2022 (3) TMI 726 - HC - Income Tax

Addition on account introduction of un-explained partner s opening capital in the assessee s books of accounts - As per Tribunal separate addition can be made once the net profit rate is applied on contract receipts of the appellant for estimating its income from contract work when the provisions of section 68 is directly hit in the instant case - HELD THAT - This Court answers the question No.(i) in the negative, i.e. in favour of the Appellant assessee against the Department by holding that the ITAT erred in holding that a separate addition on account of introduction of unexplained partner s opening capital in the assessee s books of accounts could be made particularly since the net profit was uniformly applied at 8% as an estimation. Adjust the TDS or refund back the same even though the said amount was deposited during the assessment year 2005-06 - HELD THAT - CIT (A) directed the AO to withdraw the credit given for TDS . The ITAT while agreeing with the finding of the CIT (A) ought to have been to permit the Assessee to adjust the amount so paid or ordered it to be refunded to the Assessee. There is no explanation why this was not done. Learned counsel for the Department also could not support the above failure of the CIT(A) as well as the ITAT to issue such a direction. Question (ii) is also answered in the negative i.e. in favour of the Appellant assessee and against the Department by holding that the ITAT and the CIT(A) were not tried in failing to give a direction to adjust the TDS amount or refunded although the said amount to be deposited in AY 2005-06 Disallow the partner s salary although the same is permissible u/s.44AD - HELD THAT - The proviso to Section 44AD (2), as it read at the relevant time, did permit the salary and interest paid to the partners of a firm to be deducted from income of the firm subject to the condition specified under Section 40(d) of the Act being fulfilled. This appears to have been lost sight of by the ITAT. Accordingly, question (iii) is also answered in the negative i.e., in favour of the Appellant assessee and against the Department by holding that the ITAT erred in law in not allowing deduction the salaries paid to the partners from the income of the firm.

Summary

Issues:
1. Whether separate addition on account of unexplained partner's opening capital can be made when net profit rate is applied for estimating income from contract work?
2. Whether the Income Tax Department should adjust TDS or refund the same when wrongly deducted?
3. Whether partner's salary can be disallowed even if permissible under section 44AD of the Income Tax Act?

Analysis:

Issue 1:
The appeal dealt with the question of whether a separate addition on account of unexplained partner's opening capital could be made when the net profit rate was applied for estimating income from contract work. The Appellant argued that once the profit was estimated at 8%, there was no need for a separate addition. The ITAT upheld the order of the CIT(A) regarding the estimation of net profit at 8%. The Court referred to a decision by the Punjab & Haryana High Court and held that the addition of unexplained credit was not sustainable when the net profit was uniformly applied at 8%. The Court ruled in favor of the Appellant, stating that the ITAT erred in allowing a separate addition.

Issue 2:
Regarding the adjustment of TDS wrongly deducted, the ITAT upheld the CIT(A)'s decision that there should not have been any deduction of TDS by Bharati Cellular Ltd. (BCL) while paying advances to the Appellant. The total tax deducted was &8377;55,400, and the CIT(A) directed the AO to withdraw the credit given for TDS. However, the ITAT did not permit the Assessee to adjust the amount paid or order a refund. The Court found in favor of the Appellant, stating that the ITAT and CIT(A) were at fault for not giving a direction to adjust the TDS amount or refund it, which should have been done for the assessment year 2005-06.

Issue 3:
The Court also addressed the disallowance of partner's salary, which was permissible under Section 44AD of the Income Tax Act. The proviso to Section 44AD(2) allowed for the deduction of salaries paid to partners from the income of the firm, subject to certain conditions. The ITAT had overlooked this provision, and the Court ruled in favor of the Appellant, stating that the ITAT erred in not allowing the deduction of salaries paid to the partners from the firm's income.

In conclusion, the Court allowed the appeal, ruling in favor of the Appellant on all three issues raised in the case.