TaxTMI 
TaxTMI 
2016 (8) TMI 1140
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....Ans. to Q.No.10 "We accept the discrepancy in stock and offer an additional income of Rs. 41,00,000/- on account of excess stock found during the course of survey. I declare this as my business income over and above my regular income." 3. The assessee in the return filed disclosed such income in the profit and loss account. However, it has claimed interest and remuneration to partners from such income. According to the AO, the assessee has negated the offered undisclosed stock amount by booking expenses/reducing GP ratio as compared to the preceding year. That was not the intention of the declaration made u/s.133A of the I.T. Act during the survey. According to him, the amount declared during the course of survey was over and above the income offered in the regular books of account. The AO, therefore, asked the assessee to explain as to why the amount of Rs. 41 lakhs offered as income during the course of survey proceedings should not be treated as deemed income under the provisions of section 69/69B of the I.T. Act. 4. The assessee in his reply submitted that the major expenditure claimed by it was on account of interest and salary to partners amounting to Rs. 24,78,558/- an....
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....day-to-day business and therefore investment should be accepted as derived from business activity. It was submitted that since the assessee had offered the explanation regarding the source of acquisition of excess stock, therefore, the provisions of section 69/69B would not apply. Various decisions were also brought to the notice of the CIT(A). 6. However, the Ld.CIT(A) was also not satisfied with the explanation given by the assessee. According to him, excess stock found during the course of survey represents unaccounted investment which was not fully disclosed in the books of account maintained by the assessee. The assessee had not furnished any evidence to show that the activities undertaken during the course of business had resulted in income which had been applied to procure excess stock. The source of funds remains explained and it was merely a lip service to say that excess stock was generated out of business carried by the assessee. Relying on the decision of Hon'ble Gujarat High Court in the case of Fakir Mohmed Haji Hasan reported in 247 ITR 290 and the decision of Hon'ble Chattisgarh High Court in the case of Dhanush General Stores Vs. CIT reported in 339 ITR 651 he h....
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....td. and the decision of Hon'ble Bombay High Court in the case of Ahmedabad Electricity Company. 11. The Ld. Counsel for the assessee referring to the copy of the assessment order drew the attention of the Bench to the reply given by the assessee to Question No.10 in which the assessee has declared the additional income of Rs. 41 lakhs on account of discrepancy in stock and the same was declared as business income over and above the regular income. He submitted that since the assessee has declared such income as business income the assessee is entitled to get remuneration and interest from such additional income disclosed during the course of survey. Referring to the decision of the Pune Bench of the Tribunal in the case of Shri Venkatesh Textile Mills Vs. JCIT vide ITA No.2268/PN/2012 order dated 28-11-2014 he submitted that the Pune Bench of the Tribunal following the decision of Hon'ble Calcutta High Court in the case of Md. Serajuddin & Brothers Vs. CIT reported in (2012) 80 DTR 46 has held that assessee is entitled to remuneration from such additional income declared during the course of survey. Referring to the decision of the Ahmedabad Bench of the Tribunal in the case of ....
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....however, has claimed remuneration to partners and interest on capital and thereby declared the net income of Rs. 34,70,590/- which is less than the additional income of Rs. 41 lakhs declared during the course of survey. I find the AO held that the amount of Rs. 41 lakhs declared during the course of survey is to be treated as deemed income u/s.69B of the I.T. Act and the assessee is not entitled to any remuneration or interest as per the provisions of section 40(b) of the I.T. Act. I find in appeal the CIT(A), following the decision of Hon'ble Gujarat High Court in the case of Fakir Mohamed Haji Hasan (Supra) and the decision of Hon'ble Chattisgarh High Court in the case of Dhanush General Stores (Supra) held that investment in excess stock found during the course of survey would constitute deemed income u/s.69B of the Act and the assessee is not entitled to deduction u/s.40(b) of the I.T. Act. It is the submission of the Ld. Counsel for the assessee that such excess stock found during the course of survey which was offered as additional income by the assessee constitutes business income and the assessee is entitled to get deduction towards remuneration to partners and interest ....
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....ra), assessee was found to have failed to explain the source of the cash found during the course of survey, which was offered as an additional income; and, therefore in the absence of the nature of source of cash being proved it was held not to be assessable as income from business. We may also refer to a judgement of the Hon'ble Karnataka High Court in the case of CIT vs. S. K. Srigiri and Bros. (2008) 298 ITR 13 (Kar), which has been rendered in the context of section 40(b)(iii) of the Act. In the case before the Hon'ble Karnataka High Court, the Tribunal had come to a factual finding that the additional income declared in the course of survey was from business and therefore the remuneration paid to the partners was held liable to be deducted. Be that as it may, we may now examine the facts of the present case, qua the additional income of Rs. 15,01,620/- declared by the assessee as 'excess stock'. 9. As already noted earlier the discrepancy in stock position was accepted by the assessee in the course of survey and such amount was offered as additional income for the assessment year 2007-08. In the deposition of the assessee, accepting the said discrepanc....
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.... far as the additional income declared which is not found to be assessable as 'income from business', the stand of the Revenue is that the same cannot qualify for the purposes of section 40(b) of the Act. In this context, we have noticed that the Hon'ble Calcutta High Court in the case of Md. Serajuddin & Brothers vs. CIT, (2012) 80 DTR 46 (Cal.) has considered a similar controversy. According to the Hon'ble High Court, for the purpose of computation of allowable remuneration to partners, bookprofit has to be ascertained not only from income of business alone but also income from other sources. As per the Hon'ble High Court in calculating the allowable remuneration, profit means profit as per the Profit & Loss Account. The following discussion in the order of the Hon'ble High Court is worthy of notice :- "The said chapter nowhere provides that method of accounting for the purpose of ascertaining net profit should be the only income from business alone and not from other sources. Section 29 provides how the income from profits and gains of business or profession should be computed and this has to be done as provided under Section 30 to 43D. By virtue....
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....unal." At page 282 of the said report the Supreme Court has also observed amongst: other- "The fact that it is shown under a different head of income would not deprive the company of its benefit under section 32AB so long as it is held that the investment in the units of the UTI by the assessee-company is in the course of its "eligible business". Therefore, in our opinion, the dividend income earned by the assessee-company from its investment in the UTI should be included in computing the profits of eligible business under section 32AB of the Act." Thus it emerges as follows: Even if the income from other sources is included in the profit and loss accounts to ascertain the net profit qua book-profit for computation of the remuneration of the partners the same cannot be discarded." 11. Following the aforesaid judgement of the Hon'ble Calcutta High Court and in the absence of any contrary decision, we direct the Assessing Officer to calculate the allowable remuneration by ascertaining not only income from business but also income from other sources." 15. Similarly, the Ahmedabad Bench of the Tribunal has also an occasion to decide s....
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.... that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. When the income cannot be so classified under any one of the heads of income under section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. The provisions of sections 69, 69A, 69B and 69C, treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, acquisition o....
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....e would fall such as whether investment/expenditure pertains to business or relates to acquisition of capital asset or to other source or to agriculture. Where the assessee is able to explain nature and source of investment/expenditure and also if they are recorded in the books of account then such investment/expenditure will not be treated as deemed income but where investment /expenditure is not recorded in the books of account and/or their nature and source is not explained or not satisfactory explained, deeming provision under these four sections can be invoked by the AO and investment/expenditure would be treated as deemed income of the assessee. Thus for invoking these deeming sections first condition has to be necessarily satisfied that they are not recorded in the books of account regularly maintained by the assessee. But for establishing nexus of such investment/expenditure with a head of income and to take the benefit of set off, assessee has to necessarily explain the nature and source of such investment/expenditure and establish its nexus with any head of income. Hon. Gujarat High Court further held that for claiming trading loss in respect of an asset whose investment ....
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....rtain companies. Thus treatment of loss arising under the head business is provided only under section 72 which directs to carry forward the unabsorbed loss to the next year unless it is otherwise provided in any other section of Chapter -VI. We have gone through all the sections under Chapter -VI and we do not find any provision for setting off of business loss against deemed income under sections 69, 69A, 69B & 69C. 11. But this does not mean that loss computed under any of the five heads mentioned in section 14- (i) 'salary', (ii) 'income from house property', (iii) 'profits and gains from business or profession', (iv) 'capital gains' and (v) 'income from other sources' - cannot at all be adjusted against unexplained investment or expenditure. What is necessary as per Hon. Gujarat High Court is that source of acquisition of asset or expenditure should be clearly identifiable. In the case before Hon. Gujarat High Court the source of gold confiscated was not identifiable and hence adjustment was not permitted. 12. Thus the important aspect that emerges from the entire discussion is that for invoking deeming provisions under....
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....penditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is only where no nexus is established with any head then it should be considered as deemed income under section 69, 69A,69B & 69C as the case may be. It is because when assessee fails to explain satisfactorily the source of such investment then it should be taxed under section 69, 69A, 69B & 69C as the case may be. It should not be done at the first instance without giving opportunity to the assessee to establish nexus. Therefore, there is no conflict with the decision of Hon. Gujarat High Court in the case of Fakir Mohmed Haji Hasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, we hold that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset, falling u....