2010 (10) TMI 686 - AT - Income Tax

Disallowance - Voluntarily surrendered income during survey u/s 133A - Since the assessee is engaged in the business of manufacturing and export of garments the same, is not other income other than income from such business - Therefore, in view of the decisions cited on by the learned counsel for the assessee the additional income declared during the course of survey, has to be treated as business income - The assessee is accordingly entitled to claim remuneration to partner on such business income. Under section 40(a)(ia) of the Act - - Partners remuneration u/s.40(b) - As regards the alternate contention of the learned counsel for the assessee that enhanced remuneration to partners should be allowed in case the disallowance of Rs.58,48,912 is upheld, we do not find any merit in the same. Remuneration to partners has to be computed on the basis of the book profit declared by the assessee subject to the conditions prescribed u/s. 40(b) of the Act - Enhanced remuneration to partners cannot be allowed on the basis of any addition/disallowance made in the assessment order - Therefore,do not find any merit in the alternate contention of the learned counsel for the assessee - The above grounds by the assessee are accordingly dismissed. depreciation on motorcar and vehicle expenses - absence of maintenance of log book - Disallowance of 20% depreciation on motorcar for probable personal use appears to be on higher side and, therefore, restrict such disallowance of depreciation to 15% - Similarly, the disallowance of Rs.50,000 out of the vehicle expenses also appears to be on higher side - Therefore, restrict such disallowance to Rs.40,000 - Thus, appeal of the assessee is accordingly partly allowed. levy of interest u/s. 234B and 234D - Since, charge of interest u/s. 234B is mandatory and consequential in nature - Similarly, since provisions of sec. 234D were bought to the statute book by the Finance Act, 2003 w.e.f 1.6.2003 and since the assessment year involved is 2005-06, therefore, the same, in our opinion, is also mandatory and consequential - Therefore, this ground by the assessee is dismissed.

Issues Involved:
1. Classification of voluntarily surrendered income during a survey as "Income from other sources" vs. "Business income".
2. Disallowance of remuneration to partners under section 40(b) due to reclassification of income.
3. Disallowance under section 40(a)(ia) for TDS not paid within the stipulated time.
4. Enhancement of deduction for partners' remuneration under section 40(b) due to disallowance under section 40(a)(ia).
5. Disallowance of depreciation on motorcar and vehicle expenses due to personal use.
6. Levy of interest under sections 234B and 234D.

Detailed Analysis:

1. Classification of Voluntarily Surrendered Income:
The assessee firm, engaged in the business of manufacturing and exporting garments, disclosed an additional income of Rs. 50 lakhs during a survey under section 133A. The Assessing Officer (AO) treated this income as "Income from other sources" instead of "Business income", leading to a disallowance of Rs. 19,61,464 in partners' remuneration under section 40(b). The CIT(A) upheld this classification, relying on precedents from the Punjab and Haryana High Court.

The Tribunal, however, disagreed with the AO and CIT(A), noting that the assessee had consistently declared income from its garment business and had no other source of income. The Tribunal referenced several judicial decisions, including those from the Supreme Court and Calcutta High Court, which supported the treatment of undisclosed income as business income when it arises from business activities. Consequently, the Tribunal ruled that the additional income should be treated as business income, allowing the assessee to claim partners' remuneration.

2. Disallowance of Remuneration to Partners:
The AO's reclassification of the surrendered income led to the disallowance of Rs. 19,61,464 in partners' remuneration. The Tribunal's decision to treat the surrendered income as business income reversed this disallowance, allowing the remuneration claim.

3. Disallowance under Section 40(a)(ia):
The AO disallowed Rs. 77,95,501 under section 40(a)(ia) due to late payment of TDS. The CIT(A) partially upheld this disallowance, confirming Rs. 58,48,912 and directing verification for the remaining amount. The Tribunal upheld the CIT(A)'s decision, noting the assessee's admission of the disallowance and the AO's allowance of the expenditure in the subsequent year.

4. Enhancement of Deduction for Partners' Remuneration:
The assessee argued for enhanced partners' remuneration if the disallowance under section 40(a)(ia) was upheld. The Tribunal rejected this, stating that remuneration to partners must be computed based on book profits, not on additions or disallowances.

5. Disallowance of Depreciation and Vehicle Expenses:
The AO disallowed 20% of depreciation on motorcars and Rs. 50,000 of vehicle expenses due to probable personal use. The Tribunal found these disallowances excessive and reduced them to 15% for depreciation and Rs. 40,000 for vehicle expenses.

6. Levy of Interest under Sections 234B and 234D:
The Tribunal upheld the levy of interest under sections 234B and 234D, stating that these charges are mandatory and consequential.

Conclusion:
The Tribunal's decision resulted in a partial allowance of the assessee's appeal, reversing the classification of surrendered income, thereby allowing partners' remuneration, and reducing disallowances related to vehicle expenses and depreciation. The disallowance under section 40(a)(ia) and the levy of interest under sections 234B and 234D were upheld.

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