TaxTMI 
TaxTMI 
2009 (9) TMI 637
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....as worked out at Rs. 24,29,300 as against Rs. 27 lakhs claimed, which, in his view resulted in escaped assessment of income under s. 147 of the IT Act, 1961. The same was processed under s. 143(1) on dt 22nd Dec., 2003. For the above reason, as apparent from p. 1 of the assessment order, the AO issued a notice under s. 148 on dt. 23rd March, 2005. The other relevant facts, as stated by the learned Authorised Representative are that the appellant represented some overseas companies in India on 'exclusive' basis and marked their special products to large Indian engineering industries. While importing the equipments from overseas suppliers, the appellant has to make payment in advance or could have imported the same through letter of credits (LC) by obtaining bank guarantees. The cost of these equipments being very high, while giving the bank guarantees or LC limit facilities, the bank always insisted for furnishing security by way of fixed deposits. Considering the business requirement, the appellant had to keep some money in the form of fixed deposit with bank. During asst. yr. 2003-04, the appellant earned interest income of Rs. 7,63,997 on such FDRs. Since these FDRs were kept ....
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....e of s. 40(b). The past record, needless to say, was available with the AO, hence rather he must have had a prima facie belief opinion that in light of these facts and circumstances, the interest should be considered as a part of the book profit. On the contrary, there was no iota of evidence from which the AO could notice that some income escaped/excessive deduction was claimed and even allowed (though admitted by the parties, yet escaped the attention of the AO or he accidentally ignored), nor there was anything to suggest a contrary view than entertained in the past or in this year. He further submitted that it was not the case of the Revenue that the Hon'ble Supreme Court has taken a view which was already available but escaped attention or the assessee admitted such interest income not to be from business in the past, but wrongly claimed and stood allowed this year or a similar type of situation, necessitating invoking of Explanation below s. 147. In other words, the AO is required to notice a fact which, though available but escaped attention and assessment. However, the above submissions clearly suggest that from the facts, as they prevailed or were available before the AO a....
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.... not the stage to reach to a conclusion. In the facts of the case and based on the material available, we are satisfied that the AO could have had such belief and therefore, the learned CIT(A) rightly has upheld the action under s. 147, with which, we are also in agreement as this Bench has already been taking a consistent view that any interest income on the funds placed with the banks and the interest earned thereon, should be taxed only under the head income from other sources and not as business income especially when earning of interest is undisputedly not the business of the assessee. Therefore, this part of the plea made by the learned counsel is hereby rejected. Ground No. 2 7. The appellant in ground No. 2 has challenged the part disallowance out of Rs. 2,70,700 the claim of remuneration made under s. 40(b) by the AO and confirmation thereof by the CIT(A). The relevant facts are that the assessee is trading in the specialized engineering equipments. During the year on total sales of Rs. 3.40 crores and service receipts of Rs. 9.903 lakhs, gross profit of Rs. 74.34 lakhs and net profit of Rs. 40.05 lakhs has been shown. The AO noticed that the net profit includes i....
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.... guarantees. The cost of these equipments being very high, while giving the bank guarantees or LC limit facilities, the bank always insisted for furnishing security by way of fixed deposits. Considering the business requirement, the appellant had to keep some money in the form of fixed deposit with bank. Considering these business requirement, the appellant has taken OD limit, LC limit and bank guarantees from his bankers i.e., State Bank of Hyderabad, Kota. In the year under consideration, the appellant has taken OD limit Rs. 40 lacs, LC limit Rs. 25 lacs and has deposited margin money in the form of FDR for issuance of bank guarantees of Rs. 19 lacs. During the relevant year, there were FDRs of Rs. 92.50 lacs, pledged with the bank against the limits. It was under these circumstances only, the appellant has earned interest income incidentally however, it never intended to earn income regularly on investment. In fact, it was exploitation of the commercial assets in the best suited manner by a businessman. Further, there was no surplus money. There was no other source of income except business income, hence such interest earned was a "business income" only. Similar was the posit....
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....of payment of remuneration to the partners was held allowable i.e. under s. 40(b)(v) of the Act. He took us to the provisions of s. 40(b)(v), which permit payment of remuneration to any partner, who is a working partner, if such payment is authorized by and is found to be in accordance with the terms of partnership deed. However, the aggregate payment to be made to all the partners should not exceed such aggregate amount, which has to be computed in a prescribed manner. He submitted that cl. (2) provides that in the case of any firm, other than a professional firm, the deduction is to be made as per given percentage with reference to the amount of "book profit". He further submitted that book profit has been specifically defined under Expln. 3 to mean the net profit as shown in the P&L a/c for the relevant pervious year, computed in the manner laid down in the Chapter IV-D as increased by the aggregated amount of remuneration......... He submitted that in the said definition, there is absolutely no reference (or no requirement for that purpose) of the selection of the any head of income, more particularly of the head "Profits and gains of business or profession". Hence it is only t....
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.... as specifically defined in the Expln. 3 i.e. the net profit shown in the P&L a/c together with some permissible adjustments only and not beyond that. For this purpose he took us to another analogous law under s. 10B and a recent decision based thereupon in the case of CIT vs. Hycron India Ltd. wherein, it was held that the words profits and gains have not been defined therefore, one needs to refer s. 2(24) cl. (i), which also simply includes profits/gains in the definition of income. In absence of any legislative intent/indication, the meaning in common parlance has to be adopted. He submitted that the present controversy is directly covered by the above two decisions of Hon'ble apex Court and the Hon'ble Rajasthan High Court. The learned Authorised Representative submitted that from the unambiguous drafting of the provision, it is manifestly clear that the legislature never intended to compute book profit strictly under s. 14 r/w s. 28 or s. 56. The learned Authorised Representative also submitted that where a particular item of income falls under two heads, the assessee has the right to choose the head which subjects him to lesser tax. For this proposition he cited CIT vs. Bo....
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....and has been recognized under s. 28(iv) where the income from any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by a partner of a firm from such firm, shall be chargeable to income-tax under the head "Profits and gains of business or profession" under s. 40(b). As a necessary corollary therefore, the source i.e., the profits of the firm is impliedly assessable as business income. He also relied upon the case of CIT vs. Ramniklal Kothari (1969) 74 ITR 57 (SC) to the effect that the business of the firm is business of the partners of the firm and, hence, salary, interest and profits received by the partner from the firm is business income and, therefore, expenses incurred by the partners for the purpose of earning this income from the firm are admissible as deduction from such share income from the firm in which he is a partner. The learned Authorised Representative also submitted that the entries in the regularly maintained books of accounts are an admissible evidence under s. 34 of Indian Evidence Act, 1872 and such interest was regularly credited to the P&L a/c every year. Such facts and legal position assumes greater importan....
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....d counsel, for the assessee that a pertinent question, which certainly arises in the present case is as to whether the technical classification as done by the authorities below under s. 14 r/w s. 28 or s. 56, was at all required on the facts of the present case and in the law, with which we are concerned in as much as the present claim of deduction of remuneration to the partners was made under s. 40(b) of the Act. For this purpose, we shall first refer to the provisions of s. 40(b), the relevant extracts from the said provision are also reproduced hereunder in verbatim: "Sec. 40(a) ........... (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 authorised 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 aut....
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....mencing on the 1st April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such, payment. Explanation 1............. Explanation 2............. Explanation 3.: For the purposes of this clause, "book profit" means the net profit, as shown in the P&L a/c for the relevant previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4.: For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;" It is not denied that as per sub-s. (2) of s. 40(b), the allowable deduction is to be computed as per given percentage with reference to the amount of "book profit". Book profit, which in turn, has been defined under Expln. 3 to mean the net profit as shown in the P&L a/c for the relevant previous year, computed in the manner laid down in the Chapter IV-D as increased by the aggregated amount of remuneration.......... A ....
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.... allowable remuneration with reference thereto only. It is under this background, the legislature has not authorized exclusion of such receipts from the P&L a/c even though may be non-business receipts. This theory also fits in the underlying purpose of forming a partnership firm and the relations defined under s. 4 of the Partnership Act, as discussed (infra). It is not disputed that in the instant case, the remuneration was claimed (paid) only after considering the net profit of the firm in its P&L a/c and the required adjustments were also duly made i.e. such net profit was computed in the manner laid down in Chapter IV-D and was increased by the amount of remuneration debited to the P&L a/c. We are in agreement with the contention of the learned counsel that the law contained under s. 115J/115JA is a analogous law and therefore, the judicial pronouncements or guideline available with reference to the said provision, can very well be used here also for our guidance. For a better appreciation therefore, the relevant extracts from the said provision are also reproduced hereunder in verbatim: "115JA (1) Notwithstanding anything contained in any other provisions of this Act....
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....orded exactly in the same manner in the Expln. 3 below s. 40(b) also. We may now refer to the decision in the case of Apollo Tyres Ltd. vs. CIT. The brief facts necessary for the disposal of first of the above questions are as follows: The assessee-company while determining its net profit for the relevant accounting year has provided for arrears of depreciation in its P&L a/c which according to the Revenue is not in accordance with Parts II and III of Sch. VI to the Companies Act, 1956 (the "Companies Act"). Hence, the AO while considering the case of the assessee-company under s. 115J of the IT Act recomputed the said P&L a/c of the company so as to exclude the provision made for arrears of depreciation. The said action of the AO in questioning the correctness of the accounts maintained by the company was challenged by the company before the Income-tax Appellate Tribunal ("the Tribunal") which among other things held that the AO has no authority to reopen the accounts of a company which is certified by the auditors of the company as having maintained in accordance with the provisions of the Companies Act and which account has been accepted in the general meeting of the company ....
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....ded in the Expln. 3, nor he is empowered to decide under which head the income is to be taxed. The net profit as shown, is not to be allocated into different components. The dispute relating to the allowability of deduction of remuneration under s. 40(b) falls within the group of ss. 28 to 44DB, falling under Chapter IV-D titled as profits and gains income of business or profession. Moreover, s. 40(b) starts with the words, "notwithstanding anything to the contrary in ss. 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'." Therefore, it is presupposed that the AO was already working under the head profits and gains/income from business and profession only and not under a different head. Thus, it is not the stage of the selection of a proper head under s. 14 of the Act. At this juncture, we find useful to refer a decision cited by the learned Authorised Representative in CIT vs. Hycron India Ltd. wherein, it was held that. exemption under s. 10B-Profits and gains derived from export-Oriented undertaking-Interest from sister concern-Interest received by assessee from sister conce....
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.....M. Chidambaram Pillai held that salary paid to a partner of a firm shall continue the same character, as was in the hands of firm. To preciously quote it was held that: "A firm is not a legal person, even though it has some attributes of personality. In IT law, a firm is a unit of assessment, by special provisions, but it is not a full person. Since a contract of employment requires two distinct persons, viz.; the employer and the employee, there cannot be a contract of service, in strict law between a firm and one of its partners. Payment of salary to a partner represents a special share of the profits. Salary paid to a partner retains the same character of the income of the firm. Held accordingly, the salary paid to a partner by a firm which grows and sells tea is exempt from tax, under r. 24 of the IT Rules, 1922, to the extent of 60 per cent thereof, representing agricultural income and is liable to tax only to the extent of 40 per cent." Applying this analogy, if the nature of the income has been deemed by the legislature to be the business income by the recipient, the source also should bear the same character i.e. business income. We see no reason not to proceed on th....
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....nt of the total claim made including Rs. 1,563, which worked out to Rs. 35,801, which is under challenge. 13. The learned Authorised Representative submitted that the appellant was maintaining its book of accounts on regular basis and entire expenses were fully supported by bills and vouchers and were duly audited, which were submitted to the AO during the course of assessment proceedings. None of the expenses were found not supported by bills and vouchers. The appellant is dealing in supply of equipments parts to the manufacturer companies. The customers of the appellant firm are generally not the permanent customers and normally only one time transaction were held for supply of specific equipment. To get the order and then to complete the same, appellant has to move extensively. The entire expenses incurred under the head of travelling expenses are only for business purposes and it should be allowed in full. Further, only Rs. 1,563 were incurred by Shri R.P. Vijay and Shri C.P. Maloo, who were working to complete with the supply order placed by M/s Instrumentation Ltd., Kota and were borne by the assessee and as such rightly claimed as business expenses of the assessee. Such a....
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....hoorji Vallabhdas & Co. (1962) 46 ITR 144 (SC) and prayed that the addition be deleted. Whereas the learned Departmental Representative supported the AO. 17. We have considered the facts of the case and the interest income having accrued in asst. yr. 2004-05, could not be taxed in this year, therefore the same is directed to be deleted. Hence this ground is allowed. Ground No. 5 18. The appellant in ground No. 5 has challenged the disallowance out of business promotion expenses out of Rs. 51,996 claimed. The brief fact are that the AO disallowed the entire business promotion expenditure on the plea that various expenses have been incurred on gifts, sweets or food, etc., which cannot be considered to be for the purpose of business. Vouchers arc not in the name of the firm or no vouchers for these expenses were furnished before the AO. In the first appeal the learned CIT(A) has held as under: "r have considered the argument of the appellant and perused the assessment order. The expenditure on purchase of jewellery of Rs. 6,100, wherein bill has also been issued in the name of Smt. Rashmi Rathi and the purchase from Ahmedabad, cannot be said to be for gifting for the bu....