2023 (9) TMI 677 - AT - Income Tax

Incentives & Discounts Treated as Business Income, Not Unexplained Cash Credits

The Tribunal upheld the CIT(A)'s decision that the income declared under 'Incentives and Discounts' should be treated as business income and taxed under ... Characterisation of receipts as business income - unexplained cash credits and deeming provision of section 68 - requirement of satisfactory explanation for credits in books - application of enhanced rate under section 115BBE when income is assessed under deeming provisionsCharacterisation of receipts as business income - requirement of satisfactory explanation for credits in books - unexplained cash credits and deeming provision of section 68 - Whether the amount of Rs. 50 crores credited as 'discounts and incentives' could be treated as unexplained cash credits and assessed under the deeming provision of section 68 or whether it is taxable as business income under the normal head Profits & gains of business. - HELD THAT: - The Tribunal found from the assessment order and surrounding material that the assessee maintained books and had consistently disclosed amounts under the head 'discounts and incentives' in earlier years. The Assessing Officer's own discussion recorded that the credits were linked to the assessee's business operations and had been disclosed in the profit and loss account as business receipts. The conditions for invoking the deeming provision of section 68 require that the assessee offers no explanation or that the explanation is unsatisfactory in the opinion of the Assessing Officer. Here the assessee had explained the nature and source as business receipts and offered them to tax under the head business; the Assessing Officer did not produce material showing that this explanation was unsatisfactory. Consequently, the foundational ingredients for applying section 68 were absent and the Assessing Officer erred in treating the credited sum as unexplained cash credit. [Paras 6, 12, 13]The amount credited as 'discounts and incentives' is assessable as income from business and profession and not as unexplained cash credits under section 68.Application of enhanced rate under section 115BBE when income is assessed under deeming provisions - unexplained cash credits and deeming provision of section 68 - Whether the enhanced tax rate under section 115BBE would apply to the Rs. 50 crores once it was assessed under section 68. - HELD THAT: - Section 115BBE operates where income is assessed by invoking the deeming provisions such as section 68. The Tribunal held that because the sum in question is to be assessed as business income under the normal head (and not as deemed income under section 68), section 115BBE does not get attracted. The CIT(A)'s direction to compute tax under normal rates for firms was affirmed for this reason. [Paras 14]Section 115BBE is not applicable since the sum is held to be business income and not income determined under the deeming provisions.Application temporal scope of statutory amendment to section 115BBE - Whether the amended higher rate under section 115BBE (Taxation Laws (Second Amendment) Act, 2016 receiving Presidential assent on 15.12.2016) would apply to amounts earned/declared before assent. - HELD THAT: - Both parties argued the point, and the assessee contended that enhanced levy should not apply to income earned and declared before the amendment's assent; the Revenue relied on contrary authority. The Tribunal observed that because it had held the sum to be assessable as business income (and not under section 68), the legal question on applicability of the amendment became infructuous in the present adjudication and was therefore not decided on merits. The Tribunal expressly left the question open for adjudication if it arises later. [Paras 15]Not adjudicated; the question as to temporal application of the amended section 115BBE is left open for determination if it arises in future proceedings.Final Conclusion: The appeal is dismissed. The Tribunal upholds the CIT(A)'s finding that the Rs. 50 crores credited as 'discounts and incentives' is assessable as business income under the normal head and not as unexplained cash credits under section 68; consequently section 115BBE does not apply. The separate contention on temporal applicability of the 2016 amendment to section 115BBE was not decided and is left open for future consideration if required. Issues Involved:1. Whether the income declared under the head 'Incentives and Discounts' should be treated as business income or unexplained cash credits under Section 68 of the Income Tax Act.2. Applicability of Section 115BBE for taxing the income declared under 'Incentives and Discounts.'Summary:Issue 1: Treatment of Income under 'Incentives and Discounts'The Revenue challenged the CIT(A)'s direction to treat the amount declared under 'Incentives and Discounts' as business income rather than unexplained cash credits under Section 68. The assessee, engaged in trading gold jewellery and other items, had deposited significant cash during the demonetization period. The Assessing Officer (AO) concluded that the income declared as 'Incentives and Discounts' was from suppressed sales turnover and treated it as unexplained cash credits, invoking Section 68. However, the CIT(A) found that the AO did not provide specific reasons for changing the head of income and noted that the AO had accepted the income as linked to business activities. Thus, the CIT(A) held that the basic ingredients of Section 68 were not satisfied, and the income should be treated as business income.Issue 2: Applicability of Section 115BBEThe AO applied Section 115BBE, imposing a higher tax rate on the income declared under 'Incentives and Discounts.' The CIT(A) disagreed, stating that once the income is linked to business activities, it should be taxed under normal provisions applicable to business income, not under Section 68. The Tribunal upheld the CIT(A)'s decision, noting that the AO had accepted the income as arising from business activities, and therefore, Section 115BBE was not applicable.Conclusion:The Tribunal dismissed the Revenue's appeal, confirming that the income declared under 'Incentives and Discounts' should be treated as business income and taxed under normal provisions, not under Section 68 or Section 115BBE. The legal arguments regarding the amendment to Section 115BBE were deemed infructuous as the income was held to be business income.