Income Tax Appellate Tribunal

DCIT, Circle-1(2) vs. Niyati Construction Co.

MANU/IB/0236/2021

25.10.2021

Direct Taxation

Interest income generated out of surplus fund invested in the Fixed Deposit is a part of the business income

The fact of the case is that, assessment under Section 143(3) read with Section 263 of the Income Tax Act, 1961 (IT Act) was finalized at Rs. 42,09,980 after making disallowance under Section 40(a)(ia) of Rs. 12,03,690 and disallowance under Section 40(b) of Rs. 10,18,000. The AO has made disallowance of Rs. 12,03,960 on the ground that, assessee has not made any TDS on payment of testing charges of Rs. 12,32,344. The assessee has made disallowance under Section 40(b) of Rs. 11,68,000 on the ground that, while calculating the allowable remuneration to the partners, the assessee has not excluded the income of Rs. 20,56,185 earned on account of interest on fixed deposit.

The aggrieved assessee has filed appeal before the Learned CIT(A) against the aforesaid disallowance made by the AO. The Learned CIT(A) has allowed the appeal of the assessee. In respect of addition of Rs. 12,32,344 made under Section 40(a)(ia) of the IT Act, the Learned CIT(A) has held that, assessee was not liable to deduct tax as the actual payment to the contractor for testing charges was made by the Government and the assessee had only reimbursed the expenses to the Government. Regarding disallowance of Rs. 10,18,000 on account of partner's' remuneration under Section 40(b) of the IT Act on the ground that, interest received on Fixed Deposit/SSNL Bonds was income from other sources, the Learned CIT(A) after following the decision of High Court in the case of CIT vs. J. J. Industries allowed the appeal of the assessee holding that, interest income generated out of surplus fund invested in the Fixed Deposit was a part of the business income.

The AO has made disallowance of Rs. 12,03,690 under Section 40(a)(ia) being the amount of expenses claimed under the head testing charges on the reason that, the assessee has not deducted tax on such payment in accordance with the provision of Section 194C of the IT Act. The Learned CIT(A) in his finding held that, the assessee has not awarded any contract to any party for testing charges, in fact, the testing charges were deducted by the Government while making payment to the assessee on running bills raised by the assessee upon the Government. The assessee has not made any payment directly for testing charges to any party. Further, the Government has awarded a contract to some entity for testing charges and the assessee has only reimbursed the expenses to the Government.

There is no infirmity in the decision of the Learned CIT(A) holding that, testing charges was made by the Government and the assessee has only reimbursed the expenses through the mode of deduction made by the Government out of running bills of contract. Therefore, there is no merit in the ground of appeal of the Revenue and the same stand dismissed.

Regarding second ground of the Revenue, the AO has disallowed Rs. 10,18,000 under Section 40(b) of the IT Act. The assessee has claimed that, interest on Fixed Deposit, interest on SSNL Fixed Deposit and interest on SSNL Bonds was made out of surplus funds available with the assessee and the interest income was part of the business income. Therefore, the same was correctly included for calculating remuneration of the partners. The assessee has also placed a copy of decision of the High Court in the case of CIT vs. J.J. Industries wherein it is held that, interest from Fixed Deposit on spare funds cannot be excluded from book profit for the purpose of determining allowable deduction of remuneration paid to partners. There is no error in the decision of the Learned CIT(A). The appeal of the Revenue is dismissed.

Tags : Assessment Disallowance Provision

Share :