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2016 (8) TMI 1140 - AT - Income TaxExcess stock found during the course of survey - deemed income under the provisions of section 69/69B - assessee submitted that the major expenditure claimed was on account of interest and salary to partners and accordingly the same represents appropriation of income and not a charge on income- Held that - Tribunal held that the amount being difference in stock is represented by undeclared business income. It does not have a separate physical identity and has to be taxed under the head business income and the assessee is entitled to remuneration to partners u/s.40(b) of the I.T. Act from such income Thus the amount of ₹ 41 lakhs declared by the assessee during the course of survey partakes the character of business income and the assessee is entitled to remuneration and interest on capital as per the provisions of section 40(b) of the I.T. Act on such income. I hold and direct accordingly. The additional ground as well as the ground raised by the assessee are accordingly decided in favour of the assessee.
Issues Involved:
1. Classification of additional income declared during the survey. 2. Applicability of Section 69/69B of the Income Tax Act. 3. Eligibility for deductions under Section 40(b) of the Income Tax Act for remuneration and interest to partners. Detailed Analysis: 1. Classification of Additional Income Declared During the Survey: The assessee, a partnership firm engaged in manufacturing and trading gold, silver ornaments, and diamond jewellery, declared an additional income of ?41,00,000/- during a survey under Section 133A of the Income Tax Act due to excess stock. The assessee included this additional income in its profit and loss account but claimed deductions for interest and remuneration to partners. The Assessing Officer (AO) argued that this additional income should be treated as deemed income under Section 69/69B, as it was over and above the regular income and not supported by any business transactions or evidence. 2. Applicability of Section 69/69B of the Income Tax Act: The AO treated the ?41,00,000/- as deemed income under Section 69/69B, asserting that the source of funds for the excess stock was unexplained and could not be classified under any specific head of income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this view, relying on decisions from the Hon’ble Gujarat High Court in Fakir Mohmed Haji Hasan and the Hon’ble Chattisgarh High Court in Dhanush General Stores, which held that unaccounted investments found during a survey constitute deemed income under Section 69B and are not eligible for deductions under Section 40(b). 3. Eligibility for Deductions under Section 40(b) of the Income Tax Act: The assessee appealed, arguing that the additional income from excess stock should be considered business income, thus qualifying for deductions under Section 40(b) for remuneration and interest to partners. The Tribunal examined similar cases, such as Shri Venkatesh Textile Mills and M/s. Fashion World, where additional income declared during a survey was treated as business income, allowing for deductions under Section 40(b). The Tribunal noted that the excess stock did not have an independent physical identity separate from the declared business stock, implying it was part of the business income. The Tribunal also considered the decision of the Hon’ble Calcutta High Court in Md. Serajuddin & Brothers, which supported including additional income declared during a survey as part of business income for calculating allowable remuneration to partners. The Tribunal concluded that the ?41,00,000/- declared by the assessee should be treated as business income, thus entitling the assessee to deductions for remuneration and interest under Section 40(b). Conclusion: The Tribunal allowed the appeal, holding that the additional income declared during the survey partakes the character of business income. Consequently, the assessee is entitled to remuneration and interest on capital as per Section 40(b) of the Income Tax Act. The decision emphasizes the importance of the nature and source of income in determining eligibility for deductions and the classification of additional income declared during surveys.
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