2016 (5) TMI 1312 - AT - Income Tax

ITAT affirms CIT(A)'s decisions on loss set off, business income, and genuine losses

The ITAT dismissed the revenue's appeals, affirming the CIT(A)'s decisions. It upheld the set off of losses against deemed income, classified undisclosed ... Declaration of unrecorded / unaccounted Stock - taxable u/s 69 as undisclosed investment or u/s 28 - stock of jewellery found during search - Held that:- The declaration was related to business stock in trade hence it is evident that the declaration amount is required to be assessed under the head' Income from Business or profession. Thus, the undisclosed income of ₹ 13,47,63,640/- declared voluntarily by the assessee for A.Y. 2011-12, is undisclosed stock held under the customary trading of the business and hence should be treated as the business income of the assessee firm and not as undisclosed investment as held by the AO. If all the three conditions of Section 69 exist together, the unrecorded investment or value of assets can be deemed to be assessee's income of the relevant financial year. In the present case all three conditions as required under section 69 are not fulfilled because the appellant has offered explanation and nature of source of acquisition as undisclosed stock received from the unaccounted trading of diamond as source of income. The partner of the firm has time and again stated in his statement that diamond found in the premises during the search is out of unrecorded trading of diamonds hence the third part of section 69 is not satisfied hence the said stock is not taxable under section 69 of the Act. Taxability of stock of diamond - Held that:- The stock of diamond declared during the search is taxable under the heads of income as defined in section 14 read with section 56 and not taxable separately. As there cannot be taxable income of income out of the 5 heads of income as specified in section 14 of the Act. Hence the stock of diamond of ₹ 13,47,63,640/- is taxable either under Income from Business & Profession or under income from other sources. Rejection of books of account u/s.145(3) - Held that:- AO fail to appreciate the fact that appellant has declared income during search operation at ₹ 13.47 crores and accordingly recorded the same in its books of accounts. The valuation carried out by another Govt. Approved valuer has nothing to do with the amount declared by the assessee but the same was done to prove on the part of assessee that the value of diamond found during the search was much less therefore the assessee has to sell it at lower value. The AO has wrongly mistaken the purpose of second valuation. Thus the assessee has fully discharged its onus to disclose this stock and offer it as income. CIT(A) has given categorical finding to the effect that the AO has considered gross profit based on SEZ Unit on A’ Star Exports at Surat. We found that SEZ Unit operates on fiscal benefits available to SEZ unit and is a manufacturing activity cannot be compared with trading activity. The loss has arisen because of the value considered as its cost. However, there is no evidence of cost in the books of accounts. Further the valuation made at the time of search is a mere one page summary which gives no description of the diamonds and is merely total value of 5-6 packets. Thus, no meaningful comparison can be made. The CIT(A) has categorically dealt with each and every documents and after giving detailed finding in para 4.11, reached to the conclusion that rejection of books of accounts and estimation of gross profit by the AO was not justified on the facts of this case. The findings recorded by CIT(A) are as per material on record and do not require any interference on our part. Set off of business loss against income declared during search - Held that:- Section 115BBE bar from claiming any expenses or allowance from the income taxable under section 68, 69, 69A, 69B, 69C, or 69D of the Act. In the instant case before us the claim was of set off of business loss against income declared during search. There is vital difference between the loss and expenses/ allowance. Hon'b1e Supreme Court in case of CIT Vs. Wallford share & Stock brokers Pvt. Ltd (2010 (7) TMI 15 - SUPREME COURT ) while discussing the issue that losses incurred in mutual fund from which dividend received, can not be considered for the purpose of section 14A of the Act and held that: 'We may reiterate that one must keep in mind the conceptual difference between loss expenditure, cost of acquisition, etc. while interpreting the scheme of the Act.' In view of the decision of Hon’ble Supreme Court, business loss cannot be treated at par with the expenses / allowances and such business loss can be set off against any type of income as section 71 do not debar from setting off such losses. Thus we do not find any infirmity in the order of CIT(A) for allowing set off of business loss against income declared during the course of survey/search, accordingly, this appeal of the revenue is also dismissed. Issues Involved:1. Set off of loss incurred on sale of polished diamond goods against deemed income assessed under Section 69A.2. Classification of sales from undisclosed stock of diamond goods as business sales.3. Treatment of loss on sale of diamonds as genuine.4. Deletion of Gross Profit addition by rejecting books of accounts.Issue-wise Detailed Analysis:1. Set off of Loss Incurred on Sale of Polished Diamond Goods Against Deemed Income Assessed Under Section 69A:The revenue contested the CIT(A)'s decision allowing the set off of losses incurred on the sale of polished diamond goods against the deemed income assessed under Section 69A. The CIT(A) noted that the assessee declared the undisclosed stock as business income and accordingly set off the loss against this income. The CIT(A) referenced the Gujarat High Court's decisions in Radhey Developers Pvt. Ltd. and Shilpa Dyeing & Printing Mills Pvt. Ltd., which overruled the earlier decision in Fakir Mohamed Haji Hasan, asserting that income must fall under one of the heads specified in Section 14 of the Income Tax Act. Thus, the set off of business loss against the income declared during the survey was justified. The ITAT upheld this view, confirming that the income declared during the search was part of the business income and could be set off against the business loss.2. Classification of Sales from Undisclosed Stock of Diamond Goods as Business Sales:The CIT(A) determined that the unaccounted diamonds found during the search were indeed stock-in-trade, not investments. This conclusion was based on the nature of the business conducted by the assessee group, which involved trading and manufacturing diamonds. The CIT(A) emphasized that the diamonds found were consistent with the regular business activities of the assessee and hence should be treated as business stock. The ITAT agreed with this classification, noting that the diamonds were part of the business operations and were rightly considered stock-in-trade.3. Treatment of Loss on Sale of Diamonds as Genuine:The CIT(A) accepted the assessee's claim that the loss incurred on the sale of diamonds was genuine. The AO had questioned the loss, citing discrepancies in valuation and the lack of detailed stock records. However, the CIT(A) found that the valuation at the time of the search was higher than the subsequent sale prices, which justified the loss. The ITAT supported this finding, noting that the sales were genuine, verified by customs authorities, and the payment was received through proper banking channels. The ITAT also noted that the AO did not provide evidence of under-invoicing or any irregularities in the sales transactions.4. Deletion of Gross Profit Addition by Rejecting Books of Accounts:The AO had rejected the assessee's books of accounts under Section 145(3) and estimated the gross profit based on the SEZ unit's performance. The CIT(A) found this approach unjustified, noting that the SEZ unit's fiscal benefits and manufacturing activities could not be compared with the trading activities of the assessee. The CIT(A) also pointed out that the valuation report at the time of the search lacked detailed descriptions, making meaningful comparisons difficult. The ITAT upheld the CIT(A)'s decision, confirming that the books of accounts were maintained according to industry standards and there were no significant defects warranting their rejection.Conclusion:The ITAT dismissed the revenue's appeals, affirming the CIT(A)'s decisions on all issues. The judgment emphasized that the income declared during the search was part of the business income, allowing for the set off of business losses. The classification of the diamonds as stock-in-trade was upheld, and the losses on their sale were deemed genuine. The rejection of the books of accounts by the AO was found to be unjustified, and the CIT(A)'s deletion of the gross profit addition was confirmed.