👍👍👍👍👍Interest on deposits cannot be treated as business Income for Section 44AD

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Euro Homes Vs DCIT (ITAT Chennai)

In so far as interest on deposits is concerned, the assessee has included interest received from deposits amounting to Rs. 55,449/- as business receipts and estimated net profit u/s. 44AD of the Act. The AO has excluded interest receipts from gross receipts and assessed under the head income from other source. It was the argument of the Ld. Counsel for the assessee, that the assessee has parked surplus funds which is not immediately required for the purpose of business in fixed deposits and earned interest and thus, it partakes the nature of business receipts and assessable under the head income from business. We find that there is no merits in the argument of the ld. Counsel for the assessee, that source of fund is not relevant to decide the nature and head of income under which a particular receipt is taxable, but what is relevant is nature of receipts. In this case, interest on fixed deposits is in the nature of income which is assessable under the head income from other source and this legal position is supported by the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd vs CIT[1997] 227 ITR 172(SC). Therefore, we are of the considered view that interest on fixed deposits is rightly assessed under the head income from other source and thus, we reject the argument of the assessee.

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal filed by the assessee is directed against the order passed by the Commissioner of Income-tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi dated 13.10.2021 and pertains to assessment year 2017-18.

2. The brief facts of the case are that, the appellant is a partnership firm engaged in the business of home furnishing, filed its return of income for the assessment year 2017-18 on 31.03.2018, declaring total income u/s. 44AD of the Income‑ tax Act, 1961 (hereinafter referred to as “the Act”) and estimated net profit of Rs. 7,85,880/-. The gross turnover of the assessee for the assessment year 20 17-18 includes sale of goods, incentive received, interest on deposits etc. The AO, CPC processed return of income filed by the assessee and issued intimation u/s. 143(1) of the Act on 18.01.2019 and determined total income of Rs. 12,55,770/-, by making additions towards income from house property and income from other sources. The assessee carried the matter in appeal before the first appellant authority and ld. CIT(A), NFAC, Delhi vide their order dated 13.10.2021, dismissed appeal filed by the assessee. The assessee carried the matter in further appeal before the Tribunal and the ITAT, Chennai Benches in ITA No. 668/Chny/2022, dated 19.09.2022, partly allowed appeal filed by the assessee with a direction to the AO to reduce additions made towards income from house property and income from other sources to be reduced from gross turnover for the purpose of estimation of net profit. The assessee has filed Miscellaneous Application u/s. 254(2) of the Act, against order of the Tribunal and the ITAT vide their order dated 17.02.2023 in MA No. 06/Chny/2023, recalled the order of the Tribunal dated 19.09.2022, qua ground no. 2(b), 2(c) and 2(d) of appeal filed by the assessee. Therefore, we deem it appropriate to reproduce ground no. 2(b), 2(c) and 2(d) of grounds of appeal filed by the assessee:

“b) The Hon’ble Commissioner of Income Tax (Appeals) erred in dismissing the appeal, by erroneously holding that, the Appellant had included commission and brokerage in the turnover declared u/s 44AD of the Act.

c) The Hon’ble Commissioner of Income Tax (Appeals} failed to appreciate that, section quoted by the Deductor while filing his TDS Statement cannot determine the “Head of income under which it is to be reported in the Deductee’s return of income.

d) The Hon’ble Commissioner of Income Tax {Appeals) ought to have appreciated that, an income would be classified under different. “Heads of Income only based on the nature of receipt in the hands of the recipient.”

3. The first issue that came up for our consideration from ground no. 2(b) of assessee appeal is exclusion of commission and brokerage from the turnover for the purpose of estimation of profit u/s. 44AD of the Act. The Ld. Counsel for the assessee, referring to franchise agreement between M/s. Hush India Pvt. Ltd and appellant, submitted that the appellant has received incentive for achieving sale target and the principal has deducted TDS u/s. 194H of the Act. The AO, on the basis of TDS compliance from the principal, opined that the assessee has received commission and brokerage which is assessable under income from other source. But fact remains that incentive received by the assessee is inextricably linked to sale of goods and thus, same cannot be assessed under the head income from other source.

4. The Ld. DR for the revenue, on the other hand supporting the order of the Ld. CIT(A) submitted that as per provisions of section 44AD of the Act, income assessable under the head other source like commission and brokerage interest etc cannot be included for the purpose of gross turnover. He further, submitted that even otherwise, the assessee could not file necessary evidences to prove their claim that payment subjected to 194H provisions is not commission and brokerage. Therefore, there is no error in the reasons given by the Ld. CIT(A) to sustain additions.

5. We have heard both the parties, perused materials available on record and gone through orders of the authorities below. The assessee had entered into a franchise agreement with M/s. Hush India Pvt. Ltd for marketing their product and further had also entered into a Memorandum of Understanding dated 18.04.2015. As per said MoU, the assessee had undertaken a business of sale and marketing of products of M/s. Hush India Pvt Ltd and also providing services to its customers. As per agreement between the parties, in addition to the margin, the assessee is also eligible to get some incentive if the annual target purchase is achieved. Accordingly, the assessee has received a sum of Rs. 3,95,421/- as sales incentives, on which the principal has deducted TDS u/s. 194H of the Act. But, fact remains that said incentive is inextricably linked to sale of goods and thus any income derived from sale of goods includes incentives, if any earned for achieving target is part of business turnover of the assessee and thus, we are of the considered view that the AO and CIT(A) are erred in excluding incentives received by the assessee as commission and brokerage, only for the reason that said amount is suffered to tax as per the provisions of section 194H of the Act. Thus, we direct the AO to include incentives received amounting to Rs. 3,95,421/- as part of business turnover for the purpose of determination of income u/s. 44AD of the Act and deleted addition made under the head income from other sources.

6. In so far as, expenses reimbursement amount which was subjected to TDS u/s. 194IB of the Act amounting to Rs. 27,169/-, the assessee could not file any evidence to prove that said amount is only the reimbursement of various expenses incurred in relation to exhibition. If you go by the nature of amount received by the assessee, it is very clear that it was subjected to TDS u/s. 194IB of the Act, which is applicable to rent and other receipts assessable under the head income from house property. Therefore, we are of the considered view that the AO has rightly excluded said receipts from the gross receipts while estimating net profit u/s. 44AD of the Act and assessed under the head income from house property after allowing necessary deductions.

7. In so far as interest on deposits is concerned, the assessee has included interest received from deposits amounting to Rs. 55,449/- as business receipts and estimated net profit u/s. 44AD of the Act. The AO has excluded interest receipts from gross receipts and assessed under the head income from other source. It was the argument of the Ld. Counsel for the assessee, that the assessee has parked surplus funds which is not immediately required for the purpose of business in fixed deposits and earned interest and thus, it partakes the nature of business receipts and assessable under the head income from business. We find that there is no merits in the argument of the ld. Counsel for the assessee, that source of fund is not relevant to decide the nature and head of income under which a particular receipt is taxable, but what is relevant is nature of receipts. In this case, interest on fixed deposits is in the nature of income which is assessable under the head income from other source and this legal position is supported by the decision of Hon’ble Supreme Court in the case of Tuticorin Alkali Chemical and Fertilizers Ltd vs CIT[1997] 227 ITR 172(SC). Therefore, we are of the considered view that interest on fixed deposits is rightly assessed under the head income from other source and thus, we reject the argument of the assessee.

8. In the result, appeal filed by the assessee is partly allowed in terms of our observation given herein above. Order pronounced in the court on 31st March, 2023 at Chennai.

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