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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N.V. VASUDEVAN & Ms. PADMAVATHY S
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : BANGALORE BEFORE SHRI N.V. VASUDEVAN, VICE PRESIDENT AND Ms. PADMAVATHY S, ACCOUNTANT MEMBER
ITA No.717/Bang/2021 Assessment year : 2015-16
M/s. Karnataka Hitech Agro Vs. The Principal Commissioner of Enterprises, Income Tax, M-5, M-6, KSSIDC Shed, Hubli. Hatalageri Road Extension, Gadag – 582 101. Karnataka. PAN: AADFK 5365P APPELLANT RESPONDENT
Appellant by : Shri Ramaraju N., Advocate Respondent by : Shri K. Sankar Ganesh K., Jt.CIT(DR)(ITAT), Bengaluru.
Date of hearing : 05.12.2022 Date of Pronouncement : 08.12.2022 O R D E R Per Padmavathy S., Accountant Member This appeal is against the order of the Principal Commissioner of Income Tax, Hubballi [PCIT] passed u/s.263 of the Income Tax Act (the Act) 1961 for the assessment year 2015-16 dated 11.03.2020.
The assessee raised the following ground :–
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“1. The order passed by the learned Principal Commissioner of Income-Tax is against to the Appellant is bad in law and contrary to the settled principles of law. 2. The Appellant denies itself liable to be taxed in excess of returned income as assessed and accepted by the learned assessing officer under the facts and circumstances of the case. 3. The learned Principal Commissioner of Income-Tax is not justified in exercising the powers conferred under section 263 of the Act in the absence of mandatory twin precedent conditions under the facts and circumstances of the case. 4. The learned Principal Commissioner of Income-Tax erred in law in exercising the power conferred under section 263 of the Act, in view of specific application of mind on the issue of revision during the assessment and rectification proceedings by the learned Assessing Officer under the facts and circumstances of the case. 5. The learned Principal Commissioner of Income-Tax erred in law in exercising the powers under section 263 of the Act as against the assessment order under section 143(3) of the Act, without taking cognizance of the subsequent rectification proceedings initiated and dropped under the provisions of section 154 of the Act under the facts and circumstances of the case. 6. The learned Principal Commissioner of Income-Tax erred in law in exercising the revisionary powers under section 263, without independent application of mind and further erred in exercising the said powers at the instance of proposal from other person in a mechanical manner under the facts and circumstances of the case. 7. The learned Principal Commissioner of Income-Tax erred in law in exercising the revisionary powers under section 263, in the absence of specific addition under the provisions of section 68, 69, 69A, 69B, 69C, 69D of the Act, under the facts and circumstances of the case.
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The learned Principal Commissioner of Income-Tax is not justified in substituting his view of taxing the declaration during survey under the head - Income from other sources, with that of the view adopted by the learned Assessing Officer i.e., taxing the said sum under the head - Income from Business on the facts and circumstances of the case. 9. The learned Principal Commissioner of Income-Tax erred in law in directing the learned Assessing Officer to deny the Appellant, the deduction of Rs.1,26,19,839/ - claimed on account of remuneration to partners under the facts and circumstances of the case. 10. The learned Principal Commissioner of Income-Tax erred in law in not appreciating that the remuneration of Rs.1,26,19,239/- was offered to tax in the individual hands of the partners of the Appellant firm as per the scheme of the statute and the subject matter of revision was much less of prejudicial to the interest of the revenue under the facts and circumstances of the case. 11. Without prejudice the learned Principal Commissioner of Income-Tax erred in law in not appreciating that, in view of the provisions of section 155 of the Act, the act of revision instant case was much less of prejudicial to the interest of the revenue under the facts and circumstances of the case. 12. Without further prejudice the learned Principal Commissioner of Income-Tax erred in law in not directing the learned Assessing Officer to provide the Appellant as well as it's partners the benevolence under the provisions of section 155 of the Act under the facts and circumstances of the case. 13. Without further prejudice the learned Principal Commissioner of Income-Tax erred in law in not directing the learned Assessing Officer to provide the Appellant with the credit of tax as discharged by the partners of the Appellant in their individual hands as computed against the
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remuneration from the appellant firm under the facts and circumstances of the case. 14. The Appellant craves leave to add, alter, amend, modify, substitute or delete any of the grounds urged above. 15. In the view of the above and other grounds that may be urged at the time of the hearing of the appeal, the Appellant prays that the appeal may be allowed in the interest of justice and equity.” 3. The assessee is a partnership firm and is in the business of production and marketing of sowing seeds such as Maize, Bengal Grams and Green Gram. The assessee filed the return of income for AY 2015-16 on 30.09.2016 declaring a total income of Rs.82,63,305. The case was selected for scrutiny under CASS and the statutory notices were duly served on the assessee. The AO completed the assessment u/s.143(3) after making certain disallowances to the tune of Rs.80,000.
There was a survey in the premises of the assessee on 20/03/2015. During the course of survey the partner of the firm offered a sum of Rs.2,00,50,750 as undisclosed income which consisted of Rs.1,83,76,500 towards the difference in advance against stock and Rs.16,74,250 towards advances to farmers. The PCIT noticed from the assessment records that the assessee has claimed expenditure against the declared income of Rs.2,00,50,750 and offered only the net income of Rs.82,63,305 to tax. The PCIT held that as per the provisions of section 115BBE(2) no deduction should be allowd against the unexplained income and therefore the amount claimed as remuneration
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to partners for Rs.1,26,19,840 should have been disallowed. The PCIT issued a show cause notice to the assessee in this regard u/s.263. The assessee filed a reply stating that the income declared during the course of survey is from the business of the assessee and the same is recorded in the books of accounts of the assessee. Accordingly the assessee had claimed the remuneration to partners as per the partnership deed by including the income declared as part of ‘book profits’ for the purpose of section 40(b). The PCIT did not accept the contentions of the assessee and passed an order u/s.263 by holding that the AO ought to have denied the deduction of expenditure claimed towards partners’ remuneration for Rs.1,26,19,839 and should have brought the entire amount declared to tax as per provisions of section 115BBE. To this extent the PCIT was of the view that the order of the AO is erroneous and prejudicial to the interest of the revenue and accordingly set aside the order u/s.143(3) for fresh assessment. Aggrieved the assessee is in appeal before the Tribunal.
The ld AR submitted that the amount was declared as part of survey proceedings where some discrepancies were noticed in the advances received from farmers towards stock. In this regard the ld AR drew our attention to question number 8 and question number 12 of the statement recorded on 17.04.2015 (page 54 of paper book). The ld AR submitted that the details with regard income declared during survey was enquired by the AO during the assessment proceedings by raising the specific query as part of notice u/s.142(1). The assessee had in response filed the relevant details with regard to the income declared
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and the tax returns of the partners were submitted to substantiate that the expenses claimed in the books of accounts of the assessee has suffered tax in the hands of the partners. The ld AR further submitted that the AO has issued a notice u/s.154 for the reason that the income declared ought to have been taxed u/s.115BBE (page 149 of paper book) to which the assessee had filed a response. However the AO did not pass any order u/s.154. The assessee vide letter dated ………... had enquired the status of section 154 proceedings and the AO had replied saying that the issue under consideration being debatable cannot be rectified u/s.154 and that section 263 proceedings have been intiated by the PCIT. For this reason the AO stated that the proceedings u/s.154 have been dropped.
It is the contention of the ld AR that during the proceedings u/s.143(3) after verifying the details called for the AO has made a conscious decision after applying his mind not to make any addition/disallowance. The AO himself has dropped the proceedings u/s.154 stating that the issue is debatable and therefore section 263 cannot be invoked. The ld AR made an alternate submission by stating that as per the letter dated 11.11.2021 (Pg. 151 of PB) states that the reference has been made for proceedings u/s.263 and that the proceedings initiated based on AOs reference is not valid. In this regard the ld AR relied on the decision of the Ashish Prasannakumar Jain v. PCIT, ITA No.466/B/2020. The ld AR also submitted that when the issues is debatable as admitted by the AO himself there cannot be any initiation of u/s.263. The ld AR further submitted that there is no
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loss to the revenue by allowing the partner’s remuneration in the hands of the firm since the rate of tax u/s.115BBE for the year under consideration and the rate at which the partner’s have paid tax is same.
The ld DR submitted that the contention that section 263 proceedings were initiated based on AO recommendation is not correct since the PCIT in the order u/s.263 has clearly stated that he has perused the assessment records and accordingly invoking the provisions of revision u/s.263. The ld DR also submitted that the amount disallowed being revenue neutral is not the issue here but the allowability of expenses claimed against the income declared in a survey proceeding. The DR further submitted that the mention by the AO about the issue being debatable is not with respect to whether the partner’s remuneration is allowable are not but with respect to whether the issue is a mistake apparent on record is debatable to rectify u/s.154. So it cannot be held as a basis for contending that section 263 is not applicable. It is submitted by the ld DR that though the assessee has submitted the survey related details before the AO, there has not been any further enquiry done by the AO and that the order also does not speak about enquiry and the decision to accept assessee’s claim. In this regard the ld DR relied on the order of the coordinate bench of the Tribunal in the case of Shri Navunda Abdulla Badruddin vs PCIT (ITA No.508/Bang/2022).
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We heard the rival submissions and perused the material on record. The impugned amount declared during the survey proceedings is emanating from the response given by the partner of the assessee to question number 8 and question number 12. The relevant extract is reproduced below:-
“8. Please go through the Agam Duplicate Book marked KHAE/01 impounded during the survey and explain the transactions noted therein. Ans: I have gone through the Agam Duplicate Book marked KHAE/01. This book contains the details of the goods arrivals of Bengal gram made from the farmers during the period from 13-02-2015 to 19-03-2015. As stated earlier the samples of the seeds supplied by the farmers are sent for germination tests and only after the test results are received, the firm makes purchases from the farmers for the sowing seeds supplied by them. However, tie farmers start insisting for advance payments right from the date of supply of parent seeds for sowing to the date of certification. As we have to retain these farmers with us and to ensure that they send their produce to us on y, out of our own resources advances are given to these armers. This book has 85 pages written and contains the details of such advances given to the farmers and the total of such advance given as per this book is Rs. 1,83,76,500/-. Q.No.12 Please go through the loose sheet bundle marked KHAE/09 impounded during the survey and explain the contents of the same. Ans : I have gone through the loose sheet bundle marked KHAE/09. Pages 01 to 25 are the copies of the receipts from Shri Sai Warehouse services for the goods kept in their premises. As admitted by me in my statement earlier, these stock contain portion of the unprocessed Bengal gram seeds on which advances are made and admitted by me as my undisclosed income. Pages 26 to 58 contain details of the
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names of the farmers, ledger account nos., etc. Pages 59 and 60 contain details of the advances made to some other farmers for pesticides, etc. during this year for the cultivation of sowing seeds. These advances made are in addition to the farmers whose produce is received by the firm and total to Rs.16,74,250/-. To overcome all these omissions and commissions, I agree to offer these advances given to the farmers totaling to Rs.16,74,250/- during the current financial year and not recorded in the books of account as the additional income of the firm for current F.Y. relevant to the A.Y. 2015-16 and agree to pay the taxes thereon.” 9. The PCIT has come to the conclusion that the order of the AO is erroneous and prejudicial on the ground that the expenses cannot be allowed against the income declared being undisclosed. The findings of the PCIT in this regard is as given below –
“7.2. Thus, it is seen that unrecorded Bengal gram procured from the farmers and sent to the warehouse as well as the advances given to the farmers during the current financial year (2014-15) and not recorded in the books of accounts have both been offered as additional income of the firm for the F.Y relevant to A.Y 2014-15, the total declaration of additional income amounting to Rs.200,50,750/-. The assessee has categorically stated that the declaration is made voluntarily and to buy peace and avoid litigation. 7.3. Nowhere, in the course of statement recorded, has the assessee stated that the source for the additional income declared is, the profits of the assessee-firm's business. Hence, the strong contention of the assessee in the present proceedings u/s 263 that the additional income constitutes "business profits" and not the deemed profits or income from other sources, is clearly an afterthought. 7.4. As clearly mentioned in the show cause notice issued by the undersigned to the assessee firm, the provisions of Section 115BBE (2) of the Act clearly spell out that no deduction is allowable in respect of any expenditure or allowance (or set off of
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any loss) to the assessee under any provision of the Act in computing the income referred to in Section 115BBE (1)(a) and (b) of the Act. Sub-clauses (a) & (b) of Section 115BBE (1) refers to income u/s 68, 69, 69A, 69B, 69C or 69D of the Act which is either reflected in the ROI filed by the assessee or that determined by the Assessing Officer. 7.5. The assessee has placed reliance on a plethora of decisions of various High Courts and Benches of the Hon'ble ITAT. It is seen that these are subject to interpretation and none of the decisions is binding on the Assessing Officer as these have not been rendered by the jurisdictional High Court. In several of these decisions, it has been held that the provisions of Section 115BBE of the Act were not applicable if the surrender (of undisclosed income by the assessee) was made on account of excess stock found during the source of survey. The rationale behind such judgements is that in these cases, the unrecorded investment which is gone in purchase of such unrecorded stock (say, of food grains etc.,) has since been recorded in the books of accounts by the assessee and offered to tax by crediting the said amount in the P & L A/c. Clearly, the case of the assessee is distinguishable on the very same set of facts from these decided cases. During the course of survey conducted on 20-03-2015 in the assessee's business premises, it was found that the books of accounts (maintained in Tally package) were written only upto February 2015 and were' not updated as on the date of the survey. The reason stated for this by the assessee is that they don't have a regular accountant. Further time was granted to the assessee-firm to update its books of accounts and produce the same. Subsequently, the statement of the assessee was recorded as late as on 27-04-2015 on which date, the assessee managed to submit books of accounts written upto the date of survey. 7.6. Thus, the admission of additional income by the assessee- firm made vide statement recorded on 27-04-2015 was the unrecorded income after the books were written up / updated. This makes it very clear that the stock as well as advances to farmers totalling to Rs.2,00,50,750/- have not at all been recorded by the assessee in its books of accounts, even after the same were written up and updated up to the date of survey. Hence, the case of the assessee is clearly distinguishable from cases such as
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Bajargan Traders, Jaipur and other cases relied upon by the assessee in its written submissions. Thus, there is no question, whatsoever of treating such unrecorded stock and advances to farmers as 'business income' of the assessee. 8. The Assessing Officer ought to have denied the deduction of expenditure totalling to Rs.1,26,19,839/- on account of remuneration to partners, from the admitted income of Rs.2,00,50,750/-. As per the provisions of Section 115BBE (1) & (2) of the Act, he ought to have brought the entire admitted income of Rs.2,00,50,750/- to tax. 9. In view of the foregoing, I have no hesitation to come to the conclusion that the assessment order passed by the Assessing Officer u/s.143(3) on 01-12-2017 is erroneous in as much as it is prejudicial to the interest of revenue and as such, under the powers vested in me, under section 263 of the Income Tax Act, 1961, the said assessment order is set aside with a direction to the Assessing Officer to pass a fresh assessment order, after giving due opportunity to the assessee.” 10. From the above it is clear that the reason for invoking section 263 by the PCIT is that the partner’s remuneration should not have been allowed and the AO erred in allowing the same. The basis for PCIT’s contention is that the income declared during the survey proceedings is to be assessed to tax u/s.115BBE and not to be treated as business income. From the perusal of the statement recorded we notice that the revenue did not question the source for the income declared by the assessee and the assessee’s contention is that there is no other source other than business from which the income was declared. We further notice that the PCIT during the revision proceedings also did not raise any query pertaining to the source of the income but has proceeded by stating that the AO ought not to have allowed the expenditure claimed against the income declared and to
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this extent held that the order of the AO is erroneous and prejudicial. It is noticed that the assessee has credited the amount declared during the course of survey to the profit and loss account and has claimed expenditure against the overall income including the amount declared. The amount of remuneration debited to the profit and loss account is disallowed in the computation and the amount allowable towards partners remuneration u/s.40(b) is claimed as deduction. We will look at the provisions of section 40(b) of the Act as extracted below –
“Amounts not deductible. 40. Notwithstanding anything to the contrary in sections 30 to 38, the following amounts shall not be deducted in computing the income chargeable under the head "Profits and gains of business or profession",— (a) *** (b) in the case of any firm assessable as such,— (i) any payment of salary, bonus, commission or remuneration, by whatever name called (hereinafter referred to as "remuneration") to any partner who is not a working partner; or (ii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is not authorised by, or is not in accordance with, the terms of the partnership deed; or (iii) any payment of remuneration to any partner who is a working partner, or of interest to any partner, which, in either case, is authorised by, and is in accordance with, the terms of the partnership deed, but which relates to any period (falling prior to the date of such partnership deed) for which such payment was not authorised by, or is not in accordance with, any earlier partnership deed, so, however, that the period of authorisation for such payment by any earlier partnership deed does not cover any period prior to the date of such earlier partnership deed; or (iv) any payment of interest to any partner which is authorised by, and is in accordance with, the terms of the partnership deed and relates to
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any period falling after the date of such partnership deed in so far as such amount exceeds the amount calculated at the rate of twelve per cent simple interest per annum; or (v) any payment of remuneration to any partner who is a working partner, which is authorised by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as here under :—
(a) on the first Rs. 3,00,000 of the Rs. 1,50,000 or at the rate of 90 per book-profit or in case of a loss cent of the book-profit, whichever is more; (b) on the balance of the book- at the rate of 60 per cent : profit
Provided that in relation to any payment under this clause to the partner during the previous year relevant to the assessment year commencing on the 1st day of April, 1993, the terms of the partnership deed may, at any time during the said previous year, provide for such payment. Explanation 1.—Where an individual is a partner in a firm on behalf, or for the benefit, of any other person (such partner and the other person being hereinafter referred to as "partner in a representative capacity" and "person so represented", respectively),— (i) interest paid by the firm to such individual otherwise than as partner in a representative capacity, shall not be taken into account for the purposes of this clause; (ii) interest paid by the firm to such individual as partner in a representative capacity and interest paid by the firm to the person so represented shall be taken into account for the purposes of this clause. Explanation 2.—Where an individual is a partner in a firm otherwise than as partner in a representative capacity, interest paid by the firm to such individual shall not be taken into account for the purposes of this clause, if such interest is received by him on behalf, or for the benefit, of any other person. Explanation 3.—For the purposes of this clause, "book-profit" means the net profit, as shown in the profit and loss account for the relevant
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previous year, computed in the manner laid down in Chapter IV-D as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit. Explanation 4.—For the purposes of this clause, "working partner" means an individual who is actively engaged in conducting the affairs of the business or profession of the firm of which he is a partner;”
Accordingly the allowable remuneration to partners is computed based on the book profits and book profit is defined to be the net profit as per profit and loss account as increased by the remuneration if already debited to the profit and loss account. In assessee’s case it is noticed that the allowable remuneration is computed based on the net profit as per the profit and loss account including the income declared in the course of survey which according to the assessee is the business income. Further on perusal of the records it is noticed that the assessee firm is in the business from the year 2007 and considering this fact coupled with other circumstances, we see merit in the argument that the only source of income declared is from the business of the assessee. In view of these discussions it is clear that there is more than one view possible while deciding the impugned issue. What is prejudicial to the interest of the Revenue is explained in the judgment of the Hon’ble Supreme Court in the case of Malabar Industries Co Ltd v. CIT [2000] 243 ITR 83 (SC) (head note):-
"The phrase 'prejudicial to the interests of the Revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer, cannot be treated as prejudicial to the interests of
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the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law."
The principle which has been laid down in Malabar Industrial Co. Ltd. [2000] 243 ITR 83 (SC) has been followed and explained in a subsequent judgment of the Supreme Court in CIT v. Max India Ltd. [2007] 295 ITR 282.
Placing reliance on the decision of Hon’ble Supreme Court, we are of the considered view that the PCIT is not justified in setting aside the order of the AO u/s. 263 of the Act. Accordingly the directions of the PCIT are quashed.
In the result, the appeal by the assessee is allowed.
Pronounced in the open court on this 8th day of December, 2022.
Sd/- Sd/-
( N V VASUDEVAN ) ( PADMAVATHY S ) VICE PRESIDENT ACCOUNTANT MEMBER
Bangalore, Dated, the 8th December, 2022. /Desai S Murthy /
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Copy to:
Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR, ITAT, Bangalore.
By order
Assistant Registrar ITAT, Bangalore.