TMI Blog2013 (11) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Yoganand Textiles [1991 (9) TMI 14 - GUJARAT High Court] and DCIT Circle-6, Surat vs. Om Terrace [2013 (9) TMI 118 - ITAT AHMEDABAD], claim of deduction in regard to interest and remuneration is allowed – Decided against the Revenue. - ITA No.1212,4421/Ahd/2010 - - - Dated:- 19-4-2013 - D K Tyagi and T R Meena, JJ. For the Appellant : Shri Rahul Kumar, Sr. DR For the Respondent : Shri Rajesh M Upadhyay, AR ORDER:- Per: T R Meena: These two appeals filed by the Assessed and Revenue, which have emanated from the orders of CIT(A)-II, Surat, dated 05-01-2010 for A.Y. 2004-2005 in both cases. These two appeals were heard together and are being disposed of by way of this common order for the sake of convenience. 2. First we take, ITA No.4421/Ahd/2007 Grounds of assessee s appeal are as under: (1) learned D.C.I.T. of I.T. has erred in law and on facts to invoke the provisions of the Act and to make additions to the returned income without pointing out any defects in the accounts maintained and produced before him and Accounting method consistently followed by the appellant. Learned CIT(Appls) has also erred in confirming I.T.O. s action. (2) Addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Unaccounted expenses as per diary Rs.15,63,111/- Rs.6,72,574/- Rs.22,35,685/- Total Rs.34,83,111/- Rs.8,12,574/- Rs.41,95,685/- The appellant followed project completion method of accounting. The assessee had shown work in progress at Rs. 89,43,250/- and had claimed deduction of Rs.22,35,685/- as work in progress i.e. unaccounted expenses recorded in the diary for which no bill and vouchers were found during the course of survey. The ld. A.O. rejected the books of account u/s.145 of the IT Act, which has been confirmed by the ld. CIT(A). The ld. A.R. of the appellant submitted that there was no defect pointed out by the A.O. before applying the Section 145 of the IT Act. After considering the argument of the both parties, the rejection of books of account u/s.145 is justifiable as two diaries in which unaccounted payments to the partner and unaccounted expenses recorded, were found. Thus, we dismiss the ground no.1. 5. Ground no.2 of the assessee s appeal is against confirming the addition of Rs.22,35,685/-. During the survey, Red Narmada diary Bhagwati Ashish-1 Green Darshna diary Bhagwati As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a deduction, even though the Assessed may have subsequently brought such unaccounted expenses into the books of account. When a particular sum is treated as income It implies that the said sum is net of all expenses. Therefore no further expenses can be claimed as deduction. Thus, the claim of the AR that the unaccounted expenses should have been reduced from the unaccounted income, is without any logical basis. His further contention that a document has to be utilized as a whole and not in part, is also not relevant to the point dealt herein. The AO therefore, was fully justified in disallowing the claim of deduction. The addition of the sum of Rs.22,35,685/- is therefore, confirmed. 7. Now the assessee is before us. Ld. Counsel for the appellant submitted that there was a survey u/s.133A and the appellant had disclosed Rs.42 lacs during the course of survey, which has been credited in the p l account of the A.Y. 04-05. The appellant had incurred expenses, which were unaccounted as per diary impounded by the department. He argued that this expenditure is allowable against the income disclosed on account of work in progress disclosed against the project. He relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of huge amount of interest and remuneration to partners as under: A.Y. 2004-05 A.Y. 2003-04 Interest to partners Rs.13,17,187/- Rs.5,65,169/- Remuneration to partners Rs.6,00,729/- Rs. Nil Total Rs.19,17,916/- Rs.5,65,169/- As per A.O., it was held that the interest and remuneration to the partner was excessive and unreasonable to mitigate the tax liability arising on account of disclosure of additional unaccounted income of Rs.42,00,000/-. The A.O. gave reasonable opportunity of being heard on this issue. After considering the assessee s reply and various case laws mentioned in paragraph nos. 14 to 19 held that the interest and remuneration paid to the partners compared to immediate preceding year was not reasonable. Thus, he made addition of Rs.19,17,916/- 10. The assessee carried the matter before the CIT(A) who had confirmed the addition which is reproduced as under: 9.5 I have carefully considered the view taken by the AO as also the written submissions of AR. First of all, the ratio of the case of Yoganand Textiles (supra) does not apply to the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontention of the AR that in cases where a payment is covered by Sec.40(b) of the Act, the provisions of Sec.40A(2)(b) cannot be applied. Sec. 40 deals with amounts which are not deductible while computing income chargeable under head 'Profits and gains of business or profession'. Clause (b) provides examples in the case of firms where certain payments made by the firm under certain conditions, cannot be allowed as a deduction. These are contained in sub-clauses (i) to (v) r.w. the proviso, as also the Explanation below the said section. As per the decision for the Hon. Gujarat High Court, the payments which are not covered by Sec. 40(b), i.e., the payments which are not barred from being allowed as a deduction in the hands of a firm, can be treated as excessive or as unreasonable having regard to the facts of the case. It goes without saying that once a payment made by the firm is not allowable as a deduction u/s. 40(b) of the IT Act, there remains no scope for such payment to be considered under Sec. 40A(2)(b) of the Act. On the other hand, an expenditure which is allowable as a deduction u/s. 40(b) can be disallowed u/s. 40A(2)(b) of the Act as being excessive or unreasonable. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO is therefore sustained, and the disallowance of Rs.19,17,916 is confirmed. 11. Now the assessee is before us. The ld. A.R. of the appellant submitted that the firm is entitled to allow the interest on credit balance of the partner and remuneration to the partner as per terms and conditions of the partnership deed from the book profit. He further argued that Section 40A is not applicable on payments covered u/s.40(b) of the IT Act. Even undisclosed income declared by the appellant during the course of survey is qualified for deduction. He relied upon following cases: i. Munjal Sales Corp. vs. CIT Anr. (2008) 298 ITR 298 (SC) - Conditions for claiming deduction u/s. 40(b)(iv) i.e. partner s capital interest vis- -vis interest allowable u/s.36(iii) of IT Act. ii. CIT vs. Yoganand Textiles 202 ITR 869 (Guj.) - Section 40A is not applicable to payments covered by section 40(b). iii. DCIT Circle-6, Surat vs. Om Terrace, ITA No. 440/Ahd./2012 - Deduction u/s.40(b), in accordance with partnership deed, is allowable from undisclosed income declared in survey/search. iv. Gist of severat judgments - Deduction u/s 40(b)(iv) and 40(b)(v) allowable against undisclos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidering the Co-ordinate D Bench decision dated 11.05.2012, in case of DCIT Circle-6, Surat vs. Om Terrace (supra), the A.O. is directed to verify the terms and condition of partnership deed on interest and remuneration to the partner and allow the interest and remuneration from the book profit of the firm as per Explanation 3, Clause b of Section 40 of the Act. This ground of appeal is set aside. 13. Ground no.4 of assessee s appeal is not pressed by the ld. A.R. Accordingly, it is dismissed as not pressed. 14. In the result, assessee s appeal is partly allowed. 15. Now, we take ITA No.1212/Ahd/2010 Ground of Revenue s appeal is as under: 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting penalty levied by the AO of Rs.14,53,760/- for concealment of income. 16. Revenue s appeal is against deleting the penalty by the CIT(A) at Rs.14,53,760/-. The A.O. imposed penalty u/s. 271(1)(C) vide penalty order dated 27.03.2009 for A.Y. 04-05 (wrongly mentioned A.Y. 05-06 by both the authorities) on the basis of addition made by the A.O. under the head unaccounted expenses of Rs.22,35,685/- as unreasonable and excessive interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest and remuneration to the partner. At the outset, ld. Counsel for the appellant has submitted that both items of addition made by the A.O., had been disclosed in the regular books of account. Nothing has been concealed by him. He further relied in case of Rayala Corporation (P) Ltd. Vs. UOI Ors. (2007) 15 (I) ITCL 476, CIT vs. Manu Engineering Works (1980) 122 ITR 306 (Guj), ITAT, Ahmadabad decision in Navinbhai M. Patel vs. ITO (1988) 27 ITD 411, Hon ble Apex Court decision in case of UOI vs. Dharmendra Textile Processors [2008] 306 ITR 277 (SC), CIT vs. Atul Mohan Bindal [2009] 317 ITR 1, Dilip N. Shroff v. JCIT [2007] 291 ITR 519, CIT vs. Ram Commercial Enterprise Ltd. v. CIT [2000] 246 ITR 568 (Delhi), T. Ashok Pai v. CIT [2007 292 ITR 11 (SC), CIT vs. SAS Pharmaceuticals CIT vs. Reliance Petro Product Pvt. Ltd. and claimed that during the course of survey whatever discrepancy was found had been disclosed by the assessee by offering the addition of amount of Rs.42 lacs. Since, the survey was conducted on 11.09.2003 in F.Y. 03-04, for that assessment year, the assessee had not filed income tax return naturally the occasion to file the income tax return had not matured wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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