Partners remuneration / interest on capital allowable from estimated profit. ITAT allows deductions following decision of Jurisdictional High Court
ABCAUS Case Law Citation:
ABCAUS 3212 (2019) (12) ITAT
Important case law relied upon by the parties:
Vijay Constructions 213 CTR 105
M/s B. Durga Reddy & Co.
M/s. K. Venkata Raju, Rajahmundry
In the instant case, appeal was filed by assessee against the order of CIT(A) in not allowing the claim of interest on capital and remuneration to partners from the assessed income.
A survey operation was conducted at the business premises of the assessee. In the aftermath of survey, the assessee declared net profit @ 8% of gross turnover, over and above the returned income as per return filed.
During the course of scrutiny assessment proceedings, the assessee was confronted with the impounded documents pursuant to which the assessee filed detailed reconciliation statement and explained that the cash expenses below the permissible limit of Rs. 20,000/- made out of imprest accounts for various construction sites.
However, the Assessing Officer was not impressed with the reconciliation statement and rejected the book results as well as the books of account of the assessee. The Assessing Officer proceeded to complete the assessment by adopting 8% of gross turnover as net profit and made addition accordingly.
The assessee carried the matter before the CIT(A) and claimed interest on capital and remuneration paid to partners as per partnership deed. However, the claim of the assessee was denied by the CIT(A) who was of the opinion that since profit has been estimated on gross receipts after survey u/s 133A of the Act, the assessee is not entitled for any further deduction.
Before the Tribunal the assessee stated that the claim of interest on capital and remuneration to partners was as per partnership deed, which was in line with the provisions of section 40B of the Act and, therefore, the assessee was entitled for claim of deduction.
On the contrary, the Revenue strongly supported the findings of the Assessing Officer. It was contended that once profit is estimated , all these expenses are deemed to be allowed and, therefore, no further deduction should be allowed to the assessee.
The Tribunal observed that the Hon’ble High Court of Allahabad had the occasion to consider an appeal where the books of account were rejected and best judgment assessment was made u/s 144 of the Income Tax Act, 1961 (the Act).
The Hon’ble High Court had held that the statutory deductions which are available to the assessee firm could not be taken away or snatched away from the firm merely because their books of account had been rejected and best judgment assessment had been made.
The Tribunal also observed that the Coordinate Bench of the Tribunal had also held that interest on partner’s capital account and remuneration to partners was allowable deductions even after estimation of net profit on gross receipts.
Accordingly, following the decision of the Hon’ble Jurisdictional High Court and that of the co-ordinate bench, the Tribunal directed the Assessing Officer to allow remuneration to the partners and interest on capital as per provisions of law.
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