2005 (1) TMI 366 - AT - Income Tax

Deduction u/s 40(b) - Computation remuneration payable to the partner on the profit declared in the P L a/c which was inclusive of the income surrendered by the assessee on account of excess stock - Income disclosed at the time of survey from the profit of the business - addition made u/s 69 - HELD THAT - No material has been brought on record by the Department to disprove the assessee s contention regarding source of business income which was out of business of gold and silver ornaments. It is also not the case of the Department that assessee was doing some other activities in which such income was earned and alleged to be invested in the gold and silver ornaments in which the assessee was dealing. As per provisions of s. 40(b) Expln. 3 for the purpose of this clause book profit means the net profit as shown in the P L a/c for the relevant previous year computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. There is no dispute to the fact that net profit of the assessee-firm was inclusive of the profit earned in the course of business found to be invested in the stock. We therefore find ourselves inclined to agree with the learned AR that source of stock was out of business income and which was not controverted by the Department by bringing any material on record on which the assessee was eligible to claim deduction of remuneration under s. 40(b) of the IT Act. We do not find any infirmity in the order of the CIT(A). In the result the appeal of the Revenue is dismissed.

Summary

Issues Involved:
The appeal filed by the Revenue against the order of CIT(A) for the assessment year 1994-95, specifically regarding the treatment of an amount surrendered by the assessee during a survey as business income.

Summary:
The Revenue's grievance was directed at the CIT(A)'s decision to treat the amount surrendered by the assessee during a survey as business income. The assessee had admitted excess stock during the survey and offered to include it in the business income for the relevant year. The AO, however, treated this income as assessable under section 69, not as business income for the purpose of allowing remuneration to partners under section 40(b) of the IT Act.

The CIT(A) observed that the excess stock found during the survey was purchased out of business income of the current year, as explained by the assessee. The CIT(A) directed the AO to compute the remuneration payable to the partner based on the profit declared in the P&L account, which included the income surrendered by the assessee due to excess stock.

The Revenue contended that since the addition was made under section 69, the income should be treated as from unexplained sources, and the CIT(A) was not justified in directing the computation of remuneration under section 40(b).

The Authorized Representative argued that the excess stock was indeed purchased out of business income of the current year, as confirmed during the survey. The book profit, inclusive of the profits disclosed and invested in the stock, formed the basis for computing remuneration under section 40(b).

After considering the contentions and evidence, the Tribunal found that the source of investment in the excess stock was from the current year's business income, as properly recorded in the books of account. The Department failed to disprove this explanation or provide evidence to the contrary. Therefore, the Tribunal upheld the CIT(A)'s decision to compute remuneration based on the business income inclusive of the excess stock amount.

Ultimately, the Tribunal dismissed the Revenue's appeal, finding no fault in the CIT(A)'s order.