INCOME TAX APPELLATE TRIBUNAL AHMEDABAD ‘’C” BENCH – AHMEDABAD

ITA No.270/Ahd/2013 Asst. Year: 2007-08
Mona Developers (Appellant) vs. Income-tax Officer (Respondent)
Date of Order: 04-01-2015

ORDER

PER Manish Borad, Accountant Member.
This appeal of the assessee is directed against the order of CIT(A) IV, Baroda dated 6.11.2012 for Asst. Year 2007-08. Assessment order was framed u/s 143(3) of the I.T. Act, 1961 (in short the Act) by ITO Ward -2, Bharuch on 29/12/2009. Grounds of appeal raised are from ground no.1.1 to 1.4. But the effective ground is that the ld. CIT(A) has erred in upholding the order of Assessing Officer with regard to the amount of addition of Rs.1,30,138/- on account of interest paid to partners and Rs.1,43,160/- on account of remuneration paid to partners.

2. Briefly stated facts are that the assessee is a partnership firm engaged in the business of construction of residential houses and commercial shops. Assessee filed its return of income on 31.3.2009 declaring total income of Rs.83,493/-. The case was selected for scrutiny assessment and assessment proceedings were initiated by Assessing Officer by issuing notice u/s 143(2) of the Act on 20.8.2009. In the case of assessee survey under section 133 A of the Act was carried out at the business premises of the firm on 22.2.2007 and Rs.1,91,000/- was declared as unaccounted business income by the assessee. This unaccounted income was disclosed by the assessee in profit and loss account. However, during the year under appeal assessee claimed Rs.1,30,138/- towards interest paid to partners and Rs.1,43,160/- towards remuneration to partner. However, the assessing officer did not allow the claim of assessee for interest and remuneration paid to partner by treating that Rs.1,91,000/- being unaccounted cash was not part of the book profit.

3. Aggrieved, assessee went in appeal before the CIT(A) who upheld the order of Assessing Officer. Aggrieved, the assessee is now in appeal before the Tribunal.

4. The ld. AR submitted that the assessee firm has surrendered business income and a partner is entitled to interest and remuneration from business income and to support his submissions relied on the decision of the Tribunal in the case of DCIT vs. M/s Om Terrace in ITA No.440/Ahd/2012 pronounced on 11.5.2012.

5. The ld. DR supported the orders of lower authorities.

6. We have heard the rival contentions and perused the material on record. The only issue for adjudication is whether the assessee firm is eligible to claim deduction of interest paid to partner in a situation when it has surrendered remaining undisclosed business income during the survey proceedings u/s 133A of the Act. From going through the order of the Co-ordinate Bench in the case of DCIT vs. M/s Om Terrace in ITA No.440/Ahd/2012 we find that similar issue has been decided by the Tribunal in favour of assessee in granting deduction in respect of salary worked out as per provisions u/s 40(b) of the act in accordance with the partnership deed from the undisclosed income disclosed during survey proceedings, vide order dated 11.5.2012, by observing as under :-

“5. We have heard the rival submissions and perused the materials on record. The facts of the case are that one of the partners of the appellant had agreed during the course of survey that the firm was in receipt of income to the extent of Rs.65 lacks which were not accounted. Subsequently, the firm had disclosed this amount in its profit & loss account, but had debited the profit & loss account with salary paid to the partners to the extent of Rs.52,25,613/- worked out as per the partnership deed of the firm and in accordance with the provisions of section 40(b) of the Act. The learned AO disallowed an amount of Rs.23,98,795/- by holding that the amount of Rs.65,00,000/- disclosed during the course of the survey to be treated separately as ' deemed income' and the allowable salary to be worked out on the balance profit in accordance with the partnership deed and provisions of 40(b) of the Act. At the outset, we must say that this issue is squarely covered by the decisions rendered by ITAT Ahmedabad Benches in the following two cases-(i) ITA No.556/Ahd/2008 dated 05-06-2009 - M/s.Arihant Enterprise Vs DCIT, Cir-3, Surat wherein it was held by the ITAT Ahmedabad "D" Bench as under:

"7.3 The Id. CIT(A) in the impugned order has also drawn support from a decision of the ITAT in the case of Whiteline Chemicals (supra) holding that income which is disclosed in course of the survey would have to be shown in the return in addition to normal current year's profit and concluded that the assessee could not have credited the sum to the profit and loss account and claimed deduction by way of remuneration to partners. We are not inclined to accept this conclusion of the Id. CIT(A) since the partner of thb firm clearly stated in his statement during the course of survey that the amount of undisclosed income of Rs.65 lacs has been generated on account of extra work done by the firm, over and above the specification given for the construction of row houses and onmoney received on sale of plots while booking the row house and sale of land on behalf of the landlord. There is no material before us controverting the averments in the said statement. Once the amount has been assessed as business income, remuneration admissible to partners in terms of the partnership deed has to be allowed in accordance with and within the limits stipulated under the provisions of sec. 40(b) of the Act.

7.4 However, we find that the AO disallowed remuneration paid to Smt. Jignaben M. Shah, inter alia on the ground that she is not a "working partner". The Id. CIT(A) has not recorded any findings on this aspect nor the Id. AR on behalf of the assessee placed before us any material suggesting that Smt. Jignaben M Shah is actively engaged in conducting the affairs of the business of the firm. Even a copy of partnership deed has not been placed before us. Since, in terms of the provisions of sec. 40 (b) of the Act, deduction on account of remuneration to a working partner alone is admissible in terms of the stipulations in partnership deed subject to the limits prescribed in the aforesaid provisions, we have no alternative but to restore the issue of deduction of remuneration to Smt. Jignaben M Shah to the file of the AO with the directions to allow sufficient opportunity to the assessee to establish that Smt. Jignaben M Shah is a working partner within the meaning of explanation 4 to sec. 40(b) of the Act and thereafter dispose of the matter in accordance with law.

7.5 In view of the foregoing and subject to our directions in Para 7.4 above, we set aside the impugned orders of Revenue authorities and direct the Assessing Office to allow deduction of remuneration to partners in terms of provisions of sect. 40(b) of the Act without having recourse to provisions of sec. 40(2) (a) of the Act. With these observations, ground no. 1 is disposed of."

(ii) ITA No. 1901/Ahd/2009 dated 25-09-2009 - Shree Khodiyar Corporation Vs ACIT, Cir-3, Surat ITAT Ahmedabad "D" Bench on an identical issue held as under:

"3. In further appeal before us, the assessee has placed reliance on the order of the Ahmedabad "D" Bench in ITA N0.556/AHD/2008 (AY2004-05), dated 5-6-2009 in the case of M/s. Arihant Enterprise, Surat Vs DCIT to contend that the view taken by the income-tax authorities is wrong. From the copy of the order placed before us, we find that in Paragraph 7.2 of the order the Tribunal has considered the issue. The Tribunal has referred to the judgment of the Hon'ble Gujarat High Court in Yoganand Textiles (2002 ITR 869) and the earlier order of the Ahmedabad Bench in the case of Chhajed Steel Corporation (69 TTJ 232) and held that "we have no hesitation in holding that the Assessing Officer does not have any power to go into the question of reasonableness of remuneration paid to a working partner while examining as to whether or not the remuneration paid exceeds the limits prescribed in sec. 40(b) of the Act This view of ours is supported by the decision of a co-ordinate Bench in the case of Chhajed Steel Corporation (supra)". In this view of the matter, the Tribunal accepted the contention of the assessee, which is the same as in the present case, and decided the issue in favour of the assessee."

6. Since our coordinate Benches had decided the issue of granting deduction in respect of salary worked out as per the provisions of Section 40(b) of the Act and in accordance with the partnership deed from the undisclosed income disclosed during the course of survey considering the same as business income as cited in the decisions supra, we do not have any hesitation to uphold the decision of the learned CIT(A) in this case before us because the facts are identical. It is ordered accordingly.”

As the facts of the present appeal are similar to the facts decided in the above referred decision of the Co-ordinate Bench and is squarely covered in favour of the assessee, therefore, we do not have any hesitation to delete the addition made by Assessing Officer and quash the orders of lower authorities. The ground raised by the assessee is allowed.

7. In the result, the appeal filed by the assessee is allowed.

Order pronounced in the open Court on 4th January, 2016

(Rajpal Yadav)         (Manish Borad)
Judicial Member      Accountant Member