Rathod Developers & Builders v. ITO

Case snapshot

Sections / provisions: 40(b)(v)

Questions before the Court / Tribunal

• additional income declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed u/s 40(b) – Held Yes
• What factual, statutory and procedural conditions control the relief?
• How does the operative order apply to the parties and the challenged proceeding?

Material facts and procedural background

M/s.Rathod Developers & The Income Tax Officer Builders, Captain Desai Park v. Ward 2(2) Narayanpur Hubli. Dharwad – 580 008. PAN : AALFR7678E. (Appellant) (Respondent)

Appellant by : Sri.S.V.Ravishankar, Advocate Respondent by : Sri.Gudimella V P Pavan Kumar, JCIT -DR Date of Date of Hearing : 19.10.2022 Pronouncement : 02.11.2022

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?

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…

Appellant / assessee submissions

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?

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…

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.

Revenue / respondent submissions

The packaged judgment does not separately label the respondent's submissions in an independently extractable passage. No contention is inferred; read the full order.

Court / Tribunal analysis and reasoning

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:-

17. We have heard rival submissions and perused the material on record. Undisputedly, the URD purchases are only 2% of the total purchases. Considering the nature of the assessee’s business, i.e., the construction of flats and commercial buildings, undoubtedly, the assessee has to make purchases, such as jelly, stones and bricks etc. In the facts and circumstances of the case, we are of the view that the adhod disallowance at the rate of 20% of the URD purchases is highly excessive. The assessee itself before the first appellate authority stated that the disallowance at 20% is excessive and should be reduced to 10% of the URD purchases. Accordingly, we limit the disallowance of URD purchases to 10% of Rs.16,59,344. Hence, we sustain an addition of Rs.1,65,934 and delete the balance. It is ordered accordingly.

Operative decision and relief

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?

6. Hence, these appeals deserve to be dismissed by upholding the orders passed by the Income-tax Appellate Tribunal and they are dismissed.”

“9.1. The report of the AO was duly confronted to the appellant. In response to the same the appellant has submitted that the disallowance is excessive and that the same be reduced to 10% of the URD purchases. The submissions of the appellant and report of the AO have duly been considered. The appellant has not substantiated its argument to support its claim. The purchases are unverifiable and in cash. So the action of the AO in disallowing 20% of the same cannot be considered as unreasonable. The action of the AO is upheld and the ground of appeal 8 is dismissed.”

19. In the result, the appeal filed by the assessee is partly allowed.

Ratio and legal principle

• The packaged judgment addresses additional income declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed u/s 40(b) – Held Yes. The precise proposition must be read with the Court/Tribunal's reasoning and operative directions.
• Reliance depends on matching the statutory version, jurisdiction, procedural stage and material evidence recorded in the judgment.

Why this judgment matters

This decision is relevant to practitioners and affected parties dealing with additional income declared during the course of survey can be treated as business profits and remuneration paid to partners on the same is to be allowed u/s 40(b) – held yes Its value lies in showing how the adjudicating forum connected the applicable rule to the proved facts and procedural posture.

Practitioner action points

• Match the statutory version, jurisdiction, procedural stage and decisive evidence before relying on the result.
• Verify current appellate, review and SLP history and any later amendment or controlling authority.
• Attach the complete judgment to the working paper or filing and cite the paragraph/page supporting the proposition.

Does this case match your facts?

Section / provision impact

• 40(b)(v) - apply the exact version considered in the judgment.

Case network

Similar issue / useful comparison

• Pr. CIT v. Tata Power Company Ltd. - Bombay High Court
• Merchant Association v. ITO - ITAT Pune
• M D Sons & Ors. v. ITO (Special Bench) - ITAT Bangalore Special Bench

Different outcome / possible distinction

• Pr. CIT v. Persistent Systems Pvt. Ltd. - Dismissed
• CIT(E) v. Hyderabad Cricket Association - Operative order controls

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