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TMI Blog2012 (6) TMI 537X X X X Extracts X X X X X X X X Extracts X X X X ..... having been completed in the first instance u/s. 143(3) of the Act by examining all the relevant aspects; the 'profit and loss account' as well as the 'tax audit report' u/s. 44AB of the Act, filed along with the return of income, duly disclosing both the interest received from the bank as well as the quantum of remuneration allowed to the partners, i.e., the two facts which constitute the basis of the re-opening of the assessment. 3. We have heard the parties, and perused the material on record. We find no substance in the assessee's claim. There is no whisper either of the interest income, which is on bank deposits, credited to the profit and loss account of the assessee-firm for the year at Rs. 4,71,612/-, or the head of income under which it is liable to be assessed under the Act, in the original assessment order (copy on record). The same has clearly escaped the attention of the AO while making the assessment, so that there has been no expression of any opinion in the matter, for the assessee to contend of a change of opinion. Even as observed by the Bench during the hearing, the assessment stands re-opened within four years of the commencement of the relevant assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts separate paper-book. 5.1 Though the assessee has raised alternative contentions as well, we shall proceed by examining the principal issue first. The primary facts are relevant and bear mention. The assessee is a wholesale dealer in solvents and chemicals, availing a loan of Rs. 1.20 crores from its bank for the purpose during the relevant year. The bank deposits, on which the impugned interest stands earned, are only toward margin money for the issue of bank guarantee/s in favour of its principal suppliers, i.e., the Hindustan Oil Corporation Ltd. (HOCL) and Kochi Refineries Ltd. (KRL), by its banker, State Bank of India; the total amount of bank guarantees, issued and outstanding during the year, being to the tune of Rs. 1.95 crores. The suppliers, as explained by the assessee, extend credit (for one month) only on the condition of being guaranteed the payment on the expiry of the defined period, toward which the funds are placed in bank deposits by way of margin money @ 25% of the bank guarantee/s. These fact are not disputed, so that we shall take them as given for the purpose of our deliberation. 5.2 With regard to the law in the matter, we may refer to, among others, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision by the apex court itself in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172/93 Taxman 502 (SC). In the subsequent decision cited supra, i.e., Bokaro Steel Ltd's case (supra) and Karnal Cooperative Sugar Mills Ltd.'s, case (supra) the overdraft facility was availed on the security of short term bank deposits, and which funds were used for business purposes. It was under these circumstances that it was held that the interest on the bank deposits would not be assessable as business income but only as income from other sources, while the assessee would get full deduction u/s. 36(1)(iii) on the interest on the overdraft account. The bank deposits, it may be appreciated, were nowhere connected with the assessee's business, and only represented parking of funds, deemed surplus for the time being, on a short term basis. That these constituted the security for availing of overdraft facility from the bank, availed and utilised for business purposes, was, as also pointed out by the hon'ble court, a different matter altogether. It was on this basis that the interest on overdraft was disallowed for being set off against the bank interest income, hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra); Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra); Bokaro Steel Ltd (supra); Karnal Cooperative Sugar Mill Ltd. (supra), where the apex court has time and again confirmed that it is the purpose or the proximity to the purpose, which would determine the character of the asset and, thus, that of the income arising there-from and, consequently, its assessability under the Act, going on to hold that where the amount was deposited in the bank to obtain a letter of credit for purchase of a capital asset (machinery), the interest thereon would only be a capital receipt, which shall go to reduce the cost of the relevant capital asset. The said decisions, in our view, full govern the present case, and the Revenue has misapplied the decisions by the hon'ble jurisdictional high court. We, accordingly, hold the impugned interest income of Rs. 471612/- as liable to be assessed as business income under Chapter IV-D of the Act. Accordingly, it would be entitled to deduction qua remuneration allowed to working partner/s by considering the said income as part of the 'book profit' under Explanation 3 to s. 40(b)(v). We decide accordingly. 5.4 Continuing further, Ground No. 4 represents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e quantum thereof, would arise. The relevant and the proper question to be asked, therefore, in determining the issue at large, is not whether the term 'book profit' would include only income assessable u/c. IV-D or could possibly include other income/s as well, but whether the impugned interest income is assessable u/c. IV-D, i.e., as business income, or as income from other sources, and the question posed, or the contention raised per the relevant grounds, is misconceived, and amounts to putting the cart before the horse. The deduction qua the partner's remuneration is being claimed and, therefore, would stand to be allowed only in determining the income assessable u/c. IV-D, in which case it would automatically fall to be included in the 'book profit', and the assessee allowed its claim for remuneration allowed to the working partner/s with reference thereto - at the claimed/exigible amount, else not (sic). The condition with reference to 'book profit', it may be appreciated, does not lay down any qualitative test, but only a quantitative one, so that the deduction, being in respect of expenditure to persons constituting the firm itself, is sought to be regulated by the Act. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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