Rathod Developers & Builders Vs ITO (ITAT Bangalore)
ITAT Bangalore held that as the additional income offered is considered as business income, remuneration u/s. 40(b)(v) of the Income Tax Act is available on the same.
Facts-
The assessee is a partnership firm engaged in the business of construction of residential and commercial buildings. It also undertakes development of layouts. A survey u/s. 133A of the I.T. Act was conducted at the business premises of the assessee.
During the course of survey, AO found a valuation report, wherein the cost of construction per square feet was mentioned at Rs.3,200, whereas the assessee had entered into sale agreement at an average rate of Rs.2,375 per sq.ft. The partner was confronted with the aforesaid valuation report. It was stated that the valuation report did not disclose the true and fair market value of the flat, however, the partner in order to buy peace with the Department, voluntarily offered a sum of Rs. 2 Crore as on-money received.
AO completed the assessment order u/s 143(3) wherein he held a sum of Rs.2 crore declared during the course of survey cannot be treated as business receipts and had to be taxed u/s 115BBE of the Income Tax Act. AO rejected the argument of the assessee that remuneration claimed by it would be taxable in the hands of the partners at the rate of 30% by observing that the partner had reduced their taxability by claiming various expenses against such income.
Aggrieved by the order of AO, the assessee raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee by holding that there is nothing on record to suggest that a sum of Rs. 2 crore surrendered by the assessee during the course of survey was its business income. Being aggrieved, the present appeal is filed.
Additionally, there was also a dispute that whether the assessee is entitled to remuneration as per section 40(b)(v) of the I.T.Act on the additional income offered.
Conclusion-
The manner of computation by the assessee in arriving at the additional income of Rs.2 crore as per the sworn statement demonstrate that it is directly relatable to the construction of flats, and hence, deem to accrue as part of the consideration of sale of flats and thus the income is to be treated as income from business of the assessee. The surrendered income disclosed by the assessee are part of the business activities and as mentioned earlier no other activities were carried on by the assessee, nor has the Revenue brought on record any contrary material for the aforesaid conclusion. Moreover, the Revenue has not found any money during the course of survey. Further, the tax rate specified u/s 115BBE of the I.T.Act for assessment year 2016-2017 is at 30% (same as the normal rate) and the partners of the assessee after considering the remuneration have discharged tax liability more or less at the same rate of 30%. Thus, we are of the view that there is no loss to the revenue.
Held that since we have already held that the additional income offered by the assessee is to be considered as business income, as a natural corollary, the remuneration u/s 40(b)(v) of the I.T.Act has to be computed considering the entire business income declared by the assessee.
FULL TEXT OF THE ORDER OF ITAT BANGALORE
This appeal at the instance of the assessee is directed against CIT(A)’s order dated 20.06.2022. The relevant assessment year is 2016-2017.
2. The assessee has raised 15 grounds in its memorandum of appeal, however, the learned AR during the course of hearing had only argued the grounds pertaining to the following issues:-
(i) Whether additional income of Rs.2 crore declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed as deduction u/s 40(b) of the I.T.Act?
(ii) Whether the CIT(A) is justified in confirming the disallowance of Rs.3,31,868 being disallowance of 20% of Un-registered Dealer purchases (URD)?
We shall adjudicate the above issues as under:
Sum of Rs.2 crore declared during the course of survey, whether it pertains to business income or not? (Grounds 3 to 8)
3. The brief facts of the case are as follows:
The assessee is a partnership firm engaged in the business of construction of residential and commercial buildings. It also undertakes development of layouts. A survey u/s 133A of the I.T.Act was conducted on 22.12.2015 at the business premises of the assessee. A statement on oath was recorded from the partner of the assessee, Mr.Vimal Chand Pukhraj Telisara. During the course of survey, the Assessing Officer found a valuation report, wherein the cost of construction per square feet was mentioned at Rs.3,200, whereas the assessee had entered into sale agreement at an average rate of Rs.2,375 per sq.ft. The partner was confronted with the aforesaid valuation report. It was stated that the valuation report did not disclose the true and fair market value of the flat, however, the partner in order to buy peace with the Department, voluntarily offered a sum of Rs.2 crore as on-money received on account of 22 sale agreement, token advance for 14 flats and sale of open sites for the relevant assessment year 2016-2017. The assessee in the return of income for assessment year 2016-2017 disclosed a sum of Rs.2 crore in its profit and loss account. The assessee while arriving at the net profit of Rs.86,19,846.33 had claimed a deduction of Rs.1,31,54,770 towards partners remuneration as per section 40(b) of the I.T.Act.
4. The A.O. completed the assessment order u/s 143(3) of the I.T.Act (order dated 24.12.2028), wherein he held a sum of Rs.2 crore declared during the course of survey cannot be treated as business receipts and had to be taxed u/s 115BBE of the I.T.Act. The A.O. worked out the allowance of remuneration to partners at Rs.11,54,770 on the basis of regular book profits at Rs.17,74,616 and disallowance balance remuneration claimed by the assessee. The A.O. also rejected the argument of the assessee that remuneration claimed by it would be taxable in the hands of the partners at the rate of 30% by observing that the partner had reduced their taxability by claiming various expenses against such income. The relevant finding of the A.O., for ready reference, reads as follows:-
5. Aggrieved by the order of the A.O., the assessee raised this issue before the first appellate authority. The CIT(A) rejected the contentions of the assessee by holding that there is nothing on record to suggest that a sum of Rs.2 crore surrendered by the assessee during the course of survey was its business income. The CIT(A) also distinguished the case laws relied on by the assessee. The CIT(A) held that there was a factual finding in those cases relied on, wherein the additional income was treated as from business only.
6. Aggrieved by the order of the CIT(A), the assessee has raised this issue before the Tribunal. The learned AR filed a paper book comprising of 121 pages, enclosing therein the computation of income, acknowledgement for the return filed, copies of the financial statements for the relevant assessment year in the case of the assessee as well as its partners, statement on oath taken from the partners, copies of the notices and replies submitted, etc. The learned AR submitted that the partner of the assessee in the sworn statement recorded at the time of survey dated 21.12.2015 had offered additional income of Rs.2 crore, which is nothing but business income arising out of the construction activities undertaken by the assessee. It was contended that the valuation arrived in the cost of construction is as per the industrial standards and there is no infirmity in the books of account of the assessee. It was contended that the possibility of receiving additional income due to the increase in the rate of construction cannot be ruled out in future years and it is in this context, a sum of Rs.2 crore was disclosed. Therefore, it is submitted that the same is to be treated as business income and no inference could be drawn that additional income was unexplained. It is further submitted that there was no cash or incriminating documents found in the premises of the assessee to draw inference that there was unexplained receipts in the nature of income warranting invocation of section 115BBE of the I.T.Act. Further, it was contended that there was no loss to the Revenue, since the partners salary has been taxed at the maximum marginal rate. Lastly, it was contended that the partners salary was a mandatory charge on the profits and a permissible deduction u/s 40(b)(v) of the I.T.Act. In other words, it was contended that the additional income once it is treated as business income, the natural consequences in arriving at the total taxable income is after allowing deduction of remuneration paid to the partners u/s 40(b)(v) of the I.T.Act. In this context, the learned AR relied on the judgment of the Hon’ble jurisdictional High Court in the case of CIT v. S.K.Srigiri & Bros reported in 298 ITR 13 (Kar.).
7. The learned DR supported the order of the A.O. and the CIT(A). It was submitted that the additional income offered of Rs.2 crore is not a business income and the same has been rightly taxed as per the provisions of section 115BBE of the I.T.Act. Therefore, it was stated that the A.O’s order, which was confirmed by the CIT(A) in not granting deduction u/s 40(b)(v) of the I.T.Act in respect of excess remuneration is correct and no interference is called for.
8. We have heard rival submissions and perused the material on record. The sworn statement of the partner is placed on record at page 26 and 27 of the paper book filed by the assessee. The relevant question and answer to the same, namely, question No.8 and its answer, reads as follows:-
“Q.8 : There is a difference of about Rs.800/- per sq.ft. for the 22 apartments (25,000 sq.ft) wherein sale agreements have been made and the valuation report found. Please explain.
Ans. : The valuation report was given by the customer who does not reflect the correct rate per sq.ft. However, I am voluntarily offering a sum of Rs.2 crores as on money received on account of the 22 sale agreements made as well as token advance received for the balance 14 flats & sale of open sites for the A.Y. 2016-17.”
9. From the above answer to question No.8, it is clear that the additional income has been offered on account of sale of flats. The undisputed fact is that the assessee is in the business of construction of flats, commercial buildings, and undertakes development of layouts. The additional income has been disclosed on account of amounts received from the customers towards future sale of flats and open sites. Further, from the above answer, it is clear that the rate itself stated by the A.O. during the course of survey is in respect of valuation report obtained by the prospective buyers and not from the assessee. Therefore, for all practical purposes, same is likely to be inflated for obtaining loans from financial institution and could not be construed to be price of the units accruing to the assessee. It is further to be noticed that the survey u/s 133A of the I.T.Act was conducted on 22.12.2015 and the assessment year under consideration, i.e., A.Y. 2016-2017, was not complete. The manner of computation by the assessee in arriving at the additional income of Rs.2 crore as per the sworn statement demonstrate that it is directly relatable to the construction of flats, and hence, deem to accrue as part of the consideration of sale of flats and thus the income is to be treated as income from business of the assessee. The surrendered income disclosed by the assessee are part of the business activities and as mentioned earlier no other activities were carried on by the assessee, nor has the Revenue brought on record any contrary material for the aforesaid conclusion. Moreover, the Revenue has not found any money during the course of survey. Further, the tax rate specified u/s 115BBE of the I.T.Act for assessment year 2016-2017 is at 30% (same as the normal rate) and the partners of the assessee after considering the remuneration have discharged tax liability more or less at the same rate of 30%. Thus, we are of the view that there is no loss to the revenue. The average tax rate of the partners for the relevant assessment year are detailed below:-
