Business disallowance under section 40(b)—Remuneration to partner—Interest income whether to be disallowed

Conclusion: Interest earned on FDRs to avail of OD facilities for running the business qualifies for inclusion in the profit to be considered for remuneration to the partners.

Assessee shown interest from FDRs with SBI, which was taken into account for calculation of remuneration to the partners. AO was of the view that interest of FDR was not a business income but it was income from other sources, therefore, excess remuneration was allowed to the partners on this account. Accordingly, he made a disallowance on this account. Held: There was not dispute that the business of the assessee dealing in food grains, oil seeds and pulses etc was a seasonal business depending upon crop seasons. Therefore, during the non-harvesting season the assessee was not having much business activity and accordingly the funds which were otherwise required for the business activity had to be kept in the bank. Further, it was also not disputed by the AO that some of the FDRs were taken by the assessee to avail overdraft facility from the Bank for the purpose of business activity during the pick season of crops.  Thus, the funds, which could not be utilized during the slack season and therefore, was not immediately needed, were kept in bank deposits including FDR. Hence, interest earned on FDRs to avail OD facilities for running the business qualifies for inclusion in the profit to be considered for remuneration to the partners.

Decision: In assessee’s favour.

Referred: CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315, Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (1997) 227 ITR 172 (SC), CIT v. Lok Holdings (2009) 308 ITR 356 (Bom.), Shree Krishna Polyster Ltd. v. DCIT (2005) 274 ITR 21 and CIT v. Paramount Premises (P) Ltd. (1991) 190 ITR 259

IN THE ITAT, JAIPUR BENCH

VIJAY PAL RAO, J.M. & VIKRAM SINGH YADAV, A.M.

ITO v. Suresh Chand Ravi Datt

ITA No. 1020/JP/2017

21 February, 2018

Assessee by: C.L. Yadav (C.A.)

Revenue by: Ram Singh (Addl. CIT)

Vijay Pal Rao, J.M.

This appeal filed by the Revenue is directed against the order dated 23-10-2017 of learned Commissioner (Appeals), Alwar for the assessment year 2010-11. The Revenue has raised the following ground :–

“(i) That the Commissioner (Appeals), Alwar has erred on the facts and circumstances of the case in deleting the disallowance made by the assessing officer on account of excess claim of remuneration to the partners claimed for Rs. 1,37,629.”

2. During the course of assessment proceedins, the assessing officer noted that the assessee has shown a sum of Rs. 2,29,381 interest from FDRs with SBI which was taken into account for calculation of remuneration to the partners. The assessing officer was of the view that interest of FDR is not a business income but it is income from other sources, therefore, excess remuneration was allowed to the partners on this account. Accordingly, the assessing officer made a disallowance of Rs. 1,37,629 on this account. The assessee challenged the action of the assessing officer before the learned Commissioner (Appeals) and submitted that the assessee firm is engaged in the business of trading and commission agency of food grains, oil seeds and pulses etc. and have availed cash credit/ overdraft facility from the bank for this purpose. The assessee’s business is a seasonal business related to crop season, therefore, the assessee has parked some of these funds during the slack season in FRD and some of the FDRs were taken for availing over draft facility. The assessee relied upon the decision of Hon’ble Bombay High Court in case of CIT v. Lok Holding (2009) 308 ITR 356 (Bom.). The learned Commissioner (Appeals) allowed the claim of the assessee and deleted the addition of Rs. 1,37,629 .

3. Before us, learned Departmental Representative has submitted that the assessee has admittedly parked its surplus funds in the bank deposit and therefore, the interest on the FDR cannot be treated as income of the assessee for the purpose of remuneration given to the partners. He has relied upon the order of the assessing officer.

4. On the other hand, learned Authorised Representative of the assessee has submitted that since the business of the assessee is depending upon the crop season and therefore, during the lean period the funds available with the assessee was kept in FDR which is a temporary deposit in the bank. Further, some part of the FDRs were made only for availing overdraft facility for running the business, therefore, the interest on the FDR has direct nexus with the business activity of the assessee. He has support the order of the learned Commissioner (Appeals).

5. We have considered the rival submissions as well as relevant material on record. There is not dispute that the business of the assessee dealing in food grains, oil seeds and pulses etc is a seasonal business depending upon crop seasons. Therefore, during the non harvesting season the assessee is not having much business activity and accordingly the funds which are otherwise required for the business activity has to be kept in the bank. Further, it is also not disputed by the assessing officer that some of the FDRs were taken by the assessee to avail overdraft facility from the Bank for the purpose of business activity during the pick season of crops. The learned Commissioner (Appeals) decided this issue in para 5.3 is as under :–

“5.3 I have considered the order passed by the assessing officer and submissions filed by the appellant. The moot question in the case is whether the income earned on FDRs which was made to avail OD facilities for running the business shall be included in the distribution of remuneration to the partners under section 40 of the Act. In view of the facts mentioned by the appellant and the Mumbai High Court judgment in the case of CIT v. Lok Holding as cited by the appellant, it is may considered view that the interest earned on FDRs to avail OD facilities for running the business qualifies for inclusion in the profit to be considered for remuneration to the partners. Accordingly, the addition of Rs. 1,37,629 is deleted.”

Thus, the funds which could not be utilized during the slack season and therefore was not immediately needed were kept in bank deposits including FDR. The Hon’ble Bombay High Court in case of CIT v. Lok Holding (supra) while considering the identical issue has held in paras 5 to 8 as under :–

“5. In our view, the facts of the present case are completely different than the facts in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). In that case, the business of the assesseecompany had not commenced and, therefore, the Apex Court held that there could be no income from business.

6. Apart from this, the business of the assessee in that case was the manufacturing of heavy chemicals. The investment of loans received and the accruing of interest therefrom were not a part of the business of the assessee-company. In the present case, the fact situation is that the income admittedly arose out of a running business of the assessee-company. Interest was earned out of such monies accruing from the business of the assessee-company and the same was also utilised for the purpose of business. This is not a case where the assessee did not have a running business during the assessment year.

7. The advocate appearing for the respondent relied upon a judgment of the Division Bench of this Court in the case of CIT v. Paramount Premises (P) Ltd. (1991) 190 ITR 259. The facts of Paramount Premises (P) Ltd.’s case(supra) were almost similar to the facts before us. The assessee in that case had received deposits in instalments from prospective purchasers while the work of construction was in progress. If the purchasers failed to make deposits by stipulated dates, they were required to pay interest. Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. In due course the assessee’s appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. This Court held that the aforesaid interest was assessable as income from business and affirmed the correctness of the view of the Tribunal that the interest so earned was “Income from business”. In our view, the law as laid down in Paramount Premises (P) Ltd.’s case(supra) is squarely applicable to the facts of the present case.

8. The advocate for the assessee also brought to our notice a judgment of the Apex Court in the case of CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315. In that case, the assessee-company was in the business of manufacturing of steel. For the purpose of construction of the plant the company gave advances to its contractors and earned interest from such advances, which were adjusted against the charges payable to the contractors, thus utilising the interest amount to reduce the cost of construction. In such a fact situation, the Apex Court affirmed the finding of the High Court, that these were capital receipts and not income of the assessee from any independent source. The fact situation in that case was completely different than the fact situation in the present case. The assessee in the case before the Supreme Court was not in the business of construction. The interest receipts had been utilised towards creation of capital assets. The said judgment is not relevant for deciding the present matter. Lastly, the advocate for the assessee brought to our notice, a more recent judgment of the Division Bench of this Court in the case of Shree Krishna Polyster Ltd. v. Dy. CIT (2005) 274 ITR 21. In that case, the assessee-company was engaged in the business of manufacturing of synthetic yarn. The assessee received surplus money in public issue of shares and the said money was invested in bank deposits for a period of 45 days. In their returns the assessee claimed that this interest was “business income”. The Tribunal found that the assessee was not in the business of money-lending and, therefore, the interest income could not be said to be business income. It treated the income as “Income from other sources”. The fact situation in that case was also different from the fact situation in the present case. In that case, the assessee-company was not in the business of money-lending. In the present case, admittedly, the assessee-company was engaged in a construction business and had deposited money received in the course of such business with the bank, earning interest thereon.”

Thus, in the facts and circumstances of the case and in view of the decision of Hon’ble Bombay High Court in case of CIT v. Lok Holding (supra), we do not find any error or illegality in the order of the learned Commissioner (Appeals) qua this issue.

In the result the appeal of the Revenue is dismissed.