Case Law Details
Montu Shallu Knitwears Vs DCIT (ITAT Chandigarh)
Recently the B Bench Of Chandigarh Income Tax Appellate Tribunal passed an judgement in the above case examining the applicability of Sec 69B r.w.s 115BBE. The central point of discussion was whether AO was right in applying the provisions of Sec 69B r.w.s 115BBE upon the excess value of stock found at the assessee’s premises during a survey conducted u/s 133A.
Issue:- Assessee is a partnership firm engaged in the business of manufacturing of wearing apparels. Apart from the said business, the assessee does not own or operate any other businesses, nor does the assessee have any other sources of income. On 29-08-2018 a survey action u/s 133A of the Act was carried out at the business premises of the assessee. During the course of survey the Ld. AO verified the stock and compared it to the value of stock in the assessee’s books of account. Discrepancies were discovered, so the assessee surrendered Rs. 50,00,000/- as an additional business income to buy peace of mind and to avoid litigation in FY 2018-19. For FY 2018-19 assessee declared a total income of Rs 1,40,22,393/- which includes that 50 lacs and paid tax at normal rate. Further that assessee’s case was selected for compulsory scrutiny assessment under CBDT guidelines, and a notice u/s 143(2) & u/s 142(1) along with a detailed questionnaire was issued to assessee on 29/9/20 & 20/01/21 respectively. On dt 28-09-2021 assessment order was passed where in the total income of the assessee was assessed at Rs 1,90,22,390/- after making additions of Rs 50,00,000/- on account of disallowance u/s 37. The Ld. AO also applied the provisions of section 115BBE on application of sec 69B of the Act.
Being aggrieved by the order of Ld. Assessing Officer the assessee filed an appeal before the Ld. CIT(A), where the additions of Rs 50,00,000/- on account of disallowance u/s 37 was deleted and the application of sec 115BBE was confirmed vide order dt 04-01-23. Further aggrieved by the order of Ld. CIT(A) the assessee filed an appeal before the Hon’ble ITAT.
In the whole case the assessee contention was that since he has no other source of income except income from business and the amt of Rs 50,00,000/- surrendered by him on account of discrepancies identified by the Ld. AO in respect of stock shall be treated as business income and should be offered to tax at normal rate.
Assessee Contention:- The assessee’s only source of income is their business income, which has been accepted by the department and it is a settled principle in law that when there is no other source of income (secret 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, hence the amount surrendered shall be treated as business income.
Department Contention:- There should be no presumption to treat the value of excess stock as application of business income in absence of any evidence of earning that income or details as to when, how and from whom such income was derived. Assessee has not been able to establish nexus between the excess stock and normal business income. Further no documentary evidence has been submitted to justify the additional income of Rs. 50,00,000/- as business income. So action of the Ld. AO in applying the rates of Sec 115BBE is justified and and the Ld. CIT(A) has rightly affirmed the order of the Ld. AO.
ITAT Order:- Stock which was physically found has been valued and then, compared with the value of stock so recorded in the books of accounts and the difference so found has been offered to tax. So there is a clear commonality between the stock so found during survey and the stock as recorded in the books of accounts. Revenue failed to point out any nexus of that excess stock with any other receipts other than the business being carried on. Therefore the nature and source of such unaccounted stock is nothing but arising out of assessee’s business operations. No doubt, these transactions were not recorded at the time of survey thus qualifying 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 hence not satisfying the second condition for invoking the deeming provisions of section 69B of the Act.
Conclusion:- The assessee appeal was allowed & various judicial pronouncements were relied upon. It was concluded that there was no physical distinction between the accounted stock and the unaccounted stock. The unaccounted stock has no independent identity and it is the part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset. It is clearly evident that the unaccounted stock is linked with business of the assessee as the department itself compared it with the value of accounted stock and through the explanations and statements provided by the assessee. Thus what is not declared to department is receipt from business and the diff should be treated as business income and should taxed at normal rate. Hence the appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 04/01/2023 pertaining to Assessment Year 2019-20.
2. In the present appeal, the assessee has raised the following grounds of appeal:
1. That the ld. CIT(A) has erred in treating the income surrendered during survey on account of excess stock u/s 69B r.w.s. provisions of section 115BBE of the Income Tax Act, 1961.
2. That the ld. CIT(A) has failed to appreciate the various binding judgments of Chandigarh and Amritsar Bench of the ITAT, wherein on similar facts and circumstances, the said income on account of “excess stock” during survey have been taxed at the normal rate of taxes and which ought to have been followed by the Ld. CIT(A), being jurisdictional Bench of ITAT.
3. That the various case laws as relied upon by the CIT(A) while confirming the addition are against the facts and circumstances of the case.
4. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
3. During the course of hearing, the Ld. AR submitted that this is a case of an assessee which is a partnership firm engaged in the business of the business of manufacturing of wearing apparels. Apart from said business, the assessee is not engaged in any other business and the assessee does not have any other source of income apart from the business income of the assessee.
4. It was submitted that a survey action u/s 133A of the Act was carried out at the business premises of the assessee on 29.08.2018. During the course of survey, certain discrepancies were encountered in physical verification of stock and in order to buy peace of mind and to cover up such discrepancies, the assessee surrendered an amount of Rs. 50,00,000/- as additional business income out of normal business income of the assessee for the FY 2018-19. The copy of the surrender letter of the assessee dated 30.08.2018 is placed at page no. 38 of the paper book.
5. It was submitted that during the course of survey action, statement of Sh. Munish Chopra, a Partner of the assessee firm was recorded and in the said statement, the assessee in response to question 39, again specified that the amount of Rs. 50,00,000/- as additional income over and above normal business income of the assessee. The copy of the said statement is placed in the paper book at page no. 39-44.
6. It was submitted that the assessee credited the said amount of Rs. 50,00,000/- in its profit and loss account for the year ending 31.03.2019 and the said books of account were audited by a Chartered accountant. Therefore, on the basis of audited financial statements, the assessee filed its return of income on 30.09.2019 wherein, a total income of Rs. 1,40,22,393/- was declared which includes the surrendered amount of Rs. 50,00,000/-. It is pertinent to mention on the said amount of Rs. 1,40,22,393/-, the assessee paid tax at normal rate of tax.
7. Thereafter, the case of the assessee was selected for scrutiny under compulsory scrutiny assessment as per the guidelines of CBDT and a notice u/s 143(2) of the Act was issued to the assessee on 29.09.2020. Thereafter, the assessee was issued a notice u/s 142(1) of the Act dated 20.01.2021 along with a detailed questionnaire. The copy of the same is placed in the paper book at page no. 45-49. The assessee in response to the said notice, filed various replies. The copy of the screenshot of the IT portal account of the assessee depicting the replies filed by the assessee is placed in the paper book at page no. 50-53.
8. Subsequently, the case of the assessee was finalized and assessment order dated 28.09.2021 was passed wherein, the total income of the assessee was assessed at Rs. 1,90,22,390/- after making additions of Rs. 50,00,000/- on account of disallowance u/s 37 of the Act. In addition to this, the Ld. AO also applied the provisions of section 115BBE of the Act on alleged application of section 69B of the Act in the case of the assessee.
9. Against the said order of the AO, the assessee filed an appeal before the ld CIT(A). During the course of appellate proceedings, the assessee filed its detailed submissions on the alleged application of section 69B of the Act r.w.s. 115BBE of the Act and disallowance of amount of Rs. 50,00,000/- u/s 37 of the Act. The ld CIT(A) vide order 04.01.2023 although deleted the disallowance of Rs. 50,00,000/- u/s 37 of the Act however, the submissions of the assessee on the alleged application of section 69B of the Act in the case of the assessee were not considered and the ld CIT(A) confirmed the application of section 115BBE of the Act in the case of the assessee on account of amount surrendered by the assessee during the course of survey action on account of excess stock found. Now, against the order of CIT(A), the assessee is appeal before the Tribunal.
10. In the aforesaid factual background, it was submitted that the assessee has been engaged in the business of manufacturing of wearing apparels and is not engaged in any other business and neither the assessee has any other source of income. The same fact has been accepted by the department during the course of survey action as well as during the course of assessment proceedings later on wherein, no adverse opinion w.r.t. any other source of income of the assessee. Hence, in the first instance, it is hereby submitted that the assessee is engaged only in the business of manufacturing of wearing apparels and any income which accrues to the assessee or any asset which is in the possession of the assessee are wholly earned from the business income of the assessee. During the course of survey action on 29.08.2018, the Ld. AO conducted the physical verification of the stock and compared the same with the value of stock in the books of account maintained by the assessee which itself justifies that the department itself believes that the stock belongs only to the business of the assessee.
11. It was submitted that after surrender of Rs. 50,00,000/-, the assessee credited the said amount in its profit and loss account prepared for the year ending 31.03.2019. Hence, the assessee paid tax on surrendered amount of Rs. 50,00,000/- at normal rate of tax. In addition to this, the assessee also recorded the said stock in the books of account. Now, as there is no other source of income of the assessee other than the business income earned by the assessee and the said fact has been duly accepted by the department and it is a settled principle in law that when there is no other 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 and hence, the surrender amount of Rs. 50,00,000/- on account of excess stock should be treated as the business income of the assessee. Reliance in this regard is placed on the judgment in the case of Daulat Ram Rawatmull vs. CIT [1967] 64 ITR 593, wherein Calcutta High Court held as under:
“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.”
12. Reliance in this regard is placed on the judgment dated 18.02.2021 in the case of Shri Harish Sharma vs. The ITO in ITA No. 327/CHD/2020 wherein it was held that that Section 68 not applies when assessee explained nature & source of Income. Hence, when all the incomes earned by the assessee/ assets in the possession of the assessee are only from the business income of the assessee, there do not arise any question as to application of provisions of section 69B of the Act and hence taxing such income at special rate as per section 115BBE of the Act is invalid. In the case of the assessee also, there has been no other source of income identified, neither during the course of survey action nor during the revision assessment proceedings initiated later on. Hence, the income of the assessee is only on account of the business of the assessee carried on by the assessee since past many years and in these circumstances, the provisions of section 69B of the Act are not applicable.
13. Further, reliance is also placed on the following judgments:
- Hon’ble Chandigarh Bench of ITAT in the case of M/s. Sham Jewellers in ITA No. 375/CHD/2022, wherein, it has been held as under:
“Ground Nos. 8 & 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.”
- In the case of M/s. Sham Fashion Mall in ITA No. 315/CHD/2022, the Hon’ble Chandigarh Bench of ITAT has held as under:
“12.0 In ITA No. 315/CHD/2022, in the case of Sham Fashion Mall, the only issue before us is the challenge to the provisions of section 115BBE by the AO and its sustenance by the Ld. CIT-(A). In this case the returned income has been accepted by the AO. We have also gone through the assessment order as well as the order of the Ld. CIT-(A) and it is seen that nowhere in the orders of both the lower authorities is there any fact brought on record or even a whisper of any allegation against the assessee that the assessee had any other source of income except income from business and income from other source. There is no iota of evidence to even suggest that the lower authorities had unearthed any other source of income of the assessee except under the heads of income declared by the assessee in the return of income. Therefore, in absence of any such evidence of any other undisclosed source of income of the assessee having been detected by the tax authorities, we are afraid that the invocation of provisions of section 115BBE will not hold good in the present case as well.The detailed reasons and observations in this regard have already been incorporated in Para 10.17 to 10.23 of this order in the case of M/s Sham Jewellers wherein also we have rejected the action of the Income Tax Authorities in applying the provisions of section 115BBE of the Act. Likewise, on identical facts and on identical reasoning and law, we allow the grounds of the assessee in the present appeal also and hold that the application of provisions of section 115BBE of the Act in the case of M/s Sham Fashion Mall was bad in law and the same cannot be sustained.”
- Hon’ble Chandigarh Bench of ITAT in the case of Gaurish Steels Pvt. Ltd. as reported in 82 com 337 wherein it has been held as under:
“It has been held that income surrendered by the assessee during the survey on account of discrepancy in cost of construction of building, discrepancy in stock and discrepancy in advances and receivables would be considered as business income and not as deemed income under section 69.”
- In the case of Bajaj Sons. Ltd., the Hon’ble Chandigarh Bench of ITAT, ITA No. 1127/CHD/2019, has stated as under:
“The AO has not pointed out any unexplained credit in the books of account, any unexplained investment, any unexplained money, bullion or jewellery, any unexplained expenditure or any amount of loan repaid in the assessment order in this respect. Therefore, the provisions of Section 68, 69, 69A, 69B, 69C and 69D are not attracted on the surrendered amount of Rs. 15 lacs. The said amount of Rs. 15 lacs was offered in case any discrepancy is found in the books of account. However, in actual neither any unexplained investment nor any unexplained expenditure or otherwise any unexplained asset was found during the search action so far as the aforesaid surrender of Rs. 15 lacs was concerned. In these circumstances, the aforesaid surrender of Rs. 15 lacs can be said to have been offered to cover up the discrepancies in respect of likely disallowances of claims, if any, relating to its business income.
9. In view of this, since the aforesaid surrender is not covered under the provisions of Section 68, 69, 69A, 69B, 69C and 69D, the provisions of Section 115BBE are not attracted in this case.
10. In view of the above, the action of the lower authorities in invoking provisions of Section 115BBE on the surrender income of Rs. 15 lacs is set aside and the AO is directed to compute the said surrendered income under normal provisions as applicable to the business income of the assessee.
11. In the result, appeal of the assessee stands allowed.”
- The Hon’ble Chandigarh Bench in the case of The DCIT vs M/s Khurana Rolling Mills Pvt. Ltd. as reported in ITA No. 745/CHD/2016:
“9. In the facts of the present case, it is not disputed that the surrender had been made on account of undisclosed debtors. Since the facts are identical to that in the case of Famina Knit Fabs (supra), and no distinguishing facts have been brought to our notice by the Ld. DR, the decision rendered in that case will also apply to the present case, following which we hold that the Ld. CIT(A) had rightly treated the surrendered income as in the nature of business income of the assessee and accordingly, allowed the benefit of set off of losses against the same. The order of the Ld.CIT(A) is accordingly, upheld. The ground raised by the Revenue is dismissed.”
- In the case of Prashanti Surya Contruction Co. Pvt. Ltd. in ITA No. 315/CHD/2014, the Hon’ble Chandigarh ITAT Bench has held as under:
“Since the facts of the present case are identical to that in Gaurish Steels Pvt. Ltd. (supra), the surrender having been made by the assessee on account of investment made in the BOT project which was the business of the assessee, the decision rendered by the I.T.A.T. in the said case will squarely apply in the present case, following which we hold that the income surrendered by the assessee of Rs. 1.75 crores is assessable under the head ‘income from business and profession”.
- In the case of M/s. Arora Alloys vs. DCIT in ITA No. 1481/CHD/2017 the Hon’ble Chandigarh Bench has held as under:
“In the light of the above, let us examine the facts of the present case. The stand of the assessee is that expenditure incurred for construction of building was from the routine business, and such addition of Rs.32 lakhs ought to be treated as business income. We find force in this contention of the ld. counsel for the assessee, because the expenditure incurred for creating a business asset and it must have been generated through the business carried out by the assessee. It is pertinent to bear in mind that expenditure laid out for the purpose of business is to be allowed deduction either as expenditure or to be capitalized on which depreciation will be allowed. The assessee might have earned income from the business which has not been accounted and used for constructing the business asset, though specific details have not been discussed either in the impugned order about the nature of evidence found during the course of survey. We also need not to ponder on this aspect because the assessee has admitted this unexplained expenditure on construction of building. This admission has to be accepted as given by the assessee, wherein it was alleged that it is for the purpose of the business. Therefore, to the extent the expenditure incurred for construction of the building, out of unexplained source is concerned, it is to be construed as earned from the business and it will take character of the business income. Once this income is to be assessed under the “business income”, then all incidental benefits for set off from brought forward loss or any other expenditure is to be given to the assessee.”
14. It was further submitted that Section 115BBE of the Act does not state the head of income in which the income of the assessee stands taxable, hence, in such circumstances, the Ld. AO has to look into surrounding circumstances to determine under which the income of the assessee should stand taxable and in this regard, it is hereby submitted that as the assessee has been filing its return of income since past many years and the facts and circumstances of the case of the assessee hereby represent that the assessee has been showing his income under the head income from business and not under any other source of income.
15. Without prejudice to the above, it was submitted that during the course of survey action at the business premises of the assessee on 29.08.2018 as well as during the course of assessment proceedings, the Ld. AO has not passed any adverse opinion with respect to any other source of income of the assessee, neither the AO has brought on record any adverse material on record. Hence, the business income is the only source of income of the assessee and moreover, in the case of assessee excess stock has been found during the course of survey which have been compared with the stock as per the books of account of the assessee, hence, in the first instance, the department itself has accepted that the said stock is the business stock of the assessee and such excess stock is not earned in a single day, hence, it means that the investment in excess stock is only from the business income of the assessee. And, hence, all the income earned by the assessee is only on account of such business of the assessee and therefore, needs to be taxed under the business head only. And, the case of the assessee is squarely covered by the judgment in the case of M/s. Arora Alloys vs. DCIT in ITA No. 1481/CHD/2017 the Hon’ble Chandigarh Bench has held as under:
“the assessee, wherein it was alleged that it is for the purpose of the business. Therefore, to the extent the expenditure incurred for construction of the building, out of unexplained source is concerned, it is to be construed as earned from the business and it will take character of the business income. Once this income is to be assessed under the “business income”, then all incidental benefits for set off from brought forward loss or any other expenditure is to be given to the assessee.”
16. It was further submitted that in the order passed by the ld CIT(A) dated 04.01.2023, the ld CIT(A) has placed reliance on the judgments in the cases of Fakir Mohamad Haji Hasan v CIT 247 IT 290 (Guj), Kim Pharma Pvt. Ltd. v CIT 216 Taxman 153 (P&H), Famina Knit Fab v ACIT 176 ITD 246 (Chandigarh Trib.), Pr. CIT v. Khushi Ram & Sons Foods (P) Ltd. In this regard, it was submitted that the said judgments are duly discussed in the judgment of the Hon’ble Chandigarh Bench of ITAT in the case of M/s Khurana Rolling Mills Pvt. Ltd. as reported in ITA No. 745/CHD/2016 as well as in the case of judgment of the Hon’ble Chandigarh Bench of ITAT in the case of M/s. Bindas Foods Pvt. Ltd. in ITA No. 409/CHD/2021.
17. Per contra, the Ld. DR submitted that for the unaccounted stock found during the survey proceedings there can be no presumption to treat the value representing such excess stock as application of business income in absence of any evidence of earning that income or details as to when, how and from whom such income was derived which has been invested in stock. It was submitted that the assessee has not been able to establish nexus between the excess stock and normal business income. Further no documentary evidence has been submitted to justify the additional income of Rs. 50,00,000/- as business income. It was accordingly submitted that the action of the AO in applying the rate as prescribed u/s 115BBE of the Act on the surrendered income included in the tax return and which has been treated by the AO as income under section 69B of the Act is justified and the Ld. CIT(A) has rightly affirmed the order of the AO in treating the surrender of Rs. 50,00,000/- on account of unaccounted stock found during the course of survey as deemed income under section 69B of the Act and which has been brought to tax as per the provisions of Section 115BBE of the Act. It was accordingly submitted that the order so passed by the Ld. CIT(A) be confirmed and the appeal so filed by the Assessee be dismissed.
18. We have heard the rival contentions and purused the material available on record. The AO has invoked the deeming provisions of section 69B and brought to tax excess stock found during the course of survey which is under challenge before us. It is a settled legal proposition 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 explain the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.
19. In particular, for the deeming provisions of section 69B to be attracted in the instant case, there has to be a finding that the assessee has made investments in the stock during the financial year and such investments are not fully 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. Therefore, the explanation so offered by the assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the assessee needs to be analysed and examined to draw necessary conclusions in this regard.
20. For the purposes, we refer to the statement so recorded of the one of the partners of the assessee firm during the course of survey on 29/08/2018. In Question no. 35, it was stated that during the course of survey proceedings u/s 133A, physical verification of stock lying in the business premises was done with the help of person deputed by the assessee and after physical verification, it comes to Rs 1,94,48,494/- whereas as per provisional trading account submitted by your accountant, the stock as on today is Rs 1,34,48,922/- so there is a difference of Rs 59,99,572/- in the stock and the assessee was asked about the difference in stock found and recorded in the books of accounts. In response, the assessee submitted that purchase bills amounting to Rs 10,04,572/- are yet to be entered in the system against which goods have already been received and for the remaining difference, he sought time to explain after consulting with the accountant. We find that the stock physically found has been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the firm has been offered to tax. There is thus no dispute that there is a commonality in the stock so found and as recorded in the books and in absence of which, the comparison would not have been possible and difference would not have been worked out. The Revenue has not pointed out that the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. There is thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found is clearly in nature of business income. The statement of the partner of the assessee firm 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. Further, in the surrender letter dated 30/08/2018, the assessee has stated that during the course of survey operations, certain discrepancy out of excess stock of Rs 50 lacs has been found and to purchase piece of mind and to avoid litigation, they offer additional business income of Rs 50 lacs out of excess stock found out of their normal business income for the current financial year 2018-19 over and above normal business income. We therefore find that the nature and source of such unaccounted stock is nothing but arising out of assessee’s business operations. 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 69B of the Act.
21. In case of Fashion Fashion World Vs. ACIT (IT Appeal No. 1634 (Ahd.) of 2006, dt. 12/02/2010), the Coordinate Ahmedabad Benches has held 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.8,10,011/- 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.
22. In the instant case as well, there is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus 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 business income.
23. In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the income of Rs 50 lacs surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same has to be assessed to tax under the head “business income”. In absence of deeming provisions, the question of application of section 115BBE doesn’t arise and normal tax rate shall apply. The AO is thus directed to assess the income of Rs 50 lacs under the head “Income from Business/profession” and apply the normal rate of tax.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open Court on 01.12.2023
Author Bio
