Jasjot Singh Garcha Vs PCIT (ITAT Chandigarh)
ITAT Chandigarh held that transaction not recorded at the time of survey qualify as unrecorded transactions, however, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and hence invoking deeming provisions of section 69-69D of the Income Tax Act unjustified.
Facts- During the course of survey operation, certain discrepancies were noticed and as a result, the assessee offered a sum of Rs. 70,00,000/- apart from his normal business income. Subsequently, the assessee filed his return of income on 30/10/2017 showing total income of Rs. 81,22,830/- including the surrendered income of Rs. 70,00,000/-. The case of the assessee was taken up under compulsory scrutiny and notice u/s. 143(2) and 142(1) were issued alongwith detailed questionnaire. The returned income was accepted by the AO and assessment order dt. 28/06/2019 was passed by the AO u/s. 143(3) of the Act.
Subsequently, the assessment records were called for and examined by the Ld. Pr. CIT and a show cause u/s. 263 dt. 22/02/2022 was issued and thereafter, after taking into consideration the submissions so filed by the assessee but not founding the same acceptable, the assessment order passed u/s. 143(3) was held to be erroneous in so far as prejudicial to the interest of the Revenue and the matter was set aside to the file of the AO for passing a fresh order in accordance with law, keeping in view the observation made in the impugned order and after providing reasonable opportunity to the assessee. Against the said findings and directions of the Ld. Pr. CIT, the assessee is in appeal before us.
Conclusion- No doubt, these transactions were not recorded at the time of survey thus qualify as unrecorded transactions satisfying one of the essential conditions, at the same time, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and the necessary nexus with assessee’s business has been established, thus, it cannot be said that these are unexplained transactions thus, doesn’t satisfy the second condition for invoking the deeming provisions of section 69-69D of the Act. The AO has duly taken cognizance of the findings of the survey team, the documents found during the course of survey, the statement of the assessee, the surrender letter and the return of income and after examination thereof and due application of mind, the income has been rightly assessed under the head business income.
Held that the order so passed by the AO cannot be held as erroneous due to lack of inquiry or for that matter requisite inquiry on the part of the AO.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
1. This is an appeal filed by the Assessee against the order of the Ld. PCIT, Patiala dt. 21/03/2022 pertaining to Assessment Year 2017-18 wherein the assessee has taken the following grounds of appeal:
“1. That the Ld. PCIT (Central), Ludhiana has erred in assuming the jurisdiction to issue notice u/s 263 of the Income Tax Act, 1961 and, thereby, setting aside the order as passed after due application of mind by the Assessing Officer.
2. That the Ld. PCIT has failed to appreciate the fact that the original assessment was framed by the Assessing Officer after due application of mind and on that basis and after consideration of all the facts and circumstances of the case, has charged to tax the income offered during the course of survey to the tune of Rs.70 lacs at the normal rate of tax since the same was derived out of business/professional income of the assessee.
3. That the Ld. PCIT has failed to appreciate that the assessment had been completed after due consideration of various replies by the Assessing Officer during the course of assessment proceedings and the Assessing Officer having taken a possible view and, therefore, the assumption of jurisdiction u/s 263 was not called for by the Ld. PCIT.
4. That the Ld. PCIT had failed to appreciate that at the time of survey, it was clearly stated that the nature of Income offered during survey was professional Income and the same was mentioned in the profit and loss account and even cheques had been given for normal rate of taxes, which proves that the Assessing Officer at the time of survey and lateron was of the view to tax the same at normal rate of tax and, thus, invoking of provisions of section 1 15BBE is out of context.
5. Notwithstanding the above said ground of appeal, the Ld. PCIT has erred in assuming the jurisdiction u/s 263 on the basis of audit objections, which is apparently wrong and incorrect in view of the judgment of Jurisdictional High Court in the case of Sohana Woollen Mill and other judgments of jurisdictional ITAT, Chandigarh Bench, Chandigarh in the case of M/s Ganga Acrowools Ltd. in ITA No. 196/Chd/202 1 and in the case of Sh. Surinder Pal Singh in ITA No. 576/Chd/202 1 vide orders, dated 31.01.2022 and also that 263 proceedings have been initiated at the best of proposal sent by the Assessing Officer/Addl.CIT and, thus, the proceedings are void ab-initio.”
2. Briefly the facts of the case are that a survey operation under section 1 33A was carried out at the business premises of the assessee on 30/08/2016. During the course of survey operation, certain discrepancies were noticed and as a result, the assessee offered a sum of Rs. 70,00,000/- apart from his normal business income. Subsequently, the assessee filed his return of income on 30/10/2017 showing total income of Rs. 81,22,830/- including the surrendered income of Rs. 70,00,000/-. The case of the assessee was taken up under compulsory scrutiny and notice under section 143(2) and 142(1) were issued alongwith detailed questionnaire. After taking into consideration, the submissions of the assessee, the returned income was accepted by the AO and assessment order dt. 28/06/2019 was passed by the AO under section 143(3) of the Act.
2.1 Subsequently, the assessment records were called for and examined by the Ld. Pr. CIT and a show cause under section 263 dt. 22/02/2022 was issued and thereafter, after taking into consideration the submissions so filed by the assessee but not founding the same acceptable, the assessment order passed under section 143(3) was held to be erroneous in so far as prejudicial to the interest of the Revenue and the matter was set aside to the file of the AO for passing a fresh order in accordance with law, keeping in view the observation made in the impugned order and after providing reasonable opportunity to the assessee. Against the said findings and directions of the Ld. Pr. CIT, the assessee is in appeal before us.
3. During the course of hearing, the Ld. AR submitted that the assessee is an individual running Orthopaedics & Dental Clinic under the name and style of M/s Garcha Orthopedic & Dental Care. It was submitted that other than the said business, the assessee does not have any other source of income.
3.1 It was submitted that survey under section 133A was conducted at the business premises of the assessee on 30/08/2016 wherein assessee surrender a sum of Rs. 70,00,000/- as part of his normal business income to buy peace of mind and to avoid litigation and tax was also paid at normal rate of tax. It was submitted that the said surrender includes a sum of Rs. 45,50,000/- on account of Misc. Advances, Rs. 9,50,000/- on account of cash in hand and Rs. 15,00,000/- on account of Furniture, Fixture and Equipment’s and all these discrepancies were related to the business being carried on by the assessee.
3.2 It was submitted that subsequently, the assessee also submitted a surrender letter dt. 31/08/2016 and as evident from the said letter, the surrender was made by the assessee over and above the regular business income of the assessee and it has been clearly stated therein that the tax shall be paid on such additional business income at normal rate of tax.
3.3 It was submitted that thereafter the assessee filed his return of income disclosing income of Rs. 81,22,830/- which includes the income of Rs. 70,00,000/- surrendered during the course of survey proceedings. Thereafter the case of the assessee was selected for compulsory scrutiny and notice under section 143(2) and 142(1) were issued.
3.4 It was submitted during the course of assessment proceedings, the AO issued questionnaire dt. 22/05/2019 asking the assessee to furnish details of income surrendered during the course of survey proceedings and in response, the assessee filed his submission stating that Rs. 45,50,000/- surrender was made on account of certain loans and advances and person-wise detail of the same were also filed before the AO and Rs. 15,00,000/- was surrendered on account of Furniture, Fixture and equipment and Rs. 9,50,000/- on account of cash and in support cash book, ledger and receipts books of the assessee were produced before the AO.
3.5 It was submitted that after verification of details filed by the assessee, the AO took a possible view based on the due application of mind and based on verification made by the AO, the assessment order was passed under section 143(3) wherein the returned income of the assessee was accepted and surrendered income was accepted as part of regular business income chargeable at normal rate of tax.
3.6 It was submitted that thereafter, the assessee received a show cause issued by the Ld. PCIT under section 263 dt. 22/02/2022 and in response to show cause, the assessee filed detailed submissions which were not found acceptable by the Ld. PCIT and the impugned order was passed wherein the matter was set aside to the file of the AO on the issue of applicability of tax under section 11 5BBE of the Act on the income surrendered by the assessee.
3.7 In the said background, it was submitted that the assessee is in appeal before this Tribunal. It was submitted that the amount surrendered and the discrepancy noted were related to one and only Orthopaedic & Dental clinic of the assessee. Since the assessee was not carrying on any other business, whatever has been surrendered by him is related to the business carried on by the assessee.
3.8 It was submitted that even at the time of surrender, it was specifically mentioned by the assessee before the survey team that the surrender has been made as additional income which is over and above the regular business of the assessee and the tax have to be paid at the normal tax rate and the said surrender was accepted by the tax authorities as part of regular business income of the assessee.
3.9 It was submitted that thereafter during the course of assessment proceedings, the AO specifically enquired about the income surrendered and the nature and source thereof and after considering the reply filed by the assessee, the AO took a possible view on the taxability of income surrendered by the assessee and accepted the sum surrendered as part of regular business income of the assessee. It was accordingly submitted that it is definitely not a case of lack of enquiry by the AO and in fact there is proper application of mind by the AO.
3.10 It was further submitted that the revision proceedings under section 263 have been initiated merely basis of difference of opinion which cannot be a ground to determine the order passed by the AO as erroneous and prejudicial to the interest of the revenue. It was submitted that where the AO after due application of mind took a possible view which is different from view taken by the Ld. PCIT and has accepted the additional income surrendered as business income, the action of the Ld. PCIT under section 263 cannot be sustained.
3.11 It was further submitted that the Ld. PCIT has not stated as to how the order passed by the AO is erroneous in so far as prejudicial to the interest of the Revenue specially where there is no further inquiry or investigation done by the Ld. Pr. CIT.
3.12 It was further submitted that the survey was conducted at the business premises of the assessee and discrepancy has also been found at the business premises of the assessee and related to the one and only medical profession carried on by the assessee. It was submitted that the advances given during the course of the profession, fixed assets purchased for his professional activity and cash related to the receipts from the profession only. It was submitted that the assessee does not have any other source of income and the income surrendered was purely part of professional receipts and liable to be taxed at normal rate instead of tax rates mentioned in Section 1 15BBE of the Act. In support, reliance was placed on the Coordinate Chandigarh Benches decision in the case of Arora Alloys Ltd. Vs. DCIT (in ITA No. 1481/Chd/2017) and in case of Khurana Mills Pvt. Ltd. (in ITA No. 745/Chd/2016).
4. Regarding the findings of the Ld. PCIT in para 4 of the impugned order, it was submitted that the contention of the Ld. Pr. CIT that no further submissions have been filed in response to the show cause dt. 2 1/02/2022 is totally incorrect, as the necessary submissions have been filed which is submitted as part of the assessee’s paper book at page no. 45 to 48 wherein the general entries passed by the assessee have been duly explained. It was further noted that the assessee has no other source of income except from his profession and therefore the findings of the Ld. PCIT at para 4 are not borne out from the records.
4.1 Regarding findings of the Ld. PCIT at para 4.1, it was submitted that the said findings are again not borne out from the records as the general entry have been duly explained wherein the amount of Rs. 82,77,162/- has been shown in the capital account and professional income of Rs. 70,00,000/- has been credited in the P&L Account and the net profit of Rs. 82,77,120/- which has been arrived at has been duly credited in the capital account. It was accordingly submitted that the complete double entry explaining the debits and credits have been duly submitted which have not been rightly appreciated by the Ld. PCIT.
4.2 It was further submitted that the nature and source of the income surrendered during the course of survey has been duly explained and the case of the assessee is covered by the decision of the Coordinate Chandigarh Benches in case of M/s Surya Hatchery Vs. Pr. CIT (in ITA No. 317/Chd/2022 dt. 07/12/2022), in case of Neelkanth Hatcheries Vs. Pr. CIT (in ITA No. 318/Chd/2022 dt. 07/12/2022), in case of Gandhi Ram Vs. Pr. CIT (in ITA No. 121/Chd/2021 dt. 04/08/2022), and decision of Coordinate Delhi Benches in case of Shri Balwinder Singh Vs. PCIT (in ITA No. 570/Del/2022.)
5. Per contra, the Ld. CIT/DR has relied on the findings of the Ld. PCIT. It was submitted that during the course of survey, the assessee had surrendered an amount of Rs. 70,00,000/- which is in the nature of undisclosed advances, investment in furniture, fixture and equiments and excess cash which was not accounted for in the books of accounts. It was submitted that assessee in his return of income has shown the surrendered income as business income and has paid taxes as per normal slab rate. It was submitted that during the course of assessment proceedings, the assessee failed to submit any explanation for showing the surrendered income as normal business income. It was submitted that the amount so surrendered represent the undisclosed income of the assessee which would have never come to light had there been no survey action under section 133A of the Act and the same could not be treated as normal business income and have to be considered as unexplained income under section 69, 69A and 69B of the Act and the tax rate © 77.25% should have been applied as per the provisions of Section 11 5BBE of the Act in terms of amendment to Section 11 5BBE by taxation laws 2nd Amendment Act, 2016. It was accordingly submitted that in this case, the AO should have considered the amount so surrendered as unexplained income under section 69A to 69B and the tax should have been charged under section 11 5BBE of the Act.
5.1. It was further submitted that this was the only possible view in the facts and circumstances of the present case wherein the provision of Section 11 5BBE are applicable on surrendered income after taking cognizance of prevalent provisions of law and therefore the contention of the ld AR that the AO has taken a possible view cannot be accepted. It was accordingly submitted that there is no infirmity in the order of the Ld. Pr. CIT wherein the order so passed by the AO has been held as erroneous in so far as prejudicial to the interest of the Revenue.
5.2 Further reference was drawn to the decision of Hon’ble Gujarat High Court in case of Fakir Mohamad Haji Hasan Vs. CIT 247 ITR 290, decisions of Hon’ble Punjab & Haryana High Court in case of Pr. CIT Vs. Khusi Ram & Sons Foods(P) Ltd. in ITA NO. 126 of 2015 (O&M) dt. 21/07/201 6, in case of Kim Pharma Pvt. Ltd. Vs. CIT 216 Taxman 153 (P&H) ITA No. 106 of 2011 (O&M), and decision of Hon’ble Kerala High Court in case of Maruthi Babu Rao Jadav Vs. ACIT in WA No. 984 of 2019 dt. 23/09/2020.
6. In his rejoinder, the Ld. AR submitted that all these decisions which have been relied on by the Ld. PCIT have been duly considered by the various Coordinate Chandigarh Benches decision which have been relied on by the It was further submitted that same has been again considered in the recent decision of Coordinate Chandigarh Bench in case of M/s Sham Jewellers in ITA No. 375/Chd/2022 and in the case of M/s Sham Fashions in ITA No. 31 5/Chd/2022.
7. We have heard the rival contentions and purused the material available on record. Recently, we have decided a similar matter in case of Shri Parmod Singla, Prop. M/s Singla Wire & Allied Products vs ACIT (ITA No.516/CHD/2022 dated 24/07/2023), wherein we have discussed the matter in detail including the various authorities quoted at the Bar and it would be relevant to refer to the discussion therein which are equally relevant in the instant case and the same are reproduced as under:
“13. We have heard the rival contentions and purused the material available on record. The genesis of the present case lies in the survey operations u/s 133A conducted at the business premises of the assessee on 8/07/2016 wherein the assessee surrendered a sum of Rs 84.80 lacs, thereafter the return of income filed by the assessee on 23/03/2018 was selected for compulsory manual scrutiny as per CBDT guidelines presumably to examine whether the assessee has honoured the surrender so made at the time of survey while filing his return of income, as also evident from the conduct of the assessment proceedings by the AO in terms of issuing the show-cause and seeking comments of the assessee on the amount so surrendered during the course of survey and subsequent passing of the assessment order. As per the AO, the amount so surrendered by the assessee during the course of survey though has been offered in the return of income and thus, the assessee has honoured the surrender of income so made but at the same time, the income so offered in the return of income falls under the deeming provisions of section 69 and 69A of the Act and thus, the tax liability thereon has to be determined in terms of section 11 5BBE of the Act. As per the ld AR, the assessee has honoured the surrender so made at the time of survey not just in terms of the quantum of income so surrendered but also in terms of nature of income so surrendered, and the rate of tax at which the surrender has been made and surrender so made has been accepted by the survey team and thus, the deeming provisions of section 69 and 69A r/w section 115BBE are not attracted in the instant case.
14. To appreciate the aforesaid rival positions, we refer to the provisions of section 69 and 69A of the Act. Section 69 provides that where in the financial year immediately preceding the assessment year, the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year. Section 69A provides that where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.
15. In the instant case, for the deeming provisions of section 69 to be attracted, there has to be a finding that the assessee has made investments during the financial year in the stock and by way of advances, such investments are not recorded in the books of accounts so maintained by the assessee, and the assessee offers no explanation about the nature and source of the investments or the explanation so offered is not found satisfactory in the opinion of the AO. Similarly, for the deeming provisions of section 69A to be attracted, there has to be a finding that the assessee was found to be owner of cash so found at the time survey, such cash has not been recorded in the books of accounts so maintained by the assessee, and the assessee offers no explanation about the nature and source of the cash or the explanation so offered is not found satisfactory in the opinion of the AO.
16. Recently, in case of Surender Kumar & others (ITA No. 398/Chd/2022), the Coordinate Chandigarh Benches has held that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to disclose the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him and the relevant findings read as under:
“10. We have considered the rival contentions and have gone through the record. As per the provisions of Section 1 15BBE of the Act, the income tax on income referred to in Section 68 or Section 69 or Section 69A or Section 69B or Section 69C or Section 69D are chargeable to tax at a higher rate. Now a perusal of the provisions of Section 68, 69, 69A, 69B, 69C and 69D would reveal that those provisions are attracted in respect of the credits, cash, expenditure, investment etc. regarding which the assessee offers no explanation about the nature and source thereof. It is to be pointed out that the income is to be assessed u/s 68 wherein any sum is found credited in the books, of which the assessee offers no explanation about the ‘nature and source thereof’ or the explanation offered by him is not found satisfactory by the AO. Section 69 is attracted to the unexplained investments of which the assessee offers no explanation about the ‘nature and source’ thereof or the explanation is not found satisfactory. Similarly, Section 69A is attracted in case of money, bullion, jewellery or other valuable articles, Section 69B refers to the investments, Section 69C refers to the expenditure and Section 69D refers to the amount borrowed or repaid on hundi. The provisions of these Sections are attracted and the income is assessed under these Sections, if, the assessee fails to give the explanation about the ‘nature and source’ of such undisclosed income. The ld. PCIT in our view, in this case has confused himself between the ‘undisclosed income’ and the word ‘unexplained income’. As per provisions of Section 68 to 69D are attracted in respect of the undisclosed income but the condition for assessing such income under the said provisions is that the assessee has either failed to disclose the nature and source of such income or the AO does not get satisfied with the explanation offered by him.
15. The perusal of the above relevant part of the Audit Report proposal of the AO and Show Cause Notice issued by the ld. PCIT u/s 263 of the Act, would show that all the aforesaid authorities have been swayed by the notion that the income surrendered by the assessee was undisclosed income of the assessee and therefore, the same has to be assessed u/s 68 to 69D, as the case may be, of the Income Tax Act and thereby would be charged to higher rate of tax u/s 1 15BBE of the Act. However, as noted above, for an income to be taxed u/s 68 to 69D, as the case may be, it should not only be the undisclosed income but the essential condition is that the assessee has failed to disclose the ‘nature and source’ of such undisclosed income or that the explanation offered by the assessee is not found satisfactory by the AO. In the case in hand, as noted above, the AO duly made enquiries from the assessee as to the nature and the source of the aforesaid surrendered income and has also show caused the assessee as to why the same should not be charged at a higher rate of tax as per provisions of Section 1 15BBE of the Act. The ld. AO after considering the submissions and explanations of the assessee accepted the contention of the assessee that the surrendered income was out of the business income of the assessee. The perusal of the impugned order of the ld. PCIT would show that the ld. PCIT has not pointed out as to why the explanation offered by the assessee to the AO was not satisfactory and further what more enquiries are required to be conducted in this case, which the AO had failed to conduct. The ld. PCIT has simply based his opinion and order on the Audit Objections/Report as pointed out even in the Audit Report that since the same was undisclosed income of the assessee which was surrendered by the assessee during the survey action and therefore, the same was to be assessed under the provisions of Section 68 to 69D of the Act. The above reasoning of the survey party is not in accordance with the relevant provisions of the Act. Therefore, we do not find any justification on the part of the ld. PCIT in invoking the Revisionary jurisdiction in this case.”
17. Therefore, the foundational requirement before invoking the deeming provisions is not that there were certain survey operations u/s 133A and some undisclosed income has been detected and surrendered by the assessee and thus, the deeming provisions are automatically attracted. Rather the foundational requirement is whether the assessee has made the investment/has been found to be owner of cash and the explanation offered by the assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the assessee keeping into account the facts and circumstances of the relevant case. In fact, if we look at the provisions of section 1 33A, clause (iii) of sub-section (3) provides that an income tax authority acting under this section shall record the statement of any person which may be useful for or relevant to any proceedings under this Act. Therefore, what explanation has been offered by the assessee as part of his statement recorded u/s 133A needs to be analysed and examined before drawing any conclusions in this regard.
18. In the instant case, in the statement so recorded of the assessee during the course of survey, in Question No. 3 raised by the survey team, the assessee was asked about the source of his income and in response, the assessee submitted that he was sole Proprietor of M/s Singla Wire and Allied Products, Patiala and except the said business, he has no other source of income. Further, he stated that he was not partner/Director in any of the firm or company. In Question No. 4 raised by the survey team, he was asked to state the date of commencement of his concern and the nature of activity carried out alongwith details of manufactured products. In response, the assessee submitted that the concern started business in the year 2008 and it is involved in manufacturing of aluminum and copper wires and thereafter, he has given the details of manufacturing process. In Question No. 10, he was asked by the survey team that as per assessee’s books of account, there was cash in hand of Rs. 66,400/- however on physical verification, Rs. 10,46,000/- is found from your business premises thus there is excess cash of Rs. 9,80,000/- and the assessee was asked to explain the discrepancy. In response, the assessee submitted that at this point in time, he was not in a position to explain the said discrepancy found in cash and offered the difference of Rs. 9,80,000/- for taxation. In Question No. 11, the survey team noted that one note pad (katcha) was found during the course of survey and advance to various persons to the tune of Rs. 55,00,000/- has been found noted therein and the assessee was asked to explain the nature of these advances. In response, the assessee submitted that these advances relates to his business activity, however he is not in a position to explain the same at this moment of time and to buy peace of mind, he offered this amount of Rs. 55,00,000/- for taxation for the F.Y. 2016-17 pertaining to A.Y 2017-18. In Question No. 12, the survey team stated that stock to the tune of Rs. 17,38,400/- has been found as per the books of account maintained by the assessee, however on physical verification, stock to the tune of Rs. 37,38,210/- has been determined and the assessee was asked to explain the difference of excess stock valued at Rs. 20,00,000/-. In response, the assessee submitted that at this moment of time, he is not in a position to explain the said difference of Rs. 20,00,000/- however to buy peace of mind, he offered this amount of Rs. 20,00,000/- for taxation for the F.Y. 2016-17 pertaining to A.Y. 201 7-18. Thereafter, in the statement so recorded, it is mentioned that taxes on total additional income of Rs. 84,80,000/- so surrendered by the assessee were worked out and three post dated cheques were given by the assessee to the survey team for securing the payment of due taxes amounting to Rs. 26,20,000/-. Thereafter, in terms of surrender letter dt. 08- 09/07/2016 addressed to the Additional CIT, Patiala Range, Patiala, the assessee has reiterated the amount surrendered of Rs. 84,80,000/- which were offered as additional income at the time of survey on account of certain discrepancies noticed in terms of advances to various persons amounting to Rs. 55,00,000/-, cash in hand of Rs. 9,80,000/-, excess stock of Rs. 20,00,000/- and the tax liability of Rs. 26,20,000/- which has been worked out at the time of survey and the details and particulars of the cheque issued were mentioned.
19. We therefore find that through various questions raised during the course of survey, the assessee has been asked about the nature and source of his income and various discrepancies so found during the course of survey. In response, the assessee has stated that he is running a sole proprietorship business concern in name of M/s Singla wires and allied products since 2008 wherein he manufactures and sells aluminum and copper wires and all along, the same is his only source of income and thereafter, he has been confronted with discrepancies in terms of cash found excess as compared to what has been recorded in the books of accounts, certain advances relating to his business written in a rough diary and excess value of stock as compared to what has been recorded in the books of accounts. Therefore, we find that the assessee has been confronted with not just the discrepancy so found during the course of survey but the nature and source thereof during the course of survey proceedings and it is clearly emerging that the source of such income is from his business operations. There is a clear statement of the assessee that the advances are related to his business, however since the same have not been recorded in the books of accounts, he has offered the same to taxation. Similarly, the stock physically found has been valued and then, compared with stock as recorded in the books of accounts, thus, there is clear nexus of stock with the assessee’s business. The statement of the assessee is available on record and related documents so found during the course of survey are stated to be in possession of the Revenue authorities. Apparently, the AO has failed to take into consideration the statement of the assessee recorded during the course of survey holistically, and other documents and findings of the survey team which are very much part of the records. Following the surrender so made during the course of survey, the assessee has honored the surrender so made and offered the additional income as business income in his return of income and paid due taxes thereon.
20. In our view, what is relevant before invoking the deeming provisions is not just the factum of survey action but besides that, what is the explanation so offered by the assessee explaining the nature and source of income so found during the course of survey proceedings and which has not been recorded in the books of accounts and the same is the essence of the statutory provisions as duly recognized by the Courts and various Benches of the Tribunal and which has been reiterated from time to time. The statement of the assessee has to be read as a whole and not in piecemeal especially where the Revenue is relying on the same statement and in such circumstances, the defence available to the assessee in terms of part of the statement not been considered by the Revenue cannot be ignored. The mere fact that survey/search proceedings have been initiated at the business premises of the assessee doesn’t mandate the Assessing officer to automatically invoke the deeming provisions and before invoking the deeming provisions, he has to call for the explanation of the assessee and only where the explanation so offered is not found satisfactory, he can proceed and invoke the deeming provisions.
21. In case of Gandhi Ram (ITA No. 12 1/Ci-ID/202 1 dated 04/08/2022), speaking through one of us, it was held that it is like laying a general rule which is beyond the mandate of law that wherever there is a survey and some income is detected or surrendered by the assessee, the deeming provisions are attracted by default and by virtue of the same, provisions of section 11 5BBE are attracted and the relevant findings read as under:
5. “Firstly, how the ld PCIT has arrived at a conclusive finding that the discrepancies found, confronted and accepted by the assessee during the course of survey attract the deeming provisions of section 68, 69, 69A, 69B & 69C is not apparent from the impugned order. Merely stating that excess cash is clearly covered u/s 68 or 69A, excess stock is covered u/s 69 or 69B, construction of Shed/Godown is covered u/s 69B or 69C and advances made to Sundry Parties is covered u/s 69, 69B or 69D is like an open ended hypothesis which is not supported by any specific finding that the matter shall fall under which of the specific sections and how the conditions stated therein are satisfied before the said provisions are invoked. It is like laying a general rule, which to our mind is beyond the mandate of law, that wherever there is a survey and some income is detected or surrendered by the assessee, the deeming provisions are attracted by default and by virtue of the same, provisions of section 1 15BBE are attracted. The ld PCIT has to record his specific findings as to the applicability of the relevant provisions and how the explanation called for and offered by the assessee is not acceptable in the facts of the present case which is clearly absent in the instant case. Therefore, where the ld PCIT himself is not clear about the applicability of relevant provisions and in the same breath holding the Assessing officer to task by not invoking the said provisions is clearly shooting in the dark which cannot be sustained in the eyes of law and the order so passed therefore cannot be held as erroneous in the eyes of law.”
22. In case of Chokshi Hiralal Maganlal Vs. DCIT (Supra), briefly the facts of the case were that during the course of survey under section 1 33A which was carried out at the premises of the assessee, excess stock of gold and silver ornaments were found and in the return of income subsequently filed by the assessee, he had included the value of excess stock as part of closing stock inventory. However the AO observed that the said disclosure was not consistent with the provisions of Section 69B of the Act and same was accordingly brought to tax under section 69B. The Ld. CIT(A) confirmed the order of the AO and thereafter on further appeal, the Coordinate Ahmedabad Bench held that the excess stock found during the survey is not separately and clearly identifiable but is part of mix lot of stock found at the premises which included declared stock as per books and also the excess stock as computed by the Survey Officers and therefore the provisions of Section 69B cannot be made applicable as primary condition for invoking the said provision is that the asset should be separately identifiable and it should have independent physical existence of its own and since excess stock as a result of suppression of profit from business over the years and has not kept identifiable separately but as part of overall physical stock found, the investment in the excess stock has to be treated as business income and thereafter has referred to the decision of the Tribunal in case of Fashion Fashion World Vs. ACIT (IT Appeal No. 1634(Ahd.) of 2006, dt. 12/02/20 10) wherein the Tribunal had observed as under:
“11. But this does not mean that loss computed under any of the five heads mentioned in section 14 – (i) ‘salary’, (ii) ‘income from house property’, (iii) ‘profits and gains from business or profession’, (iv) ‘capital gains’ and (v) ‘income from other sources’ – cannot at all be adjusted against unexplained investment or expenditure. What is necessary as per Hon. Gujarat High Court is that source of acquisition of asset or expenditure should be clearly identifiable. In the case before Hon. Gujarat High Court the source of gold confiscated was not identifiable and hence adjustment was not permitted.
12. Thus the important aspect that emerges from the entire discussion is that for invoking deeming provisions under sections 69, 69A, 69B & 69C there should be clearly identifiable asset or expenditure. In the present case we find that entire physical stock of Rs.25, 14,306/- was part of the same business. Both kind of stock i.e. what is recorded in the books and what was found over and above the stock recorded in the books, were held and dealt uniformly by the assessee. There was no physical distinction between the accounted stock or unaccounted stock. No such physical distinction was found by the Revenue either. The assessee has repeatedly claimed that unaccounted business income is invested in stock and there is no amount separately taxable under section 69. The department has ignored this claim of the assessee and sought to tax the difference between book-stock and physical-stock as unaccounted investment under section 69 without considering the claim of the assessee that first the business receipt has to be considered and then investment should be treated as coming out of such unaccounted income. The difference in stock so worked out by the authorities below had no independent identity of its own and it is part and parcel of entire lot of stock. The difference between declared stock in the books and what is physically found would only be a mathematical expression in terms of value and not a separate independent identifiable asset. Therefore, it cannot be said that there is an undisclosed asset existed independently. Once this is so then what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset.
13. Thus in a case where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is only where no nexus is established with any head then it should be considered as deemed income under section 69, 69A, 69B & 69C as the case may be. It is because when assessee fails to explain satisfactorily the source of such investment then it should be taxed under section 69, 69A, 69B & 69C as the case may be. It should not be done at the first instance without giving opportunity to the assessee to establish nexus. Therefore, there is no conflict with the decision of Hon. Gujarat High Court in the case of Fakir Mohmed Haji Hasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, we hold that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment.
14. To conclude sum of Rs.8, 10,0 1 1/- being difference in stock is represented by undeclared business income. It does not have a separate physical identity. It is to be only taxed under the head ‘business’. Other assets have separate physical identity being furniture and fixtures, air conditioners etc. They cannot have a direct nexus with business and therefore investment therein has to be considered under section 69 only.”
15. In view of the above, AO is directed to consider the sum of Rs.8,10,011/- as undisclosed business income assessable under the head ‘business’ and other two sums under section 69. The business income including application of section 40(b) has to be considered accordingly. For calculation of income in view of our above observations, we restore the matter to the file of AO.
23. In the instant case as well, we find that the difference in stock so found out by the authorities has no independent identity and is part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as undeclared business income.
24. Following the said decision of the Coordinate Ahmedabad Bench, the Jaipur Bench in case of DCIT Vs. Shri Ram Narayan Birla (Supra) has taken a similar view holding that the excess stock so found during the course of survey was part of the stock and the Revenue has not pointed out the excess stock has any nexus with any other receipts other than the business being carried on by the The relevant findings are contained at para 4.3 which read as under:
“4.3. We have heard rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that the assessee is engaged in the business of jewellery. During the course of survey excess stock valuing Rs. 77,66,887/- was found in respect of gold and silver jewellery. The Coordinate Bench in the case of Chokshi Hiralal Maganlal vs. DCIT, 131 TTJ (Ahd.) 1 has held that in a cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is observed that there is no conflict with the decision of Hon’ble Gujarat High Court in the case of Fakir Mohd. HajiHasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, the Hon’ble Coordinate Bench held that where asset in which undeclared independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. In the present case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore, we do not find any fault with the decision of the ld. CIT (A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found.”
25. Thereafter, the Coordinate Jaipur Benches in case of Bajargan Iraders Vs. ACIT (Supra) has similarly held as under:
“2.10. We have heard the rival contentions and perused the material available on record. During the course of survey, the assessee has surrendered an amount of Rs. 70,04,814/- towards investment in stock of rice which had not been recorded in the books of accounts. Subsequently, in the books of accounts, the assessee has incorporated this transaction by debiting the purchase account and crediting the income from undisclosed sources. In the annual accounts, the purchases of Rs. 70,04,814/-were finally reflected as part of total purchases amounting to Rs. 33,47, 19,658/- in the profit and loss account and the same also found included as part of the closing stock amount to Rs. 1,94,42,569/-in the profit/loss account since the said stock of rice was not sold out. In addition to the purchase and the closing stock, the amount of RS. 70,04,814/- also found credited in the profit and loss account as income from undisclosed sources. The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known source, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. Accordingly, we do not see any infirmity in assesseeEs bringing such transaction in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future.
2. 11. Having said that, the next issue that arises for consideration is whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head business income or income from other sources . In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla (supra) supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head business income and not under the head income from other sources . In the result, ground No. 1 of the assessee is allowed.”
26. The said decision of Coordinate Jaipur Benches has since been confirmed by the Hon’ble Rajasthan High Court in case of PCIT vs Bajargan Traders (DB Appeal No. 258/2017 dt. 12/09/201 7).
27. Similarly, the Coordinate Chandigarh Benches in case of M/s Gaurish Steels Pvt. Ltd. Vs. ACIT (Supra) has held as under:
“10. We have heard the rival contentions and perused the material available on record. This is a fact on record that the assessee surrendered an amount of Rs.70 lacs as additional income during the course of survey conducted at its premises on account of following heads:
