2018 (5) TMI 628 - AT - Income Tax

Estimation of net profit - Rate of estimation of income in the hands of the firm - contention of the learned AR is that while estimating the profit a separate deduction is to be given for interest and salary paid to the partners of the assessee - Held that - As decided in M/s. Adarsh Construction 2015 (3) TMI 1318 - ITAT HYDERABAD it is only the method of assessing the income of the assessee firm which either has to be done by accepting the voluntary return filed under section 139(1) or it has to be regularly assessed under section 143(3) or best judgment assessment is to be made under section 144. The final outcome of the assessment of the income of the assessee firm calls for consequential imposition of tax and realisation thereof. The statutory deductions thus which are available to the assessee firm cannot be taken away of snatched away from the firm merely because their books of account have been rejected and best judgment assessment has been made Salary and interest, which is given to the partners in terms of the partnership deed, the tax liability of the said amount shifts upon the partners and cannot be taken as tax liability of the firm. The applicability of section 28(v) cannot be excluded in the matter of best judgement assessment in respect of an assessee firm. It was the specific case of the assessee that the partners were working partners and they were entitled to salary and interest, as per terms of the deed in accordance with section 40(b). - Decided against revenue. See Indwell Construction 1998 (3) TMI 121 - ANDHRA PRADESH High Court Addition made on account of payment of EPF beyond specified due date - Non-payment of employees contribution to the account of Government within due date - Held that - CIT(A) correctly considering the submissions of the assessee restricted the addition, upto ₹ 20,498/- and allowed the remaining portion of the addition on being satisfied the said contribution was paid before the due date of filing of the return of income in terms of the decision of the Hon ble Supreme Court in the case of Alom Extrusion Ltd. 2009 (11) TMI 27 - SUPREME COURT

Summary

Issues involved:
1. Restriction of addition of net profit by the Ld. CIT(A) for A.Y. 2007-08.
2. Deletion of addition made on account of payment of EPF beyond specified due date.

Analysis:

Issue 1: Restriction of addition of net profit by the Ld. CIT(A)
The issue revolved around the deduction of salary paid to partners of the assessee while estimating the net profit. The A.O. added the difference in profit to the total income of the assessee, which was contested by the assessee before the Ld. CIT(A). The Ld. CIT(A) restricted the net profit by allowing the deduction of salary paid to partners based on the decision of the High Court of Rajasthan. The learned AR argued that separate deductions for interest and salary should be given while estimating profit, citing the provisions of section 44AD. The Co-ordinate Bench of ITAT Hyderabad discussed the statutory provisions and held that interest and salary paid to partners are allowable deductions, subject to certain conditions under section 40(b) of the Act. The Bench referred to various judgments supporting the allowance of interest and salary paid to partners as statutory deductions. Consequently, the ITAT upheld the decision of the Ld. CIT(A) in restricting the net profit by allowing the deduction of salary paid to partners.

Issue 2: Deletion of addition made on account of payment of EPF beyond specified due date
The AO added an amount for non-payment of employees' contribution to the EPF within the due date, which was contested by the assessee. The CIT(A) restricted the addition based on the payment made before the due date of filing the return of income, in line with the decision of the Hon'ble Supreme Court. The ITAT found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this ground.

In conclusion, the ITAT dismissed the revenue's appeal and partially allowed the assessee's appeal, emphasizing the importance of allowing deductions for interest and salary paid to partners while estimating net profit and upholding the restriction of additions based on timely payments as per legal precedents and statutory provisions.