Sandeep Singh Karhail ORDER
Sandeep Singh Karhail, Member (J)
1. The present appeal has been filed by the Revenue challenging the impugned order dated 23/05/2023 passed under section 250 of the Income Tax Act, 1961 ("the Act") by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi ["learned CIT(A)"], for the assessment year 2011-12.
2. In this appeal, the Revenue has raised the following grounds:-
"a. On the facts and in circumstances of the case, the CIT(A) erred in allowing the appeal of the assessee by relying on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Lok Holdings [MANU/MH/1311/2008 : 308 ITR 356) (Bom) without considering that in the present case no nexus between the advances received from customers and FDRs on which interest income was earned, was established by the assessee.
b. On the facts and in circumstances of the case, the CIT(A) erred in allowing the appeal of the assessee without considering that interest on FDRs is taxable under the head "Income from other sources" and not business income.
c. It is humbly requested that present appeal may be filed in accordance with the CBDT's Circular No. 3/2018 : MANU/DTCR/0003/2018 dated 11.07.2018 amended vide letter dated 20.08.2018 as per para 10(c) of the said Circular. Therefore, the order of the CIT(A) may kindly be vacated and that of the AO may be restored."
3. The brief facts of the case are that the assessee is a partnership firm and is carrying on the business of builders and developers. For the year under consideration, the assessee filed its return of income on 27/09/2011 declaring a total income of Rs.1,93,72,937. The return filed by the assessee was selected for scrutiny and vide order dated 21/02/2014 passed under section 143(3) of the Act the total income of the assessee was assessed at Rs.1,95,75,061. Subsequently, notice under section 148 of the Act was issued on 28/03/2018 on the basis that the assessee has claimed excess remuneration to partners amounting to Rs.6,70,740. In response to the aforesaid notice, the assessee submitted that the return original filed on 27/09/2011 be treated as a return filed in response to the aforesaid notice issued under section 148 of the Act. During the reassessment proceedings, upon perusal of the profit and loss account for the financial year 2010-11, it was observed that the assessee while calculating the remuneration to partners amounting to Rs.2,92,84,405 has considered interest amounting to Rs.11,17,899 received on fixed deposits with the bank as business income. The Assessing Officer ("AO") vide order dated 14/12/2018 passed under section 143(3) read with section 147 of the Act held that the interest received on fixed deposits is income from other sources and thus is to be reduced from the book profit to calculate the remuneration payable to the partners. Accordingly, the AO excluded the aforesaid amount of Rs.11,17,899 from the book profit while recomputing the remuneration payable to the partners to Rs.2,86,13,665 as against an amount of Rs.2,92,84,405 claim by the assessee. Therefore, the differential amount of Rs.6,70,740 was added to the total income of the assessee.
4. The learned CIT(A), vide impugned order, allowed the ground raised by the assessee on this issue by following the decision of the Hon'ble jurisdictional High Court in CIT v/s Lok Holdings, MANU/MH/1311/2008 : [2009] 308 ITR 356 (Bom.) and held that interest received on fixed deposits is a business income of the assessee. Accordingly, the addition of Rs.6,70,740 made by the AO was directed to be deleted. Being aggrieved, the Revenue is in appeal before us.
5. We have considered the submissions of both sides and perused the material available on record. The only grievance of the Revenue is against treating the interest received on fixed deposits as business income of the assessee instead of income from other sources. By considering the interest received on fixed deposits as income from other sources, the AO has reduced the same from the book profit to compute the remuneration payable to partners. On the other hand, it is the plea of the assessee that it is in the business of builders and developers, and in the course of its business, it has received advances from its customers. Further, the surplus funds were deposited in the banks from which it earned interest. Accordingly, it is the claim of the assessee that since the interest has been earned on temporary deposits of surplus funds of its business, the same constitutes business income and accordingly was credited to the profit and loss account. As a result, the aforesaid interest received on fixed deposits was considered for the purpose of computation of book profit for calculating the remuneration payable to the partners.
6. It is pertinent to note that for computing the remuneration payable to the partners, which is within the allowable limits as per section 40(b) of the Act, "book profit" means the net profit as shown in the Profit and Loss account computed in the manner laid down in Chapter-IV-D of the Act, which deals with computation of profits and gains of business or profession. Therefore, only receipt which is in the nature of business income can form part of the book profit to compute the remuneration payable to the partners. In support of its plea that interest received on fixed deposits with the banks is in the nature of business income, the assessee has placed reliance upon the decision of the Hon'ble jurisdictional High Court in Lok Holdings (supra). From the perusal of the aforesaid decision, we find that in the facts of that case, the taxpayer was also involved in the business of development of properties and in the course of its business received advances from its customers intending to purchase flats in the properties developed by it. Since those advances could not be utilised immediately for the business, the taxpayer invested the surplus amount temporarily with the banks and other concerns and earned interest thereon. Therefore, in the aforesaid facts, while deciding the issue in favour of the taxpayer, the Hon'ble jurisdictional High Court held that interest earned on surplus funds deposited with the bank is assessable as business income and not as income from other sources. Since in the present case also the assessee earned interest from the deposit of surplus funds of its construction business, we are of the considered view that the ratio of the aforesaid decision of the Hon'ble jurisdictional High Court is squarely applicable to the facts of the present case. Accordingly, we find no infirmity in the impugned order in treating the interest received on fixed deposits with the bank as business income and considering the same for the purpose of computation of book profit for calculating the remuneration paid to the partners. As a result, the grounds raised by the Revenue are dismissed.
7. In the result, the appeal by the Revenue is dismissed.
Order pronounced in the open Court on 01/05/2024
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