M/s. Pachchigar & Sons, Surat V. The ACIT.,Circle-3, Surat

ITA 1185/AHD/2010

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 67745 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 24-09-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 16-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K C MATHEWS SRDR
• Assessee Lawyers: M K PATEL
• Keywords: Capital asset; Business income; Business expenditure; Income from undisclosed sources
• Section: 133A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD BEFORE SHRI B. P. JAIN, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ITA NO. 1185/AHD/2010 A.Y: 2006 -07 M/S. PACHCHIGAR & SONS, 7, KHANDWALA ESTATE, NR. ASOPALAV, PARLE POINT ATHWALINES, SURAT. PAN: AAFFP2384K VS THE ACIT CIRCLE-3, SURAT. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.C. MATHEWS, SRDR ASSESSEE(S) BY : SHRI M.K. PATEL, A.R. DATE OF HEARING : 24/09/ 2013 DATE OF PRONOUNCEMENT : 27/09/2013 O R D E R PER SHRI B.P. JAIN, ACCONTANT MEMBER : THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER O F LEARNED CIT(A)-II, SURAT, DATED 15.12.2009 FOR THE ASSESSME NT YEAR 2006-07. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF THE AP PEAL, REPRODUCED AS UNDER: 1. THAT ON FACTS AND IN LAW, THE LEARNED CIT(A), H AS GRIEVOUSLY ERRED IN CONFIRMING THE DISALLOWANCE OF RS.2,01,620/- MADE U /S. 40A(2)(B) OF THE ACT. 2. THAT ON FACTS AND IN LAW, IT OUGHT TO HAVE BEEN HELD THAT THE PAYMENT OF REMUNERATION TO PARTNERS WAS ALLOWABLE IN FULL, AS PRAYED FOR. 3. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND ANY GROUND OF APPEAL. 2. THE BRIEF FACTS ARE THAT THE ASSESSEE HAD PAID R EMUNERATION TO PARTNERS AMOUNTING TO RS.7 LACS WHICH WAS HIGHER TH AN WHAT HAD BEEN PAID IN THE IMMEDIATELY PRECEDING YEAR. NO SUCH SUM WAS PAID UPTO THE DATE OF SURVEY CONDUCTED U/S. 133A IN ASSESSEES PR EMISES. THE AO, ITA NO.1185/AHD/2010 M/S. PACHCHIGAR & SONS VS. ACIT, SURAT. A.Y. 2006-07 - 2 - THEREFORE, TOOK THE VIEW THAT SUCH EXCESS REMUNERAT ION WAS PAID TO REDUCE THE IMPACT OF THE DISCLOSURE OF UNACCOUNTED INCOME OF RS.83,47,554/- MADE DURING COURSE OF SURVEY. WHEN ASKED TO EXPLAIN WHY THE EXCESS REMUNERATION PAID TO THE PARTNERS SHOULD NOT BE DIS ALLOWED, IT WAS SUBMITTED BY THE ASSESSEE THAT, FROM THE A.Y. 1993- 94, THE FIRMS INCOME HAD BEEN ASSESSED AFTER ALLOWING THE INTEREST AND R EMUNERATION PAYABLE TO THE PARTNERS. SUCH INTEREST AND REMUNERATION HAD BE EN SEPARATELY OFFERED FOR TAXATION IN THE INDIVIDUAL HANDS OF THE PARTNER S. THE FIRM HAD BEEN ALLOWED TO TREAT SUCH REMUNERATION AND INTEREST TO PARTNERS AS ITS BUSINESS EXPENDITURE. THE AO REJECTED THE ASSESSEES SUBMISS ION AND OBSERVED THAT THE REMUNERATION DEBITED WAS VERY MUCH IN EXCE SS OF WHAT NORMALLY SHOULD HAVE BEEN PAID. SUCH EXCESS REMUNERATION WAS PAID IN ORDER TO REDUCE THE TAX LIABILITY ARISING OUT OF THE DISCLOS URE MADE DURING THE SURVEY. THE AO THUS WORKED OUT THE ADMISSIBLE SALAR Y U/S. 40(B) AT RS.4,98,380/-, AND CONSEQUENTLY DISALLOWED THE BALA NCE SUM OF RS.2,01,620/- UNDER THE PROVISIONS OF SEC. 40A(2)(B ) OF THE IT ACT. LEARNED CIT(A) HAS CONFIRMED THE ACTION OF THE AO. 3. LEARNED COUNSEL FOR THE ASSESSEE INVITED OUR ATT ENTION AT PAGE 4 OF THE AOS ORDER WHERE THE ASSESSEE HAS DECLARED THE UNDISCLOSED STOCK AS WELL AS CASH, WHICH WAS GENERATED FROM ROUTINE BUSI NESS ACTIVITY, IN THE REGULAR COURSE OF BUSINESS. THE SAID STOCK AND CASH DECLARED HAS BEEN CLAIMED AS A BUSINESS INCOME IN THE P & L ACCOUNT. THE SAID STOCK AND CASH WERE FOUND FROM THE BUSINESS PREMISES. THERE I S NO OTHER ACTIVITY CARRIED OUT BY THE ASSESSEE AND THE DEPARTMENT HAS NOT BROUGHT ANY OTHER ACTIVITY ON RECORD OTHER THAN THE BUSINESS CARRIED ON BY THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED UPON TH E DECISION OF ITAT C ITA NO.1185/AHD/2010 M/S. PACHCHIGAR & SONS VS. ACIT, SURAT. A.Y. 2006-07 - 3 - BENCH AHMEDABAD IN ITA NO.3258/AHD/2011, DATED 18.5 .2012 WHEREIN ON IDENTICAL ISSUES THE LEARNED CIT(A) HAS ALLOWED THE REMUNERATION TO PARTNER U/S. 40(B) OF THE IT ACT AND THE ITAT C B ENCH AHMEDABAD HAS DISMISSED THE APPEAL OF THE REVENUE IN PARAGRAPH 8 TO 13 OF THE ORDER. LEARNED COUNSEL ALSO RELIED UPON THE JUDGMENT OF TH E HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF DCIT VS. RADHEY DEVELOPERS INDIA AS REPORTED IN 329 ITR 1 (GUJ) . 4. LEARNED DR, ON THE OTHER HAND, RELIED UPON THE O RDER OF THE AUTHORITIES BELOW AND INVITED OUR ATTENTION AT PAGE 3 AND 4 OF THE AOS ORDER IN PARAGRAPH 4.3 WHEREIN THE AO HAS RELIED UP ON THE DECISION OF HONBLE ITAT AHMEDABAD IN THE CASE OF M/S. WHITELIN E CHEMICALS VS. ITO WARD 2(1), SURAT, DATED 30.8.2005 IN ITA NO.350 9/AHD/2004 AND ITA NO.3759/AHD/2004 FOR A.Y. 2001-02. LEARNED DR H AS FURTHER RELIED UPON THE DECISION OF VARIOUS COURTS OF LAW. 5. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE SIDES AND PERUSED THE FACTS OF THE CASE. THE ASSESSEE IS ENGAGED IN T HE MANUFACTURING OF GOLD, SILVER, DIAMOND JEWELLERY AND OTHER ITEMS. TH E SURVEY ACTION U/S. 133A WAS CARRIED OUT ON THE ASSESSEE AND THE ASSESS EE HAS MADE A DISCLOSURE OF RS.83,47,554/-. THE AO HAS OBSERVED T HAT THE ASSESSEE HAS PAID REMUNERATION TO THE PARTNERS OF RS.7 LACS WHIC H IS HIGHER AS COMPARED TO THE PRECEDING YEAR. THE ASSESSEE MADE T HE EXPLANATION WHICH WERE CONSIDERED BY THE AO BUT THE EXPLANATION OF TH E ASSESSEE WAS NOT ACCEPTED AND ACCORDINGLY THE AO ADDED BACK RS.7 LAC S SALARY PAID TO THE PARTNERS TO THE BOOK PROFIT AND ALLOWED SALARY U/S. 40(B) AMOUNTING TO RS.4,98,380/- THUS DISALLOWING THE BALANCE SUM OF RS.2,01,620/-. THE ITA NO.1185/AHD/2010 M/S. PACHCHIGAR & SONS VS. ACIT, SURAT. A.Y. 2006-07 - 4 - ASSESSEE HAS SUBMITTED THAT HE HAS DECLARED THE UND ISCLOSED STOCK AS WELL AS CASH WHICH WAS GENERATED FROM ROUTINE BUSINESS A CTIVITY IN THE REGULAR COURSE OF BUSINESS AND THE SAME WAS FOUND ONLY FROM THE BUSINESS PREMISES WHICH WAS NOT RECORDED IN THE BOOKS OF ACC OUNT REGULARLY MAINTAINED AT THE BUSINESS PREMISES. THERE IS NO OT HER EVIDENCE THAT THE FIRM HAS EARNED SUCH INCOME BY SALE OF ANY CAPITAL ASSET OR THROUGH ANY OTHER SOURCE OF INCOME. THE SAID CONFIRMATION WAS M ADE BY THE ASSESSEE ON THE DATE OF SURVEY BY STATEMENT RECORDED. IN THI S REGARD, REVENUE HAS NOT CONTROVERTED THE SAID EXPLANATION OF THE ASSESS EE AND NO ADVERSE MATERIAL HAS BEEN BROUGHT ON RECORD THAT THE ASSESS EE HAS EARNED THE INCOME FROM ANY OTHER SOURCE. IN THE CIRCUMSTANCES AND FACTS OF THE CASE, CASES RELIED UPON BY THE AO AND THE LEARNED CIT(A) CANNOT HELP THE REVENUE. ON IDENTICAL ISSUE, THE MATTER HAS BEEN DE ALT BY ITAT C BENCH AHMEDABAD IN THE CASE OF DCIT VS. M/S. SHREE LABDHI PRINTS, DATED 18.5.2012. FOR THE SAKE OF CONVENIENCE, THE DECISIO N OF ITAT C BENCH AHMEDABAD IN THE CASE OF M/S. SHEE LABDHI PRINTS IN PARAGRAPH 8 TO 13, IS REPRODUCED AS UNDER: 4. SUBSEQUENTLY THE CASE WAS REOPENED FOR THE REASON THAT IT WAS NOTICED BY THE AO THAT DESPITE HAVING NEGATIVE BOOK PROFITS OF RS.17,69,534/-, REMUNERATION OF RS.10,00,000/- WAS ALLOWED TO PARTNERS. ACCORDING TO AO, AS PER THE PROVISIONS OF SECTION 40(B), THE REMUNERATION TO PARTNERS OF THE FIRM IS PERMITT ED FROM THE NET PROFITS OF THE FIRM. ACCORDING TO THE AO THE PROFIT HAS ARISEN OUT OF THE DISCLOSURE MADE BY THE ASSESSEE U/S. 133A. ACCO RDING TO THE AO WHEN THE SOURCE OF ANY INCOME WAS NOT KNOWN THE INCOME HAS TO BE CLASSIFIED UNDER THE HEAD OF OTHER SOURCES AN D NO UNDER THE HEAD OF BUSINESS AND PROFESSION. ACCORDING TO HIM, IF THE INCOME DECLARED DURING THE SOURCE OF SURVEY IS EXCLUDED FR OM THE BUSINESS INCOME, THE NET PROFIT OF THE FIRM WAS NEGATIVE, AN D THEREFORE NO REMUNERATION TO PARTNERS AS ENVISAGED U/S. 40(B) WA S ALLOWABLE. THE AO VIDE ORDER DATED 31.7.2008 PASSED U/S. 143(3 ) R.W.S. 147 DISALLOWED THE AFORESAID REMUNERATION AND DETERMINE D THE TOTAL ITA NO.1185/AHD/2010 M/S. PACHCHIGAR & SONS VS. ACIT, SURAT. A.Y. 2006-07 - 5 - INCOME AT RS.73,68,780/-. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE CIT(A). BEFORE CIT (A) THE ASSESSEE CONTENDED THAT BASED ON THE DOCUMENTS FOUN D FROM THE PREMISES OF THE ASSESSEE, DISCLOSURE WAS MADE UNDER THE HEAD INCOME FROM BUSINESS. ONCE IT IS CONSIDERED AS BUSI NESS INCOME THEN THE REMUNERATION TO PARTNERS HAS TO BE COMPUTE D AFTER TAKING IT INTO CONSIDERATION. FOR THIS PROPOSITION HE RELI ED ON THE DECISION OF CIT & ANR. VS. S.K. SRIGIRI & BROS (2008) 20 (I) ITCL 248 (KAR HC), HOTEL KUMAR PALACE VS. DCIT (2005) 93 TTJ (A SR) 629 AND OTHER DECISIONS. CIT VIDE ORDER DATED 22.8.2011 ALLOWED THE APPEAL OF THE ASSESSEE BY HOLDING THAT WHEN ONCE TH E ADDITIONAL INCOME OFFERED FOR TAXATION DURING THE SURVEY IS AC CEPTED AND IT HAS BEEN EXPLAINED BUSINESS AS THE SOURCE OF ADDITI ONAL INCOME THEN THERE IS NO BAR IN THE ACT FROM CLAIMING PARTN ERS REMUNERATION FROM SUCH ADDITION BUSINESS INCOME OFF ERED FOR TAXATION. 5. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE IS NOW IN APPEAL BEFORE US. BEFORE US THE LD. D.R. STATED THAT THE ASSESSEE FIR M MADE DISCLOSURE UNDER THE FOLLOWING UNDER:- INVESTMENT IN FDR 48,00,000 ON MONEY PAID FOR AGAM ROW HOUSE 22,00,000 MACHINERY 23,79,225 STOCK 4,01,580 UNRECORDED CASH 4,25,000 6. THE ASSESSEE HAD OFFERED THE SAME AS BUSINESS IN COME BUT SOURCE OF THE SAME WAS NOT KNOW AND ALSO INCOME WAS NOT DECLARED UNDER ANY HEAD OF REGULAR PROFIT AND LOSS ACCOUNT. AS PER THE PROVISIONS OF SECTION 40(B), A PARTNER OF THE F IRM WOULD BE ALLOWED REMUNERATION FROM THE BUSINESS PROFIT DECLA RED BY THE ASSESSEE FOR THE PARTICULAR YEAR AND FOR DETERMININ G THE BOOK PROFITS FOR THE PURPOSE OF DETERMINING THE REMUNERA TION THE INCOME DISCLOSED DURING SURVEY U/S 133 A CANNOT BE CONSIDE RED AS PART OF THE BUSINESS PROFITS. ACCORDINGLY, THE LD. DR. URGE D THAT THE ORDER OF AO BE SUSTAINED. 6. IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CA SE AND THE DECISION PRONOUNCED REFERRED TO IN THE ORDER OF ITAT C BEN CH AHMEDABAD IN THE ITA NO.1185/AHD/2010 M/S. PACHCHIGAR & SONS VS. ACIT, SURAT. A.Y. 2006-07 - 6 - CASE OF M/S. SHREE LABDHI PRINTS (SUPRA), WE ARE OF THE VIEW THAT ADDITIONAL INCOME FOR TAXATION DURING THE COURSE OF SURVEY IS ACCEPTED AS BUSINESS INCOME OF THE ASSESSEE AND THERE IS NO BAR IN THE ACT FROM CLAIMING PARTNERS REMUNERATION ON SUCH ADDITIONAL B USINESS INCOME. ACCORDINGLY, WE REVERSE THE ORDER OF THE LEARNED CI T(A) AND DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE. HENCE, THE G ROUNDS OF THE ASSESSEE ARE ALLOWED. IN THE RESULT THE APPEAL OF THE ASSESSEE IN ITA N O.1185/AHD/2010 IS ALLOWED. SD/- SD/- (KUL BHARAT) ( B.P. JAIN) JUDICIAL MEMBER ACCOUNTANT MEMBE R AHMEDABAD; DATED 27/09/2013 PRABHAT KR. KESARWANI, SR.P.S. TRUE COPY COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. CONCERNED CIT 4. THE CIT(A)-III, AHMEDABAD 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, (DY./ASSTT.REGISTRAR) ITAT, AHMEDABAD