2017 (11) TMI 521 - HC - Income Tax

Interest from Fixed Deposit Receipts not business income; Appeals favor department.

Commissioner of Income Tax, Kota Versus M/s Allen Career Institute

The court held that the interest earned on Fixed Deposit Receipts (FDRs) should not be considered part of business income but classified as 'income from ... Determination of remuneration to partners u/s 40(b) - Income earned in the FDR (surplus funds) - whether to be considered as part of the income of the business - Section 40(b)(v) applicability - whether 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? - Held that:- The FDR which was invested by the assessee was never the part of business, in that view of the matter, the income which has been earned in the FDR cannot be considered as part of the income of the business. In that view of the matter the contention raised by learned counsel for appellant that Section 40(b)(v) of Explanation, the Tribunal and the CIT have seriously committed error and the view taken by the AO required to be allowed is not sustainable. It was never intention of the legislation to differentiate Section 40(b) falling under Chapter IV-D which income is to be considered as business income taking into consideration the purpose of Section 115J and granting benefit for initiation of the entries, it is investment of surplus funds of the respondents which is not part of the business income. Therefore, the same proviso will not apply in the facts of the case. - Decided against assessee. Issues Involved:1. Whether the ITAT is justified in considering the interest as part of the book profit in contravention of Section 40(b).2. 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.Detailed Analysis:Issue 1: Justification of ITAT in Considering Interest as Part of Book ProfitThe court examined whether the ITAT was correct in including the interest earned on Fixed Deposit Receipts (FDRs) as part of the book profit for the purpose of Section 40(b). The appellant argued that Chapter IV-D, which includes Sections 28 to 44, specifically governs the computation of profits and gains from business or profession. The appellant contended that the interest from FDRs should be classified as 'income from other sources' and not as business income, citing several precedents including Madhya Pradesh State Industries Corporation Ltd. vs. CIT and CIT vs. Rajasthan Land Development Corporation.The Tribunal had previously allowed the appeal of the assessee, treating the interest income as part of the business income. However, the appellant argued that this decision was contrary to the provisions of law and facts, emphasizing that the FDRs were made out of surplus funds and were not a business necessity.The court referred to various judgments, including Reliance Trading Corporation and Ors. vs. The ITO, Jaipur and Ors., which emphasized the restricted meaning of 'derived from' compared to 'attributable to.' The court concluded that the interest income from FDRs does not have a direct and proximate nexus with the business income and should be treated as 'income from other sources.'Issue 2: Deletion of Disallowance of Rs. 2,30,00,796/-The court also examined whether the Tribunal was justified in deleting the disallowance made on account of remuneration to partners by considering the interest earned on FDRs as part of the book profit and business income under Section 28. The appellant argued that the AO had rightly assessed the income, excluding the interest from FDRs from the business income, and that the reasons adopted by the AO were wrongly set aside by the CIT(A).The Tribunal had earlier observed that the interest on FDRs should be treated as eligible income for the purpose of Section 40(b), contrary to the AO's view. The court, however, found that the Tribunal had erred in its decision, emphasizing that the interest income from FDRs should not be considered as part of the business income for the purpose of calculating the book profit.The court referred to several judgments, including CIT vs. J.J. Industries and Apollo Tyres Ltd. vs. CIT, which supported the view that the interest income from FDRs should be classified as 'income from other sources' and not as business income. The court concluded that the Tribunal and the CIT(A) had committed an error in their interpretation and that the AO's original assessment should be upheld.Conclusion:The court concluded that the interest earned on FDRs should not be considered as part of the business income and should be classified as 'income from other sources.' The Tribunal and CIT(A) had erred in their interpretation, and the AO's original assessment was correct. The appeals were allowed, and the issue was answered in favor of the department and against the assessee.