DCIT, CHANDIGARH vs. M/S AJAY SANGARI & CO., CHANDIGARH

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ITA 860/CHANDI/2015Status: DisposedITAT Chandigarh29 November 2018AY 2009-104 pages
AI SummaryDismissed

What did the Tribunal hold?

The Tribunal agreed with the assessee, holding that the method of computing net profit and book profit should be consistent. Therefore, income from other sources included in the profit and loss account for ascertaining book profit for partner remuneration cannot be discarded.

What were the facts?

The Assessing Officer disallowed a portion of partner's remuneration, arguing that interest income from partners, treated as 'income from other sources', should be deducted from book profits before calculating allowable salary. The assessee contended this interest was part of business income and should not be excluded.

What were the issues?

Whether interest income from partners, even if classified as 'income from other sources', should be excluded from book profits for calculating allowable partner remuneration.

Which sections of the Income-tax Act were involved?

Section 40(b),Section 154,Section 155

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Cases cited in this judgment(2)Show list

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Income Tax Appellate Tribunal, CHANDIGARH BENCH “A”, CHANDIGARH

For Appellant: Shri. S.K. Mukhi
For Respondent: Smt. Chandrakanta
Hearing: 04/09/2018Pronounced: 29/11/2018

आदेश/Order

PER DR. B.R.R. KUMAR, A.M:

The present appeal has been filed by the Revenue against the order of

the Ld. CIT(A)-1, Chandigarh dt. 24/09/2015.

2.

In the present appeal Revenue has raised the following grounds:

1.

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing appeal of the assessee without appreciating the facts of the case. 2. Whether in the facts and circumstances of the case the Ld. CIT(A) was right in deleting the addition by holding that partners remunerations were allowable on the net profit even if the same included income from other sources, even thought the explanation (3) to section 40(b) of the I.T. Act clearly provies that the Book profit is to be calculated in the manner laid down in chapter IV D whereas the Income from other sources is computed in the manner as laid down in chapter IV F.

3.

It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer may be restored.

3.

It was argued by the Ld. DR that owing to the audit objection the case

cannot be covered by the Circular No. 21 of 2015 dt. 10/12/2015. Hence the

case has been recalled and being decided on merits.

4.

As taken from the order of the Ld. CIT(A) and from the records the brief

facts of the issue are that the original assessment was completed u/s 143(3) of

the Income Tax Act, 1961 on 30.11.2011. The Assessing Officer issued a notice u/s

154/155 on 15.11.2012 to rectify the apparent mistake in the assessment order.

As per the notice issued the details of mistake apparent from record was given

as "the assessee has claimed & allowed salary to partners amounting to Rs.

19,50,878/- on the basis of book profits of Rs. 47,45,944/'-. The assessee has

included income of Rs. 21,77,434/- received as interest on capital withdrawn by

the partners. The interest income on capital was not chargeable to tax as

business income but as income from other sources. As such the amount was

required to be deducted from book profits for calculation of salary allowable to

partners. The salary allowable after deducting the income from other sources

works out to Rs. 10,79,904/- calculated on book profit of Rs. 25,68,810/- (Rs.

47,45,944/- - 21,77,434/-). The salary excess allowed by the partners Rs. 8,70,974/-

(Rs. 10,79,904/- - Rs. 19,50,878/-) is under assessment. Tax effect of this omission is

Rs. 2,69,130/- besides levy of interest under section 234D is Rs. 86,121/-."

5.

Order u/s 154 was passed on 22.03.2013 disallowing excess salary paid to

the partners of Rs. 8,70,974/-. A submission dated 10.09.2015 was filed during the

course of appellate proceedings, which is considered.

6.

It was submitted before the Ld. CIT(A) that the partners had withdrawn

excess to their capital account and interest is recovered from partners. The

interest earned as such from the partners gets adjusted against the interest paid

on borrowings and, therefore, the business expenses is reduced and income

under the head "business and profession' increases. The expenses for payment

to partners for interest and salary are covered u/s 40(b)(v) of the Act and not u/s

57 of the Act. The Assessing Officer has wrongly treated the interest recovered

from partners amounting to Rs. 21,77,434/-as income from other sources instead

of business income and recomputed the book profit and has disallowed the

excess salary paid to the partners. In, support its plea, the appellant has relied

upon the decision of the Hon'ble Calcutta High Court in the case of Md.

Serajuddian and bros. Vs. CIT reported as (2012) 82 CCH 0098 KolHC/(2012) 80

DTR 0046/(2012) 210 Taxman 0084. Reliance was also placed upon the decision

of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT, reported in

[2002] 255 ITR 273 (SC).

7.

The Ld. CIT(A) considered the decision of Hon'ble Calcutta High Court in

the case of Md. Serajuddian and bros. Vs. CIT wherein it was held as under

"the said chapter nowhere provided that method of accounting for the purposes of ascertaining net profit should be the only income from business alone and not from other sources. S. 29 provide how the income from profits and gains of business or profession should be computed and this had to be done as provided u/s 30 to 43D. By virtue of s. 5 of the said Act that total incomes of any previous years includes all income from whatever source derived. Thus for the purpose of s. 40(b)(v) read with Explanation there cannot be separate method of accounting for ascertaining net profit and/ or book-profit. The said section nowhere provides that the net profit as shown in the profit and loss account is not the profit computed under the head profit and gains of business or profession"

8.

It was held finally that even if the income from other sources is included in

the profit & loss accounts to ascertain the net profit qua book profit for

computation of the remuneration of the partners, the same cannot be

discarded.

9.

We have gone through the facts on record and also argument of both

the parties and we are in agreement with the finding that the method of

computation of income should be the on the similar lines for determination of

net profit and as well as determination of book profit as per the provisions of the

Income Tax Act, 1961. Hence the appeal of the Revenue is hereby dismissed.

10.

In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Open Court. Sd/- Sd/- संजय गग� डा. बी.आर.आर, कुमार, (SANJAY GARG ) ( DR. B.R.R. KUMAR, AM) �या�यक सद�य/ Judicial Member लेखा सद�य/ Accountant Member AG Date: 29/11/2018

आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

1.

अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

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