2016 (9) TMI 260 - AT - Income Tax

Tribunal allows deduction for partner remuneration interest. Disallowance deemed unjustified.

M/s. Vaibhav Enterprises Versus The Asst. CIT, Circle-3, Surat

The Tribunal allowed the appeal of the assessee, permitting the deduction of Rs. 17,04,950 claimed towards interest on capital and salary to partners. The ... Disallowance of expenses made in respect of partners remuneration u/s.40(b) - undisclosed income - Held that:- It is an undisputed fact that during the course of survey, assessee had disclosed ₹ 1.75 crores as unaccounted income. We find that before the AO, assessee in the written submissions had stated that assessee-firm is engaged in only business of Green Plaza Project and it has only one source of income being construction activity. The aforesaid submission of the assessee has not been controverted by Revenue nor the Revenue has placed any material on record to demonstrate that assessee was having engaged in other than the business of construction. As in the case of Md.Serajuddin & Brothers vs. CIT [2012 (8) TMI 104 - CALCUTTA HIGH COURT] has held that even if the income from other sources is included in the Profit and Loss accounts, to ascertain the net profits qua book profit for computation of the remuneration of the partners, the same cannot be discarded. Thus we are of the view that no disallowance u/s.40(b) of the Act on account of remuneration and salary to partners can be made in the present case and thus the ground of assessee is allowed. Issues Involved:1. Disallowance of deduction claimed by the assessee of Rs. 17,04,950/- towards interest on capital and salary to partners.Issue-wise Detailed Analysis:1. Disallowance of Deduction Claimed by the Assessee of Rs. 17,04,950/-:The core issue in this case revolves around the disallowance of a deduction claimed by the assessee for Rs. 17,04,950/-, which pertains to interest on capital and salary to partners. This deduction was adjusted against the total unaccounted income disclosed during a survey.Facts and Background:- The assessee, a partnership firm engaged in construction, was subjected to survey proceedings under section 133A of the Income Tax Act on 23/03/2007, revealing unaccounted receipts of Rs. 1.75 crores.- The working partner admitted to receiving the amount in cash, which was not recorded in the books of accounts.- The assessee filed its return for AY 2007-08 declaring a total income of Rs. 1,52,96,800/-, which was later assessed at Rs. 1,75,00,000/- by the AO.- The AO disallowed the deduction of Rs. 17,04,950/- claimed towards interest on capital and salary to partners, as the source of the unaccounted income was not satisfactorily explained.Arguments and Findings:- The assessee contended that the unaccounted receipts were business income from the sale of shops and offices in Green Plaza Complex and, therefore, expenses related to the business, including interest and salary to partners, should be allowed.- The AO and CIT(A) held that since the income was unaccounted and deemed income, it could not be classified under any head of income as per section 14 of the Act, and thus, no deductions were permissible.- The CIT(A) relied on the Gujarat High Court decision in Fakir Mohamed Haji Hasan Vs CIT, which stated that deemed income under sections 69, 69A, 69B, and 69C does not qualify for deductions applicable to regular heads of income.Tribunal's Analysis and Decision:- The Tribunal noted that the assessee was engaged solely in the construction business, and the unaccounted income was acknowledged to be from this business.- It referenced the Coordinate Bench's decision in Shri Labdhi Prints, which allowed deductions for partner remuneration from additional business income disclosed during a survey.- The Tribunal also considered the Calcutta High Court's decision in Md. Serajuddin & Brothers vs. CIT, which supported the inclusion of income from other sources in the Profit and Loss account for computing partner remuneration.- The Gujarat High Court's decision in J.K. Chokshi vs. ACIT was cited, reinforcing that if no other source of income exists, business income should be considered for allowable deductions.Conclusion:The Tribunal concluded that since the assessee's unaccounted income was from its sole business activity, the disallowance under section 40(b) for remuneration and salary to partners was not justified. Thus, the appeal of the assessee was allowed, and the deduction of Rs. 17,04,950/- was permitted.Order Pronouncement:The order was pronounced in open court on 28/07/2016, allowing the appeal of the assessee.