2015 (1) TMI 392 - HC - Income Tax

Disallowance u/s 40(b) - salary paid to partners - AO did not accept the amount surrendered during the survey as income from business - addition of excess stock - Held that - It appears from the Assessment Order that there is nothing to conclusively establish that the amount offered for taxation in the return of income and credited in the books of account is not the business income of the assessee. The A.O who recorded the statement of the assessee u/s. 131 did not question the source of income of assessee in respect of the disclosed income. Therefore, the stock, cash, etc. found during the course of survey indicate that the income disclosed is in respect of the business carried on by the assessee. No evidence has been brought on record by the A.O to establish that the assessee was doing any other activity other than the business in gold ornaments, etc. for which the amount was disclosed. It is, therefore, clear that the amount disclosed is nothing but, the business income of the assessee. - Now, when the business activity of the assessee has been accepted and no other source of income is found, then there was no justification for disallowing the salary paid to Partners at ₹ 4.50 Lacs. Therefore, the disallowance of ₹ 4.50 Lacs granted by the A.O and confirmed by the Tribunal is erroneous and deserves to be quashed and set aside. - Following decision of Md. Serajuddin & Bros. v. Commissioner of Income tax 2012 (8) TMI 104 - CALCUTTA HIGH COURT - Decided in favour of assesse.

Summary

Issues:
1. Disallowance of Rs. 4.50 Lacs made by the Assessing Officer under Section 40(b) of the Income Tax Act, 1961.
2. Treatment of undisclosed income offered during survey u/s.133A as "income from other sources" and not as "income from profits and gains of business or profession."

Issue 1: Disallowance under Section 40(b):
The appeal was filed against the judgment of the Income Tax Appellate Tribunal, which partly allowed the Revenue's appeal. The appellant, a registered firm dealing in gold and silver ornaments, declared total income for A.Y. 1994-95 at Rs. 9,89,947. The disallowance of Rs. 4.50 Lacs under Section 40(b) was based on the addition of "excess stock" and the disclosure of unexplained income during a survey. The appellant argued that the disallowance should be assessed under the head "income from business/profession" as no other source of income was identified. The appellant relied on a decision of the Calcutta High Court to support their position. The High Court held that since the appellant had no other source of income, the disallowance of Rs. 4.50 Lacs was unjustified. The Tribunal's decision was overturned, and the appeal was allowed in favor of the assessee.

Issue 2: Treatment of Undisclosed Income:
The second question revolved around the treatment of undisclosed income offered during a survey as "income from other sources" instead of "income from profits and gains of business or profession." The High Court noted that the disclosed income was related to the business activities of the assessee, as no evidence suggested any other income source. The Court emphasized that if the assessee had no other source of income, the undisclosed income should be considered part of the business income. The Court found no justification for treating the undisclosed income as separate from the business income, especially when the assessee had no other income sources. Consequently, the High Court answered the second question in favor of the assessee, quashing the Tribunal's decision and restoring the order of the CIT(A) from 1995.

In conclusion, the High Court overturned the Tribunal's decision on both issues, ruling in favor of the assessee. The disallowance under Section 40(b) and the treatment of undisclosed income were both deemed unjustified given the lack of evidence of any other income sources apart from the business activities of the assessee. The appeal was allowed, and the original order of the CIT(A) was reinstated, leading to the disposal of the case in favor of the appellant.