BY THE COURT :

1. Since these three appeals arise out of the same order they are being decided by this common judgment.

2. By way of these appeals, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has dismissed the appeal of the Department and allowed the appeal of the assessee modifying the order of CIT(A) partially.

3. This Court while admitting the IT Appeal No. 355 of 2011 has framed following substantial question of law :

"Whether in the facts and circumstances of the case the Tribunal is justified in considering the interest as part of the book profit in contravention of s. 40(b) i.e., as per s. 40(b) the book profit has to be computed in the manner laid down in Chapter IV-D "

4. This Court while admitting the IT Appeal No. 537 of 2011 has framed following substantial question of law :

"Whether in the facts and circumstances of the case the Tribunal is justified in considering the interest as part of the book profit in contravention of s. 40(b) i.e., as per s. 40(b) the book profit has to be computed in the manner laid down in Chapter IV-D "

5. This Court while admitting the IT Appeal No. 22 of 2015 has framed following substantial question of law :

"Whether the Tribunal was legally justified in deleting the disallowance of Rs. 2,30,00,796 made on account of remuneration to partners by taking the interest earned on FDRs as part of book profit and business income under s. 28 specifically when it was 'Income from other sources' and contrary to s. 40(b), Expln. 3 and s. 40(b)(v)(2) "

6. Counsel for the appellant contended that the Chapter IV-D consists of ss. 28 to 44 under heading of profits and gains of business or profession.

7. She has also relied upon s. 40(b)(v) r/w Expln. 3 which reads as under :

"40(b)(v) any payment of remuneration to any partner who is a working partner, which is authorized 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 in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder :

(a) on the first Rs. 3,00,000 of the book-profit or in case of a loss-

Rs. 1,50,000 or @ 90 per cent of the book-profit, whichever is more;

(b) on the balance of the book-profit

at the rate of 60 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."

8. She contended that while considering the matter AO has specifically observed as under :

"It may be also seen that these FDRs not made as a business necessity without which the business of the 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 the same is to be treated as income from other sources.

The following case law 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) 193 CTR (AAR) 481 : (2005) 273 ITR 299 (AAR).

(iii) Murli Investment Company vs. CIT (1987) 65 CTR (Raj) 5 : (1987) 167 ITR 368 (Raj).

(iv) CIT vs. Rajasthan Land Development Corporation (1995) 125 CTR (Raj) 261 : (1995) 211 ITR 597 (Raj).

(v) CIT vs. Monarch Tools (P) Ltd. (2003) 182 CTR (Mad) 463 : (2002) 260 ITR 258 (Mad).

Considering, these facts the remuneration to partners is calculated as under :

Net Profit as per P&L a/c (Before appropriation)

Rs. 15,14,59,810

Less : Income chargeable to tax under income from other sources (Interest from bank FDRs)

Interest from other sources

Rs. 2,16,07,375

Rs. 4,43,714 + 41,551

(-) Rs. 2,20,51,089

Rs. 41,551

Add : Donation as per Computation

(+) Rs. 16,41,704

Add : On account of disallowance of vehicle expenses and depreciation on vehicle as per computation.

(+) Rs. 1,26,892

Less : Interest on capital

(-) 2,05,79,959

Add : (Expenses diallowance as per (Paras I to IV)

(+) 1,62,139

Rs. 11,07,17,946"

9. She contended that the AO after taking into account has rightly assessed the income and held that FD income is not a business income and the reason adopted by the AO was wrongly set aside by the CIT(A) and it is contended that the Tribunal while considering the matter has observed as under :

"2. Rs. 87,55,582 :

2.1 The learned CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of the claim of remuneration paid to the partners under s. 40(b)(v)(2) of the IT Act of Rs. 87,55,582 (Rs. 5,30,95,260 claimed less Rs. 4,43,39,678 allowed) by the AO by holding that interest on FDR of Rs. 2,16,07,375, was an income under the head 'Income form other sources' and not 'Income from profits and gains of business or profession', hence will not be a part of book profit for the purpose of s. 40(b)(v), which is totally contrary to the provisions of law and facts. Hence, such interest income be held and directed to be treated as eligible income being a part of book profit for the purpose of s. 40(b). The disallowance so made and confirmed by the learned CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full."

2.2 Alternatively and without prejudice to the 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 the facts and circumstances of the case and the diallowance so made kindly be deleted in full."

10. It is contended that the Tribunal has wrongly allowed the appeal of the assessee. She has relied upon Full Bench decision of this Court in Reliance Trading Corporation vs. ITO (2015) 278 CTR (Raj)(FB) 113 : (2015) 121 DTR (Raj)(FB) 265 : (2015) 376 ITR 53 (Raj)(FB), observed as under :

"37. In sub-s. (3) of s. 80HHC of the Act, the words used are. 'derived from'. In our view, the words 'derived from' are of restricted meaning, and are not as wide as are 'attributable to'. The 'standalone' provision of s. 80HHC of the Act has to be construed on its own wordings. A distinction sought to be made in respect of the definition of 'profit of the business' under sub-s. (baa) of the Explanation, to mean the profits of the business as computed under the head 'Profits and gains of business of profession' which incorporates the entire procedure for and gains of business or profession', which incorporates the entire procedure for computing the business income under ss. 28 to 44 of the Act. De hors s. 80HHC of the Act, the consistent talks is that where the statutory provision takes of 'income derived form' the business activity in question, the nexus theory should be applied in order to determine whether a particular item of income is business income or not.

41. While applying the direct and proximate nexus test, we are of the view that where the interest earned does not have direct and proximate nexus, with the income form the business or export, the interest cannot be deducted as income from export under s. 80HHC(3)(a) of the Act, and has to be given the same treatment for tax, as 'income from other sources' under s. 56 of the Act."

11. She contended that the view taken by the Tribunal is required to be reversed.

12. Mr. Gargieya, counsel for respondent has taken us to the order of the Tribunal as well as CIT(A) and contended as under :

"It may be also seen that these FDRs not made as a business necessity without which the business of the 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 the same is to be treated as income from other sources. The following case law are alsoW replied upon.

(i) Madhya Pradesh State Industries Corporation Ltd. vs. CIT (1968) 69 ITR 824 (MP).

(ii) Shamas Tabrez Vanti, In re (2005) 193 CTR (AAR) 481 : (2005) 273 ITR 299 (AAR).

(iii) Murli Investment Company vs. CIT (1987) 65 CTR (Raj) 5 : (1987) 167 ITR 368 (Raj).

(iv) CIT vs. Rajasthan Land Development Corporation (1995) 125 CTR (Raj) 261 : (1995) 211 ITR 597 (Raj).

(v) CIT vs. Monarch Tools (P) Ltd. (2003) 182 CTR (Mad) 463 : (2002) 260 ITR 258 (Mad).

Considering these facts it is argued that the 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 : On account of disallowance of vehicle expenses and depreciation on vehicle as per computation.

(+) Rs. 1,30,142

Less : Interest on capital

(-) Rs. 1,43,62,637

Add : (Expenses diallowance as per (Paras I to IV)

(+) 2,08,026

Rs. 8,06,22,369

On this book profit of Rs. 8,06,22,369, the allowable partners remuneration is arrived at Rs. 3,23,01,448 whereas the assessee has claimed the remuneration at Rs. 3,92,48,924. The excess partners remuneration to the extent of Rs. 69,47,476 is disallowed and added in the income of the assessee. This being a wrong claim, proceeding under s. 271(1)(c) of IT Act, 1961 is also initiated.

With these remarks the income of the assessee is computed as under :

Total income as per ITNS-150 dt. 24/4/2007

Rs. 5,79,72,440

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 the vehicles as discussed in para-IV

Rs. 6,770

5. Addition on account of wrong claim of partners remuneration as discussed in para-V

Rs. 69,47,476

Rs. 71,55,502

Total Income

Rs. 6,51,27,942

Total Income R/o

Rs. 6,51,27,942

Assessed under 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 under s. 234B & 234C as per ITNS 150 which is part of this order. Penalty proceedings under s. 271(1)(c) of IT Act 1961 are initiated separately."

13. It is also contended that the AO has considered the business income and the same was partly allowed by the CIT(A) and no interference is called for.

14. He has relied upon decision in CIT vs. J.J. Industries (2013) 385 ITR 531 (Guj), wherein it has been observed as under :

"6. The question, therefore, arises whether the interest income earned by the assessee-firm from the fixed deposit receipts should be ignored for the purpose of working-out the book profit to ascertain the ceiling of the partners remuneration.

7. The Tribunal has proceeded on the basis that for the purpose of ascertaining such ceiling on the basis of book profit, the profit shall be in the P&L a/c and is not to be classified in the different heads of income under s. 40 of the Act. The interest income, therefore, cannot be excluded for the purposes of determining the allowable deduction of remuneration paid to the partners under s. 40(b) of the Act.

8. Counsel for the Revenue vehemently contended that for the purpose of ascertaining the limit, only business income would be relevant and not any other income. In the present case, however, we need not enter into such controversy. The assessee had held out that it is in the business of purchasing raw cotton and ginning the same. It is a seasonal business. The interest income was generated out of spare funds invested in the fixed deposit. Such income was declared as part of the business income and that is how even the AO had accepted the same. That being the position, and the AO in the assessment taxed such income as business income, we do not see any question of law arising. The correctness of the Tribunal's view on the specific issue may be gone into in an appropriate case."

15. He has also relied upon decision in case of Md. Serajuddin & Brothers vs. CIT (2012) 80 DTR (Cal) 46 which reads as under :

"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. Sec. 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under ss. 30 to 43D. By virtue of s. 5 of the said Act that total incomes of any previous year includes all income from whatever source derived. Thus for the purpose of s. 40(b)(v) r/w Explanation there cannot be separate method of accounting for ascertaining net profit and/or book-profit. The said section nowhere provides as rightly pointed by Mr. Khaitan, learned senior advocate that the net profit as shown in the P&L a/c not the profit computed under the head ‘Profit and gains of business or profession’."

16. The 3rd judgment which has been relied on is in the case of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521 : (2002) 255 ITR 273 (SC), wherein it has been observed as under :

"5. For deciding this issue, it is necessary for us to examine the object of introducing s. 115J in the IT Act which can be easily deduced from the Budged Speech of the then Hon'ble Finance Minister of India made in the Parliament while introducing the said section which is as follows :

'It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called 'zero-tax' highly profitable companies deserves attenion. In 1983, a new s. 80VVA was inserted in the 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 a provision whereby every company will have to pay a 'minimum corporate tax' on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely-held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores.'

The above speech shows that the IT authorities were unable to bring certain companies with the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that s. 115J, was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own account. For the said purpose, s. 115J makes the income reflected in the company's books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of words "in accordance with the provisions of Parts II and III of Sch. VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an AO under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the 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 the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the AO to re-scrutinise this account and satisfy himself that these accounts have been maintained in accordance with the provisions of Companies Act. In our opinion, reliance placed by the Revenue on sub-s. (1A) of s. 115J of the IT Act in support of the above contention is misplaced. Sub-s. (1A) of s. 115J does not empower the AO to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under IT Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of s. 115J of the Act, then it should be that income which is acceptable to the authorities under Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income-tax both maintained under the same Act. If the legislature intended the AO to reassess the company's income, then it would have stated in s. 115J that "income of the company as accepted by the AO." In the absence of the same and on the language of s. 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.

Therefore, we are of the opinion the AO while computing the income under s. 115J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put it differently, the AO does not have the jurisdiction to go behind the net profit shown in the P&L a/c except to the extent provided in the Explanation to s. 115J."

17. The 4th judgment which has been relied on is in the case of CIT vs. Hycron India Ltd. (2008) 13 DTR (Raj) 13 : (2008) 219 CTR (Raj) 288, 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 the Act to be different species of income. In this background, s. 2(24) as such, does not categorise 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, the language of s. 10B, again, provides for exemption, with respect to any "profits and gains" derived by the assessee, and is not confined to "profits and gains of business and profession" as provided under s. 14D.

12. Then for the 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, the 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, the profit means the price received over the cost of purchasing and handling the 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, the word "profit", as ordinarily used, is held to mean, the 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 the 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 an elastic and ambiguous word, often properly used in more than one sense; its meaning in a written instrument is governed by the intention of the parties appearing therein, but any accurate definition thereof must always include, the element of gain. Similar definition has been given in various other judgments.

13. If considered from these standpoints, there is no escape for the conclusion, that the income derived by the assessee, from Wolkem India Ltd., does fall within the expression "profits and gains."

18. The 5th judgment which has been relied on is in the case of Berger Paints India Ltd. vs. CIT (2004) 187 CTR (SC) 193, wherein it has been observed as under :

"9 In view of the judgments of this Court in Union of India & Ors. vs. Kaumudini Narayan Dalal & Anr. (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), the principle established is that if the Revenue has not challenged the correctness of the law laid down by the High Court and has accepted it in the case of one assessee, then it is not open to the Revenue to challenge its correctness in the case of other assessees, without just cause.

11 The decision in Lakhanpal National Ltd.'s case which clearly laid down the interpretation of s. 43B was followed by the judgments of the Madras High Court and Bombay High Court and was again followed by the decision of Special Bench of the Tribunal none of which has been challenged. In these circumstances, the 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 the principle. Hence, in our view the Revenue could not have been allowed to challenge the principle laid down in Lakhanpal National Ltd's case (supra) which was followed by the IAC in the case of the assessee in the three assessment years in question. We are, therefore, of the view that the CIT, the Tribunal and the Calcutta High Court erred in permitting the Revenue to raise a contention contrary to what was laid down by the Gujarat High Court in Lakhanpal National Ltd.'s case. This decision has been subsequently followed by the decisions of the Bombay High Court in CIT vs. Bharat Petroleum Corpn. Ltd. (supra) and the Madras High Court in Chemicals & Plastic India Ltd. vs. CIT (supra) as well as the decision of the Special Bench in Indian Communication Network (P) Ltd. vs. IAC (supra), which have all remained unchallenged."

19. He also drew our attention to s. 115J which reads as under :

"115J. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income as computed under this Act in respect of any previous year relevant to the assessment year commensing on or after the 1st April, 1988, (but before the 1st day of April, 1991) (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Part-II and III of Sch. VI to the Companies Act, 1956.

Explanation—For the purposes of this section, "book profit" means the net profit as shown in the P&L a/c for the relevant previous year, as increased by—

(a) the amount of income-tax paid or payable and the provision therefor; or

(b) the amounts carried to any reserves (other than the reserves specified in s. 80HHD or sub-s. (1) of s. 33AC, by whatever name called; or

(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d) the amount by way of provision for losses of subsidiary companies; or

(e) the amount or amounts of dividends paid or proposed; or

(f) the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter-III applies, or

(g) the amount withdrawn from the reserve account under s. 80HHD, where it has been utilized for any purpose other than those referred to in sub-s. (4) of that section; or

(h) the amount credited to the reserve account under s. 80HHD, to the extent that amount has not been utilised within the period specified in sub-s. (4) of that section;

(ha) the amount deemed to be the profits under sub-s. (3) of s. 33AC,

if any amount referred to in cls. (a) to (f) is debited or, as the case may be, the amount referred to in cls. (g) and (h) is not credited to the P&L a/c, and as reduced by,—

(h) the amount withdrawn from reserves (other than the reserves specified in s. 80HHD) or provisions, if any such amount is credited to the P&L a/c :

Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year to the assessment year commencing of or after the 1st day of April, 1988, shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or

(ii) the amount of income to which any of the provisions of Chapter-III applies, if any such amount is credited to the profit and loss account; or

(iii) the amounts [as arrived at after increasing the net profit by the amounts referred to in cls. (a) to (f) and reducing the net profit by the amounts referred to in cls. (i) and (ii)] attributable to the business, the profits from which are eligible for reduction under s. 80HHC or s. 80HHD; so, however, that such amounts are computed in the matter specified in sub-s. (3) or sub-s. (3A) of s. 80HHC or sub-s. (3) of s. 80HHD, as the case may be; or

(iv) the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of cl. (b) of the first proviso to sub-s. (1) of s. 205 of the Companies Act, 1956 (1 of 1956), are applicable.

(2) Nothing contained in sub-s. (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-s. (2) of s. 32 or sub-s. (3) of s. 32A or cl. (ii) of sub-s. (1) or s. 72 or s. 73 or s. 74 or sub-s. (3) of s. 74A or sub-s. (3) of s. 80J"

20. In view of above, it is contended that the Tribunal has not committed any error.

21. We have heard counsel for parties.

22. Taking into consideration, the FDR which was invested by the assessee was never the part of business, in that view of the matter, the income which has been earned in the FDR cannot be considered as part of the income of the business. In that view of the matter the contention raised by learned counsel for appellant that s. 40(b)(v) of Explanation, the Tribunal and the CIT(A) have seriously committed error and the view taken by the AO required to be allowed is not sustainable. It was never intention of the legislation to differentiate s. 40(b) falling under Chapter IV-D which income is to be considered as business income taking into consideration the purpose of s. 115J and granting benefit for initiation of the entries, it is investment of surplus funds of the respondents which is not part of the business income. Therefore, the same proviso will not apply in the facts of the case.

23. Thus, the issue is answered in favour of Department and against the assessee.

24. The appeals stand allowed.