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.

Summary

Issues Involved:
1. Whether additional income of Rs. 2 crore declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed as deduction u/s. 40(b) of the I.T. Act?
2. Whether the CIT(A) is justified in confirming the disallowance of Rs. 3,31,868 being disallowance of 20% of Un-registered Dealer purchases (URD)?

Issue-wise Detailed Analysis:

1. Treatment of Additional Income of Rs. 2 Crore as Business Profits:
- Facts of the Case: The assessee, a partnership firm engaged in construction, declared Rs. 2 crore as on-money received during a survey. This was included in the profit and loss account for AY 2016-2017, and the assessee claimed a deduction of Rs. 1,31,54,770 towards partners' remuneration under section 40(b) of the I.T. Act.
- Assessment Officer's (A.O.) Decision: The A.O. determined that the Rs. 2 crore could not be treated as business receipts and taxed it under section 115BBE of the I.T. Act. Consequently, the A.O. allowed only Rs. 11,54,770 as partners' remuneration based on regular book profits, disallowing the remaining claimed remuneration.
- CIT(A)'s Decision: The CIT(A) upheld the A.O.'s decision, stating there was no evidence that the Rs. 2 crore was business income.
- Tribunal's Analysis: The Tribunal reviewed the partner's sworn statement and found that the additional income was related to the sale of flats, part of the assessee's business activities. The Tribunal noted that the valuation report used by the A.O. was from prospective buyers and likely inflated for loan purposes. The Tribunal concluded that the additional income was business income, as it was directly related to the construction activities.
- Conclusion: The Tribunal held that the additional income should be treated as business income, allowing the remuneration deduction under section 40(b)(v) of the I.T. Act. This decision was supported by the jurisdictional High Court's ruling in CIT v. S.K. Srigiri & Bros.

2. Disallowance of 20% of Un-registered Dealer Purchases (URD):
- Facts of the Case: The A.O. disallowed 20% of URD purchases amounting to Rs. 16,59,344 on an ad hoc basis, which was confirmed by the CIT(A).
- CIT(A)'s Decision: The CIT(A) upheld the A.O.'s action, stating the purchases were unverifiable and in cash, making the 20% disallowance reasonable.
- Tribunal's Analysis: The Tribunal noted that URD purchases were only 2% of the total purchases and essential for the construction business. The Tribunal found the 20% disallowance excessive and agreed with the assessee's contention before the CIT(A) that it should be reduced to 10%.
- Conclusion: The Tribunal limited the disallowance to 10% of URD purchases, sustaining an addition of Rs. 1,65,934 and deleting the balance.

Final Judgment:
- The appeal was partly allowed, with the Tribunal ruling in favor of the assessee on the treatment of additional income as business profits and reducing the disallowance of URD purchases to 10%.