2016 (2) TMI 192 - AT - Income Tax

Allowance of partners remuneration u/s. 40b from the additional income offered for taxation during survey - CIT(A) deleted the addition - Held that - CIT(A) while deleting the addition has noted that Assessee had only one source of income being construction activity and in the statement recorded during the course of survey, it was categorical mentioned that the income was from construction project, it was disclosed in the Profit and Loss account of the firm and was offered to tax and the quantum of income disclosed has been accepted by Revenue. We find that the Co-ordinate Bench of Tribunal in the case of Shri Labdhi Prints (2012 (5) TMI 635 - ITAT AHMEDABAD) after considering the various decisions cited before it and referred to in the order had agreed with the decision of ld. CIT(A) that once the additional income offered for taxation during the survey is accepted and it has been explained to be as business income as the source then there is no bar in the Act for claiming partners remuneration from such additional business income. Before us, Revenue has not controverted the findings of ld. CIT(A) nor has brought on record any contrary binding decision. We further find that Hon ble Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT reported in (2012 (8) TMI 104 - CALCUTTA HIGH COURT ) has held that even if the income from other sources is included in the Profit and Loss accounts, to ascertain the net profits qua book profit for computation of the remuneration of the partners, the same cannot be discarded. - Decided against revenue

Summary

Issues:
Appeal against CIT(A) order for A.Y. 2003-04 - Addition on account of remuneration to partners - Reopening of assessment - Validity of notice u/s. 148 - Interpretation of Section 40(b)(v)(2) - Undisclosed income from construction activity - Claim of partners remuneration - Source of income - Business income for partner's remuneration - Acceptance of additional income during survey - Claiming partners remuneration from additional business income - Binding decisions - Dismissal of Revenue's appeal and Assessee's C.O.

Analysis:

1. Reopening of Assessment and Addition of Remuneration to Partners:
The appeal filed by the Revenue challenged the CIT(A) order for the assessment year 2003-04, specifically concerning the deletion of the addition on account of remuneration to the partners. The A.O. re-opened the case, issued a notice u/s. 148, and framed the assessment u/s. 143(3) r.w.s. 147. The dispute centered around the remuneration claimed by the Assessee on the undisclosed income from construction activity, amounting to Rs. 13,94,516. The A.O. contended that this remuneration was not allowable as it did not qualify under Section 40(b)(v)(2) of the Act.

2. Validity of Reopening and Source of Income:
The Assessee challenged the validity of reopening the assessment, arguing that there was no failure in disclosing material facts and that the reassessment was beyond the statutory period. During a survey, the Assessee disclosed Rs. 35 lacs as undisclosed income from the construction project. The A.O. disputed the source of this income, leading to the dispute over partners' remuneration. However, the CIT(A) accepted that the income was from the construction project, forming part of the book profits and eligible for computation u/s. 40(b).

3. Interpretation of Section 40(b) and Business Income:
The A.O. re-computed the deduction u/s. 40(b), questioning the nature of the undisclosed income and the validity of claiming partners' remuneration. The CIT(A) disagreed with the A.O., emphasizing that the income disclosed during the survey was from the construction project, the sole source of income for the Assessee. The Tribunal supported the CIT(A)'s decision, citing precedents and highlighting that once additional income offered for taxation is accepted as business income, partners' remuneration can be claimed from such income.

4. Dismissal of Appeal and Cross-Objections:
The Tribunal dismissed the Revenue's appeal and the Assessee's Cross-Objections. The Revenue failed to provide any contrary binding decision to challenge the CIT(A)'s findings. Additionally, the Assessee did not press the grounds raised in the C.O. before the Tribunal. The decision was based on the acceptance of the additional income as business income and the eligibility of partners' remuneration from such income, in accordance with relevant legal provisions and precedents.

This detailed analysis outlines the key issues raised in the legal judgment, including the validity of reopening the assessment, interpretation of relevant tax provisions, and the acceptance of undisclosed income as business income for claiming partners' remuneration. The decision by the Tribunal to dismiss the Revenue's appeal and the Assessee's Cross-Objections was based on the established source of income and the applicability of partners' remuneration in such circumstances.