Case Law Details
Case Name : M/s Kerala Sponge Iron Ltd. Vs CIT, Trichur (Kerala High Court at Ernakulam)
Appeal Number : IT Appeal No.-195/2014
Date of Judgement/Order : 19/08/2015
Related Assessment Year :
Brief of the case:
- The Hon’ble Kerala High Court in the case of M/s Kerala Sponge Iron Ltd. vs. CIT held that once the income has been assessed u/s 68 as unexplained cash credit it cannot be treated as business income because it is not an income classifiable under any heads of income as per Sec 14.
- Therefore, such incomes are not eligible to set off brought forward business losses and unabsorbed depreciation.
Facts of the case:
- A sum of Rs. 5,13,55,093/- was found credited in the books of accounts of the assessee as commodity trading profit claimed to be received from M/S Vatika Merchants Private Limited.
- The said income was set off by the assessee against business losses for the year in question. On enquiring with National Multi Commodity Exchange of India AO came to know that Vatika Merchants Private Limited was expelled by the exchange on the ground of issuing fraudulent contract to its clients. It was also confirmed that the assessee is a not an existing client of any member of the exchange.
- Based on this AO concluded that the transactions showing generation of commodity trading profit of 5,13,55,093/- was a bogus one. Accordingly, he treated the same as unexplained cash credit u/s 68 and added the same to the total income.
- However, assessee claimed the income assessed u/s 68 should be allowed to set off the brought forward business loss/brought forward depreciation.
- CIT(A) upheld the order of AO in totality , but on further appeal to Tribunal , it held in favour of assessee so far as set off losses & unabsorbed depreciation against the unexplained cash credit income. Tribunal allowed the claim on the ground that unexplained cash credit is nature of business income because the unexplained source viz. commodity trading income pertain to business head.
- Revenue appealed the order of tribunal so far as it allowed the claim of set off before Kerala High Court.
Contention of Assessee:
- The commodity trading profit credited to P&L A/c assessed as unexplained cash credit u/s 68 is infact a business income and therefore, should be allowed to set off the brought forward business losses and unabsorbed depreciation.
- Assessee also relied on the decision of Hon’ble Supreme Court in the case of Lakhmichand Baijnath v. Commissioner of Income Tax, West Bengal (1959) 35 ITR 416 wherein the court held that concealed profits of business added to business income are eligible to set off losses.
Contention of Revenue:
- The commodity trading profit credited in P&L A/c was not a business income rather a bogus income shown in order to claim set of off losses against it.
- Such incomes assessed as unexplained cash credit cannot be treated as business income because it cannot be classified under any head of income u/s 14.
Issue before the High Court:
- Whether the tribunal was right in allowing the set off of brought forward business loss and unabsorbed depreciation against the unexplained cash credit added to assessee’s total income u/s 68?
Held by Hon’ble High Court:
- High court relied on the decision of Hon’ble Gujarat HC in the case of Fakir Mohmed Haji Hassam vs. CIT(2001) 247 ITR 290 where the court held that when income cannot be 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.
- Applying the ratio of above case to the present case, once the income has been assessed u/s 68 it cannot be treated as business income because it is not an income classifiable under any heads of income as per Sec 14.
- Thus, the question of set off of losses against such income not arise at all.
- Further, the Supreme Court judgment in case of Lakhmichand Baijnath cannot be relied to decide the present appeal because in that case the income claimed to set off losses was assessed by AO as concealed profits of the business.
In result , the appeal filed by revenue was allowed.