2018 (10) TMI 2014 - AT - Income Tax

Income surrendered in survey proceedings - Addition for undisclosed income out of entries in loose papers found on survey - during the course of survey proceedings both the partners were out of station and survey proceedings were represented by brother of one of the partner in their absence and his statement was recorded by the Department to know sources of various discrepancies found on survey - HELD THAT - From the records it can be seen that the assessee firm surrendered the income under the head Loose papers found and impounded on survey and included both in the trading and profit loss account for the year ended on 31.03.2010 and computation of total income for the A.Y. 2010- 11 under the head profits and gains of business . The assessee also explained each of the loose papers before the AO but the AO as well as the CIT(A) ignored the explanation offered by the assessee. Therefore we are of the opinion that both the CIT(A) as well as Assessing Officer are not correct in making this addition. The order of the CIT(A) is set aside. Disallowance out of remuneration paid to partners - computation of book profit for the purpose of admissibility of remuneration u/s 40(b)(v) - HELD THAT - The assessee firm had no other source of income except income from trading of marbles granite tiles etc. during the year under consideration as is appearing from the audited financial statement and audit report for the concerned year. Besides that on survey proceedings no documents were found by the Revenue Authorities which revealed that the assessee firm was involved in other business activities as well. Therefore we are of the opinion that the CIT(A) as well as Assessing Officer both are not correct in restricting the remuneration of the partners. Appeal of the assessee is allowed.

Summary

Issues:
1. Addition of alleged undisclosed income from entries in loose papers found during survey.
2. Disallowance of remuneration paid to partners exceeding prescribed limit.

Analysis:
1. The appeal was filed against the CIT(A)'s order confirming the addition of Rs. 76,617 out of Rs. 1,21,377 made by the Assessing Officer for alleged undisclosed income from entries in loose papers found during a survey. The assessee, a partnership firm engaged in marble trading, disclosed a profit of Rs. 44,41,356 before distribution of remuneration and interest to partners. During the survey, discrepancies were found, and the partner's brother surrendered Rs. 45,01,396 as undisclosed income. The Assessing Officer added Rs. 1,21,377 from transactions in loose papers. The CIT(A) partly allowed the appeal, but the ITAT Raipur held that the explanation offered by the assessee was ignored, setting aside the CIT(A)'s order and allowing the appeal on grounds 1 and 2.

2. Regarding the disallowance of Rs. 3,53,966 out of remuneration paid to partners, the Assessing Officer treated the surrendered income as not part of book profit under Section 40(b) and assessable as deemed income under Section 69. The ITAT Raipur found that the detailed submission of the assessee was disregarded. The High Court decision relied upon was not directly related to the issue of remuneration. The ITAT concluded that the income surrendered during the survey should be considered as business income for computing book profit under Section 40(b)(v). As the firm had no other income sources, the restriction on partner remuneration was deemed incorrect. Hence, the appeal was allowed on ground 3.

In conclusion, the ITAT Raipur allowed the appeal, setting aside the CIT(A)'s order and directing the Assessing Officer to reconsider the additions/disallowances made.