ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the Revenue against the order of the CIT(A)-XIX, Ahmedabad, dt. 7th July, 2003 for the asst. yr. 1998-99.
2. The following is the grievance of the Revenue :
The learned CIT(A) erred on facts and in law in allowing remuneration to the partners on bank interest income on FD, treating the same as income under the head ‘Profits and gain of business or profession’ instead of ‘Income from other sources’.
3. Rival contentions have been heard and records perused. The assessment completed under Section 143(3) of the IT Act, 1961, was reopened by issue of notice under Section 148 on the plea that excess deduction on account of payment of remuneration to partners was allowed in the course of original assessment. The AO stated that the assessee was having business profit as well as interest on bank deposit. While computing the maximum amount of remuneration to be allowed to partners only business profit is to be taken into account and not interest on bank deposit which is to be taxed as income from other sources. The AO also observed that with regard to reopening of the assessment, there was a direct decision of jurisdictional High Court in the case of Praful Chunilal Patel and Ors. v. M.J. Makwana, Asstt. CIT according to which the cases where an error or mistake is detected, it can never be said that there is only a mere change of opinion. The mistake or error which is detected and which constituted a valid decision or cause to form a belief that in the first assessment as a result of which the income has escaped assessment, would constitute a reason to believe that income had escaped assessment and such cases where mistakes and errors are detected and which constitute a valid justification or cause to form a belief sought to be corrected, cannot be said to be cases of mere change of opinion. He held that in the instant case, there is no change of opinion and there is nothing on record to indicate that the AO has considered the issue at the time of assessment proceedings. With regard to treatment of interest income on the bank, the AO relied on the decision of the Hon’ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT wherein the Court observed that “In the usual course, interest received by the company from bank deposits and loans would be taxable as income under the head ‘Income from other sources’ under Section 56 of the IT Act.” He, therefore, excluded interest income of Rs. 29.07 lakhs from the business income as declared in the P&L a/c and restricted the payment of remuneration accordingly, as per provisions of Section 40(b)(v) of the Act.
4. By the impugned order, the CIT(A) confirmed the action of the AO with regard to the validity of the reopening of assessment by observing that there is nothing on record to indicate that the AO had considered the disputed issue at the time of original assessment proceedings. Therefore, there was a reason to believe that income had escaped assessment due to higher allowance of deduction on account of payment of remuneration to partners.
However, in respect of interest income, the CIT(A) observed that the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) is not applicable to the facts of the case, wherein surplus fund was invested for earning interest before commencement of business. However, in the present case, the assessee had been doing business for the last many years and, therefore, surplus funds invested in earning interest will amount to utilization of commercial assets. The facts of the case are similar to the facts of the case decided by the Calcutta High Court in the case of CIT v. Tirupati Woollen Mills Ltd. (1992) 193 ITR 252 (Cal) in which it has been held that investment of surplus funds for earning interest will amount to utilization of commercial assets and, therefore, would be assessable as business income. The CIT(A) also relied on the decision of the Madras High Court in the case of CIT v. Madras Refineries Ltd. , wherein it was held that interest income on bank deposits had to be assessed under the head ‘Business income’. Considering this opinion of law, the CIT(A) concluded that the AO was not justified in treating the interest income from surplus deposit invested in the bank as ‘income from other sources’. He, therefore, directed the AO to assess interest income under the head ‘Income from business’ and to consider this income for the purpose of allowing remuneration to the partners.
5. Aggrieved by the above order of the CIT(A), the Department is in appeal before us. It was argued by the learned Departmental Representative that interest income, by no stretch of imagination, can be treated as ‘income from business or profession’ as per the verdict of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra). Therefore, the CIT(A) is not justified in directing the AO to treat such interest income as income from business and profession for allowing deduction on account of remuneration paid to partners.
6. On the other hand, it was argued by the learned Authorised Representative that the Department is consistently allowing payment of remuneration to partners on the entire income of the business which also included interest income in the earlier year as well as in the subsequent year. He relied on the judgment of the Hon’ble Supreme Court in the case of Radhasoami Satsang v. CIT in support of the proposition that the strict rule of doctrine of res judicata, even though does not apply to the proceedings under the IT Act, but at the same time it is equally true that unless there are change of circumstances, the authorities will not depart from their previous decisions at their sweet will in the absence of material circumstances or reasons for such departure. Thus, the rule of consistency which applies to income-tax proceedings has to be followed. Thus, the learned Authorised Representative submitted that when there is no change in the circumstances, a different conclusion was not warranted on the part of the AO. As per the learned Authorised Representative, there was clear clause in the partnership deed which provided that the main business of the partnership is the manufacturing of Ayurvedic medicines and over and above this income, other works can be carried out with the consent of the partners. He contended that interest income on FD is by way of exploitation of commercial assets. For the treatment of interest income as business income, he relied on the verdict of the Madras High Court in the case of Tamil Nadu Dairy Development Corporation Ltd. and Calcutta High Court in the case of Tirupati Woollen Mills Ltd. (supra). Distinguishing the facts of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), the learned Authorised Representative submitted that the Hon’ble Supreme Court was dealing with interest income earned on surplus fund invested for short time before commencement of production, whereas in the instant case, the assessee was already in production since long time and there was no question of any income prior to commencement of production and its treatment. He further submitted that in the instant case, income was generated out of exploitation of business assets year after year and there is continuity of transactions as authorized by the partnership deed to safeguard advances received from parties whereas in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra), it was a case of utilization of idle funds for the short period till the business commenced. In support of the proposition that deposit made by the assessee with bank was capital employed for the purpose of business which would become part of the capital of the industrial undertaking and any income earned by the capital employed would automatically become business income of the assessee, he relied on the decision of the Madras High Court in the case of Madras Refineries Ltd. (supra).
By taking recourse to Rule 27 of the ITAT Rules, the learned Authorised Representative submitted that the CIT(A) was not justified in holding that reopening of assessment as valid under Section 147, when undisputedly scrutiny assessment was framed under Section 143(3) in which entire material was before the AO while allowing the claim for remuneration. For this purpose, he relied on the decision of the Kerala High Court in the case of C1T v. BPL Systems & Projects Ltd. , wherein it was held that the respondent, though may not have appealed, can support the order appealed against on any of the grounds decided against him. The learned Authorised Representative relied on the decision of the Full Bench of the Tribunal in the case of CIT v. Kalvinator of India Ltd. (2002) 256 ITR 1 (Del)(FB) wherein it was held that Section 147 does not postulate conferment of power upon the AO to initiate reassessment proceedings upon mere change of opinion. Reliance was also placed by the learned Authorised Representative on the decision of the Division Bench of the Delhi High Court in the case of Jindal Photo Films Ltd. v. Dy. CIT and Gujarat High Court in the case of Garden Silk Mills (P) Ltd. v. Dy. CIT and Allahabad High Court in the case of Foramer v. CIT and Ors. in support of the proposition that mere change of opinion does not confer power upon the AO to initiate reassessment proceedings by taking recourse to Section 147.
7. We have considered the rival submissions, carefully gone through the orders of the authorities below and deliberated on the case laws cited at Bar by the learned representatives of the Department and the assessee. Section 40(b) contains provisions with regard to restricting the allowance of deduction on account of remuneration to partners. The section adopts the net profit as shown in the P&L a/c of the firm as the basis for allowing such deduction. Section 40(b) reads as under :
40. Amounts not deductible.–Notwithstanding anything to the contrary in Sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head ‘Profits and gains of business or profession,’–
(b) in the case of any firm assessable as such,–
(v) any payment of remuneration to any partner who is a working partner, which is authorised by and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed insofar as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :
(1) in the case of a firm carrying on a profession referred to in Section 44AA or which is notified for the purpose of that section–
(a) on the first Rs. Rs. 50,000 or at
1,00,000 of the the rate of 90 per
book profit or in cent of the book
case of a loss profit, whichever
profit, whichever
(b) on the next Rs. at the rate of
1,00,000 of the 60 per cent;
book profit
(c) on the balance of at the rate of
the book profit 40 per cent;
(2) in the case of any other firm-
(a) on the first Rs. Rs. 50,000 or at
75,000 of the book the rate of 90 per
profit, or in-case cent of the book
of a loss profit, whichever
is more;
(b) on the next Rs. at the rate of 60
75,000 of the book per cent; profit
(c) on the balance at the rate of 40
of the book profit per cent;
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment.
The term 'book profit' has been defined in Expln. 3 below Section 40(b)(v) as under:
Explanation 3.–For the purposes of this clause, ‘book profit’ means the net profit, as shown in the P&L a/c 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.
8. It is crystal clear from the plain reading of the above provision that allowability of deduction of remuneration is dependent on provisions in the partnership deed as well as on the net profit as shown in the P&L a/c. Under the scheme operative from asst. yr. 1993-94, the firm is taxed as separate entity under Section 184. There is now no provision for registration of a firm by the AO and there is no distinction between what was earlier termed as ‘registered firm’ and ‘unregistered firm’. When a firm is assessed as a firm the same consequences follow. Section 40(b) as it stood upto asst. yr. 1992-93 made a provision for total disallowance of any payment of interest, salary, bonus, commission or remuneration made by the firm to any partner of the firm. Section 40(b) operative from 1993-94, has lifted this ban partially and under the new scheme such payment is allowable within specified limits subject to fulfilment of specified conditions. After allowing such payments to partners upto specified limits, the balance of income of the firm is subject to maximum marginal rate of tax. The earlier distinction between the rates of income-tax for professional and non-professional firms has been removed. The partners are now not liable to tax in respect of the share of income from the firm. However, remuneration and interest allowed to partners are to be charged to income-tax in their respective hands under the head ‘Income from business or profession’.
8.1 Thus, Section 40(b) imposes conditions and financial limitations for deduction of remuneration to partners. The section adopts the net profit as shown in the P&L a/c of the firm as the base for working out the financial limits for deduction. It is in consonance with the provisions of the IT Act as well as the provisions of the Indian Partnership Act that for assessment of income from other sources which are assessable under other heads are also embedded in such ‘net profit’. In order to ensure that the figure of ‘net profit’ is not artificially reduced by claiming deduction far in excess of limits permissible under Sections 30 to 43D, Section 40(b) requires that ‘net profit’ is worked out in accordance with Chapter IV-D. Section 40(b) was overhauled in 1993 contemporaneously with the firm being made liable to be assessed on the whole of its income remaining after paying interest and remuneration to partners while working out the maximum amount of such remuneration payable to partner on the profit shown in the P&L a/c. The words ‘book profit’ have been defined for this purpose in Expln. 3 as ‘net profit’ as shown in the P&L a/c for the relevant previous year. This brings not only the income computed under the head ‘Business’ but the ‘net profit’ as shown in the P&L a/c to the centrestage of Section 40(b). This definition is, no doubt, further qualified by the words “computed in the manner laid down in Chapter IV-D”. These qualifying words have been advisedly used in order to ensure that inadmissible or excessive claims relating to income to be computed under the head ‘Business’ which are embedded in the book profit are excluded from the base for limiting remuneration to partners. Prima facie, under Section 40(b) the legislature did not authorize exclusion of non-business receipts and expenditure recorded in the P&L a/c. The legislature knew that in the scheme of the IT Act, the whole income of the firm under different heads is liable to be assessed in the hands of the firm and that remuneration to partners debited to P&L a/c cannot be broken down into different components, to be allocated to the income computed under different heads. Such exercise for breaking down remuneration to partner with respect to different income earned by the partnership firm has not been spelt out anywhere in the statute. There is also no dispute to the legal position that whatever income is received by the partner from the firm in the name of interest, salary, bonus, commission or remuneration by whatever name called is chargeable to income-tax under the head ‘Profits and gains of business or profession’ under Section 28(v). Such remuneration received by partner is neither exempt nor entitled to any kind of deduction while computing total income of the partner in his individual hands. Such remuneration is allowed to the partner for actively participating in the conduct of firm’s business and thereby putting the capital and other funds of firm for commercial exploitation. The profit earned by firm through such commercial exploitation of its resources is credited to the P&L a/c and partner is made entitled to remuneration as per the clear stipulations in the partnership deed.
8.2 In view of the above discussion and keeping in view the legislative intent for providing remuneration to active partners who have contributed their efforts in earning different income credited in the P&L a/c of the firm, we are inclined to hold that the nature of income embedded in the net profit as appearing in the P&L a/c in the instant case, which are as per object clause of the partnership deed are entitled to be taken into consideration for allowing deduction on account of remuneration to partners without excluding interest income on deposit from bank, which has formed part of the book profit.
In the result, the appeal of the Revenue is dismissed.