TaxTMI 
TaxTMI 
2017 (8) TMI 721
X X X X Extracts X X X X
X X X X Extracts X X X X
....the search proceedings without appreciating the fact that no loss can be set off in contravention to the provision of section 70 or 71 against the surrendered income assessed as deemed income u/s 69B. 3. Whether on the facts and in the circumstances of the case the CIT(A) was justified in directing to change tax at normal rate on surrender income on account of undisclosed investment in stock assessed as deemed income u/s 69B against tax charged at special rate u/s 115BBE." 2. Briefly the facts of the case are that the assessee company is engaged in the business of export, import and manufacture of precious & semi precious stones and jewellery. A survey u/s 133A was conducted on 31.10.2012 at the business premises of the assessee which was converted into search. 2.1 During the survey, the assessee's Manager, Shri Rakesh Sharma, in reply to question no. 21 admitted to excess stock of Rs. 2,43,77,004/-. This was confirmed by Shri Sanjay Bairathi, Director of the assessee company in reply to question no. 17. Thereafter on verification, Shri Sanjay Bairathi vide letter dated 04.02.2013 (reproduced at pages 4 & 5 of AO order) explained that the correct excess stock found in survey ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the assessee vide letter dated 4.02.2013 explained that the correct excess stock found in search operation works out to Rs. 231.41 lakh as against the amount of Rs. 243.77 lakh worked out at the time of search operation. The assessee further explained that the excess stock is due to the valuation of the stock at market price instead of the purchase price. b) Sworn statement recorded u/s 132(4) of lkthe Act on 31.10.2012 of Sh Sanjay Bairathi in answer to Q no 16,17,18 & 19 and answer to q no 21 of statement recorded u/s 133A of Sh Rakesh Kumar Sharma, Manager of M/s Sanjay Bairathi Gems Ld are reproduced here as under:- c) AO has made the addition of Rs. 2,31,41,217/= u/s 69B of the Act and thereafter invoked the provisions of sec 115BBE of the Act and not allowed set off of business loss against the addition made. The assessee vide letter dt 09.03.2015 has made submission before the AO. Form the above, it is seen that assessee has shown net business income Rs. 1,44,44,484/= in ITR filed on 28/9/2013 vide acknowledgment no 799563911280913 for the AY 2013-14. d) It is pertinent to mention here that applicability of set off provision as contained in sec. 115BBE of the Ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntity as an asset but as mixed part of overall stock found in the survey/search then such excess stock would represent business income only. Further, in case of the Hon'ble ITAT Bench Jaipur in case of DCIT V. Ramnarayan Birla 482/JP/2015 dated 30.09.2016 in the similar facts held that the excess stock is to be assessed as part of the normal stock and to be taxed under the head income from business. By following the decision of Coordinate Bench in the case of Chokshi Hiralal Maganlal vs. DCIT, 141 TTJ (Ahd.) 1 has held that in a cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is not recorded in the books of accounts or for which no explanation or satisfactorily explanation is given, such amount may be deemed to be the income of the assessee for such financial year. d) From the plain reading of all these provisions it is evident that whatever income is included in the total income, the same has to be classified under the five heads of income as provided in section 14. Therefore, any credit in the books of accounts which is not satisfactorily explained or any investment which is not found recorded or otherwise explained and taxed u/s 68, 69, 69A, 69B or 69C has to be taxed under any one of the above five heads. If such income can't be linked to any of the first four heads as provided in section 14, it has to be assessed under the fifth head i.e. income from other sources. Section 56 (1) also provides that income of every kind which is not to be excluded from the total income under this head shall be chargeable to income tax under the head "Income from other sources", if it is not chargeable to income tax under any of the heads specified in section 14, item A to E" Thus even an income assessable under section 69B has to be given a specific head in terms ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... stock is a result of suppression of profit from business over the years and has not been kept identifiable separately but is the part of overall physical stock found, the investment in the excess stock has to be treated as business income as per detailed reasons given in the case of Fashion World vs. ACIT ITA No. 1634/Ahd/2006 wherein, the Tribunal held that, if excess stock found during the course of survey or search and does not have any independent identity as an asset but as mixed part of overall stock found in the survey/search then such excess stock would represent business income only. 4.2 Recently the Hon'ble ITAT Jaipur Bench in case of DCIT vs. Ramnarayan Birla 482/JP/2015 dated 30.09.2016 in the similar facts held that the excess stock is to be assessed as part of the normal stock and to be taxed under the head income from business. The relevant finding of the ITAT is as under:- "We have heard rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that the assessee is engaged in the business of jewellery. During the course of survey excess stock....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of survey was not reflected in books of accounts and no source from where it was derived was declared by the assessee and therefore it was held that the same can't be assessed as business income. In this case the decision of Hon'ble Karnataka High Court in case of CIT vs. S.K. Srigiri and Bros 298 ITR 13 relied by the Assessee was distinguished by holding that in this case assessee received additional income from business only. In the present case also the excess stock offered in survey is part of the business income. The excess stock is determined by valuing the business stock at current price instead of the purchase price. Nothing was brought to suggest that this was not a regular item of the stock dealt by the assessee. Hence the case laws relied by the AO is not applicable. 4.4 The AO further referred to the provisions of section 115BBE and held that no deduction or set off of business loss will be allowable. The provisions of section 115BBE reads as under:- (1) "Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of- (a) the am....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re, the amendment to Section 115BBE w.e.f. 01.04.2017 is not applicable to the year under consideration and thus, the Ld. CIT(A) correctly directed the AO to allow the set off of the business loss for the year against the income offered on account of excess business stock found in search. 4.6 The above issue is also considered by the Hon'ble ITAT Vishakapatnam Bench in case of Pillalala Ramakrishna Rao & Anr. vs. ACIT& ANR. 2016 ITL 4940 where at Para 11 of its order, it held as under: "11. The CIT, assumed jurisdiction to revise the assessment order on the ground that there is a lack of enquiry on the part of the A.O., in examining the issue of cash found during the course of search at the time of completion of assessment u/s 143(3) of the Act. The CIT was of the opinion that the A.O. has applied incorrect provisions of the Act, to deal with cash found during the course of search, as against separate provisions provided by way of section 115BBE of the Act. The CIT further, observed that as per the provisions of section 115BBE of the Act, where the total income of an assessee includes any income referred to in section 68 to 69D of the Act, then notwithstanding anything contained....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he revenue". 5. The ld. DR is heard who has relied upon the order of the lower authorities and submitted that the AO has rightly invoked the provisions of section 69B of the Act. Further, he submitted that the provisions of section 115BBE forms part of and comes under Chapter-XII providing for determination of rate of tax in certain special cases and accordingly, quantification of the amount of tax. The provision of section 115BBE does not relate to the computation of total income. It was submitted that for quantification of tax, in respect of income referred in the said provisions, the amendment by the Finance Act 2016 would not affect the computation of total income. Hence, the business losses in the instant case cannot be allowed set off against the amount brought to tax under section 69B in terms of investment in undisclosed stock of stones and jewellery. 5.1 Further, in support of his contentions, he relied upon the following decisions: * Dhanush General Stores vs CIT (2012) 20 taxman.com 853 (Chhattisgarh) * Razakbhai R. Arabiani vs ITO (2013) 40 taxman.com 245 (Gujarat) * Vipul Kumar Kiritlal Shah vs ITO (2013) 33 taxman.com 370 (Gujarat) * Krishnamegh Yarn Indust....
X X X X Extracts X X X X
X X X X Extracts X X X X
....years. The fact that the business loss has been incurred during the year is thus not in dispute. The limited dispute relates to set off of said business loss against the income which has been brought to tax under section 69B read with section 115BBE of the Act. 8. Firstly, regarding the contention of the ld CIT DR that the provisions of section 115BBE comes under Chapter-XII providing for determination of rate of tax in certain special cases and accordingly, it relates to quantification of the amount of tax and not to the computation of total income and therefore, the amendment brought in by the Finance Act 2016 would not affect the computation of total income. It was accordingly contended that the business losses in the instant case cannot therefore be allowed set off against the amount brought to tax under section 69B in terms of undisclosed investment in stock of stones, gold and jewellery. 9. It is noted that by the Finance Act, 2016, an amendment has been brought-in in section 115BBE(2) wherein it has been provided that "notwithstanding anything contained in this Act, no set off of any loss shall be allowed to the assessee under any provision of this Act in computing his inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n 71 falls under the same chapter VI. In the absence of any provisions in section 71 falling under Chapter-VI which restrict such set off, in the instant case, set off of business losses against income brought to tax under section 69B cannot be denied. 12. Now, we refer to various judicial pronouncements quoted by both the parties. We find that the decision of Hon'ble Gujarat High in case of Fakir Mohmed HajiHasan (supra) and subsequent decision of the Hon'ble Madras High Court in case of Chensing Ventures (supra) are two earliest decisions on the subject where the Hon'ble Courts have taken a divergent view in the matter. As per the decision of Hon'ble Gujarat High Court, the addition on account of unexplained investment would be considered as total income of the previous year without allowing set-off of business loss. As per Madras High Court's decision, the addition would be set-off against the business loss and the balance addition, if any, would form part of the total income and attract tax. 13. It is noticed that the Hon'ble Gujarat High Court in case of CIT vs Shilpa Dyeing & Printing Mills (P) ltd (supra) had an occasion to consider an identical issue where the said diverg....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... collection of distinct tax levied separately on each head of income and it is not an aggregate of various taxes computed with reference to each of the different sources separately. There is only one assessment and the same is made after the total income has been ascertained. The assessee is subject to income-tax on his total income though his income under each head may be well below the taxable limit. Hence the loss sustained in any year under any heads of income will have to be set off against income under any other head. In this case, the Assessing Officer made addition of Rs. 28,50,000/- as undisclosed income under Section 69 of the Act. Once the loss is determined, the same should be set off against the income determined under any other head of income. In the assessment, no reasons were given by the Assessing Officer to deny the benefit of Section 71 of the Act. The benefit provided under Section 71 of the Act cannot be denied and the learned Standing Counsel appearing for the Revenue is also unable to explain or give reasons why the assessee is not entitled to the benefit of Section 71 of the Act. The reasons given by the Tribunal are based on valid materials and evidence and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k to the tune of Rs. 10,06,987/-. It is also an admitted fact that when the physical stock was examined by the authority, the value of the said stock was Rs. 13,33,485/-, however, as per the books of account, the value of stock was to the tune of Rs. 3,26,498/- i.e. amount to the tune of Rs. 10,06,987/- was not recorded in the books of account. However, it is admitted by the assessee himself that he has not completely disclosed the stock in the books of account. Now, considering the proviso of Section 69(B) of the act, we are of the opinion that the assessee had not fully disclosed the stocks in the books of account and therefore, the Assessing Officer as well as the CIT (Appeals) have rightly observed that the case of the assessee would fall under the proviso of Section 69(b) of the act. We are also of the opinion that the submissions made by the learned advocate is that the case would fall under the proviso of Section 69(c) of the act does not apply to the facts of the present case. It is not the case of the revenue that there is an unexplained expenditure, which would cover under the proviso of this Act and therefore, the assessee would not be entitled for the set off under t....