2023 (8) TMI 1069 - AT - Income Tax

Tribunal reclassifies excess income as business income, overturning CIT(A)'s decision.

Rajasthan Stone Industries Versus The Income Tax Officer, Ward - 1 (3), Jalgaon Maharashtra.

The Tribunal allowed the appeal of the assessee, determining that the excess income declared during the survey proceedings should be classified as income ... ‘Head of income’ under which the income declared during the course of survey proceedings to be assessed - Quantum of deduction allowable u/sec. 40(b) - remuneration paid to the partners - As per AO excess income declared should be assessed under the head “Income from other sources” which does not qualify for book profits as defined under the provisions of Sec. 40(b) for the purpose of computing the quantum of allowable remuneration to the partners - HELD THAT:- AO failed to note that once the income is credited to the P & L A/c, the presumption is that income is derived from business only and there is no evidence on record by the Assessing Officer to show that the assessee-appellant firm had derived this excess income under the head other than the business carried on by the assessee-appellant. Further once the income is credited to P & L A/c, it cannot be said that the source of the excess income is unexplained. The decisions relied on of Kim Pharma Pvt. Ltd. [2013 (1) TMI 495 - PUNJAB AND HARYANA HIGH COURT] and SVS Oils Mills [2019 (5) TMI 1392 - MADRAS HIGH COURT] have no application to the facts of the present case, inasmuch as, those cases are relates to ‘where no explanation as to the source of the excess stock was found and not shown in the P & L A/c. Whereas in the present case the excess income was credited to the P & L A/c and, therefore, it cannot be said that excess income is derived from income from other sources. We derive strength from the ratio of decision of Bajargan Traders [2017 (11) TMI 388 - RAJASTHAN HIGH COURT] is squarely applicable to the facts of the present case and, therefore, excess income declared during the course of survey proceedings cannot be treated as unexplained income of the assessee-appellant since credited to P & L A/c and cannot be assessed as income from other sources, but, under income from business. Appeal of assessee allowed. Issues:The issues involved in the judgment are related to the assessment year 2010-11 under the Income Tax Act, 1961. The main issue pertains to the quantum of deduction allowable under section 40(b) in respect of the remuneration paid to the partners. The dispute revolves around whether the excess income declared during the survey proceedings should be assessed as 'Income from other sources' or as 'Income from business.'Facts:The appellant, a partnership firm engaged in the business of cutting and polishing stones, filed its income tax return for the assessment year 2010-11 declaring income of Rs. 5,80,910. The Assessing Officer completed the assessment at a total income of Rs. 6,16,210, which was later set aside by the Principal CIT-2. Subsequently, the assessment was completed disallowing excess remuneration to partners by treating the income declared during the survey as 'Income from other sources.'Decision:The appellant contended that the excess income declared during the survey proceedings represents business income and should be assessed as such. The Assessing Officer, however, considered it as 'Income from other sources.' The Tribunal held that once income is credited to the Profit & Loss Account, it is presumed to be derived from business. The Tribunal distinguished previous court decisions cited by the CIT(A) as they involved cases where the source of income was unexplained and not shown in the P & L Account. Relying on the decision of the Rajasthan High Court, the Tribunal concluded that the excess income declared during the survey proceedings should be treated as income from business and not as unexplained income from other sources. Therefore, the order of the CIT(A) was set aside, and the appeal of the assessee was allowed.Conclusion:The Tribunal allowed the appeal of the assessee, emphasizing that the excess income declared during the survey proceedings should be considered as income from business and not as unexplained income from other sources. The decision was based on the presumption that income credited to the Profit & Loss Account is derived from business activities.