2018 (6) TMI 1705 - AT - Income Tax

Tribunal allows set off of losses against additional income, deems it business income.

The Tribunal allowed the set off of brought forward losses against additional income for both assessment years, reversing the CIT(A)'s decision. The ... Additional income declared by the appellant in the course of survey u/s.133A - deemed income u/s.69A - claim of set off of brought forward losses against the additional income - disallowance of provision for warranty - HELD THAT:- Income offered on the basis of the impounded documents collected during the survey action conducted on 24-01-2007 on the assessee. These documents clearly reflect the unexplained expenditure and unexplained receipts relates to sale of flats to the parties. Assessee is a Builder and his business is to construct the flats and sell the same to the customers. All these details clearly indicate the business nexus of the receipts/expenditure to the core business activities of the assessee. It is not the case that there was any cash impounded or seized in this case to deny such claim of set off as the source of the same becomes very vague issue. The entries available on the impounded material suggest the business nexus of the additional income. The income in question is derived from the business activities of the assessee although they are outside the books of account of the assessee. Having held so, the taxability of the same under the head ‘business’ or ‘income from other sources’ is the next issue for adjudication. Considering the existence of business nexus, we are of the opinion that there is no reason why such income is taxed as ‘income from other sources when the source for the same from the business activity, is already demonstrated by the assessee during the proceedings before the assessment/appellate authorities. Unaccounted receipts/expenditure constitutes business receipts/expenditure. As such, the judgment of jurisdictional High Court in the case of CIT Vs. Sheth Developers Pvt. Ltd. [2012 (8) TMI 159 - BOMBAY HIGH COURT] affirms that the income from business is required to be taxed as ‘business income’. We have also examined the allowability of statutory deductions out of such additional income disclosed during search and seizure/survey actions. There are binding decisions to support the claim of deduction qua the deductions u/s.80IB, 40B of the Act etc. Therefore, in principle, granting statutory deductions out of such additional income arising out of business activities is sustainable. Linking the additional income to the business activities OR income from other sources - HELD THAT:- Items of income that are chargeable to tax under the head ‘income from other sources’ as per the provisions of section 56 of the Act, are specified therein. The deemed income like the present case is certainly not specified in the said section. Further, it is not the case of the AO that the said unaccounted income of ₹ 53 lakhs and ₹ 78 lakhs cannot be classified to any other head of income. In fact, section 56(1) of the Act provides for bringing such items of income under the scope of section 56 of the Act. Therefore, the decision of the AO in treating the same as chargeable to tax under the head ‘income from other sources’ is not valid as the source for such additional income is clearly determinable as chargeable u/s.28 of the Act. Further, there is no law to automatically tax each and every ‘unaccounted income’ disclosed during search/survey actions as ‘income from other sources’. In our view, such income needs to be treated as the ‘business income’ of the assessee and consequently, the benefit of set off/carry forward should be granted to the assessee against such additional business income of the assessee in both assessment years. Accordingly, the decision of CIT(A) stands reversed on this issue. - Decided in favour of assessee. Issues Involved:1. Claim of set-off of brought forward losses against additional income.2. Disallowance of provision for warranty.Detailed Analysis:Claim of Set-off of Brought Forward Losses Against Additional Income:The primary issue in these appeals is whether the additional income declared by the assessee during the survey can be set off against brought forward losses. The assessee, a company engaged in property development, was subjected to a survey under Section 133A of the Income Tax Act on 24-01-2007, which resulted in the discovery of unaccounted transactions and additional unaccounted income of Rs. 58 lakhs for A.Y. 2005-06 and Rs. 73 lakhs for A.Y. 2006-07. The assessee claimed set off of these additional incomes against brought forward losses, treating them as business income.The Assessing Officer (AO) disallowed the set off, treating the additional income as 'deemed income' under Section 69A of the Act, and taxed it as 'income from other sources.' The AO's decision was based on the premise that the additional income was unexplained money and not eligible for set off against business losses.During the first appellate proceedings, the CIT(A) upheld the AO's decision, stating that the additional income discovered during the survey was assessable as 'deemed income' under Section 69C of the Act. The CIT(A) also directed the AO to withdraw the set off of unabsorbed depreciation granted earlier.Before the Tribunal, the assessee argued that the additional income was directly related to its business activities and should be treated as business income, eligible for set off against brought forward losses. The assessee relied on various judicial pronouncements, including the Bombay High Court's judgment in CIT Vs. Sheth Developers Pvt. Ltd., which held that undisclosed income received in the course of business is entitled to statutory deductions.The Tribunal analyzed the facts and concluded that the additional income was derived from the business activities of the assessee, albeit outside the books of account. The Tribunal noted that the impounded documents clearly linked the additional income to the business activities of the assessee. Consequently, the Tribunal held that the additional income should be taxed as business income and not as 'income from other sources.'The Tribunal further examined the allowability of statutory deductions from such additional income and found that judicial precedents supported the claim of deductions, including set off of brought forward losses. The Tribunal distinguished the judgment in Kim Pharma Pvt. Ltd. Vs. CIT, where the assessee failed to explain the source of excess cash, from the present case where the additional income was linked to business activities.In conclusion, the Tribunal allowed the set off of brought forward losses against the additional income for both assessment years, reversing the CIT(A)'s decision.Disallowance of Provision for Warranty:The judgment does not provide detailed analysis or discussion on the issue of disallowance of provision for warranty. Therefore, it can be inferred that this issue was either not pressed by the assessee or not considered significant by the Tribunal in the context of the appeals.Conclusion:Both appeals of the assessee were allowed by the Tribunal. The Tribunal held that the additional income declared during the survey should be treated as business income, eligible for set off against brought forward losses. The decision of the CIT(A) was reversed, and the set off of brought forward losses against additional income was granted to the assessee for both assessment years.