Remuneration paid to HUF Members for the services rendered in the business is allowable under section 37(1): ITAT Quashes Re-Assessment [Read Order]

The Hyderabad Bench of the Income Tax Appellate Tribunal ( ITAT ) in ACIT vs B. Sreeramulu held that Remuneration paid to HUF Members for the services rendered in the business is allowable under Section 37(1) of the Income Tax Act, 1961.

In the instant case, the assessee-HUF derived income from house property and trading of jewellery. During a survey operation and scrutiny assessment, total income of the assessee was computed to the tune of Rs. 37.96 Lacs. From that, the Assessing Officer (A.O.) allowed remuneration of Rs. 13 Lacs to the three members of the HUF for their services rendered in the business.

However, the Assessing Officer reopened the proceedings under Section 147 of the Income Tax Act, 1961 on the ground that remuneration to co-parceners is not allowable under section 184 or 40(b) of the Act. In the re-assessment, the remuneration paid to the members were disallowed. On appeal, the Commissioner of Income Tax (Appeals) (CIT(A)) considered the objections raised by the parties and decided the issue by treating the re-assessment as void ab initio. Aggrieved, revenue appealed before ITAT.

The Bench comprising of Vice President D. Manmohan and Accountant Member B. Ramakotaiah observed that the assessment had been reopened after the end of four years from the relevant assessment year and that there was no failure on the part of the assessee in furnishing full and true disclosure of the information.

“In view of that, it cannot be stated that assessee has not disclosed any information. The remuneration to the members of the HUF were paid for the services rendered in the business which is allowable U/s. 37(1) and invoking the provisions of Section 184 and Section 40(b) does not arise on the facts of the case at all. In view of that, the action of AO in reopening assessment per se is bad in law.” said the bench.