Validity of disallowance of partners remuneration under section 40(b) on income declared during survey

 

Short Overview  Where assessee offered additional income based on some incriminating documents found during the survey, AO was not justified in treating same as undisclosed income under section 69 and denying deduction claimed under section 40(b) as the nature and source of said amount disclosed during the course of survey was established as business income and assessee did not have any other business activity except business income from construction of housing project.

The assessee was a firm and engaged in the business of construction of housing project. A survey was conducted in the business premises of assessee under section 133A of the Act. The assessee offered additional income basing on some incriminating documents found during the said survey. Assessee offered additional income basing on some incriminating documents found during the survey. AO alleged that additional income offered during the course of survey should be excluded from the profit and loss account and was to be treated as undisclosed income under section 69. Further, the deduction claimed under section 40(b) on account of salary and interest paid to partners was disallowed. The assessee contended that the disclosed receipt of Rs. 72,73,369 were on account of difference of sales value of flats/unit sold and these receipts were part and parcel of the trading receipts.

It is held that The nature and source of said amount disclosed during the course of survey was established as business income and assessee did not have any other business activity, except business income from construction of housing project. Therefore, entire disclosed amount was attributable to the business activity and consequently was eligible for all allowances under section 40(b).

Decision: In assessee s favour.

Relied: Rashtriya Leather Works in ITA No. 253/PN/2003 for assessment year 1999-2000

IN THE ITAT, PUNE BENCH

P.M. JAGTAP, V.P. & S.S. VISWANETHRA RAVI, J.M.

Jadhav Kangralkar Builders v. Asstt. CIT

ITA No. 2106/Pun/2017

26 August, 2020

Assessee by: Pramod Shingte

Revenue by: Aseem Sharma

S.S. Viswanethra Ravi, J.M.

This appeal by the assessee against the Order, dated 9-5-2017 passed by the Commissioner (Appeals)-4, Pune (“Commissioner (Appeals)”) for assessment year 2013-14.

2. The only issue is to be decided as to whether the Commissioner (Appeals) justified in confirming the order of assessing officer in treating the additional income declared in survey as income from other sources as against the business income claimed by the assessee in the facts and circumstances of the case.

3. Heard both parties and perused the material available on record.

The assessee is a firm and engaged in the business of construction of housing project namely “Aayodhya Nagari” during the period relevant to the assessment year under consideration. A survey was conducted on 30-11-2012 in the business premises of assessee under section 133A of the Act. We note that the assessee offered additional income basing on some incriminating documents found during the said survey. The assessee filed return of income declaring a total income of Rs. 1,06,32,791 on 30-9-2013 and the same was processed under section 143(1) of the Act. In scrutiny, notice under section 142(1) and 143(2) were issued, in response to which the AR representing the assessee appeared from time to time and produced books of account and furnished the requisite information.

4. The contention of assessing officer was that the additional income of Rs. 75,50,400 offered by the assessee during the course of survey should be excluded from the profit and loss account and is to be treated as undisclosed income under section 69 of the Act. Further, the deduction claimed under section 40(b) of the Act on account of salary and interest paid to partners is to be disallowed. The assessee contended that the said disclosed receipt of Rs. 72,73,369 are on account of difference of sales value of flats/unit sold and these receipts are part and parcel of the trading receipts. The said submissions of assessee found not acceptable to the assessing officer and the assessing officer disallowed claimed under section 40(b) of the Act and treated an amount of Rs. 75,50,400 as income from other sources vide Order, dated 16-3-2016 under section 143(3) of the Act. We find, in the First Appellate proceedings before the Commissioner (Appeals) the assessee reiterated the same contentions as made in the assessment proceedings. The Commissioner (Appeals) held that unaccounted income as declared during the course of survey cannot be treated as trading receipts for the purpose of claiming deduction under section 40(b) of the Act and upheld the order of assessing officer in treating the same as income from other sources.

5. Before us, the contention of learned Authorised Representative is that the assessee sold 37,752 sq. ft. of area in Aayodhya Nagari project that the assessee received Rs. 200 extra per sq. ft. over and above its regular income, the said declared amount of Rs. 75,50,400 is a trading receipt and contended the same should be treated as business income. We find that the assessee during the course of assessment proceedings explained that it received Rs. 200 extra per sq. ft. of 37,752 sq. ft. The said cash payment given by customers as per their convenience. He referred to Q. No. 9 at page 11 of Paper Book during the course of survey the assessee clearly stated that written Atirikt Rakam is over and above agreement value which is not recorded in the regular books of accounts and the assessee sold 37,752 sq. ft. in Aayodhya Nagari project and earned Rs. 200 extra for each sq. ft.

6. Shri Aseem Sharma, the learned Departmental Representative vehemently opposed the submissions of learned Authorised Representative and submitted that the additional income offered during the course of survey represents undisclosed income not recorded in the books of account and it assumes the character of deemed income within the purview of section 69 of the Act. The assessee should not have considered the said income as normal trading receipts in the profit and loss account and not entitled to claim various expenses by including the additional income in its book profit. He argued any income earned out of books of account hold the character of other source of income and benefit of business expenditure cannot be allowed from such income. The learned Departmental Representative supported the order of Commissioner (Appeals).

7. We find that there is no dispute regarding the business of assessee and earning Rs. 200 extra over and above regular income for selling 37,752 sq. ft. in Aayodhya Nagari project. From the day one i.e. from date of survey as discussed above, the assessee was contended the amount disclosed during the course of survey as additional income is part and parcel of its regular trading receipts and cannot be deemed as unaccounted money under section 69 of the Act. We note that the assessee incurred expenditure of Rs. 80,00,000 on account of partners salary which is reflected in profit and loss account as on 31-3-2013 at page 30 of Paper Book. Therefore, the nature and source of said amount disclosed during the course of survey is established as business income as the assessee does not have any other business activity except business income from construction of housing project. Therefore, we hold the entire disclosed amount Rs. 75,50,400 are attributable to the business activity and consequently is eligible for all allowances under section 40(b) of the Act. We find a similar issue arose in the case of Rashtriya Leather Works in ITA No. 253/PN/2003 for assessment year 1999-2000 before this Tribunal and vide Order, dated 23-6-2006 this Tribunal held unexplained excess stock found during the course of the survey is to be treated to be a part of book profits and were chargeable to tax under the head “profits and gains of business or profession”. For better understanding the relevant part at para 22 in page 38 of Paper Book is reproduced here-in-below :–

“22. Now, the question arises as to whether this income representing the unexplained excess stock found during the course of the survey can be treated to be a part of book profit for the purpose of section 40(b) of the Act. For the purpose of section 40(b) of the Act, book profit is defined under Explanation 3 to section 40(b) of the Act, which reads as under :–

“Explanation 3 : For the purposes of this clause, “Book profit” means the net profit, as shown in the profit and loss account for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.”

On reading the same, it is thus clear that the net profit, as shown in the profit and loss account for the relevant previous year and computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm, if such amount has been deducted while computing the net profit is amounted to book profit for the purpose of section 40(b) of the Act. Chapter IV-D covers the income chargeable under the head “profit and gains of business or profession.” We have already held above on the facts and circumstances of this particular case that the unexplained excess tock was chargeable to tax under the head “profit and gains of business or profession”. It is also not in dispute that the income representing unexplained excess stock has been shown in the profit and loss account for the relevant year. Therefore, the income representing excess tock found is to be taken into account for determining the book profit within the meaning of section 40(b) of the Act.”

8. In view of the above order of this Tribunal and the discussion we made in the aforementioned paragraphs, the order of Commissioner (Appeals) is not justified and it is set aside. The only ground raised by the assessee is allowed.

9. In the result, the appeal of assessee is allowed.