Case Law Details
IN THE ITAT CHANDIGARH BENCH ‘A’
Income-tax Officer, Ward V(1) Ludhiana
V/s.
Dulari Digital Photo Services (P.) Ltd
C.O. No. 37 (Chd.) of 2010
IT Appeal No. 984 (Chd.) of 2010
[Assessement year 2006-07]
March 9, 2012
ORDER
D.K Srivastava, Accountant Member
Both the parties are aggrieved by the order passed by the CIT(A) on 23.4.2010. The issues raised by the Department in its appeal are inter-related with the issue raised by the assessee in its memorandum of cross-objections. It is therefore convenient to dispose of both of them by a consolidated order.
2. We shall first take up the appeal filed by the Department in which the following grounds of appeal have been taken:
1. That the Ld. CIT(A)-II has erred in law and on facts in holding that the Assessing Officer was not justified in treating the commodity profit of Rs. 11,94,315/- as ingenuine and sham and assessing the same under section 68 of the Income Tax Act, 1961.
2. That the Ld. CIT(A) has erred in law and on facts in holding that the income assessed under section 68 of the Income Tax Act, 1961 falls under the heads of income as mentioned in section 14 of the Income Tax Act, 1961.
3. That the Ld. CIT(A) has erred in law and on facts in holding that the income assessed under section 68 can be set off of against any other income as per provisions of section 71 of the Income Tax Act.
4. That the order of the CIT(A)-II be set aside and that of the Assessing Officer be restored.
5. That the appellant craves leave to add to amend any ground of appeal before it is finally disposed off.
3. The assessee is engaged in the business of photography. It filed return of income on 30.11.2006 returning its total income at nil. After processing, the return was selected for scrutiny as a result of which a sum of Rs.11,94,315/- being the commodity profit found credited in the books of account of the assessee was treated as bogus and sham and consequently assessed as unexplained cash credit u/s 68 of the I-T Act. The plea of the assessee that the aforesaid income taxed by the Assessing Officer u/s 68 should be set off against the loss from other heads of income was also rejected by the Assessing Officer.
4. Facts giving rise to the impugned addition are that a sum of Rs. 11,94,315/- was found credited in the books of account of the assessee for the year under appeal as commodity profit allegedly received from M/s Shivam Commodities Services (proprietor: Shri Suresh Kumar Gupta) out of which a sum of Rs.74,550/- was claimed as loss and resultantly net income amounting to Rs.11,19,765/- was shown by the assessee as commodity income. The said commodity income was adjusted/set-off by the assessee against losses under other heads/sources of income. The AO took up the case for scrutiny. He called upon the assessee to establish the genuineness of the commodity profit shown in the accounts. In reply, the assessee filed a copy of account of M/s Shivam Commodities Services as appearing in its books for the year under appeal together with photocopies of 16 bills. The AO examined the details/bills furnished by the assessee in support of its claim. He noticed several abnormal features in the transactions and accordingly issued a detailed notice dated 17.12.2008 which has been reproduced at pages 3-6 of the assessment order. After considering the materials available on record including the reply furnished by the assessee, the AO held that the impugned transactions showing generation of commodity profit of Rs.11,94,315/- were sham and bogus. He has given several reasons for coming to the aforesaid conclusion in the assessment order, which inter-alia, are (i) no investment was made by the assessee to earn commodity profit of Rs.3,43,876/- while meager investment of Rs.50,000/- was made by the assessee to earn remaining commodity profit; (ii) the said firm, i.e., M/s Shivam Commodities Services, neither paid service tax though it was, according to the AO, payable @10.20% nor was it registered with the Service Tax authorities; (iii) the direction given to the assessee to produce the said party was also not complied with; (iv) the summons issued by the AO to the said party was also not complied with; (v) the said firm, namely, M/s Shivam Commodities Services, was not registered with Multi Commodity Exchange of India (MCX); and (vi) the bills issued by M/s Shivam Commodities Services did not contain relevant particulars like MCX Code Number, name/address of ITCM, contract number, code of the client, trade time, and brokerage, etc. He therefore treated the commodity profit shown by the assessee as unexplained cash credit and accordingly taxed the same u/s 68.
5. It was also claimed by the assessee before the AO that the impugned sum taxed u/s 68 should be treated as income from other sources u/s 56 and the same should be set-off against the losses under other heads of income in terms of section 71. The AO examined the aforesaid claim. He, however, rejected the same for the reasons given in the assessment order.
6. Aggrieved by the order passed by the Assessing Officer, the assessee filed appeal before the CIT(A) upon which the claim of the assessee was allowed.
7. Aggrieved by the order passed by the CIT(A), the Department is now in appeal before this Tribunal. In support of appeal, the ld. DR invited our attention to the findings recorded by the AO in the assessment order. He submitted that the aforesaid findings clearly established that the impugned transactions with the said party were sham and therefore have no element of genuineness. According to him, the burden was on the assessee to prove the genuineness of the transactions which the assessee has failed to discharge. As regards the claim of the assessee that the impugned sum taxed by the AO u/s 68 should be considered as income from other sources u/s 56 and thereafter set off against the losses, the ld. DR submitted that such a benefit could not be extended for the detailed reasons given by the AO in the assessment order.
8. In reply, the ld. counsel for the assessee supported the order of the CIT(A) in this behalf. Without prejudice to the aforesaid, he submitted that even if the impugned sum is treated and taxed as unexplained cash credit u/s 68 it has still to be assessed as income from other sources u/s 56 and then set-off against the losses under other heads in terms of section 71. According to him, any item assessed by the AO as income including the impugned sum assessed by the AO u/s 68 must necessarily fall under one of the heads specified in section 14. He submitted that the income from other sources u/s 56 was a residuary head of income and therefore any income including the impugned sum assessed by the AO as unexplained cash credit u/s 68 which does not fall under any of the specific heads, namely, “salary”, “income from house property”, “income from business or profession” or “capital gain” would necessarily fall under the residuary head, i.e., income from other sources u/s 56. According to him, no item can be assessed as income unless it falls under any of the heads specified in section 14. He claimed that the impugned sum being unexplained cash credit taxed by the AO was therefore liable to be assessed as income from other sources u/s 56 and then set-off against the losses under other heads of income in terms of section 71. In support of his submissions, he relied upon the judgments in Lakhmichand Baijnath v. CIT [1959] 35 ITR 426 (SC) and Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 (Bom.).
9. We have heard both the parties and carefully considered their submissions. There is no dispute that a sum of Rs.11,94,315/- was credited by the assessee in its books of account for the year under appeal as commodity profit. Since the impugned sum was found credited in the books of the assessee, the burden was on the assessee to satisfactorily explain the income and source thereof. The case of the assessee before the AO was that it represented commodity profit on account of dealings with M/s Shivam Commodities Services. The AO has given detailed reasons to establish the bogus and sham nature of the transactions of the assessee with M/s Shivam Commodities Services. There is no material on record to rebut the specific finding recorded by the AO in this behalf. In this view of the matter, the finding of the AO that the dealings of the assessee with M/s Shivam Commodities Services were bogus and sham is confirmed. There is no other explanation given by the assessee to explain the nature and source of the impugned cash credits. The action of the AO in treating the impugned sum as unexplained cash credit u/s 68 of the Act, therefore, deserves to be confirmed and is accordingly confirmed.
10. We shall now deal with the issue as to whether unexplained cash credits, which are deemed to be the income of the assessee u/s 68, can be considered for set-off against losses under various heads of income as enumerated in section 14. The answer to the aforesaid question lies in the fact as to whether unexplained cash credits taxed u/s 68 are assessable under a known source or head of income as enumerated u/s 14. If they are so assessable under a head of income specified in section 14, they would then and then only need to be set off against the loss from other heads of income in terms of section 71. Chapter IV of the Income-tax Act deals with “COMPUTATION OF TOTAL INCOME” under various heads of income. Section 14, which enumerates head of income, falls under Chapter IV and reads as under:
CHAPTER IV
Computation of Total Income
Heads of income
Heads of income.
14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:-
A. – Salaries
B. – [omitted by the Finance Act 1989]
C. – Income from house property.
D. – Profits and gains of business or profession.
E. – Capital gains.
F. – Income from other sources.
11. Some of the salient features of section 14 in so far as they have material bearing on the issue under appeal are as under:
(i) Section 14 merely classifies the income under various heads of income for the purpose of computation of total income under them. Section 14 does not deal with aggregation of income; it merely deals with classification of income under various heads of income. “Computation of total income under various heads of income” under Chapter IV is altogether different from “Aggregation of income” under Chapter VI of the Income-tax Act. They do not mean one and the same thing. They are fundamentally different from each other.
(ii) Section 14 is not a charging section; it merely classifies income under various heads of income. It is total income of the previous year and not the head of income which is chargeable to income-tax u/s 4.
(iii) Opening words of section 14 are “Save as otherwise provided by this Act”, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the heads of income specified therein. Thus, section 14 is subject to the other provisions of the I-T Act. Taxability of income under the specific provisions of the I-T Act outside Chapter IV is not affected by heads of income as classified in section 14. As a corollary, it follows that income liable to be taxed under the specific provisions of the I-T Act outside Chapter IV can be taxed without bringing the same under a head of income as specified under section 14/Chapter IV.
12. At this stage, it may be relevant to consider Chapter VI in general and the provisions of section 68 in particular. They read as under:
Chapter VI
Aggregation of income and set off or carry forward of loss
Cash credits.
68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year.
13. Some of the salient features of Chapter VI and section 68 in so far as they have material bearing on the issue under appeal are as under:
(i) Any sum, which is deemed to be the income of the assessee in terms of sections 68, 69, 69A, 69B and 69C, falls within the “Scope of total income’ as defined in section 2(45)/5 and is therefore chargeable to tax under section 4. In terms of Chapter VI it is aggregated with the income computed under Chapter IV. Aggregation of income under Chapter VI is not the same thing as computation of income under various heads of income in terms of Chapter IV of the IT Act.
(ii) Computation of income under each head of income in terms of Chapter IV requires determination of excess of gross receipts over expenses legally permissible in that behalf under the relevant head of income. Aggregation of income under Chapter VI does not provide for any deduction towards any expenditure. It brings the entire sum to the charge of income-tax and thus there is no element of ‘computation’ of income under Chapter VI as in the case of income falling under specific heads in terms of Chapter IV. It could be for this reason that the sums taxed under Chapter VI have been kept outside the computational provisions of Chapter IV.
(iii) Amounts are taxed under the provisions of Chapter VI for the reason that their nature and source are not known. Once their nature and source are known, they have to be pegged to that source/head of income and taxed under the respective heads of income as enumerated in Chapter IV and not under the provisions of Chapter VI. Conversely, if the nature and source of such amounts are not known, they have to be taxed under the specific provisions of Chapter VI. It therefore necessarily follows that what is taxed under the specific provisions of Chapter VI cannot be pegged to any of the sources/heads of income as specified in Chapter IV.
14. The aforesaid view is supported by the scheme of taxation under the Income-tax Act. Section 2(45) defines “total income” as “the total income referred to in section 5, computed in the manner laid down in this Act”. It is relevant to note that the principal charging section 4 makes the “total income of the previous year” subject to the charge of income-tax. Section 5 defines the scope of total income referred to in the principal charging section. Section 14 classifies the heads of income while sections 15 to 59 provide for its quantification. Chapter VI of the Income-tax Act provides for aggregation of income and set off or carry forward of loss. Thus Chapter VI is in two parts; first part deals with aggregation of income while the second part deals with set off or carry forward of losses. Chapter VI has been placed after Chapter IV and V. It comes into play only after the computation of total income under various heads of income in terms of Chapter IV has been done. Income falling under Chapter VI is taxed by aggregating the same with the income quantified in terms of Chapter IV. Chapter VI is not subservient to Chapter IV. Besides, section 14 allows the taxability of income under specific provisions of the I-T Act outside Chapter IV. For the reasons aforestated, the income assessable u/s 68 cannot be assessed as income from other sources u/s 56.
15. Thus what is taxed under Chapter IV is income from a known source including income from other sources. A source of income means a specific source from which a particular income springs or arises. Once a source giving rise to a particular income is identified, it has then to be placed under a particular head of income as specified in section 14. Thus income can be taxed under a specific head of income as enumerated in section 14 only when it is possible to peg the same to a known source/head of income. If the nature and source of a particular receipt is not known, it cannot then be pegged to a known source/head of income. Chapter IV contemplates computation of income arising from known sources/heads of income whereas Chapter VI, on the other hand, contemplates aggregation of the entire sum the nature and sources of which are not known. The aforesaid two Chapters are completely different in their nature, scope and effect. Though the incomes assessable under them are part of total income as defined in sections 2(45)/4/5 of the I-T Act yet that does not mean that the income assessable under section 68 has to be assessed u/s 56. In the case before us, source of unexplained cash credits is not known and hence they cannot be linked to any known source/head of income including income from other sources. In order to constitute income from “other sources”, the source, namely, the “other sources”, has to be identified. Income from unexplained or unknown sources cannot therefore be considered or taxed as income from other sources. The aforesaid view is fortified by the judgment of the Hon’ble Gujarat High Court in Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 in which the Hon’ble High Court has held as under:-
“The scheme of sections 69, 69A, 69B and 69C of the Income-tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from “other sources” which have to be sources known or explained. When the income cannot be so classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. If it is possible to peg the income under any one of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not apply, in which event, the provisions regarding deductions, etc., applicable to the relevant head of income under which such income falls will automatically be attracted.
The opening words of section 14 “save as otherwise provided by this Act” clearly leave scope for “deemed income” of the nature covered under the scheme of sections 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profits and gains of business or profession, or capital gains, nor is it income from “other sources” because the provisions of sections 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head “Income from other sources”. Therefore, the corresponding deductions which are applicable to the incomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions.”
16. In view of the foregoing, we are unable to hold that unexplained cash credits assessed u/s 68 are to be assessed as income from other sources u/s 56.
17. The ld. counsel for the assessee, however, relied upon the judgments in Lakhmichand Baijnath’s case (supra) and Kevalchand Nemchand Mehta’s case (supra). We have carefully gone through them. They have been rendered in the context of old Indian Income-tax Act of 1922 in which there was no provision corresponding to section 68 or Chapter VI of the Income-tax Act 1961. In the absence of any specific provision in the old Indian Income-tax Act of 1922, a view was taken that unexplained cash credits would be assessable as income from other sources. Section 68 under Chapter VI has been inserted in the present Income-tax Act to provide that any sum found recorded in the books of the assessee would be taxed as income of the assessee if he failed to satisfactorily explain the nature and source thereof. In this view of the matter, unexplained cash credits have to be brought to tax under section 68 and not under section 56. Both the aforesaid sections operate in the fields reserved for them. It cannot therefore be said that what is assessable as income u/s 68 must be assessed as income from other sources u/s 56. Judgments rendered in the context of the old Income-tax Act are therefore hardly relevant to decide the issue under appeal.
18. The assessee claims set off of loss from business assessed by the AO u/s 28 against the income being unexplained cash credits assessed by the AO u/s 68 on the ground that income assessed by the AO u/s 68 is income from other sources u/s 56. Section 71 permits set off of loss from one head against income from another head of income as enumerated in section 14. We have already held earlier that income assessable u/s 68 cannot be assessed under any particular head of income including income from other sources u/s 56. In this view of the matter, the business loss assessed by the AO cannot be set off against the amount taxed u/s 68 as unexplained cash credits taxed under section 68 cannot be pegged to any head of income.
19. In view of the forgoing, the appeal filed by the department is allowed.
20. In its memorandum of cross-objections, the assessee has taken the following grounds:-
That the Ld. CIT(A) has erred in not allowing deduction of loss of Rs. 74,550/- form derivative trading of commodities against profit earned from the same source.
21. As already stated earlier, the assessee has claimed deduction for a sum of Rs.74,550/- representing loss form derivative trading in commodities against the total profits amounting to Rs.11,94,315/-. The loss claimed by the assessee from derivative trading was disallowed by the AO, which, on appeal, has been confirmed by the CIT(A) with the following observations:-
“7.4.1 While dealing with above mentioned grounds of appeal it has been held that the transactions of the appellant with the broker in respect of earning the income from trading in derivatives of commodity were genuine. For deciding as above most important fact which was considered was that the transactions resulted in income which has been accordingly disclosed in the return of income by the appellant. However the transactions involved in this regard are those transactions where the appellant claimed loss of Rs. 74,550/-. Therefore, for this the appellant was required to prove with necessary evidence that such loss was genuine loss. It is entirely different from the income which is otherwise disclosed in the return of income of the appellant. The very fact that the appellant could not get these transactions verified by producing the broker and producing his books of accounts before the A.OY’ would fully justify the A.O. in disallowing such loss. Therefore, though the Ld. Counsels have contended as above, the claim of loss of Rs. 74,550/- cannot be taken to have been proved with necessary evidence. Disallowance of loss of Rs. 74,550/- by the A.O. is, therefore, upheld.”
22. We have heard both the parties. We are in agreement with the reasons given by the ld. CIT(A) for confirming his action of the AO in disallowing the impugned loss. In this view of the matter, the order passed by the CIT(A) in this behalf is confirmed.
23. At the time of hearing, the ld. counsel for the assessee relied upon the judgments in CIT v. Anupam Kapoor [2008] 299 ITR 179/166 Taxman 178 (Punj. & Har.) and CIT v. Korlay Trading Co. Ltd. [1998] 232 ITR 820 (Cal.). We have gone through them. None of them is applicable to the facts of the case before us.
24. Resultantly, the appeal filed by the Department is allowed while the memorandum of cross-objections filed by the assessee is dismissed.
Good judgement.Need to know and preserve.
CA.Subhash Chandra Podder, FCA
Kolkata
14/08/2012