Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2017 Supreme(Raj) 2650

RAJASTHAN HIGH COURT (JAIPUR BENCH)
K.S. Jhaveri, Vijay Kumar Vyas, JJ.
Commissioner Of Income Tax - Appellant
Versus
M/s. Allen Career Institute - Respondent
Income Tax Appeal No. 355 of 2011, D.B. Income Tax Appeal No. 537 of 2011 Connected with D.B. Income Tax Appeal No. 22 of 2015
Decided On : 12-09-2017

Advocates Appeared:
Parinitoo Jain with Ms. Shiva Goyal, Advocates, for the Appellant; Mr. Mahendra Gargieya, Advocate, for the Respondent

Interest income earned on FDRs is not to be included in the book profit for the purpose of Section 40(b) of the Income Tax Act, 1961, if it is not derived from the business of the assessee.

Headnote:
INCOME TAX - Computation of book profit - Whether interest earned on FDRs is to be included in book profit for the purpose of Section 40(b) of the Income Tax Act, 1961.
Fact of the Case:

The assessee, a partnership firm, had earned interest on fixed deposits (FDRs). The Assessing Officer (AO) disallowed the interest income as part of the book profit for the purpose of computing the allowable partners' remuneration under Section 40(b) of the Income Tax Act, 1961. The assessee challenged the AO's order before the Commissioner of Income Tax (CIT) and the Income Tax Appellate Tribunal (ITAT). The CIT partly allowed the assessee's appeal, while the ITAT allowed the appeal in full.
Finding of the Court:

The Court held that the interest income earned on FDRs was not to be included in the book profit for the purpose of Section 40(b) of the Income Tax Act, 1961. The Court observed that the interest income was not derived from the business of the assessee and was, therefore, not part of the business income. The Court further observed that the proviso to Section 40(b)(v) of the Act, which provides for the inclusion of interest income in the book profit, was not applicable in the facts of the case.
Issues: Whether interest earned on FDRs is to be included in book profit for the purpose of Section 40(b) of the Income Tax Act, 1961.
Ratio Decidendi: The Court held that the interest income earned on FDRs was not to be included in the book profit for the purpose of Section 40(b) of the Income Tax Act, 1961. The Court observed that the interest income was not derived from the business of the assessee and was, therefore, not part of the business income. The Court further observed that the proviso to Section 40(b)(v) of the Act, which provides for the inclusion of interest income in the book profit, was not applicable in the facts of the case.
Final Decision: The Court allowed the appeals filed by the Revenue and set aside the order of the ITAT.

JUDGMENT

ORDER

K.S. Jhaveri, J. - Since these three appeals arise out of the same order they are being decided by this common judgment.

2. By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of the department and allowed the appeal of the assessee modifying the order of CIT partially.

3. This Court while admitting the ITA No.355/2011 has framed following substantial question of law:

"Whether in the facts and circumstances of the case the ITAT is justified in considering the interest as part of the book profit in contravention of Section 40(b) i.e as per Section 40(b) the book profit has to be computed in the manner laid down in Chapter-IV D?"

4. This Court while admitting the ITA No.537/2011 has framed following substantial question of law:

5. This Court while admitting the ITA No.22/2015 has framed following substantial question of law:

"Whether the Tribunal was legally justified in deleting the disallowance of Rs. 2,30,00,796/- made on account of remuneration to partners by taking the interest earned on FDRs as part of book profit and business income under Section 28 specifically when it was "Income form other sources" and contrary to Section 40(b), Explanation 3 and Section 40(b) (v) (2)?"

6. Counsel for the appellant contended that the Chapter IV-D consist of Section 28 to 44 under heading of profits and gains of business or profession.

7. She has also relied upon Section 40(b)(v) read with Explanation 3 which reads as under:-

"40(b)(v) Any payment of remuneration to any partner who is a working partner, which is authorised 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 :

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 day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provided for such payment."

8. She contended that while considering the matter AO has specifically observed as under:-

"It may be also seen that these FDRs not made as a business necessity without which the business of the assessee cannot be run and in fact these FDRs are made out of surplus fund available with assessee. In this background, as held earlier, income from bank FDRs etc. cannot said to be business income and the same is to be treated as income from other sources.

The following case laws are also relied upon.

I. Madhya Pradesh State Industries Corporation Ltd. vs. Commissioner of Income Tax (1968) 69 ITR 824 (MP).

II. Shamas Tabrez Vanti (In Re) (2005) 273 ITR 299 the Authority of Advance Ruling.

III. Murli Investment Company vs. Commissioner of Income Tax, 167 ITR 368 (Raj.)

IV. Commissioner of Income Tax vs. Rajasthan Land Development Corporation 1995 (211) ITR 597 (Raj.)

V. Commissioner of Income Tax vs. Monarch Tools Pvt. Ltd. (2002) 260 ITR258.

Considering, these facts the remuneration to partners is calculated as under:-

	(Rs.)	(Rs.)
Net Profit as per P & L a/c (Before appropriation)		15,14,59,810
Less Income chargeable to tax under income From other sources (Int

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2017 Supreme(Raj) 2650

Interest income earned on FDRs is not to be included in the book profit for the purpose of Section 40(b) of the Income Tax Act, 1961, if it is not derived from the business of the assessee.

Cases Referred (7)