Decision:    In assessee’s favour.

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

Facts:

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.

Copy of the order is attached

Income Tax Appellate Tribunal-converted

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