In Absence of Separate Source, Surrendered Amount Taxable as Business Income

Deepak Setia Vs DCIT (ITAT Amritsar)

The case of Deepak Setia vs. DCIT (ITAT Amritsar) revolves around a tax dispute concerning the classification of income and the subsequent application of tax laws.  Deepak Setia, the appellant, challenged the order of the Commissioner of Income Tax (Appeals)-5, Ludhiana [CIT(A)], which upheld the assessment order passed by the Deputy Commissioner of Income Tax (DCIT), Central Circle-1, Jalandhar. The primary contention was the classification of Rs. 12,50,321 as income from undisclosed sources under section 69A of the Income Tax Act, 1961, and the subsequent taxation under section 115BBE.

The appellant argued that this amount was already declared as business income in the return filed under section 139(1) and was part of the surrendered income during a survey under section 133A. The CIT(A) upheld the AO’s order despite acknowledging that the documents seized during the survey related to the normal business operations.

Survey and Assessment Details

A survey was conducted at the appellant’s business premises under section 133A, resulting in a surrender of Rs. 29 lakhs, declared as miscellaneous business income. During the scrutiny assessment, the AO reclassified Rs. 14,23,000 out of this amount as income from undisclosed sources, invoking section 69A, and taxed it at a higher rate under section 115BBE. The remaining amount was treated as normal business income.

Appellant’s Argument

The appellant’s representative argued that the entire surrendered amount was declared as business income in the tax return and paid at the normal rate. Relying on various judicial precedents, including the cases of Harish Sharma vs. ITO and Daulatram Rawatmull vs. CIT, the representative contended that in the absence of any separate source of income, the surrendered amount should be treated as business income.

Tribunal’s Findings and Decision

The ITAT Amritsar examined the arguments and evidence presented. It noted that the revenue authorities failed to establish that the surrendered amount originated from sources other than the appellant’s business. The tribunal relied on judicial precedents which held that when no separate source of income is identified, surrendered income during a survey should be treated as business income.

The tribunal found that the AO’s reclassification of Rs. 14,23,000 as income from undisclosed sources under section 69A, and the subsequent application of section 115BBE, was improper and lacked a proper basis. Consequently, the tribunal quashed the levy of tax under section 115BBE on this amount.

Conclusion: The ITAT Amritsar’s decision in Deepak Setia vs. DCIT underscores the importance of correctly classifying income and adhering to established judicial principles. The tribunal’s ruling highlights that in the absence of evidence pointing to undisclosed sources, income declared during a survey should be treated as business income, ensuring fair and just taxation. This case serves as a crucial reference for tax professionals and businesses in navigating similar tax disputes.

FULL TEXT OF THE ORDER OF ITAT AMRITSAR

The instant appeal of the assessee was filed against the order of the ld. Commissioner of Income Tax (Appeals)-5, Ludhiana,[in brevity the ‘CIT (A)’],order passed u/s 250 (6) of the Income Tax Act 1961, [in brevity ‘the Act’] for A.Y. 2019-20. The impugned order was emanated from the order of the ld. DCIT, Central Circle-1, Jalandhar, [in brevity ‘the AO’] order passed u/s 144 of the Act.

2. The assessee has taken the following grounds:

“1. That the order of the Ld. CIT(A)-5, Ludhiana is against law and facts of the case.

2. That the Ld. CIT(A) erred in sustaining the AO’s order to the extent of considering the amount of Rs. 12,50,321/-as Income from undisclosed sources and treating it as unexplained money under section 69A of the Income Tax Act and charge tax as per provisions of Section 115BBE of Income Tax Act, 1961 without appreciating that this amount was duly shown as income under the head ‘Income from Business or Profession’ in the return of income and this amount was disclosed as business income during survey under section 133A of Income Tax Act, 1961, which represented the sales made on the slips.

2.1 That the Ld. CIT(A) sustained the above addition while himself holding that the documents (slips) seized during survey under section 133A of Income Tax Act at the business premises of the assessee are related to the normal working of the business of the assessee.

3. That the appellant craves leave to add or amend any of the ground ofappeal before the appeal is finally heard or disposed off.”

3. Brief fact of the case is that the survey was conducted in assessee’s premises u/s 133A of the Act. The assessee surrendered the amount of Rs.29 lacs and offered for taxation as miscellaneous business income. Subsequently, the case was selected for scrutiny and the out of the 29 lacs, amount to Rs.14,23,000/- related to miscellaneous business income (MBI) was taken as income from undisclosed source u/s 69A of the Act and calculated the tax u/s 115BBE in special rate. Rest of the surrendered amount was taken as normal business income and tax was calculated as normal rate. Aggrieved assessee filed an appeal before the ld. CIT(A). The ld. CIT(A) upheld the order of the ld. AO. Being aggrieved, the assessee filed an appeal before us.

4. The ld. AR filed a written submission which is kept in the record. The ld. AR first invited our attention in page no. 18 of APB where the assessee voluntary offered business income during survey amount to Rs.29 lacs. The ld. AR also invited our attention in statement of the Sh. Deepak Setia, assessee, taken on dated 27.02.2019 where the assessee made voluntary surrendered the business income Rs. 29 lacs, annexed in APB page 30. The surrendered income of the assessee declared in survey in following manner:

4.1 The ld. AR in argument submitted that the entire amount was declared in the return filed u/s 139(1) and paid the tax in normal rate and treated the income as business income. The ld. AR relied on the order of Sh. Harish Sharma vs. ITO in ITA No. 327/Chd/2020, date of order 11/05/2021 wherein it has been held that:

“9. Further, section 68 of the Act, applies where any sum is found credited in the books of account maintained by the assessee for any previous year and the assessee fails offer any explanation about the nature and source thereof or the explanation by the assessee is not satisfactory in the opinion of the AO, the sum so credited may be treated as income of the assessee of that previous year. In the present case the assessee has explained the nature and source of the amount in question and to substantiate his contention submitted cash flow statement. We further note that the AO has not given his findings on this point. We, therefore, find merit in the contention of the assessee that in the absence of any adverse findings by the AO on the source of earning of the assessee, the authorities below have wrongly treated the amount in question as undisclosed income u/s 68 of the Act and computed the Tax liability under the provisions of section 115BBE of the Act.”

4.2. Respectfully reliance in this regard is placed on the judgment in the case of DaulatramRawatmullvs. CIT [1967] 64 ITR 593, wherein Hon’ble Calcutta High Courtheld that:

“61. In the instant case the assessee is a firm formed for the purpose of carrying on business. There is nothing on record to show that the firm had any source of income other than business. Therefore. in our opinion, it is not unreasonable to hold that any amount representing secret income arose out of business of the firm.”

Further, same view has been taken by Calcutta High Court in case of Mansfield and Sons v. CIT [1963] 48 ITR 254.

4.3. Further, respectfully reliance is also placed on the following judgments: Hon’ble ITAT-Chandigarh Bench in the case of M/s. Sham Jewellers in ITA No. 375/CHD/2022, date of order-22/08/2022wherein, it has been held as under:

“Ground Nos. 8 El 9 challenge the action of the lower authorities in applying the provisions of section 115BBE and thereby charging tax at the rate of 60%. The main thrust of the arguments of the Ld. AR has been that all the additions made or sustained relate only to the business income of the assessee and that nowhere in the assessment order has it been alleged that some other source of income had been detected which gave rise to additional income. It is seen that during the course of assessment proceedings, the various explanations submitted by the assessee have duly mentioned that the surrendered income was derived from the business. A perusal of the assessment order would also show that nowhere in the body of the assessment order. the AO has even contradicted this explanation of the assessee. The AO has not brought on record any iota of evidence to demonstrate that the assessee had any other source of income except income from business and, therefore, it is our considered view that deeming such income under the provisions of sections 68 or 69 would not hold good. In our view, in such a situation, the AO could not have legally and validly resorted to taxing the income of the assessee at the rate of 60% in terms of provisions of section 115BBE of the Act.”

5. The ld. DR vehemently argued and fully relied on the order of the revenue authorities.

6. We heard the rival submission and considered the documents available in the record. During survey proceeding the assessee surrendered total income of Rs.29 lacs out of which amount to Rs.14,23,000/- was related to other discrepancies/miscellaneous business income which was treated as income u/s 69A and calculated tax under special rate during assessment. There entire addition is certainly without forming proper basis for conversion into business income to non-business income. The revenue was not able to submit any evidence during assessment and appeal proceeding that the said income is not connected with the business income of the assessee or accumulated from non-recognising source.

Hence, when all the incomes earned by the assessee are only from the business income of the assessee, there do not arise any question as to application of provisions of section 69A of the Act and hence taxing such income at special rate as per section 115BBE is improper. It is a settled principle in law that when there is no other/separate source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only.

During survey proceeding the assessee filed surrendered letter dated 27.02.2019 and in statement assessee also recorded and income was surrendered. We respectfully relied on the order of the ITAT, Chandigarh Bench in the case of Sh. Harish Sharma & M/s. Sham Jewellers (supra) and the order of Hon’ble Calcutta High Court in the case of Daulatram Rawatmull (supra). In considered view, the conversion of business income into other income and application of section 69A is bad and illegal. Accordingly levy of tax u/s 115BBE on the income amount to Rs.14,23,000/- liable to be quashed.

7. In the result, the appeal of the assessee bearing ITA No. 112/Asr/2019 is allowed.

Order pronounced in the open court on 17.07.2023