HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 355 / 2011 COMMISSIONER OF INCOME TAX, KOTA Appellant Versus M/s ALLEN CAREER INSTITUTE, C-210/2, Talwandi, Kota Respondent Connected With D.B. Income Tax Appeal No. 537 / 2011 COMMISSIONER OF INCOME TAX, KOTA Appellant Versus M/s ALLEN CAREER INSTITUTE, C-210/2, Talwandi, Kota Respondent Connected with D.B. Income Tax Appeal No. 22 / 2015 Commissioner of Income Tax, Kota. Appellant Versus M/S Allen Carrier Institute, C-210/2, Talwandi, Kota. Respondent For Appellant(s) : Ms. Parinitoo Jain with Ms. Shiva Goyal For Respondent(s) : Mr. Mahendra Gargieya HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 12/09/2017 (2 of 17) [ ITA-355/2011] 1. Since these three appeals arise out of same order they are being decided by this common judgment. 2. By way of these appeals, appellant has challenged judgment and order of Tribunal whereby Tribunal has dismissed appeal of department and allowed appeal of assessee modifying order of CIT partially. 3. This Court while admitting ITA No.355/2011 has framed following substantial question of law: Whether in facts and circumstances of case ITAT is justified in considering interest as part of book profit in contravention of Section 40(b) i.e as per Section 40(b) book profit has to be computed in manner laid down in Chapter-IV D? 4. This Court while admitting ITA No.537/2011 has framed following substantial question of law: Whether in facts and circumstances of case ITAT is justified in considering interest as part of book profit in contravention of Section 40(b) i.e as per Section 40(b) book profit has to be computed in manner laid down in Chapter-IV D? 5. This Court while admitting ITA No.22/2015 has framed following substantial question of law: Whether Tribunal was legally justified in deleting disallowance of Rs.2,30,00,796/- made on account of remuneration to partners by taking interest earned on FDRs as part of book profit and business income under Section 28 specifically when it was Income form other sources and (3 of 17) [ ITA-355/2011] contrary to Section 40(b), Explanation 3 and Section 40(b) (v) (2)? 6. Counsel for appellant contended that Chapter IV-D consist of Section 28 to 44 under heading of profits and gains of business or profession. 7. She has also relied upon Section 40(b)(v) read with Explanation 3 which reads as under:- 40(b)(v) Any payment of remuneration to any partner who is working partner, which is authorised by, and is in accordance with, terms of partnership deed and relates to any period falling after date of such partnership deed in so far as amount of such payment to all partners during previous year exceeds aggregate amount computed as hereunder:- [(a) on first Rs. 3,00,000 of book-profit or in case of loss- Rs. 1,50,000 or at rate of 90 per cent of book-profit, whichever is more; (b) on balance of book-profit- at rate of 60 per cent :] Provided that in relation to any payment under this clause to partner during previous year relevant to assessment year commencing on 1st day of April, 1993, terms of partnership deed may, at any time during said previous year, provided for such payment. 8. She contended that while considering matter AO has specifically observed as under:- It may be also seen that these FDRs not made as business necessity without which business of assessee cannot be run and in fact these FDRs are made out of surplus fund available with assessee. In this background, as held earlier, income from bank FDRs etc. cannot said to be business income and same is to be treated as income from other sources. (4 of 17) [ ITA-355/2011] following case laws are also relied upon. I Madhya Pradesh State Industries Corporation Ltd. Vs. CIT (1968) 69 ITR 824 (MP). II Shamas Tabrez Vanti (In Re) (2005) 273 ITR 299 Authority of Advance Ruling. III Murli Investment Company vs. CIT, 167 ITR 368 (Raj.) IV CIT vs. Rajasthan Land Development Corporation 211 ITR 597 (Raj.) V CIT vs. Monarch Tools Pvt. Ltd. (2002) 260 ITR 258. Considering, these facts remuneration to partners is calculated as under:- Net Profit as Rs.15,14,59,810/ per P & L a/c - (Before appropriation) Less Income chargeable to tax under Rs.2,16,07,375/- income From other sources (-) (Interest from Rs.4,43,714/- Rs.2,20,51,089/- bank FDRs) Rs.41,551/- + 41,551/- Interest from other sources Add. Donation (+) as per Rs.16,41,704/- Computation Add. On (+) Rs.1,26,892/- account of disallowance of vehicle expenses and depreciation on vehicle as per computation. Less Interest on (-) 2,05,79,959/- capital Add. (Expenses (+) 1,62,139/- diallowance as (5 of 17) [ ITA-355/2011] per (Para I to IV) Rs.11,07,17,946 /- 9. She contended that AO after taking into account has rightly assessed income and held that FD income is not business income and reasons adopted by AO was wrongly set aside by CIT(A) and it is contended that Tribunal while considering matter has observed as under:- 2.Rs.87,55,582/-: 2.1 ld. CIT(A) erred in law as well as on facts of case in confirming disallowance of claim of remuneration paid to partners under Section 40b(v)(2) of IT Act of Rs.87,55,582/- (Rs.5,30,95,260/- claimed less Rs.4,43,39,678/- allowed) by AO by holding that interest on FDR of Rs.2,16,07,375/-, was income under head income form other sources and not income from profits and gains of business or profession , hence will not be part of book profit for purpose of Section 40b(v), which is totally contrary to provisions of law and facts. Hence, such interest income be held and directed to be treated as eligible income being part of book profit for purpose of section 40(b). disallowance so made and confirmed by ld. CIT(A) being totally contrary to provisions of law and facts of case, kindly be deleted in full. 2.2 Alternatively and without prejudice to above, such interest on FDR Rs.2,16,07,375/- be held and directed to be treated as income from profits and gains of business or profession under facts and circumstances of case and diallowance so made kindly be deleted in full 10. It is contended that Tribunal has wrongly allowed appeal of assessee. She has relied upon full bench decision of this Court reported in [2015] 376 ITR 53 (Raj.), Reliance Trading Corporation and Ors. vs. ITO, Jaipur and Ors., observed as under:- (6 of 17) [ ITA-355/2011] 37. In sub-Section (3) of Section 80HHC of Act, words used are. derived from . In our view, words derived from are of restricted meaning, and are not as wide as are attributable to . stand- alone provision of Section 80HHC of Act has to be construed on its own wordings. distinction sought to be made in respect of definition of profit of business under sub-section (baa) of Explanation, to mean profits of business as computed under head Profits and gains of business of profession which incorporates entire procedure for and gains of business or profession , which incorporates entire prodeure for computing business income under Section 28 to 44 of Act. Dehors Section 80HHC of Act, consistent approach is that where statutory provision takes of income derived form business activity in question, nexus theory should be applied in order to determine whether particular item of income is business income or not. 41. While applying direct and proximate nexus test, we are of view that where interest earned does not have direct and proximate nexus, with income form business or export, interest cannot be deducted as income from export under Section 80HHC (3)(a) of Act, and has to be given same treatment for tax, as income from sources under Section 56 of Act. 11. She contended that view taken by Tribunal is required to be reversed. 12. Mr. Gargieya, counsel for respondent has taken us to order of Tribunal as well as CIT(A) and contended as under:- It may be also seen that these FDRs not made as business necessity without which business of assessee cannot be run and in fact these FDRs are made out of surplus fund available with assessee. In this background, as held earlier, income from bank FDRs etc. cannot said to be business income and same is to be treated as income from other sources. following case laws are also replied upon. (7 of 17) [ ITA-355/2011] I Madhya Pradesh State Industries Corporation Ltd. Vs. CIT (1968) 69 ITR 824 (MP). II Shamas Tabrez Vanti (In Re) (2005) 273 ITR 299 Authority of Advance Ruling. III Murli Investment Company vs. CIT, 167 ITR 368 (Raj.) IV CIT vs. Rajasthan Land Development Corporation 211 ITR 597 (Raj.) V CIT vs. Monarch Tools Pvt. Ltd. (2002) 260 ITR 258. Considering these facts it is argued that remuneration to partners is calculated as under:- Net Profit as per P& L a/c (Before appropriation) Rs.11,05,67,193/- Less Income chargeable to tax under income from other sources (Interest from bank FDRs) Rs.1,73,21,273/- Interest from other sources Rs.2,88,686/- (-)Rs.1,76,09,959/- Add Donation as per computation (+)Rs.1,68,9604/- Add (+)Rs.1,30,142/- On account of disallownace of vehicle expenses and depreciation on vehicle as per computation Less Interest on capital (-)Rs.1,43,62,637/- Add (Expenses disallowance as per (Para I to IV) (+)2,08,026/- Rs.8,06,22,369/- On this book profit of Rs.8,06,22,369/-, allowable partners remuneration is arrived at Rs.3,23,01,448/- whereas assessee has claimed remuneration at Rs.3,92,48,924/-. excess partners remuneration to extent of Rs.69,47,476/- is disallowed and added in income of assessee. This being wrong claim, proceeding u/s 271(1)(c) of IT Act, 1961 is also initiated. With these remarks income of assessee is computed as under:- (8 of 17) [ ITA-355/2011] Total income as per ITNS-150 dated 24.4.2007 Rs.57972440/- Add 1. Disallowed out of telephone expenses as discussed in para-I Rs.69,772/- 2. Disallowed out of interest payment as discussed in para-II Rs.6,000/- 3. Disallowed out of function expenses as discussed in para-III Rs.1,25,484/- 4. Disallowed out of insurance expenses on vehicles as discussed in para-IV Rs.6,770/- 5. Addition on account of wrong claim of Rs.69,47,476/- Rs.71,55,502/- partners remuneration as discussed in para-V Total Income Rs.6,51,27,942/- Total Income R/o Rs.6,51,27,940/- Assessed u/s 143(3) of IT Act 1961 on total income of Rs.6,51,27,940/- issued notice & challan after giving credit for pre-paid taxes Charged interest u/s 234B & 234C as per ITNS 150 which is part of this order. Penalty proceedings u/s 271 (1)(c) of IT Act 1961 are initiated separately. 13. It is also contended that A.O. has considered business income and same was partly allowed by CIT(A) and no interference is called for. 14 He has relied upon decision in case CIT vs. J.J. Industries (2013) 385 ITR 531 (Guj.) wherein it has been observed as under:- 6. question, therefore, arises whether interest income earned by assessee-firm from fixed deposit receipts should be ignored for purpose of working-out book profit to ascertain ceiling of partners remuneration. 7. Tribunal has proceeded on basis that for purpose of ascertaining such ceiling on basis of book profit, profit shall be in profit and loss account and is not to be classified in different heads of income under Section 40 of Act. interest income, therefore, cannot be excluded for purposes of determining allowable deduction (9 of 17) [ ITA-355/2011] of remuneration paid to partners under Section 40B of Act. 8. Counsel for revenue vehemently contended that for purpose of ascertaining limit, only business income would be relevant and not any other income. In present case, however, we need not enter into such controversy. assessee had held out that it is in business of purchasing raw cotton and ginning same. It is seasonal business. interest income was generated out of spare funds invested in fixed deposit. Such income was declared as part of business income and that is how even Assessing Officer had accepted same. That being position, and Assessing Officer in assessment taxed such income as business income, we do not see any question of law arising. correctness of Tribunal s view on specific issue may be gone into in appropriate case. 15. He has also relied upon decision in case MD Serajuddin & Brothers vs. Commissioner of Income Tax (2012) 80 DTR 46 (Cal) which reads as under:- said chapter nowhere provides that method of accounting for purpose of ascertaining net profit should be only income from business alone and not from other sources. Section 29 provides how income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue of Section 5 of said Act that total incomes of any previous years includes all income from whatever source derived. Thus for purpose of Section 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit. said section nowhere provides as rightly pointed by Mr.Khaitan, learned Senior Advocate that net profit as shown in profit and loss account not profit computed under head-profit and gains of business or profession. (10 of 17) [ ITA-355/2011] 16. 3rd judgment which has been relied on it in case of Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273/122 Taxman 562 (SC), wherein it has been observed as under:- 5.For deciding this issue, it is necessary for us to examine object of introducing Section 115J in IT Act which can be easily deducted from Budged Speech of then Hon ble Finance Minister of India made in Parliament while introducing said section which is as follows : It is only fair and proper that prosperous should pay at least some tax. phenomenon of so-called zero-tax highly profitable companies deserves attenion. In 1983, new s.80VVA was inserted in Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce provision whereby every company will have to pay minimum corporate tax on profits declared by it in its own accounts. Under this new provision, company will pay tax on at least 30 per cent of its book profit. In other words, domestic widely-held company will pay tax of at least 15 per cent of its book profit. This measure will yield revenue gain of approximately Rs.75 crores. above speech shows that IT authorities were unable to bring certain companies with net of income-tax because these companies were adjusting their accounts in such manner as to attract no tax or very little tax. It is with view to bring such of these companies within tax net that s. 115J, was introduced in IT Act with deeming provision which makes company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For said purpose, s. 115J makes income reflected in companies books of accounts as deemed income for purpose of assessing tax. If we examine said provision in above background, we notice that use of words in accordance with provisions of Parts II and III of Sch. VI to Companies Act was made for limited purpose of empowering assessing authority to rely upon authentic statement of accounts of company. While so looking into accounts of company, AO under IT Act has to accept authenticity of accounts with reference to provisions of Companies Act which obligates company to maintain its account in manner provided (11 of 17) [ ITA-355/2011] by Companies Act and same to be scrutinised and certified by statutory auditors and will have to be approved by company in its general meeting and thereafter to be filed before Registrar of Companies who has statutory obligation also to examine and satisfy that accounts of company are maintained in accordance with requirements of Companies Act. In spite of all these procedures contemplated under provisions of Companies Act, we find it difficult to accept argument of Revenue that it is still open to AO to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with provisions of Companies Act. In our opinion, reliance placed by Revenue on sub-s. (1A) of S. 115J of IT Act in support of above contention is misplaced. Sub-s. (1A) of s.115J does not empower AO to embark upon fresh inquiry in regard to entries made in books of account of company. said sub-section, as matter of fact, mandates company to maintain its account in accordance with requirements of Companies Act which mandate, according to us, is bodily lifted from Companies Act into IT Act for limited purpose of making said account so maintained as basis for computing company s income for levy of income tax. Beyond that, we do not think that said sub-section empowers authority under IT Act to probe into accounts accepted by authorities under Companies Act. If statute mandates that income prepared in accordance with Companies Act shall be deemed income for purpose of s.115J of Act, then it should be that income which is acceptable to authorities under Companies Act. There cannot be two incomes one for purpose of Companies Act and another for purpose of income tax both maintained under same Act. If legislature intended AO to reassess company s income, then it would have stated in s. 115J that income of company as accepted by AO. In absence of same and on language of s. 115J, it will have to held that view taken by Tribunal is correct and High Court has erred in reversing said view of Tribunal. Therefore, we are of opinion AO while computing income under s.115J has only power of examining whether books of account are certified by authorities under Companies Act as having been properly maintained in accordance with Companies Act. AO thereafter has limited power of making increase and reductions as provided for in (12 of 17) [ ITA-355/2011] Explanation to said section. To put it differently, AO does not have jurisdiction to go behind net profit shown in P&L a/c except to extent provided in Explanation to s.115J. 17. 4th judgment which has been relied on it in case of CIT v/s Hycron India Ltd. (2008) 219 CTR 288 (Raj.), wherein it has been observed as under under:- 10. Thus it is clear, that for all purposes, profits and gains of business or profession, and income from other sources, are treated, by Act to be different species of income. In this backgrounds, s. 2(24) as such, does not categories separately, profits and gains of business or profession. Thus expression profits and gains as used in s. 2(24), is wider expression, and is not confined to profits and gains of business or profession . 11. In this background, language of s. 10B, again, provide for exemption, with respect to any profits and gains derived by assessee, and is not confined to profits and gains of business and profession as provided under s. 14D. 12. Then for definition of profits and gains , we are left to seek assistance from other sources. Dictionary meaning, as such, does not provide much of assistance. Then in Re Arthur Average Assocn. For British, Foreign & Colonial Ships, Ex p. Hargorove & Co. (1875), L.R. 10 Ch.App. 545, meaning of word gain has been given as acquisition, and has no other meaning. Gain is something obtained or acquired, and is not limited to pecuniary gain. Regarding profit , in general, profit means price received over cost of purchasing and handling goods, it means pecuniary gain, as held in Stratton vs. Cartmell, 42 A. 2d 419, 422, 114 Vt. 191. In Oliver vs. Halstead, 86 S.E. 2d 858, 859, 196 Vz. 992, word profit , as ordinarily used, is held to mean, gain made upon any business or investment, and does not include compensation for labour. Then in George E. Warren Co. vs. U.S., D.C. Mass, 76 F. Supp. 587, 591, it has been held, that Profits is capable of numerous constructions, and for any given use, its meaning must be derived from context. Likewise, in Gulf Refining Co. vs. Stanford 30 So. 2 d 516,517, 202 Miss. 602, 173 A.L.R. 1099, it has been held, that profit is elastic and ambiguous word, often properly used in more than one sense; its meaning in written instrument is (13 of 17) [ ITA-355/2011] governed by intention of parties appearing therein, but any accurate definition thereof must always include, element of gain. Similar definition has been given in various other judgments. 13. If considered from these stand points, there is no escape for conclusion, that income derived by assessee, from Wolkem India Ltd., does fall within expression profits and gains. 18. 5th judgment which has been relied on it in case Berger Paints India Ltd. V/s CIT (2004) 187 CTR 193 (SC), wherein it has been observed as under:- 9.In view of judgments of this Court in Union of India vs. Kaumudini Narayan Dalal (2001) 168 CTR (SC) 3 : (2001) 249 ITR 219 (SC), CIT vs. Narendra Doshi (2002) 174 CTR (SC) 411 : (2002) 254 ITR 606 (SC) and CIT vs. Shivsagar Estate (2002) 177 CTR (SC) 107 : (2002) 257 ITR 59 (SC), principle established is that if Revenue has not challenged correctness of law laid down by High Court and has accepted it in case of one assessee, then it is not open to Revenue to challenge its correctness in case of other assessees, without just cause. 11.The decision in Lakhanpal National Ltd s case which clearly laid down interpretation of s. 43B was followed by judgments of Madras High Court and Bombay High Court and was again followed by decision of Special Bench of Tribunal none of which have been challenged. In these circumstances, principle laid down in Union of India vs. Kaumudini Narayan Dalal (supre), CIT vs. Narendra Doshi (supra) and CIT vs. Shivsagar Estate (supra) clearly applies. We see no just cause as would justify departure from principle. Hence, in our view Revenue could not have been allowed to challenge principle laid down in Lakhanpal National Ltd s case (supra) which was followed by IAC in case of assessee in three assessment years in question. We are, therefore, of view that CIT, Tribunal and Calcutta High Court erred in permitting Revenue to raise contention contrary to what was laid down by Gujarat High Court in Lakhanpal National Ltd. s case. This decision has been subsequently followed by decisions of Bombay High Court in CIT vs. Bharat Petroleum Corpn. Ltd. (supra) and Madras High Court in Chemicals & Plastic India Ltd. vs. CIT (supra) (14 of 17) [ ITA-355/2011] as well as decision of Special Bench in Indian Communication Network (P) ltd. vs. IAC (Supra), which have all remained unchallenged. 19. He also drew our attention to Section 115J which reads as under:- 115J. (1) Notwithstanding anything contained in any other provision of this Act, where in case of assessee being company (other than company engaged in business of generation or distribution of electricity), total income as computed under this Act in respect of any previous year relevant to assessement year commensing on or after 1 day of April, 1988 st (but before 1st day of April, 1991) (hereafter in this section referred to as relevant previous year), is less than thirty per cent of its book profit total income of such assessee chargeable to tax for relevant previous year shall be deemed to be amount equal to thirty per cent of such book profit. (1A) Every assessee, being company, sale, for purposes of this section, prepare its profit and loss account for relevant previous year in accordance with provisions of Part-II and III of Schedule VI to Companies Act, 1956. Explanation-- For purposes of this section, book profit means net profit as shown in profit and loss account for relevant previous year, as increased by-- (a) amount of of income tax paid or payable and provisions therefor, or (b) amounts carried to any reserves (other than reserves specified in Section 80HHD [or sub-section (1) of section 33AC])], by whatever name called; or (c) amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or (d) amount by way of provision for losses of subsidiary companies; or (15 of 17) [ ITA-355/2011] (e) amount or amounts of dividends paid or proposed; of (f) amount or amounts of expenditure relatable to any income to which any of provisions of Chapter-III [applies, or] (g) amount withdrawn form reserve account under section 80 HHD, where it has been utilized for any purpose other than those referred to in sub-section (4) of that section; or (h) amount credited to reserve account under section 80 HHD, to extent that amount has not been utilised within period specified in sub-section (4) of that section; (ha) amount deemed to be profits under sub-section (3) of section 33AC] [if any amount referred to in clauses (a) to (f) is debited or, as case may be, amount referred to in clauses (g) and (h) is not credited] to profit and loss account, and as reduced by,-- (h) amount withdrawn from reserves [(other than reserves specified in section 80HHD)] of provisions if any such amount is credited to [profit and loss account: Provided that, where this section is applicable to assessee in any previous year (including relevant previous year), amount withdrawn from reserves created or provisions made in previous year to assessment year commencing of or after 1st day of April, 1988 shall not be reduced form book profit unless book profit of such year has been increased by those reserves or provisions (out of which said amount was withdrawn) under this explanation; or] (ii) amount of income to which any of provisions of Chapter III applies, if any such amount is credited to profit and loss account; or (iii) amounts [as arrived at after increasing net profit by amounts referred to in clauses (a) to (f) and reducing net profit by amounts referred to in clauses (I) and (ii)] attributable to business profits from which are eligible for reduction under section 80HHC or section 80HHD; (16 of 17) [ ITA-355/2011] so, however, that such amounts are computed in matter specified in sub section (3) or sub- section (3A) of Section 80HHC or sub-section (3) of section 80HHD as case may be; or] (iv) amount of loss or amount of depreciation which would be required to be set off against profit of relevant previous year as if provisions of clause (b) of first proviso to sub-section (1) of section 205 of Companies Act, 1956 (1 of 1956), are applicable. (2) Nothing contained in sub-section (1) shall affect determination of amounts in relation to relevant previous year to be carried forward to subsequent year or years under provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) or section 72 or section 73 or Section 74 or sub- section (3) of section 74A or sub-section (3) of section 80J] 20. In view of above, it is contended that Tribunal has not committed any error. 21. We have heard counsel for parties. 22. Taking into consideration, FDR which was invested by assessee was never part of business, in that view of matter, income which has been earned in FDR cannot be considered as part of income of business. In that view of matter contention raised by learned counsel for appellant that Section 40(b)(v) of Explanation, Tribunal and CIT have seriously committed error and view taken by AO required to be allowed is not sustainable. It was never intention of legislation to differentiate Section 40(b) falling under Chapter IV-D which income is to be considered as business income taking into consideration purpose of Section 115 J and granting (17 of 17) [ ITA-355/2011] benefit for initiation of entries, it is investment of surplus funds of respondents which is not part of business income. Therefore, same proviso will not apply in facts of case. 23. Thus, issue is answered in favour of department and against assessee. 24. appeals stand allowed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Chouhan/11-13 Commissioner of Income-tax, Kota v. Allen Career Institute