A division bench of the Bombay High Court, in M/s Bagdi Enterprises v. ITO, Nagpur, held that a Firm can claim a deduction of salary paid to partners on amount surrendered to the department if such amount was treated as business income for the purpose of assessment under the Income Tax Act.
In the instant case, the department found an excess stock of Rs.2,85,361 in the premises of the assessee during the course of survey under section 133A of the Income Tax Act. It was also found that assessee has received an amount of Rs.1,50,000/as cash loans/advances, sources of which could not be explained and the same were not entered into the books of accounts.
Later, the assessee filed their income tax return claiming the amount as “business income” and claimed deduction under section 40(b) of the Income Tax Act. The Assessing Officer held that the other income shown by the appellant could not be considered to be a business income of the firm, this other income of Rs.1,50,000/was added in the profit and loss account to the gross profit and included for the purposes of Section 40(b) of the Act while determining the book profit. However, otherwise, the amount of Rs.1,50,000/was included as a part of business income to compute the tax payable in the assessment order.
On appeal, both the appellate authorities dismissed the plea of the appellant and held that merely because an amount has been credited to the profit and loss account, it would not necessarily become part of the profit of the business.
The bench comprising of Justice M.S Sanklecha and Justice Manish Pitale noticed the fact that the Assessing Officer has brought to tax the amount of Rs.1,50,000/shown as other income in profit and loss account as income from the business under Section 28 of the Act. “The assessment order does not classify the same as income from other sources or under any other head. Once the aforesaid position is accepted, then for the purpose of computing book profit as defined in section 40(b) of the Act, the other income of Rs.1,50,000/has also to be considered to be part of the income from business arrived at in accordance with the Chapter IVD of the Act. It is not open to the Revenue to contend that the amount of Rs.1,50,000/is part of business income while computing the tax payable but not so for the purposes of Section 40(b) of the Income Tax Act. The character of the income does not change depending upon the section to be applied. This issue has not been examined at all by the authorities under the Act. It goes to the root of the dispute.”
Read the full text of the Order below.