2017 (6) TMI 447 - AT - Income Tax

Addition towards alleged difference in investment in partnership firm - Held that - There is no evidence to the fact as to how much was generated from ASA & Co and from Dutta Trading Co. We find that the ld AO had made addition only on account of unexplained investment in Nature View Restaurant in the instant case. Hence we confine our opinion only on the point whether an addition could be made in the hands of the assessee towards undisclosed investment in Nature View Restaurant. In our considered opinion, the excess amount of ₹ 34,20,000/- , being the difference in capital account, as reflected in Nature View Restaurant vis a vis investment reflected in assessee firm s books, is found credited only in the books of Nature View Restaurant. Hence if at all any addition that could be made, the same could be made in the hands of Nature View Restaurant u/s 68 of the Act. Alternatively, it could also be made in the hands of the respective partners who had deposed that the undisclosed income has been generated from two partnership businesses and the same has been ploughed back by them as investment in Nature View Restaurant. There is absolutely no case for making an addition in the case of the assessee firm in the instant case. Hence we have no hesitation in deleting the addition of ₹ 34,20,000/- made in the hands of the assessee. - Decided in favour of assessee. Disallowance of partners remuneration - addition u/s 40(b) - Held that - It was held that the Circular No. 739 dated 25.3.1996 would be applicable where neither the amount has been quantified nor the limit of total remuneration has been specified in the deed, but the same has been left to be determined by the partners at the end of the accounting year. Only in such cases, the payment of remuneration cannot be allowed as deduction. It further held that when the manner of computation of remuneration is provided in the partnership deed and the same is in accordance with the provisions of section 40(b) then no disallowance of remuneration could be made. In the instant case, as stated supra, the partnership deed clearly mentions the manner of computation of remuneration. Hence respectfully following the ratio laid down in the said decision, we direct the ld AO to allow deduction towards partners remuneration in the sum of ₹ 1,57,735/-.

Summary

Issues Involved:
1. Addition towards alleged difference in investment in partnership firm M/s Nature View Restaurant.
2. Disallowance of partners’ remuneration.
3. Chargeability of interest under Sections 234A, 234B, and 234C of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Addition towards alleged difference in investment in partnership firm M/s Nature View Restaurant:

The primary issue was whether the CIT(A) was justified in upholding the addition of ?34,20,000 towards the alleged difference in investment in M/s Nature View Restaurant. The assessee, a partnership firm engaged in trading building materials, underwent a survey under Section 133A of the Income Tax Act, during which partners disclosed ?25 lakhs as undisclosed investment in Nature View Hotel. The Assessing Officer (AO) noted discrepancies between the investment amounts reflected in the assessee's balance sheet and documents from the ITO of Nature View Hotel, leading to an addition of ?34,20,000 for undisclosed investment.

Before the CIT(A), the assessee argued that no discrepancies were found in the assessment of Nature View Restaurant for the same year and provided audited financial statements. The CIT(A) upheld the AO's addition based on the higher figure of partners' contribution in Nature View Restaurant's balance sheet and the partners' disclosure of ?25 lakhs each as undisclosed investment.

The assessee contended that any addition for discrepancies should be made in the hands of Nature View Restaurant under Section 68 of the Act, not in the assessee firm. The Tribunal agreed, noting that the excess amount was credited only in Nature View Restaurant's books and should be added in the hands of Nature View Restaurant or the respective partners, not the assessee firm. The Tribunal deleted the addition of ?34,20,000.

2. Disallowance of partners’ remuneration:

The next issue was whether the CIT(A) was justified in upholding the disallowance of partners' remuneration amounting to ?1,57,735. The AO disallowed the remuneration on the grounds that the partnership deed did not specify the quantum, relying on CBDT Circular No. 739.

The assessee argued that the partnership deed prescribed the manner of calculating remuneration based on a percentage of income allowable under Section 40(b)(v) of the Act. The Tribunal found that the partnership deed specified the manner of computation, aligning with the provisions of Section 40(b). Citing the Agra Tribunal's decision, the Tribunal held that when the manner of computation is provided, no disallowance should be made. Consequently, the Tribunal directed the AO to allow the deduction of ?1,57,735 for partners' remuneration.

3. Chargeability of interest under Sections 234A, 234B, and 234C:

The final issue regarding the chargeability of interest under Sections 234A, 234B, and 234C was deemed consequential and did not require specific adjudication.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal deleting the addition of ?34,20,000 towards undisclosed investment and directing the allowance of ?1,57,735 for partners' remuneration. The issue of interest chargeability was noted as consequential. The order was pronounced in court on 07.06.2017.