Interest from fixed deposit of spare fund cannot be excluded from book profit for purpose of determining allowable deduction of remuneration paid to partners
HIGH COURT OF GUJARAT
Commissioner of Income-tax – III
TAX APPEAL NO. 316 OF 2013
APRIL 25, 2013
K.M. Parikh for the Appellant.
Akil Kureshi, J. – The revenue is in appeal against the judgment of the Income Tax Appellate Tribunal dated 07.09.2012 raising following question for our consideration:
“Whether on the facts and in the circumstances of the case, the Tribunal was justified in taking view that whole income embedded in P & L account of assessee is to be taken into consideration for allowing deduction of remuneration paid to partners under section 40(b) without excluding interest income credited to P & L account even if it is not business income?”
2. The issue pertains to the ceiling of deduction on remuneration on a partnership firm which can be claimed in terms of Section 40 of the Income Tax Act, 1961 (‘the Act’ for short).
3. Brief facts are that;
3.1 The respondent-assessee is a partnership firm and is engaged in the business of purchasing raw cotton, ginning the same, making cotton beds and selling such cotton beds and cotton seeds. For the assessment year 2004-05, the assessee filed the return of income on 27.10.2004 declaring total income of Rs. 20.35 lacs (rounded off). The Assessing Officer framed a scrutiny assessment on 27.10.2006 determining the total income of Rs. 20.46 lacs (rounded off). Such assessment was subsequently reopened under Section 147 of the Act. During such reassessment proceedings, the Assessing Officer examined the question of remuneration paid by the firm to the partners. He was of the opinion that the ceiling of such remuneration for the purpose of claiming deduction had to be computed after ignoring the interest income of the assessee-firm earned on fixed deposits which came to Rs. 11.82 lacs (rounded off). He thus concluded that there was excess remuneration to the partners to the extent of Rs. 4.90 lacs (rounded off). He made disallowances accordingly.
3.2 The assessee carried the matter in appeal. CIT(A) rejected the assessee’s appeal and confirmed the view of the Assessing Officer upon which, the assessee approached the Tribunal. The Tribunal, by the impugned judgment, reversed the decision of the revenue- authorities and allowed the assessee’s appeal making following observations:
“9. We have heard the rival submissions and perused the material on record. It is an undisputed fact that assessee has earned interest of Rs. 22,23,006/- on F.D.’s and paid interest of Rs. 10,40,234/- on money borrowed. The net interest income of Rs. 11,82,769/- has been credited to P & L account and included in the net profit and the same has been considered as business income while framing assessment order u/s. 143(3). The co-ordinate Bench in the case of S.P. Equipment & Services (supra) after considering the various decisions has held as under:-
4. Section 40 of the Act pertains to amounts which are not deductible. Relevant portion of Section 40 reads as under :
“Notwithstanding anything to the contrary in [sections 30 to 38], the following amounts shall not be deducted in computing the income chargeable under the head “Profits and gains of business or profession”,-
|(a)||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 payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorized by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorized by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorization for such payment by any earlier partnership deed does not cover any 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 with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:-|
|(a)||On the first Rs.3,00,000 of the book-profit or in case of a loss||Rs. 1,50,000 or at the rate of 90 per cent of the book-profit, whichever is more;|
|(b)||On the balance of the book-profit||At the rate of 60 per cent|
5. From the above provision 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 Rs. 30 lacs on the book profit or in case of loss such ceiling is Rs. 1,50,000/- or 90% of the book profit which ever is more. On the balance of the book profit such ceiling prescribed is @ 60%.
6. The question, therefore, arises whether the interest income earned by the assessee-firm from the fixed deposit receipts should be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners’ remuneration.
7. The Tribunal has proceeded on the basis that for the purpose of ascertaining such ceiling on the basis of book profit, the profit shall be in the profit and loss account and is not to be classified in the different heads of income under Section 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable deduction of remuneration paid to the partners under Section 40B of the Act.
8. Counsel for the revenue vehemently contended that for the purpose of ascertaining the limit, only business income would be relevant and not any other income. In the present case, however, we need not enter into such controversy. The assessee had held out that it is in the business of purchasing raw cotton and ginning the same. It is a seasonal business. The interest income was generated out of spare funds invested in the fixed deposit. Such income was declared as part of the business income and that is how even the Assessing Officer had accepted the same. That being the position, and the Assessing Officer in the assessment taxed such income as business income, we do not see any question of law arising. The correctness of the Tribunal’s view on the specific issue may be gone into in an appropriate case.
9. Before closing we may record that though the tax effect involve was below the minimum limit prescribed by the CBDT in its circular dated 09.02.2011, learned counsel for the revenue pointed out that the case falls under one of the exception namely that it was an appeal filed on the basis of audit objection.
Tax appeal is dismissed.