2018 (1) TMI 1147 - HC - Income Tax

Claim of deduction u/s 40(b) - working out the salary paid to the partner in terms of section 40(b) - amount surrendered in the course of survey U/s. 133A - the surrender amount was shown as business income and assessed as business income - Held that - It is undisputed that the Assessing Officer has brought to tax the amount of ₹ 1,55,289/shown as other income in profit and loss account as income from business under Section 28 of the Act. The assessment order does not classify the same as income from other sources or under any other head. Once the aforesaid position is accepted, then for the purpose of computing book profit as defined in section 40(b), the other income of ₹ 1,55,289/has also to be considered to be part of income from business arrived at in accordance with the Chapter IVD of the Act. It is not open to the Revenue to contend that the amount of ₹ 1,55,289/is part of business income while computing the tax payable but not so for the purposes of Section 40(b) of the Act. The character of the income does not change dependent upon the section to be applied. This issue has not been examined at all by the authorities under the Act. It goes to the root of the dispute. - Decided in favour of appellant/assessee

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 regarding claim under section 40(b) on amount surrendered during survey under Section 133A of the Act.

Analysis:
The appellant challenged the order of the Income Tax Appellate Tribunal dated 16th July, 2003, which was admitted by the High Court on the substantial question of law regarding the claim under section 40(b) of the Income Tax Act. The issue stemmed from a survey conducted at the appellant's premises on 3rd October, 1997, where excess stock and unexplained cash loans were found. The appellant filed its return of income declaring a net income, including the unexplained cash loans as 'other income' in the profit and loss account. The Assessing Officer added this 'other income' to the business income for tax purposes, but the Commissioner of Income Tax (Appeals) dismissed the appeal, stating that crediting an amount to the profit and loss account does not necessarily make it part of the business profit.

The Tribunal rejected the appeal, emphasizing that the 'other income' must have a nexus with the business activities to be included in the book profits. The appellant argued that the Assessing Officer had accepted the 'other income' as part of the business income, which was crucial for the net profit calculation. The Revenue contended that the error in not separately classifying the 'other income' would not affect their case, as the Assessing Officer's reasoning was sound. However, the High Court highlighted that the Assessing Officer had treated the 'other income' as income from business in the assessment order, without classifying it under any other head.

The Court ruled that once the Assessing Officer had treated the 'other income' as part of the business income under Section 28 of the Act, it had to be considered in computing book profits under section 40(b) as well. The Revenue could not argue differently for tax calculation purposes versus book profit computation. The Court emphasized that the character of income does not change based on the section applied. Since this critical issue was not examined by the authorities under the Act, the Court held in favor of the appellant, answering the substantial question of law in the affirmative and allowing the appeal.

In conclusion, the High Court allowed the appeal, emphasizing that the 'other income' disclosed by the appellant and treated as business income by the Assessing Officer must also be considered part of the income from business for computing book profits, rejecting the Revenue's contention that the character of income changes based on the section applied.