2024 (10) TMI 881 - AT - Income Tax

Surrendered undisclosed mining and trading income must be assessed as business income, not unexplained cash credits under section 68

B. Agrawal Stone Products Ltd. Versus DCIT, Central Circle, Varanasi

ITAT Varanasi allowed the assessee's appeals regarding unexplained income additions based on seized documents. The tribunal held that surrendered ... Unexplained income - Addition made on the basis of a seized document, which is in the form of ledger account copy containing debit and credit entries - submission of the assessee that the same represented cash/cheque given to the Director in the earlier years in connection with incurring business expenses and also for other purposes. HELD THAT:- The assessee chose to identify the portion of undisclosed income and accordingly offered a sum which means that the assessee has made sincere attempt to identify the accounted portion and unaccounted portion of income. In support of its claim of labour payments, the assessee has also furnished affidavits obtained from site supervisors. The very same fact has been mentioned by both directors in their respective statements. In view of the unanimous view expressed by both the Directors coupled with the affidavits given by the site supervisors, we are of the view that the claim of labour payments may be allowed. Accordingly, we set aside the order passed by the CIT(A) on this issue and direct the AO to allow deduction. Treatment to undisclosed income as surrendered - business income or unexplained cash credit u/s. 68 - HELD THAT:- We notice that the assessee's business consisted of mining, manufacturing, trading and transportation of boulders and stone grit materials. No other activities of the assessee have been noted by the tax authorities. Hence, the assessee could have generated the undisclosed income from out of the above said business activities only. Hence, the nature of the undisclosed income could be business receipts only and it source could be the business carried on by the assessee. It appears that the tax authorities have assessed the undisclosed income as unexplained cash credits in order to levy higher rate of tax u/s. 115BBE. The same is totally unjustified in the facts of the present case. The tax authorities are expected to assess the income under the correct head of income only. Accordingly, we are of the view that the tax authorities are not justified in treating the surrendered income as unexplained cash credit. Addition of interest income in respect of loan given to person - seized records showed that a credit balance as shown against the name - HELD THAT:- When the assessee has voluntarily agreed to surrender interest income in the earlier years, the explanation of the assessee with regard to the subsequent years could be rejected, only if there is any material found to contradict the explanation of the assessee. AO did not conduct any enquiry with Shri Ishwarchand Garg to examine the veracity of the explanation so given by the assessee. Obviously, the above said party will not give any letter to the assessee admitting that he has refused to pay principal and interest. The concept of accrual can be applied only when there is reasonable certainty of realization of income. AO was not justified in assessing interest income in AYs.2015-16 to 2019-20. Accordingly, direct the AO to delete the above said addition. Unaccounted rental income - AO assessed the above said income as unexplained cash credit u/s. 68 - HELD THAT:- There is no dispute with regard to the fact that the above said receipts are in the nature of rental income and the source is the property from which the rental income was derived. It appears that the tax authorities have assessed the rental income as unexplained cash credits in order to levy higher rate of tax u/s. 115BBE of the Act. In our view, the same is totally unjustified in the facts of the present case. The tax authorities are expected to assess the income under the correct head of income only. Accordingly, we are of the view that the tax authorities are not justified in treating the rental income as unexplained cash credit. All the appeals of the assessee are allowed. Issues Involved:1. Deduction of labor charges from undisclosed income.2. Classification of surrendered income as business income.3. Addition of interest income on a loan.4. Classification of unaccounted rental income.Issue-wise Detailed Analysis:1. Deduction of Labor Charges from Undisclosed Income:The assessee contested that the labor charges amounting to Rs. 74,77,364/- should be deducted from the undisclosed income computed by the Assessing Officer (AO). The AO had treated the entire amount of Rs. 7,12,59,318/- as undisclosed income, rejecting the assessee's claim for deductions. However, the appellate tribunal noted that the impugned addition was based on a seized ledger account, which the assessee explained as containing both accounted and unaccounted transactions. The assessee provided affidavits from site supervisors and statements from directors to substantiate the claim that the labor payments were made for business purposes. The tribunal found this explanation credible and directed the AO to allow the deduction of Rs. 74,77,364/- for labor charges.2. Classification of Surrendered Income as Business Income:The assessee argued that the surrendered income of Rs. 5,72,77,961/- should be classified as business income rather than unexplained cash credits under Section 68 of the Income Tax Act. The tax authorities had classified it as unexplained cash credits to apply a higher tax rate under Section 115BBE. The tribunal observed that the assessee's activities were limited to mining, manufacturing, trading, and transportation, and thus, the undisclosed income likely originated from these business activities. The tribunal concluded that the income should be assessed as business income, not unexplained cash credits, and directed the AO to reassess it accordingly.3. Addition of Interest Income on a Loan:The issue involved the addition of interest income of Rs. 2,01,600/- related to a loan given to an individual. The assessee claimed that the principal loan amount of Rs. 15.00 lakhs had become unrecoverable, and no interest was received after 2013. The AO, however, assessed the interest income on an accrual basis for AYs 2015-16 to 2019-20. The tribunal noted that the AO had not conducted any inquiry to verify the assessee's claim and highlighted that the concept of accrual applies only when there is reasonable certainty of income realization. Consequently, the tribunal directed the AO to delete the addition of interest income for the specified years.4. Classification of Unaccounted Rental Income:During search proceedings, unaccounted rental income of Rs. 4,000/- and Rs. 37,340/- for AYs 2017-18 and 2018-19, respectively, was admitted by the director. The AO assessed this income as unexplained cash credits under Section 68. The tribunal found this classification unjustified, noting that the income was clearly rental income derived from a property. The tribunal directed the AO to assess the rental income under the correct head, 'Income from house property,' rather than as unexplained cash credits.Conclusion:The tribunal allowed all the appeals of the assessee, directing the AO to make the necessary adjustments as per the tribunal's findings on each issue. The decision emphasized the importance of assessing income under its correct head and ensuring that deductions are allowed when adequately substantiated.