Surrendered income used for business assets treated as business income, not subject to higher section 115BBE tax rates

The ITAT Amritsar held that surrendered income used for constructing business assets should be treated as business income rather than subject to higher tax rates under section 115BBE. The assessee had disclosed the surrendered amount as business income with proper explanation of source during survey and assessment proceedings, reflecting it in books of account. The tribunal distinguished adverse precedents where amounts were not reflected in books or sources unexplained. Following the coordinate bench decision in Arora Alloys Ltd, the tribunal directed the Assessing Officer to treat the surrendered income used for building construction as business income, rejecting the application of higher tax rates.

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Issues Involved:
1. Applicability of provisions of Section 115BBE of the Income Tax Act, 1961.
2. Treatment of surrendered income as business income or deemed income under Section 69.

Summary:

Issue 1: Applicability of provisions of Section 115BBE of the Income Tax Act, 1961

The assessee challenged the confirmation of the order by the CIT(A) regarding the applicability of Section 115BBE. A survey conducted on 15.07.2016 led to the surrender of Rs. 1.61 crores as additional business income. The AO accepted the surrendered income but disputed Rs. 81,95,000/- used for building construction, taxing it under Section 69 r.w.s 115BBE. The CIT(A) upheld this, bifurcating the surrendered amount and treating Rs. 81,95,000/- as unexplained investment, thus taxable under Section 115BBE.

Issue 2: Treatment of surrendered income as business income or deemed income under Section 69

The assessee argued that the surrendered income was from business activities, including sales/purchases outside the books. The CIT(A) failed to prove that the income was from non-business activities. The counsel cited various case laws supporting that such income should be treated as business income. The ITAT observed that the AO accepted the surrendered income as business income but taxed the building expenditure under Section 69. The ITAT found that the expenditure for constructing a business asset should be treated as business income, as it was generated through business activities and recorded in the books. The CIT(A) did not appreciate this and failed to disprove the business income source.

Conclusion:

The ITAT directed the AO to treat the surrendered income of Rs. 81,95,000/- as business income, following the precedent set by similar cases. The appeal was disposed of accordingly, with the order pronounced on 13.09.2023.

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