Tribunal rules in favor of assessee on income treatment & purchase disallowance

The Tribunal held that the additional income of Rs. 2 crore declared during a survey should be treated as business income, allowing the deduction of partners' remuneration under section 40(b) of the I.T. Act. The Tribunal also reduced the disallowance of Un-registered Dealer purchases (URD) from 20% to 10%. The decision partially favored the assessee, as the Tribunal ruled in favor of the assessee on the treatment of additional income as business profits and reduced the disallowance of URD purchases.

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Issues Involved:
1. Whether additional income of Rs. 2 crore declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed as deduction u/s. 40(b) of the I.T. ActRs.
2. Whether the CIT(A) is justified in confirming the disallowance of Rs. 3,31,868 being disallowance of 20% of Un-registered Dealer purchases (URD)Rs.

Issue-wise Detailed Analysis:

1. Treatment of Additional Income of Rs. 2 Crore as Business Profits:
- Facts of the Case: The assessee, a partnership firm engaged in construction, declared Rs. 2 crore as on-money received during a survey. This was included in the profit and loss account for AY 2016-2017, and the assessee claimed a deduction of Rs. 1,31,54,770 towards partners' remuneration under section 40(b) of the I.T. Act.
- Assessment Officer's (A.O.) Decision: The A.O. determined that the Rs. 2 crore could not be treated as business receipts and taxed it under section 115BBE of the I.T. Act. Consequently, the A.O. allowed only Rs. 11,54,770 as partners' remuneration based on regular book profits, disallowing the remaining claimed remuneration.
- CIT(A)'s Decision: The CIT(A) upheld the A.O.'s decision, stating there was no evidence that the Rs. 2 crore was business income.
- Tribunal's Analysis: The Tribunal reviewed the partner's sworn statement and found that the additional income was related to the sale of flats, part of the assessee's business activities. The Tribunal noted that the valuation report used by the A.O. was from prospective buyers and likely inflated for loan purposes. The Tribunal concluded that the additional income was business income, as it was directly related to the construction activities.
- Conclusion: The Tribunal held that the additional income should be treated as business income, allowing the remuneration deduction under section 40(b)(v) of the I.T. Act. This decision was supported by the jurisdictional High Court's ruling in CIT v. S.K. Srigiri & Bros.

2. Disallowance of 20% of Un-registered Dealer Purchases (URD):
- Facts of the Case: The A.O. disallowed 20% of URD purchases amounting to Rs. 16,59,344 on an ad hoc basis, which was confirmed by the CIT(A).
- CIT(A)'s Decision: The CIT(A) upheld the A.O.'s action, stating the purchases were unverifiable and in cash, making the 20% disallowance reasonable.
- Tribunal's Analysis: The Tribunal noted that URD purchases were only 2% of the total purchases and essential for the construction business. The Tribunal found the 20% disallowance excessive and agreed with the assessee's contention before the CIT(A) that it should be reduced to 10%.
- Conclusion: The Tribunal limited the disallowance to 10% of URD purchases, sustaining an addition of Rs. 1,65,934 and deleting the balance.

Final Judgment:
- The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the treatment of additional income as business profits and reducing the disallowance of URD purchases to 10%.

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