2013 (9) TMI 118 - AT - Income Tax

Disallowance of partners salary from undisclosed income - AO disallowed an amount of Rs.23,98,795/- by holding that the amount of Rs.65,00,000/- disclosed during the course of the survey to be treated separately as deemed income and the allowable salary to be worked out on the balance profit in accordance with the partnership deed and provisions of 40(b) of the Act Held that - once the amount has been assessed as business income, remuneration admissible to partners in terms of the partnership deed has to be allowed in accordance with and within the limits stipulated under the provisions of sec. 40(b) of the Act. In the present case, relying upon the above decision it was decided to grant the deduction in respect of salary worked out as per the provisions of Section 40(b) of the Act and in accordance with the partnership deed from the undisclosed income disclosed during the course of survey considering the same as business income Decided against the Revenue.

Summary

Issues involved:
Challenge to deletion of excess claim of remuneration by revenue based on unaccounted income disclosure during survey.

Detailed Analysis:

1. Facts of the Case: The appeal filed by the revenue contested the deletion of excess claim of remuneration by the CIT(A) for the assessment year 2008-09. The case involved unaccounted income disclosure of Rs.65 lakhs during a survey, which was not separately shown but treated as business profits. The AO disallowed part of the remuneration claimed by the partners, leading to the appeal.

2. AO's Decision: The AO considered the undisclosed income as deemed income and disallowed a portion of the remuneration claimed by the partners based on specific provisions of Section 40(b) of the IT Act. The AO relied on certain decisions to support the disallowance.

3. CIT(A)'s Analysis: The CIT(A) analyzed the case, noting that the undisclosed income was treated as business income and should be considered under Section 40(b) for determining partners' remuneration. The CIT(A) disagreed with the AO's approach and deleted the addition, citing relevant case laws and the nature of the income disclosed during the survey.

4. Appellant's Arguments: The DR argued that the partners' salary was used to cover up the undisclosed income, supporting the AO's decision. On the other hand, the AR relied on the CIT(A)'s order and presented additional case laws to support the position that the AO cannot question the reasonableness of remuneration paid to partners.

5. ITAT's Decision: The ITAT reviewed the case and upheld the CIT(A)'s decision based on precedents set by the ITAT Ahmedabad Benches in similar cases. The ITAT emphasized that the undisclosed income was treated as business income, and the remuneration claimed by the partners should be allowed as per Section 40(b) of the Act. The ITAT dismissed the revenue's appeal, affirming the CIT(A)'s decision.

In conclusion, the ITAT dismissed the revenue's appeal, upholding the CIT(A)'s decision to delete the disallowance of excess claim of remuneration based on the nature of the undisclosed income disclosed during the survey and in accordance with Section 40(b) of the IT Act.