2020 (12) TMI 800 - AT - Income Tax

Rectification of mistake u/s 254 - disallowance of interest to partner not adjudicated - revision in the estimation of the net profit of the assessee s contract business from 5% (of the gross receipt) to 8%, as there was no direction by the revisional authority for the same - as contended by assessee tribunal, while concluding its order had omitted to consider the disallowance of interest to partners, claimed in the sum which had therefore remained to be adjudicated, so that the same be rectified accordingly - HELD THAT - We are, with respect, afraid to say that neither the assessee nor the Revenue has properly understood the Tribunal s order. The claim of interest to partners (on their capital), at ₹ 2,49,557, forms part of the sum of ₹ 5,69,330 directed to the examined afresh by the ld. CIT, and indeed disallowed per the impugned assessment u/s. 143(3) r/w s. 263. No adjustment to the returned income on account of interest and remuneration to partners, it held, is called for. As order accordingly clarifies that the business income will remain the same, i.e., as originally assessed (at ₹ 14,47,620), which is after deduction of both interest and remuneration to partners, so that the only adjustment that obtains, post its order, is for ₹ 1,77,273, assessable u/s. 56. The reference to salary to partners is in view of section 40(b)(v), which limits the extent thereof with reference to book profit. In this context, it stands clarified that inasmuch as the enhanced estimation of business income (by applying the rate of 5 percent of the gross receipt, as against the returned 2.4%), would not impact the book profit (as defined in Explanation (v) to section 40(b)(v)), the remuneration to the partners allowable with reference to the assessee s book profit is not breached on the claimed sum of ₹ 1,30,000. No rectification, even as clarified during hearing is called for; the order passed, as would be apparent, being with a view to set at rest the controversy arising on account of the misreading of Tribunals order, even as assured during hearing.

Summary

Issues:
1. Revision of assessment under section 263 of the Income Tax Act, 1961 for AY 2010-11.
2. Disallowance of other income, interest, and remuneration to partners.
3. Tribunal's decision on adjustments made by the AO.

Analysis:

Issue 1: Revision of assessment under section 263
The original assessment was revised under section 263 of the Income Tax Act, directing the Assessing Officer (AO) to reframe the assessment considering various aspects of the assessee's return. The revision authority found deficiencies in the assessment related to undisclosed income, interest, and contract income. The AO, in the set-aside proceedings, estimated the contract business income at 8% of the turnover and made necessary adjustments to bring the total income to ?31,20,757.

Issue 2: Disallowance of other income, interest, and remuneration to partners
The first appellate authority confirmed most aspects of the revised assessment, except for the estimation of net profit. In the second appeal before the Tribunal, adjustments related to undisclosed income and interest/remuneration to partners were struck down, while the addition of other income was upheld. The Tribunal clarified that the business income would remain at ?14,47,620, and the deduction for remuneration to partners was allowable based on the book profit.

Issue 3: Tribunal's decision on adjustments made by the AO
The Tribunal's order clarified that no adjustment was required for interest and remuneration to partners, as it was already considered in the revised assessment. The business income was maintained at the original assessment level, with only the addition of other income being upheld. The Tribunal concluded that no rectification was necessary, as the order aimed to resolve misunderstandings and controversies arising from the misinterpretation of its previous decision.

In conclusion, the Tribunal partly allowed the assessee's appeal by upholding the addition of other income while maintaining the business income at the original assessment level. The decision clarified the treatment of interest and remuneration to partners based on the book profit, emphasizing that no further adjustments were required post its order.