2014 (12) TMI 346 - AT - Income Tax

Remuneration paid to partners disallowed Whether the additional income of ₹ 50,08,220/- is eligible for the purposes of computing the partners remuneration Held that - It forms a part of the profit for the purposes of computing the remuneration of the partners- In so far as the additional income declared which is not found to be assessable as income from business , the stand of the Revenue is that the same cannot qualify for the purposes of section 40(b) of the Act relying upon Md. Serajuddin & Brothers vs. CIT 2012 (8) TMI 104 - CALCUTTA HIGH COURT wherein it has been held that for the purpose of computation of allowable remuneration to partners, book-profit has to be ascertained not only from income of business alone but also income from other sources - Section 40(b)(v) read with Explanation cannot be separate method of accounting for ascertaining net profit and/or book-profit - the net profit as shown in the profit and loss account not the profit computed under the head profit and gains of business or profession thus, the AO is directed to calculate the allowable remuneration by ascertaining not only income from business but also income from other sources. Decided in favour of assessee. Additional income declared representing excess stock Whether or not additional income surrendered during the course of survey is assessable as income from business or not - Held that - There cannot be an absolute proposition that any income surrendered during the survey is a business income or vice versa - in the absence of the nature of source of cash being proved it was held not to be assessable as income from business - an amount contained in the excess stock declaration of ₹ 15,01,620/- can be said to be assessable as income from business - For balance of the amount of excess stock, assessee has not demonstrated on the basis of evidence, the source from where such investment has been made and therefore it cannot be assessed as income from business Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of remuneration to partners amounting to Rs. 9,13,920.
2. Treatment of additional income declared during the survey as 'business income'.
3. Eligibility of additional income for computing partners' remuneration under section 40(b) of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Remuneration to Partners:
The primary issue in this appeal is the disallowance of remuneration to partners amounting to Rs. 9,13,920. The Assessing Officer (AO) restricted the remuneration payable to the partners to Rs. 50,000, disallowing the balance amount. The assessee contended that the additional income declared during the survey should be treated as 'business income' and thus be eligible for remuneration calculation. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, leading to the present appeal.

2. Treatment of Additional Income Declared During Survey:
The assessee declared additional income of Rs. 50,08,220 during a survey conducted under section 133A of the Act, which included Rs. 35,06,600 from unrecorded debtors/sales and Rs. 15,01,620 from excess stock. The AO and CIT(A) disagreed with treating this additional income as 'business income'. However, the tribunal found that the unrecorded debtors/sales amounting to Rs. 35,06,600 should be accepted as 'business income' since the sales were not recorded in the regular books of account but were part of the business operations.

Regarding the additional income of Rs. 15,01,620 from excess stock, the tribunal noted that the assessee could not demonstrate the source of this income as business-derived. The tribunal accepted Rs. 3,50,000 of this amount as business income, based on the assessee's explanation that it was funded by business profits. The remaining amount was not accepted as business income due to lack of evidence.

3. Eligibility of Additional Income for Computing Partners' Remuneration:
The tribunal addressed whether the additional income of Rs. 50,08,220 is eligible for computing partners' remuneration under section 40(b). The tribunal referred to the judgment of the Hon'ble Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT, which held that for computing allowable remuneration, book-profit should include income from all sources, not just business income. Following this precedent, the tribunal directed the AO to calculate the allowable remuneration by considering both business income and income from other sources.

Conclusion:
The tribunal allowed the appeal, directing the AO to treat Rs. 35,06,600 from unrecorded debtors/sales and Rs. 3,50,000 from excess stock as 'business income' and to compute the partners' remuneration by including income from all sources. The order was pronounced in the open court on 28th November, 2014.