Whether Interest income need to be excluded while calculating the book profit for calculating the remuneration to partners?
Here is an interesting judgment by ITAT Panajinon the issue as to whether Interest income need to be excluded while calculating the book profit for calculating the remuneration to partners
The case detail is as under:
M/s. Feelings Vs PCIT (ITAT Panaji) (TA No. 149/PAN/2019)
Let us have a short overview the case:
- Assessee partnership firm had claimed deduction of partners remuneration u/s 40(b)(v). The book profit comprised of income from operation of ₹3,00,000/- and balance of ₹4,66,45,829/- represented by interest income earned/accrued.
- The AO accepted the claim in 143(3) order. However, PCIT u/s 263 set aside the assessment for misplacing explanation 3 in arriving eligible amount of book profit for the purpose of clause (v) of sub-section (b) of 40.
- Revenue’s contention was that the assessee earned interest income by investing its surplus business funds and interest so earned was to be taxed under the head ‘Income From Other Sources’ and hence such interest income was to be excluded from book profit while computing permissible remuneration u/s 40(b)(v) .
ITAT Panaji held as below:
- Guj HC in CIT Vs J J Industries [ 358 ITR 531-Guj HC] which followed SC judgement in the case of Apollo Tyres Ltd 255 ITR 273 (SC) held that the AO is not entitled to re-compute the P&L profits, even if income from other sources is included in the P&L A/c.
- In Md. Serajuddin & Bros. Vs CIT [ 80 DTR 46 Cal HC] and in CIT Vs Paramount Premises Ltd. [190 ITR 259 Mum HC ], it was held that, any interest earned from the funds deployed which arose out business activity can by no stretch of imagination be categorized under the head income from other sources.
- In CIT vs. Lok Holdings [308 ITR 356 Mum HC ] it was held that interest earned from deposit of funds linked to any business activity is income from business & profession & thus, cannot be categorized as income from other sources.
- The interest income, thus, cannot notionally be excluded while determining allowable of deduction of remuneration to partners u/s 40(b(v) .
Note: Interestingly, Circular 12/2019 dt. 19/06/2019 excludes all incomes such as capital gain, interest, rental income, income from other sources etc. which do not fall under the head ‘profit or gain of business or profession’, from the figure of book profit for the purpose of section 40(b)(v).
The copy of the order in Under: