TaxTMI 
TaxTMI 
2017 (8) TMI 721
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....,733/- against the excess stock offered for tax during 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....
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....No. 21; admitted the excess stock of Rs. 2,43,77,004/-. Later on, after verification, 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) ....
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....d/2006 wherein, the Hon'ble 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. 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 n....
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....d set off or carry forward of losses. Section 69B falls in chapter VI. As per this section where in any financial year assessee has made investment or is found to be owner of any valuable article etc. which 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 fr....
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....be made applicable as primary condition for invoking the provisions of section 69A, 69B is that the asset should be separately identifiable and it should have independent physical existence of its own. Since excess 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 recor....
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....cess stock qua the excess stock found." 4.3 The AO relied upon the decision of Hon'ble Punjab and Haryana High Court in case of Kim Pharma (p.) Limited vs. CIT 258 CTR 454. In this case the amount surrendered in course 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 und....
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....t. It further held in Para 39(c) that "if the concerned provision of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against there the revenue, has to be preferred". Therefore, 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 pr....
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....7, even if the same has been added under the provisions of sec. 68 to 69D of the Act. Therefore, we are of the view that the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interest of the revenue, as there is no prejudice is caused to the 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....
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....not allowed the set off of business loss of Rs. 86,96,733 against the said income of Rs. 2,31,41,217 which has been brought to tax under section 69B read with section 115BBE of the Act. The Assessing officer has however allowed the carry forward of said business loss to be set off in the subsequent assessment 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,....
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....n Chapter-VI such as non-allowance of business loss against salary income as provided in section 71(2A), and treatment of shortterm or long-term capital losses. There is no specific provision which restrict set off of business losses against income brought to tax under section 69B. Interestingly, both section 69B and section 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 ....
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....arise under the head "capital gains". The income tax is only one tax and levied on the sum total of the income classified and chargeable under the various heads. Section 14 has classified the different heads of income and income under each head is separately computed. Income which is computed in accordance with law is one income and it is not a 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 ....
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....osses under section 71 against such income. The relevant findings of Hon'ble High Court are as under: "8. We have learned advocates for the respective parties. Perused the orders of the CIT (Appeals) as well as the ITAT. It is an undisputed fact that during scrutiny, the assessee himself has disclosed the fact that in his books of account, he had shown less stock 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....