Excess income declared during survey proceedings and credited to P&L Account not to be treated as Unexplained Income: ITAT [Read Order]

The Pune bench of the Income Tax Appellate Tribunal (ITAT) held that excess income declared during the course of survey proceedings cannot be treated as unexplained income since the same way credited to the profit and loss account by the assessee. It was added that the same was to be assessed as income from business.

The assessee-appellant is a partnership firm duly constituted under the Indian Partnership Act, 1932, engaged in the business of cutting, polishing of various types of stones. The return of income for the assessment year 2010-11 was filed on 23.07.2010 declaring income of Rs.5,80,910/-. Against the said return of income, the assessment was completed by the Assessing Officer vide order dated 13.02.2013 passed under Section 143(3) of the Income Tax Act at a total income of Rs.6,16,210/- as against the returned income of Rs.5,80,910/-.

Subsequently, the said assessment was set aside by the learned Pr. CIT-2, Nashik vide order passed under Section 263 of the Income Tax Act dated 09.03.2015 on the ground that the Assessing Officer had allowed excess remuneration to partners of Rs.1,69,777/- by considering the excess income of Rs.7,50,190/- declared by the assessee during the course of survey as business income.

Consequent to the order of the Pr. CIT-2, Nashik, the Assessing Officer completed the assessment vide order dated 29.02.2016 disallowing the excess remuneration of Rs.1,69,777/- by treating the income declared during the course of survey proceedings as ‘Income from other sources’, rejecting the contention of the assessee-appellant that it is the business income of the firm credited to P & L A/c.

Being aggrieved by the above addition, the by the assessee-appellant filed an appeal before the  CIT(A). However the CIT(A) confirmed the actions of the Assessing Officer. Aggrieved, the assessee appealed before the tribunal.

After hearing both the sides, the tribunal noted that It is the contention of the assessee-appellant that the excess income declared during the course of survey proceedings is credited to the P & L A/c as it is derived from business carried on by the assessee-appellant firm. Whereas the Assessing Officer was of the opinion that the excess income declared shou be assessed under the head “Income from other sources” which does not qualify for book profits as defined under the provisions of Section 40(b) of the Income Tax Act for the purpose of computing the quantum of allowable remuneration to the partners.

The Assessing Officer failed to note that once the income is credited to the Profit & Loss A/c, the presumption is that income is derived from business only and there is no evidence on record by the Assessing Officer to show that the assessee firm had derived this excess income under the head other than the business carried on by the assessee-appellant. Further once the income is credited to P & L A/c, it cannot be said that the source of the excess income is unexplained.

The single member bench consisting of Inturi Rama Rao (Accountant member) held that excess income declared during the course of survey proceedings cannot be treated as unexplained income of the assessee-appellant since credited to P & L A/c and cannot be assessed as income from other sources, but, under income from business. Thus the appeal was allowed.

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