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2015 (12) TMI 123 - ITAT AHMEDABAD

2015 (12) TMI 123 - ITAT AHMEDABAD - TMI - Disallowance u/s 40(b) - remuneration paid to partners - AO held that interest so earned by the assessee can only be taxed as "income from other sources" - CIT(A) held that interest income is to be excluded from computation of permissible remuneration of partners - Held that:- The issue in appeal is now squarely covered by the judgement of Hon'ble jurisdictional High Court in the case of CIT vs. J J Industries (2013 (7) TMI 577 - GUJARAT HIGH COURT) whe .....

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admissible deduction under section 40(b), a different path was followed - Decided in favour of assessee. - ITA No. 2583/Ahd/2011 - Dated:- 15-9-2015 - Pramod Kumar, AM And Rajpal Yadav, JM For the Appellant : M. S. Chhajed For the Respondent : J. P. Jangid ORDER Per Pramod Kumar, AM 1. By way of this appeal, the assessee appellant has challenged correctness of the order dated 2nd August, 2011 passed by the ld. CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961 ( .....

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noticed that the assessee has earned interest income of ₹ 20,14,571/- by investing surplus funds and that the interest so earned by the assessee can only be taxed as "income from other sources". As a corollary to this finding, learned CIT(A) was also of the considered view that interest income is to be excluded from computation of permissible remuneration of partners. It was for these reasons that the Assessing Officer concluded that only ₹ 7,03,921/- is permissible as rem .....

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er. I have also considered the decisions relied upon by the Ld. Counsel. It can be seen from the assessment order that the assessee has claimed the remuneration to partners from the net profit shown in the profit and loss account whereas the remuneration to partners is allowable to the working partners from the book profit which is authorised by and is in accordance with the terms of the partnership deed. The "book profit" has been defined in Explanation-3 below sec. 40(b) of the Act w .....

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fit as given in the aforesaid Explanation-3 that the profit and loss account for the purposes of book profit will be computed in the manner laid down in Chapter IV-D of the Act. As per Chapter IV-D of the Act, the income and expenditure as mentioned in sec. 28 to 44DB will be considered for arriving at the profits and gains of business or profession. The Assessing Officer had noticed that the assessee had shown interest income of ₹ 20,14,571/- as business income in the profit and loss acco .....

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in deposits with other will be income from other sources and not the business income because earning of interest is not the business of the appellant firm. The Hon'ble Rajathan High Court had held in the case of Murli Investment Co. Vs. CIT 167 ITR 368 (Raj.) that merely investing surplus funds instead of keeping them idle and obtaining interest thereon would not constitute business and therefore, the interest by the assessee would not be assessable as business income but assessable s incom .....

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g business. The Himachal Predesh High Court in the case of Shanta Lal Chopra vs. CIT 214 CTR (HP) 420 had held that the interest on FDR pledged with bank for obtaining loan was assessable as income from other sources and not business income. Similar view was taken by the Hon'ble MP High Court and Hon'ble Madras High Court respectively in the cases of Ferro Concrete Construction (India)(P) Ltd. Vs. CIT 290 ITR 713 (MP) and CIT vs. Monark Tools (P) Ltd. 260 ITR 258 (Mad.). The Hon'ble .....

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to avail of credit facility for the export business. Interest earned on fixed deposits for the purpose of availing of credit facility from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income. 2.4 In view of the law laid down by the various High Courts as referred to above, the interest income is considered as "income from other sources" and therefore, no remuneration to par .....

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t derive support from the decisions so relied upon. 2.5 Considering the above discussion, I am of the opinion that the Assessing Officer has correctly disallowed the claim of the remuneration to partners on the interest income ₹ 20,14,571/-. The remuneration payable to the partners had been correctly worked out by him for ₹ 7,86,079/-. The Assessing Officer was thus justified in disallowing the excess remuneration of ₹ 7,03,921/- (Rs.14,90,000/- ₹ 7,86,079/-) and his find .....

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(358 ITR 531) wherein Their Lordships have upheld the Tribunal's stand to the effect that for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be in the profit and loss account. The interest income, therefore, cannot notionally be excluded for the purpose of determining the allowable deduction of remuneration paid to the partners under Section 40b of the Act. As in the present case, in this case also interest was assessed as business income, and yet, for the .....

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) in the case of any assessee- (b) in the case of any firm assessable as such,- (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorized by, or is not in accordance with, the terms of the partnership deed; or (iii) any paym .....

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period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of [twelve] per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorized by, and is in accordance .....

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vision it can be seen that where an assessee is a partnership firm, any payment of salary, bonus, commission or remuneration to its partners under certain circumstances, if it exceeds the limits set out in Clause B, deduction to the extent of excess cannot be claimed. In the present case, such ceiling is prescribed in two slabs. On the first ₹ 30 lacs on the book profit or in case of loss such ceiling is ₹ 1,50,000/- or 90% of the book profit whichever is more. On the balance of the .....

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