Addition u/s 69 for discrepancies in stocks was business income to be considered for computing partners remuneration under Section 40(b)

In a recent judgment, ITAT Chennai has upheld that Addition u/s 69 for discrepancies in stocks was business income and has to be considered for computing partners remuneration under Section 40(b)

Case Law Details:
ITA No.393/Mds/2013 Assessment Year : 2009-10
Income Tax Officer vs. M/s Roshan
Date of Order/Judgment: 07/04/2016

Brief Facts of the Case:
A  survey was conducted at the premises of the assessee. During the course of survey operation, physical inventory of stock was taken. The assessee was not maintaining any stock register and the details of closing stock as on 01.04.2008 were also not available. During the assessment proceeding, the assessee filed the Profit & Loss account for the year ending 31.03.2008 and also the balance sheet as on 31.03.2008 disclosing the closing stock.  When called upon to reconcile the value of inventory found during the course of survey operation, the assessee offered a sum of Rs. 30 lakhs as additional income for the discrepancies in the stock. The additional income offered by the assessee was assessed under Section 69 of the Income-tax Act, 1961 as unexplained investment in the stocks. The assessee had claimed remuneration for the partners in the book profit under Section 40(b). The AO held that additional income offered u/s 69 could not form part of book profit for the purpose of computing partners’ remuneration.

However, on appeal by the assessee, the CIT(Appeals) found what was offered by the assessee is as income and not as stock. Therefore, the additional income offered by the assessee during the course of survey operation, which was taken as unexplained investment under Section 69 of the Act, had to be taken as business income and the partners’ remuneration has to be allowed under Section 40(b).

Revenue ‘s Contention:
Unexplained investment u/s 69 of the Act could not form part of income referred to in Section 28 of the Income Tax Act, 1961. It also does not form part of Chapter IV-D of the Act. Section 69 forms part of Chapter VI of the Act, therefore, inclusion of additional income offered on the discrepancies of the stock cannot form part of book profit for the purpose of computing partners’ remuneration u/s 40(b). AO further held that there was no evidence to indicate that the additional income offered was generated in the course of business transactions. Therefore, the additional income offered could not be treated as business income for the purpose of computing book profit. Consequently, the same cannot be considered for allowing the partners’ remuneration.

AO contended that what was offered by the assessee was money. However, the source for generating money was not explained either before the Assessing Officer or before the CIT(Appeals). Therefore, CIT(A) order in treating the additional income as business income for the purpose of computing partners’ remuneration was not justified.

Assessee’s Contentions:
The assessee contended that the firm had no other source of income other than the business of the firm. The business of the firm had generated income which was invested in the stocks. Therefore, the assessee offered a sum of Rs. 30 lakhs for taxation just to avoid prolonged litigation.

Excerpt from ITAT Judgment:

It is nobody’s case that the partners have introduced any unaccounted money in the accounts of the partnership firm. The partnership firm could generate income only from its business. Therefore, the income of the partnership firm may be either from the transactions accounted in the books of account or in respect of the transactions which were not recorded in the books of account. Whatever may be the nature of transaction, whether it is recorded in the books of account or not recorded in the books of account, the source of generating additional income for investing in the stocks of the assessee is only the business transactions. Other than the business transactions, the assessee has no other source of income. Since the assessee has offered additional income of Rs. 30 lakhs when the discrepancies found in the stocks, the same was classified as unexplained income under Section 69 of the Act. This does not mean that the income was not generated from the business. This Tribunal is of the considered opinion that the income was generated in the business of the assessee-firm, therefore, it has to be necessarily considered for computing the remuneration of the partners under Section 40(b) of the Act.