Laxmi Narayan Jewellers Vs ITO (ITAT Panaji)
Survey Income Is Part of “Book Profit” for Computing Partners’ Remuneration u/s 40(b): Panaji ITAT Deletes Disallowance
The assessee, a partnership firm, was subjected to survey under Section 133A, during which excess cash was found and ₹2,70,103 was offered as additional business income. The AO excluded this surrendered income while computing book profit for partners’ remuneration and consequently disallowed ₹1,62,603 under Section 40(b). The AO also added ₹1,26,419 on account of differences in bank balances.
The Panaji ITAT deleted the Section 40(b) disallowance. It held that the amount surrendered during survey was admittedly business income, since the firm carried on no other activity. Once such income formed part of the net profit in the profit & loss account, it had to be included in “book profit” for computing allowable partners’ remuneration under Section 40(b).
The Tribunal relied particularly on the Bangalore ITAT decision in Karnataka Hitech Agro Enterprises v. PCIT, which held that net profit for this purpose includes business income declared during survey, and also on the Calcutta High Court ruling in Mohd. Serajuddin & Brothers, holding that book profit comprises the entire net profit shown in the P&L account and is not restricted merely to profits and gains of business or profession. Accordingly, the disallowance of partners’ remuneration was deleted.
On the ₹1,26,419 bank-balance difference, the ITAT found that out of 12 bank accounts considered by the AO, only two belonged to the firm while the remaining accounts belonged to the partners. Differences relating to partners’ personal bank accounts could not result in an addition in the firm’s hands. The difference relating to the firm’s own accounts was only ₹569, which was nominal and attributable to unaccounted bank charges. The entire addition of ₹1,26,419 was therefore deleted.
Cases Discussed
- Inder Singh Vs. State of Madhya Pradesh (SC), 2025 INSC 382
- M/s. Karnataka Hitech Agro Enterprises Vs. PCIT (ITAT Bangalore), ITA No.717/Bang/2021 order dated 08.12.2022
- CIT Vs. S.K. Srigiri and Bros (Karnataka HC), 298 ITR 13
- Serajuddin and Brothers (Calcutta HC), 88 DTR 0046
- Collector, Land Acquisition, Anantnag & Anr. Vs. Mst. Katiji & Ors. (SC), (1987) 2 SCC 107
FULL TEXT OF THE ORDER OF ITAT PANAJI
The captioned appeal at the instance of assessee pertaining to A.Y. 2013-14 is directed against the order dated 28.10.2025 framed by ld.CIT(A)-2, Panaji arising out of Assessment Order dated 04.03.2016 passed u/s.143(3) of the Income Tax Act, 1961 (in short ‘the Act’).
2. Registry has pointed out that the appeal is barred by limitation as the assessee has filed the appeal before this Tribunal with a delay of 59 days. Assessee has filed an affidavit explaining the reasons which led to delay. On due consideration of the said reasons, we find that ‘reasonable cause’ prevented the assessee from filing the appeal within the stipulated time limit. We find that the delay is not intentional and therefore placing reliance on the judgments of Hon’ble Apex Court in the case of Collector, Land Acquisition, Anantnag & Anr. Vs. Mst. Katiji & Ors. reported in (1987) 2 SCC 107 and in the case of Inder Singh Vs. State of Madhya Pradesh judgment dated 21.03.2025 (2025 INSC 382) condone the delay of 59 days in filing the appeal before this Tribunal and admit the appeal for adjudication.
3. The assessee’s grievance in the instant appeal is two fold, firstly against the disallowance of remuneration paid to partners at Rs.1,62,063/- and secondly against the addition for alleged bank difference of Rs.1,26,419/-.
4. Brief facts of the case are that the assessee is a partnership and survey action u/s.133A of the Act conducted at the assessee’s premises on 08.08.2012. On account of excess cash found during the course of survey the assessee offered additional business income at Rs.2,70,103/-. Thereafter, return of income for A.Y. 2013-14 e filed on 31.03.2014 declaring income of Rs.3,70,160/-. After validly serving statutory notices u/s.143(2) and 142(1) of the Act assessment proceedings were carried out. Ld. Assessing Officer observed that assessee has paid remuneration to partners and while working book profit has also included the income offered during the course of survey at Rs.2,70,103/-. Ld. Assessing Officer disallowed the claim of remuneration u/s.40(b) of the Act at Rs.1,62,603/-. Further, ld. Assessing Officer observed that there were bank accounts appearing in the books and when the closing balances were matched with the statements filed, difference of Rs.1,26,419/- was noticed. Assessee failed to file reconciliation statement as a result ld. Assessing Officer made addition of Rs.1,26,419/- and assessed the income at Rs.4,96,580/-.
5. Aggrieved assessee preferred appeal before ld.CIT(A) and submitted that in view of the judgment of Hon’ble Karnataka High Court in the case of CIT Vs. S.K. Srigiri and Bros reported in 298 ITR 13 the assessee has rightly claimed remuneration to partners on the income declared during the course of survey. As regards the different in bank balance at Rs.1,26,419/- it was submitted that various bank accounts of the partners are also appearing in the books and mainly the interest entries have not been accounted for past many years and entries appearing in the bank statement of the partners are not entered in the books of account as they are connected to business activity of assessee therefore the addition deserved to be deleted. However, ld. CIT(A) was not satisfied with these submissions and affirmed the action of the Assessing Officer. Now the assessee is in appeal before this Tribunal.
6. Ld. Counsel for the assessee reiterated the submissions filed before ld.CIT(A) and further in support of the grounds for allowability of remuneration paid to partners has referred to various decisions of Coordinate Benches including that of the Coordinate Bench, Bangalore in the case of M/s. Karnataka Hitech Agro Enterprises Vs. PCIT – ITA No.717/Bang/2021 order dated 08.12.2022. Reliance also made to the synopsis along with sheet showing the details of the bank accounts allegedly appearing in the books of the assessee with the details about the account holder with balance as per pass book and the company books.
7. On the other hand, ld. DR supported the order of ld.CIT(A).
8. We have heard the rival submissions and perused the record placed before us. The first issue is regarding disallowance of remuneration to partners u/s.40(b) of the Act. We notice that the assessee has declared income of Rs.2,70,103/- during the course of survey on account of excess cash found. Admittedly, it is business income as the partnership firm carries no other activity. The book profit for the year has been arrived after taking into consideration the amount declared during the course of survey. Thereafter, under the provisions of section 40(b) of the Act remuneration has been calculated on the basis of book profit. Ld. Assessing Officer has computed the remuneration by excluding the income declared during the course of survey at Rs.2,70,103/-and has made the impugned disallowance. We have gone through the decisions referred by ld. Counsel for the assessee and specifically taking note of the decision of Coordinate Bench, Bangalore in the case of M/s. Karnataka Hitech Agro Enterprises Vs. PCIT (supra) where the Tribunal has specifically held that allowable remuneration to partner is computed based on the book profit 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 and that the net profit includes the income declared during the course of survey which is business income in nature and therefore the remuneration payable to partners u/s.40(b) of the Act is allowable on the net profit including the income declared during the course of survey. Similarly, the Hon’ble High Court of Calcutta in the case of Mohd. Serajuddin and Brothers 88 DTR 0046 has held that for the purpose of section 40(b)(v) r.w.s Explanation thereto there cannot be separate method of accounting for ascertaining net and/or book profit. Hon’ble Court further held that book profit comprises the entire net profit as shown in the profit and loss account and it is not limited only to profit and gains of business or profession.
9. Considering the judicial precedents referred hereinabove, we are inclined to hold that assessee has rightly claimed remuneration payable to partners computed on the net profit appearing in the books of account including the income declared during the course of survey. Finding of ld.CIT(A) is set aside and the impugned disallowance u/s.40(b) of the Act stands deleted. Relevant grounds of appeal raised by the assessee on this issue are allowed.
10. The next issue for our consideration is the addition for difference in bank balance at Rs.1,26,419/-. We have perused the record and the details of bank statements filed by the assessee and observe that in the list of bank accounts ld. Assessing Officer has referred to 12 bank accounts in the assessment order out of which only 2 accounts relate to the firm and all the remaining bank accounts are in the name of the partners. The transactions appearing in the bank account of the partners are not required to be recorded in the books and further in most of these bank accounts no transactions have been taken place for last three years. Since the assessee has erred in entering the details of the bank accounts of the partners in its books of account and further the assessee not entered the transactions for the year including the interest earned on savings bank account on year to year basis which resulted into different in the bank balance as per bank statement and as per books. As per the bank accounts maintained with Central Bank of India and HDFC Bank Ltd., the difference is only Rs.569/-. Therefore, in our considered view since the alleged difference is majorly on account of difference in the bank balance of the partners of the partnership firm there cannot be any addition in the hands of partnership firm. So far as the difference at Rs.569/- found in the bank balance of the partnership firm held with Central Bank of India and HDFC Ltd. the difference is nominal and can be attributed to certain bank charges which has remained to be accounted. In our considered opinion, no addition for difference in bank account at Rs.1,26,419/- deserves to be sustained and the same is hereby deleted. Finding of ld.CIT(A) is reserved and grounds of appeal raised by the assessee are allowed.
11. In the result, the appeal of the assessee is allowed.
Order pronounced on this 28th day of July, 2026.
