2010 (11) TMI 964 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition allowing remuneration and interest to partners u/s 40(b) of the Act.
2. Deletion of addition of electricity expenses.
3. Disallowance of depreciation.
4. Addition on account of variation of closing stock.
5. Disallowance of 20% of other expenses.

Summary:

1. Deletion of Addition Allowing Remuneration and Interest to Partners u/s 40(b) of the Act:
The first issue pertains to the deletion of an addition of Rs. 34,88,675/- by the CIT(A), allowing remuneration and interest to partners u/s 40(b) of the Act. The assessee, a partnership firm engaged in the business of import-export and manufacturing of cut and polished diamonds, disclosed unaccounted income of Rs. 70 lakh during a survey u/s 133A. The AO treated this as "income from other sources" and disallowed the claim of interest and remuneration to partners. The CIT(A) held that the disclosed income forms part of the book profit and should be treated as business income, thus allowing the remuneration and interest to partners. The Tribunal upheld the CIT(A)'s order, stating that the income disclosed during the survey was business income and the assessee is eligible for deduction of remuneration and interest paid to partners u/s 40(b) of the Act.

2. Deletion of Addition of Electricity Expenses:
The second issue involves the deletion of an addition of Rs. 2,72,870/- on account of electricity expenses. The AO disallowed the expenses as the electricity bills were in the name of the partner and not the firm. The CIT(A) deleted the disallowance, noting that the business was conducted from the premises in question and the payments were made by the firm. The Tribunal confirmed the CIT(A)'s order, finding no infirmity in allowing the claim of the assessee.

3. Disallowance of Depreciation:
The third issue concerns the disallowance of Rs. 2,22,500/- on account of depreciation. The AO disallowed the depreciation due to the lack of proper bills for the purchase of machinery. The assessee claimed that it had submitted vouchers and bills backed by account payee cheques. The Tribunal set aside the issue to the AO for verification of the bills and allowed depreciation on the enhanced value of the respective assets disclosed during the survey.

4. Addition on Account of Variation of Closing Stock:
The fourth issue is the addition of Rs. 1,34,317/- due to variation in the closing stock of finished diamonds. The AO added the amount based on discrepancies found during the survey. The CIT(A) sustained the addition, and the Tribunal confirmed the findings, noting that the assessee could not provide evidence of process loss or rejection in respect of finished diamonds.

5. Disallowance of 20% of Other Expenses:
The fifth issue involves the disallowance of Rs. 32,910/-, being 20% of other expenses, on the grounds of personal nature. The assessee did not press this issue before the CIT(A) or the Tribunal. Consequently, the Tribunal dismissed this issue.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal for statistical purposes. The order was pronounced in Open Court on 19/11/2010.