2020 (10) TMI 1199 - AT - Income Tax

Income declared in the survey carried out u/s 133A - Disallowance of salary to partners claimed u/s.40(b) - income declared in the survey and also offered for taxation - whether the income offered by the assessee is covered u/ss 69/69A of the Act as held by the AO or can be classified as Business income as claimed by the assessee? - HELD THAT - Amount of investment is only a measure for quantifying the amount of addition. Raison d etre for the addition is not giving any satisfactory explanation about the source of income which was used for investment. If source is explained there can be no addition on account of investment. We are confronted with a situation in which both the source and destination are business inasmuch as the source of the income is business and the destination of such income is again in the nature of business assets that is stock cash and receivables. As a fortiori such an income will be considered as Business income covered under Chapter IV-D of the Act forming part of book-profit for the purposes of allowing remuneration to partners. As the assessee offered Rs. 50, 25, 997/- in the return of income by treating the same as part of business profit in our view the AO was obliged to consider it the same way at the time of computation of book profit by allowing claim of remuneration etc. We therefore overturn the impugned order and restore the assessee s calculation of remuneration to partners etc. - Decided in favour of assessee.

Summary

Issues:
Confirmation of disallowance of salary to partners claimed u/s.40(b) of the Income-tax Act, 1961 on the amount of income declared in the survey carried out u/s 133A.

Detailed Analysis:

Issue 1: Disallowance of Salary to Partners
- The appeal challenged the confirmation of disallowance of salary to partners claimed under section 40(b) of the Income-tax Act, 1961.
- The assessee declared additional income of Rs. 50,25,997 during a survey under section 133A, consisting of excess cash, stock, and undisclosed advances.
- The Assessing Officer (AO) considered the excess cash and stock as taxable under sections 69/69A, not allowing deduction for salary to partners.
- The Commissioner of Income-tax (Appeals) partly agreed, treating excess stock as business income but disallowing the salary on the remaining amounts.
- The Tribunal considered whether the declared income was covered under sections 69/69A or could be classified as business income.

Issue 2: Interpretation of Relevant Sections
- Section 40(b) allows remuneration and interest to partners on the amount of 'book-profit', defined in Explanation 3.
- Sections 69 and 69A deal with deeming unexplained investments and money as income if not recorded in books, falling under Chapter VI of the Act.
- Section 14 categorizes income under different heads, including 'Profits and gains of business or profession'.
- Judicial decisions, such as CIT VS. Shilpa Dyeing & Printing Mills, support classifying such incomes under one of the five heads.

Issue 3: Source of Income and Business Nature
- The excess cash, stock, and advances were found at the business premises, indicating they were generated from the business income.
- The absence of reference to other income sources suggests these amounts were derived from the business.
- The Tribunal emphasized that income source determines classification, regardless of its eventual utilization.

Issue 4: Treatment as Business Income
- The Tribunal reasoned that the income earned and utilized within the business context qualifies as 'Business income'.
- The declared amount of Rs. 50,25,997 was treated as business profit, obliging the AO to consider it for calculating 'book profit' and allowing partner remuneration.
- Consequently, the impugned order was overturned, restoring the calculation of remuneration to partners.

Conclusion:
- The Tribunal allowed the appeal, considering the declared income as 'Business income' eligible for partner remuneration, emphasizing the source of income and its business nature.