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.
