2013 (10) TMI 868 - AT - Income Tax

Tribunal allows appeal on excess remuneration under IT Act, sets precedent on partner remuneration calculation

The Tribunal allowed the appeal in favor of the Assessee regarding the disallowance of excess remuneration under Sec. 40A(2)(b) of the IT Act and the ... Deduction of Partner’s Remuneration from additional Business Income surrendered during survey u/a 133A - Held that:- The assessee had offered the same as business income but source of the same was not known and also income was not declared under any head of regular profit and loss account - As per the provisions of section 40(b), a partner of the firm would be allowed remuneration from the business profit declared by the Assessee for the particular year and for determining the book profits for the purpose of determining the remuneration the income disclosed during survey u/s 133 A cannot be considered as part of the business profits. DCIT Vs. M/s. Shree Labdhi Prints 2012 (11) TMI 442 - CESTAT, AHMEDABAD ] - additional income for taxation during the course of survey is accepted as business income of the assessee and there is no bar in the Act from claiming partners remuneration on such additional business income – the order of the learned CIT(A) reversed and the AO is directed to allow the claim of the assessee – Decided in favour of Assessee. Issues: Disallowance of excess remuneration u/s. 40A(2)(b) of the IT Act, Allowability of remuneration to partners u/s. 40(b) of the IT Act.Issue 1: Disallowance of excess remuneration u/s. 40A(2)(b) of the IT Act:The appeal arose from the order of the learned CIT(A)-II, Surat, regarding the disallowance of Rs.2,01,620/- under Sec. 40A(2)(b) of the IT Act for the assessment year 2006-07. The Assessee had paid remuneration to partners higher than the previous year, leading the AO to suspect it was to reduce the impact of disclosing unaccounted income during a survey. The AO disallowed the excess remuneration, setting an admissible salary u/s. 40(b) at Rs.4,98,380/-, and disallowing the balance sum. The Assessee's explanations were rejected, and the learned CIT(A) upheld the disallowance. The Assessee argued that the undisclosed stock and cash declared were generated from routine business activity and claimed as business income. The Revenue's reliance on past decisions was countered by the Assessee's reliance on similar cases where remuneration was allowed. The Tribunal reversed the CIT(A)'s decision, allowing the Assessee's claim based on the acceptance of additional income during the survey as business income.Issue 2: Allowability of remuneration to partners u/s. 40(b) of the IT Act:The dispute revolved around whether remuneration to partners should be allowed from business profits declared by the Assessee or if income disclosed during a survey u/s. 133A should be excluded. The Revenue argued that the undisclosed income should not be part of business profits for determining remuneration. The Tribunal, citing a previous decision, held that additional income disclosed during a survey should be considered as business income, allowing partners' remuneration on such additional business income. Consequently, the Tribunal directed the AO to allow the Assessee's claim, reversing the CIT(A)'s decision. The appeal in ITA No.1185/Ahd/2010 was allowed in favor of the Assessee.This judgment clarifies the treatment of excess remuneration and the allowability of remuneration to partners under specific sections of the IT Act. It emphasizes the importance of considering additional income disclosed during a survey as business income for determining partners' remuneration, providing a significant precedent for similar cases.