2013 (11) TMI 270 - AT - Income Tax

Rejection of books of accounts maintained u/s 145 Addition on the basis of loose papers of the amount of Rs. 12 lacs Held that - There was direct nexus between the business activity of the assessee and the loose papers found during the course of survey and there was no evidence on record to indicate that Assessee had any other source of income and the income was assessable under the head profits and gains of business or profession - Income declared at the time of survey was on the basis of loose papers found at that time and the books of accounts were not written at that time and the books of accounts were written later after considering the loose paper transactions - Rejection of books was not justified when no defects were found in the books - Revenue has not brought any material on record to controvert the above findings Addition deleted Decided against the Revenue. Disallowance of Partner s salary on the ground of it being excessive Disclosure made during survey u/s 133A to be included for computation of partner s salary u/s 40(b) of the Income Tax Act Held that - Since the disclosure made during the survey is on account of business income, the same cannot be excluded for applying section 40(b) to compute allowable deduction in respect of partners remuneration Reliance has been placed on the judgment in the case of Jamnadas Muljibhai 2005 (1) TMI 366 - ITAT RAJKOT ,wherein ITAT has upheld assessee s claim that source of investment in excess stock found during the course of survey was out of business income as the same was not controverted by the Department by bringing any material in this regard on record Decided against the Revenue.

Summary

Issues:
1. Reversal of assessing officer's action under section 145(3) of the Income Tax Act.
2. Consideration of undisclosed income as business income.
3. Deletion of disallowance of partner's salary.

Issue 1: Reversal of assessing officer's action under section 145(3) of the Income Tax Act:
The appellant, a firm engaged in construction, filed its return for AY 2003-04. During a survey, additional income of Rs 12 lakhs was admitted. The assessing officer rejected book results under section 145(3) due to alleged inflated expenses. The CIT(A) deleted the addition, citing a direct nexus between the business activity and the undisclosed income. The CIT(A) found no evidence of other income sources and held the undisclosed income assessable under "profits and gains of business or profession." The CIT(A) noted that the disclosed income was based on loose papers found during the survey and that rejecting the books of accounts was unjustified. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's appeal.

Issue 2: Consideration of undisclosed income as business income:
The assessing officer considered the undisclosed income as unexplained credit under section 68 and calculated the gross profit at 9%, resulting in a deficit. The CIT(A) rejected this approach, emphasizing that the undisclosed income was included in the books and should be considered in the total receipts. The CIT(A) found no justification for rejecting the books under section 145(3) when they were audited and no defects were found. The Tribunal agreed with the CIT(A), noting the lack of evidence from the Revenue to challenge the findings. The Tribunal dismissed the Revenue's appeal.

Issue 3: Deletion of disallowance of partner's salary:
The assessing officer disallowed excess partner's salary, considering it an attempt to reduce taxable income. The CIT(A) held that the disclosed income during the survey should be included in business income for computing partner's remuneration under section 40(b). The CIT(A) relied on tribunal decisions supporting this approach. The Tribunal upheld the CIT(A)'s decision, finding no grounds to interfere as the Revenue failed to provide contrary evidence. The Tribunal dismissed the Revenue's appeal, affirming the order of the CIT(A).

In conclusion, the Tribunal upheld the CIT(A)'s decisions in all three issues, dismissing the Revenue's appeal in its entirety. The judgment emphasized the importance of considering the factual circumstances and evidence in assessing undisclosed income, rejecting book results, and determining partner's remuneration in accordance with the relevant provisions of the Income Tax Act.