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2016 (9) TMI 260 - ITAT AHMEDABAD

2016 (9) TMI 260 - ITAT AHMEDABAD - TMI - Disallowance of expenses made in respect of partners remuneration u/s.40(b) - undisclosed income - Held that:- It is an undisputed fact that during the course of survey, assessee had disclosed ₹ 1.75 crores as unaccounted income. We find that before the AO, assessee in the written submissions had stated that assessee-firm is engaged in only business of Green Plaza Project and it has only one source of income being construction activity. The aforesa .....

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s, the same cannot be discarded. Thus we are of the view that no disallowance u/s.40(b) of the Act on account of remuneration and salary to partners can be made in the present case and thus the ground of assessee is allowed. - I.T.A. No.430/Ahd/2011 - Dated:- 28-7-2016 - SHRI RAJPAL YADAV, JUDICIAL MEMBER And SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER For The Appellant : Shri Manish J. Shah, AR For The Respondent : Shri Sanjay Kumar, Sr.DR ORDER PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER : This ap .....

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see-firm and at that time it was found that assessee had received unaccounted receipts amounting to ₹ 1.75 crores. The working partner of the firm in his statement had admitted to have received the amount in cash which was not recorded in the books of accounts. Assessee thereafter filed its return of income for AY 2007-08 on 25/10/2007 by declaring the total income of ₹ 1,52,96,800/-. The case was taken up for scrutiny and thereafter assessment was framed u/s.143(3) of the Act, vide .....

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ls) erred in upholding the disallowance of deduction claimed by the assessee of ₹ 17,04,950/-. 1.1.The CIT(Appeals) erred in not appreciating the factual as well as the legal submissions made by the assessee at the time of hearing. 1.2.The CIT(Appeals) ought to have appreciated that the deduction claimed by the assessee were legally permissible claims under the Income Tax Act, 1961 which have been completely overlooked by the Assessing Officer as well as the CIT(Appeals). 1.3.The CIT(Appea .....

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ion of ₹ 17,04,950/- being the interest on capital and salary to partners (which was adjusted against the total income disclosed of ₹ 1.75 crores). 3.1. AO during the course of assessment proceedings noticed that though at the time of survey, the partner of the assessee-firm had admitted the undisclosed income of ₹ 1.75 crore but in the return of income, assessee had offered only ₹ 1,57,95,050/- for tax after claiming expenses of ₹ 17,04,950/- towards interest on ca .....

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e submission of the appellant. In so far as disclosure of ₹ 1.75 crore made by the appellant vide the statement of the working partner recorded during the course of survey on 23.3.2007 on the business premises of the appellant is concerned, the same is not in dispute. It is also not in dispute that the above income disclosed by the appellant is on the basis of undisclosed receipts of the appellant firm recorded in a small diary titled Astral Aquarisic found in 'Annexure BF8' at the .....

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that out of the disclosure of ₹1.75 crores made at the time of survey, the appellant has returned income of ₹1,57,96,800/-. The dispute is, therefore, only regarding an amount of ₹17,04,950/- claimed as deduction against the unaccounted income of ₹1.75 crore from undisclosed sources. The appellant's submission reproduced above in short is that in the statement recorded at the time of survey, the working partner stated that figures in pages 2,3 & 4 of the diary (A .....

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(b) of the Act, is allowable. I have duly considered the above submission of the appellant. In so far as section 40(b) of the Act is concerned, interest and salary to the partners are allowable from the income computed in the books of a/c. and not from the receipts which have not found entry in the books of a/c. In the statement recorded during the course of survey, the working partner admitted that an amount of ₹1.75 crore has been received in cash and not accounted for. The contention of .....

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ooks of a/c. It is, therefore, relevant to note that income of the appellant as unaccounted income disclosed during the course of survey is in the nature of 'deemed income'. The issue of head of 'deemed income' u/s69,69A,69B and 69C has since been considered on first principles in the Gujarat High Court decision in the case of Fakir Mohamed Haji Hasan Vs CIT (2001) 247 ITR 290 (Guj). The relevant observations of the High Court are extracted below:- "The scheme of section 69, .....

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ome of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per provisions of the Act, However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, .....

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scope for "deemed income" of the nature covered under the scheme of sections 69, 69A, 69B and 69C being treated separately, because such deemed is not income from salary, house property, profits and gains of business or profession, or capital gains nor is it income from "other sources" because the provisions of section 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion etc. and unexplained expenditure as deemed income where the nature and source o .....

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Act in view of the scheme of those provisions." From the aforesaid, it follows that such amounts assessed by virtue of the deeming provisions of section 68, 69, 69A, 69B and 69C also do not form part of book profit' as defined in Explanation-3 below section 40(b), which has to be computed under the head "profits and gains of business or profession." That being the case, such income will also not enter into the computation of the amount of interest and salary of partners allowa .....

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he Act" in section 14. It may be added that by an amendment made by the Finance (No.2) Act, 1998 with effect from 01.4.1999, inserting a proviso to section 69C, it has been specifically enjoined that any explained expenditure which is deemed to be income of the assessee u/s 69C shall not be allowed as a deduction under any head of income." The effect of the Gujarat High Court decision is that it applies the same principles imbibed in the proviso to section 69C to all sections in Chapte .....

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of Fakir Mohamed Haji Hasan(supra), which has also been relied upon by the Assessing Officer, I hold that against the deemed income of ₹1.75 crore assessed in the hands of the appellant, no deduction of whatsoever in nature is allowable. I, accordingly, uphold the assessment order and dismiss the ground of appeal taken by the appellant. 3.2. Aggrieved by the order of ld.CIT(A), assessee is now in appeal before us. 3.3. Before us, ld.AR reiterated the submissions made before the AO and ld.C .....

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and interest to partners. He further placed reliance on the decision of Hon ble Gujarat High Court in the case of CIT vs. Shilpa Dyeing & Printing Mills (P.) Ltd. reported in (2013) 39 taxmann.com 3 (Guj.) and submitted that the Hon ble Gujarat High Court after considering the decision in the case of Fakir Mohmed Haji Hasan Vs. CIT reported in (2001) 247 ITR 290 (Guj.) dismissed the appeal of the Revenue. He therefore submitted that assessee s claim for deduction of interest and salary to p .....

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fore the AO, assessee in the written submissions had stated that assessee-firm is engaged in only business of Green Plaza Project and it has only one source of income being construction activity. The aforesaid submission of the assessee has not been controverted by Revenue nor the Revenue has placed any material on record to demonstrate that assessee was having engaged in other than the business of construction. We find that the Coordinate Bench of Tribunal in the case of Shri Labdhi Prints in I .....

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