2022 (11) TMI 1127 - AT - Income Tax

Claim of deduction u/s 40(b) from undisclosed income surrendered - Salary / Remunaration of partners - Additional income declared during the course of survey - HELD THAT:- It is clear that the rate itself stated by the A.O. during the course of survey is in respect of valuation report obtained by the prospective buyers and not from the assessee. Therefore, for all practical purposes, same is likely to be inflated for obtaining loans from financial institution and could not be construed to be price of the units accruing to the assessee.

As further to be noticed that the survey u/s. 133A was conducted on 22.12.2015 and the assessment year under consideration, i.e., A.Y. 2016-2017, was not complete. The manner of computation by the assessee in arriving at the additional income of Rs. 2 crore as per the sworn statement demonstrate that it is directly relatable to the construction of flats, and hence, deem to accrue as part of the consideration of sale of flats and thus the income is to be treated as income from business of the assessee.

The surrendered income disclosed by the assessee are part of the business activities and as mentioned earlier no other activities were carried on by the assessee, nor has the Revenue brought on record any contrary material for the aforesaid conclusion. Revenue has not found any money during the course of survey. Further, the tax rate specified u/s. 115BBE for assessment year 2016-2017 is at 30% (same as the normal rate) and the partners of the assessee after considering the remuneration have discharged tax liability more or less at the same rate of 30%. Thus, we are of the view that there is no loss to the revenue.

It is clear that the partners have paid average tax at 30%.The observation of the A.O. that the impugned assessment order that "individual partners have set off their various expenses against remuneration so received. Thus, the straightway 30% tax liability on Rs. 1.2 crore in the hand of assessee firm has been shifted and minimized by splitting the same remuneration to the partner" is factually incorrect.

Allowability of remuneration in the hands of the partners - There is no dispute as regards the entitlement of the remuneration by the partners, since the A.O. had allowed the remuneration as per section 40(b)(v) of the I.T. Act to the extent of Rs. 11,54,770. The dispute is with regard to whether the assessee is entitled to remuneration as per section 40(b)(v) on the additional income offered. Since we have already held that the additional income offered by the assessee is to be considered as business income, as a natural corollary, the remuneration u/s. 40(b)(v) has to be computed considering the entire business income declared by the assessee. Thus additional income offered as part of the business income, the assessee would be entitled to deduction as per the provisions of section 40(b)(v).

Disallowance of ad hoc basis, a sum being 20% of the URD purchases - HELD THAT:- Undisputedly, the URD purchases are only 2% of the total purchases. Considering the nature of the assessee's business, i.e., the construction of flats and commercial buildings, undoubtedly, the assessee has to make purchases, such as jelly, stones and bricks etc. We are of the view that the ad hoc disallowance at the rate of 20% of the URD purchases is highly excessive. The assessee itself before the first appellate authority stated that the disallowance at 20% is excessive and should be reduced to 10% of the URD purchases. Accordingly, we limit the disallowance of URD purchases to 10% of Rs. 16,59,344. Hence, we sustain an addition of Rs. 1,65,934 and delete the balance.