M/s Feelings, Margao V. The Principal Commissioner of Income Tax, Panaji

ITA 149/PAN/2019

AI Insights

The case involves M/s. Feelings, a partnership firm engaged in real estate development and civil contracting, which appealed against the revisionary order of the Principal Commissioner of Income Tax, Panaji. The dispute centered on the inclusion of interest income in the 'book profit' for calculating the permissible remuneration to partners under section 40(b)(v) of the Income-tax Act. The Tribunal examined whether the interest income, categorized under 'Income From Other Sources', should be excluded from the book profit as per the revisionary order. The Tribunal's decision was influenced by several High Court judgments that recognized such interest income as part of business income.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 136170 (ITAT-PANAJI)
• Duration Of Justice: 4 year(s) 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: WT(D)
• Next Hearing Date: 11-07-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 21-04-2019
• Other Referred Cases: CIT Vs J J Industries, Md. Serajuddin & Bros. Vs CIT, CIT Vs Paramount Premises Ltd., CIT vs. Lok Holdings
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order
• Section: 263; 143(3)

Judgement Text

॥ आयकर अपीलीय न्यायाधिकरण, पणजी न्यायपीठ, पणजी में ॥ ITAT-Pune Page 1 of 6 IN THE INCOME TAX APPELLATE TRIBUNAL, PANAJI BENCH, PANAJI BEFORE HON’BLE SHRI S. S. GODARA, JUDICIAL MEMBER AND SHRI G. D. PADMAHSHALI, ACCOUNTANT MEMBER आयकर अपील सं. / ITA No. 149/PAN/2019 धििाारण वर्ा / Assessment Year : 2014-15 M/s. Feelings, H. No. 2730, Murida, Fatorda Margao Goa- 403601 PAN:AABFF4135A . . . . . . . अपीलाथी / Appellant बिाम / V/s. Pr. Commissioner of Income Tax, Panaji, Goa. . . . . . . .प्रत्यथी / Respondent द्वारा / Appearances Assessee by : Shri Rahul Sarda Revenue by : Shri N. Shrikanth सुनवाई की तारीख / Date of conclusive Hearing : 12/07/2023 घोषणा की तारीख / Date of Pronouncement : 01/09/2023 आदेश / ORDER PER G. D. PADMAHSHALI, AM; Present appeal is instituted u/s 253(1) of the Act against order of Principal Commissioner of Income Tax, Panaji [‘CIT(A)’ in short] dt. 29/03/2019 passed u/s 263 of the Income-tax Act, 1961 [‘the Act’ in short] which in turn ascended out of assessment order dt. 30/11/2016 passed u/s 143(3) of the Act by the Income Tax Officer, Ward-5, Margao-Goa [‘AO’ in short]. M/s. Feelings ITA No.149/PAN/2019 AY: 2014-15 ITAT-Pune Page 2 of 6 2. Pithily stated facts borne out of case records are; 2.1 The assessee is a partnership firm engaged in the business as real estate developers & civil contractors etc., had e-filed its return declaring total income of ₹3,81,79,160/- after claiming a deduction of ₹84,00,000/- u/s 40(b)(v) of the Act towards partners remuneration. 2.2 The assessee’s version of computation of book profit was comprised of income from operation of ₹3,00,000/- and balance of ₹4,66,45,829/- represented by interest income earned/accrued, which was accepted by the Ld. AO by an order of assessment dt. 30/11/2016 framed u/s 143(3) of the Act. 2.3 Finding fault therewith, the Ld. PCIT invoked revisionary jurisdiction u/s 263 of the Act and has 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 of the Act. 2.4 Aggrieved by the revisionary order assessee set-up its case on legal as well meritare grounds. M/s. Feelings ITA No.149/PAN/2019 AY: 2014-15 ITAT-Pune Page 3 of 6 3. The present issue lies in a narrow compass of material facts 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’. As a corollary to this finding, Ld. PCIT was of the view that such interest income was to be excluded from book profit while computing permissible remuneration u/s 40(b)(v) of the Act. 4. Heard respective rival contentions; in the light of rule 18 of ITAT-Rules, 1963 perused relevant materials placed on record and case law relied. We note that, section 40(b)(v) restricts a partnership firm from claiming deduction towards remuneration paid to its working partner exceeding certain limits of ‘book profit’. The explanation 3 defines the term ‘book profit, means the net profit, as shown in the profit and loss account 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.’ M/s. Feelings ITA No.149/PAN/2019 AY: 2014-15 ITAT-Pune Page 4 of 6 5. We find that the present issue is squarely covered by the judgement of Hon’ble Gujarat High Court in the case of ‘CIT Vs J J Industries’ reported in 358 ITR 531’ wherein their Lordships have held that; ‘The said chapter nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. S. 29 provides how the income from profits and gains of business should be computed and this has to be done as provided u/s 30 to 43D. By virtue of s. 5 that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of s. 40(b)(v) read with the Explanation, there cannot be a separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides that the net profit as shown in the P&L A/c is not the profit computed under the head profit and gains of business. Following the principle laid down in Apollo Tyres Ltd 255 ITR 273 (SC), the AO is not entitled to recompute the P&L profits. Even if income from other sources is included in the P&L A/c, to ascertain the net profit qua book-profit for computation of remuneration of the partners the same cannot be discarded’. 6. A similar ratio also found laid by the Hon’ble Calcutta High Court in ‘Md. Serajuddin & Bros. Vs CIT’ reported in 80 DTR 46 [equivalent citation 24 taxmann.com 46] and by the Jurisdictional Bombay High Court in ‘CIT Vs Paramount Premises Ltd.’ reported in 190 ITR 259, wherein their lordship have held that, any interest earned from the funds deployed which arose out business activity by no stretch of imagination can it be categorized under the head income from other sources. Further in similar facts and circumstance the Hon’ble M/s. Feelings ITA No.149/PAN/2019 AY: 2014-15 ITAT-Pune Page 5 of 6 Jurisdictional Bombay High Court ‘CIT vs. Lok Holdings’ reported in 308 ITR 356 [equivalent citation 189 taxman 452], has categorically held that interest earned from deposit of funds linked to any business activity is income from business & profession and thus, cannot be categorized as income arising from other sources. 7. It is a settled principle of law now that, income for the purpose of ascertaining ceiling on the basis of book profit, the profit shall be as appearing in the profit and loss account. The interest income, thus, cannot notionally be excluded while determining allowable of deduction of remuneration to partners u/s 40(b)(v) of the Act. In the extent case, the interest income shall form part of business income for the purpose of computing admissible deduction u/s 40(b)(v) of the Act. 8. In the light of aforestated judicial binding precedents, we see no reasons to deviate therefrom. Resultantly in the impugned revisionary order passed setting-aside the assessment order in our considered view deserves to be quashed, therefore order accordingly. M/s. Feelings ITA No.149/PAN/2019 AY: 2014-15 ITAT-Pune Page 6 of 6 9. Before parting, we are heedful to state that, the CBDT vide para (iv) of Circular No. 12/2019 dt. 19/06/2019 instruction ‘to exclude 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)’ shall failed make its application in the present case for two reasons that; (1) Firstly, circular although binding but in no case shall override aforestated judicial precedents (2) Secondly, assessment as well impugned revisionary order were framed anterior to circular coming into effect. 10. In result, the appeal is ALLOWED in above terms. u/r 34 of ITAT Rules, order pronounced in open court on this Friday 01 st day of Sept., 2023. -S/d- -S/d- S. S. GODARA G. D. PADMAHSHALI JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / PUNE ; दिन ांक / Dated : 01 st day of September, 2023. आदेश की प्रधिधलधप अग्रेधर्ि / Copy of the Order forwarded to : 1.अपील र्थी / The Appellant. 2. प्रत्यर्थी / The Respondent. 3. The CIT Concerend. 4. The Pr. CIT, (concerned), Panaji 5. DR, ITAT, Bench, Panaji 6. ग र्डफ़ इल / Guard File. Ashwini आिेश नुस र / By Order, वररष्ठ दनजी सदिव / Sr. Private Secretary आयकरअपीलीय न्य य दिकरण, पुणे / ITAT, Pune.