of Rs. 3,58,009 claimed by the assessee. The AO noticed that under the travelling expenses, the appellant has shown travelling expenses incurred by S/Shri R.P. Vijay and C.P. Maloo amounting to Rs. 1,563 however, neither these persons are partners nor are the employees of the appellant firm. Moreover they travelled to the cities, where no sale was made. Accordingly, the AO observed that it is not possible to verify as to whether these expenses were really incurred for the purpose of business. He accordingly disallowed 20 per cent out of the remaining expenses, which came to Rs. 71,289 and also Rs. 1,563, leading to total disallowance of Rs. 72,852. In the first appeal, the learned CIT(A) partly reduced the disallowance to 10 per cent of the total claim made including Rs. 1,563, which worked out to Rs. 35,801, which is under challenge. 13. The learned Authorised Representative submitted that the appellant was maintaining its book of accounts on regular basis and entire expenses were fully supported by bil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crued amounting to Rs. 4,000 has been rightly added on accrual basis in the year consideration by the AO." Hence the assessee is in appeal. 16. It was submitted by the learned Authorised Representative that during the year. the appellant has advanced Rs. 4 lacs to Shri Ashok Gupta on 2nd Dec., 2002. The appellant has already received and declared interest income of Rs. 12,000 for three completed months. Since the interest for the fourth month accrued only on 2nd April, 2003 (from 2nd March, 2003 to 2nd April, 2003), which do not fall in this year hence no addition could be made. The income of Rs. 4,000 neither accrued nor earned in the asst. yr. 2003-04, hence no addition could be made this year. The assessee having already declared the same in asst. yr. 2004-05, the impugned addition resulted in double taxation of the income which is unjustifiable. He also cited decision in the case of CIT vs. Shoorji Vallabhdas Co. (1962) 46 ITR 144 (SC) and prayed that the addition be deleted. Whereas the learned Departmental Representative supported the AO. 17. We have considered the facts of the case and the interest income having accrued in asst. yr. 2004-05, could not be taxed in thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyees. Hence, considering the purpose of expenditure incurred, he prayed for a complete deletion. 20. The learned Departmental Representative on the other hand, supported the orders of the authorities below. He submitted that the appellant failed to prove how and for what business purpose the appellant could achieve, by making these gifts. Hence, he prayed to confirm the order of the CIT(A) on this aspect. 21. After hearing the parties, we find substance in the contentions of the learned Departmental Representative. However, we find that the expenses of Rs. 3,800 incurred on the shoes purchased for the specific use to handle the commissioning work performed at different sites and that wearing of shoes, was stated to be compulsory. necessitating such expenditure by the assessee. These facts could not be denied by the learned Departmental Representative hence a further relief of Rs. 3,800 is allowed and the balance of Rs. 22,198 is upheld. This ground is therefore, partly allowed. Ground No. 6 22. The appellant in ground No. 6 has questioned the disallowance made out of staff welfare and entertainment expenses at Rs. 2,000 out of Rs. 17,873 claimed. The brief facts are that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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