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Commissioner Of Income Tax-Ii (S) v. Shilpa Dyeing & Printing Mills Pvt. Ltd. Opponent(S)
Structured Summary of the Provided Opinion
Factual and Procedural Background
The respondent-assessee is a company engaged in the business of dyeing and printing. During scrutiny for the assessment year 2008–09, a survey at the assessee's business premises led to a disclosure of excess stock valued at Rs. 1,00,98,672 (rounded). In its return the assessee sought to adjust this amount by setting off current-year business loss against the disclosed sum.
The Assessing Officer (AO) rejected the set-off claim, taking the view that income disclosed in a survey that did not fall under any head specified in Section 14 of the Income-tax Act could not be treated as business or other heads of income and therefore could not be permitted to be offset by current-year business loss. The AO relied on the decision in Fakir Mohmed Haji Hasan.
The assessee appealed. Before the Commissioner (Appeals) the assessee relied on Section 71 of the Income-tax Act and on the Madras High Court decision in CIT v. Chensing Ventures and also placed reliance on Dy. CIT v. Radhe Developers India Ltd. The Commissioner (Appeals) allowed the assessee's claim and directed the AO to set off the current-year business loss against the income declared in the survey.
The Revenue appealed to the Income Tax Appellate Tribunal (the Tribunal). The Tribunal dismissed the revenue's appeal, after examining the accounts, the manner in which the amount was shown in schedules and the profit & loss account, and by following the reasoning in Chensing Ventures and Radhe Developers. The present opinion records the final judicial treatment of these appeals and the legal questions framed by the revenue.
Legal Issues Presented
- Whether in the facts and circumstances of the case and in law the Hon'ble ITAT was justified in treating income of Rs. 1,00,98,672/- as income falling under the head "income from other sources"?
- Whether in the facts and circumstances of the case and in law the Hon'ble ITAT was justified in not treating income of Rs. 1,00,98,672/- as "deemed income" as provided under the scheme of Section 69 of the Act?
- Whether in the facts and circumstances of the case and in law the Hon'ble ITAT was justified in deleting an addition of Rs. 1,00,98,672/- by treating the same as business income and thus allowing set off of business loss?
Arguments of the Parties
Appellant (Revenue) — Arguments
- Relied on the decision in Fakir Mohmed Haji Hasan to submit that income disclosed in survey which does not fall under any head specified in Section 14 could not be set off against current year business loss; such undisclosed income must be taxed independently and the business loss could not be applied against it.
- Contended that the decision in Radhe Developers India Ltd. did not, in substance, displace the ratio in Fakir Mohmed Haji Hasan, and therefore Fakir Mohmed's ratio still held the field.
Respondent (Assessee) — Arguments
- Relied on Section 71 of the Income-tax Act to assert that loss (other than capital gains) determined for the year can be set off against income under any other head in the same year.
- Placed reliance on the Madras High Court decision in CIT v. Chensing Ventures (2007) 291 ITR 258 / 163 Taxman 175, which held that once a head of income is assigned to the additional income disclosed, set-off of current year business loss against such income is permissible under Section 71.
- Also relied on the decision of this Court in Dy. CIT v. Radhe Developers India Ltd. (2010) 329 ITR 1/(2011) 198 Taxman 58 (Mag.) to suggest that Fakir Mohmed Haji Hasan had been explained and that the statutory scheme (including sections 14 and 56) requires income to be classified under heads set out in Section 14 before any tax treatment; consequently Section 71 would apply.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Fakir Mohmed Haji Hasan v. CIT (as relied on by AO and Revenue) | Held (as understood by AO) that income disclosed in survey not falling under the heads specified in Section 14 could not be treated as a head of income eligible for set-off with business loss. | The Revenue relied on this decision to oppose set-off. The Court examined this precedent in light of subsequent decisions and concluded that its application had been explained by later pronouncements (notably Radhe Developers), and could not be applied to deny Section 71 relief in the present facts. |
| CIT v. Chensing Ventures (Madras High Court) (2007) 291 ITR 258 / 163 Taxman 175 | Interpreted Section 71 to permit set-off of business loss against income determined under any other head (except capital gains); held that once loss is determined it should be set off against income under any head of income. | The Tribunal followed Chensing Ventures and applied its principle to allow set-off of the current-year business loss against the income disclosed in survey which was treated as "other income". |
| Dy. CIT v. Radhe Developers India Ltd. (2010) 329 ITR 1 / (2011) 198 Taxman 58 (Mag.) | Explained earlier decisions (including Fakir Mohmed Haji Hasan) and emphasized that the Act does not envisage taxing income under any head not specified in Section 14; stressed reading of Sections 14 and 56 together in the legislative scheme. | The Court treated Radhe Developers as clarifying and explaining Fakir Mohmed Haji Hasan and applied Radhe's reasoning to hold that Section 71 was applicable; the present court considered Radhe dispositive of the issue and followed it in dismissing the revenue's appeal. |
| D.P. Sandu Bros. Chembur P. Ltd. (Apex Court) (referred in Radhe Developers) | Dealt with treatment to be given to certain transactions (surrender of tenancy right) and was considered in the context of whether income outside Section 14 could be taxed. | Radhe Developers relied on the Apex Court's treatment to support the principle that the Act does not envisage taxing income under any head not specified in Section 14; the present court noted this reliance in adopting Radhe's approach. |
| United Commercial Bank Ltd. v. CIT (1957) 32 ITR 688 (SC) (referred in Radhe Developers) | Referenced among earlier Apex Court decisions considered in Radhe Developers when discussing whether income outside the heads in Section 14 is taxable. | Radhe Developers considered earlier Apex Court decisions (including this one) to conclude that taxation must be under a head specified by Section 14; the present court accepted Radhe's reasoning that these Apex Court authorities support that view. |
| Krishna Textiles (referenced in Radhe Developers) | Mentioned among prior decisions which, according to Radhe Developers, were not relevant or germane to the core issue regarding conjoint reading of Sections 14 and 56. | Radhe Developers observed that decisions such as Krishna Textiles were not relevant; the present court relied on Radhe's assessment in this regard. |
Court's Reasoning and Analysis
The court proceeded by examining the statutory provision of Section 71 of the Income-tax Act and the manner in which the undisclosed amount was recorded in the assessee's accounts. The Tribunal had found that the impugned amount was disclosed under the head "other income" (miscellaneous income), that the Schedule-12 of the balance sheet recorded sales along with other income, and that the profit & loss account carried the amount as part of "sale of products" and "other income." Against the total income, expenditure was claimed such that a resultant profit was computed and net taxable income was arrived at after adjustments. The survey disclosure itself stated additional cloth valued at Rs. 1,00,98,672.
The AO's sole objection was that such disclosure ought not to be treated as business income and therefore the resultant business loss should not be adjusted against the undisclosed income. The Tribunal and the appellate authority considered this approach incorrect for two inter-related reasons:
- Statutory: Section 71 permits an assessee to set off losses (other than capital gains) against income under any other head in the same year once that loss is determined.
- Authoritative guidance: The Madras High Court in Chensing Ventures applied Section 71 to allow set-off of a business loss against income declared under "other sources" and held that the income tax is on total income (aggregate of heads), and losses from one head can be set off against income from another head; Radhe Developers further explained that the Act does not envisage taxing income under any head not specified in Section 14 and that decisions such as Fakir Mohmed Haji Hasan were to be read in the light of the legislative scheme (conjoint reading of Sections 14 & 56).
The court therefore treated the factual classification in the assessee's audited accounts and the statutory scheme as supporting the set-off. It concluded that the AO had erred in not considering Section 71 and in following Fakir Mohmed Haji Hasan without regard to its later explanation in Radhe Developers. Applying the reasoning of Chensing Ventures and Radhe Developers, the court found no force in the revenue's grounds and dismissed the appeal.
Holding and Implications
Holding: Tax appeal dismissed.
Implications:
- The Tribunal's and Commissioner (Appeals)'s orders allowing the assessee to set off current-year business loss against the amount of Rs. 1,00,98,672 (treated as "other income") stand affirmed by dismissal of the revenue's appeal.
- The direct effect on the parties is that the assessee is entitled to set off the business loss against the disclosed amount and the Revenue's addition (or disallowance of set-off) is rejected.
- The opinion records that the result follows from application of existing authorities (Chensing Ventures and Radhe Developers) and statutory Section 71; the court stated that "no question of law arises," indicating that the decision applies existing law rather than announcing a new principle or precedent.
ORDER
Akil Abdul Hamid Kureshi, J.
1. The revenue is in appeal against the judgment of the Income Tax Appellate Tribunal ('the Tribunal' for short) raising following substantial question of law:
1. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified treating income of Rs. 1,00,98,672/- as income falling under the head 'income from other sources'?
2. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified in not treating income of Rs. 1,00,98,672/- as 'deemed income' as provided under the scheme of Section 69 of the Act?
3. Whether in the facts and circumstances of the case and in law the Hon'ble ITAT is justified in deleting an addition of Rs. 1,00,98,672/- by treating the same as business income and thus allowing set off of business loss?
Brief facts are that, the respondent-assessee is a company engaged in the business of dying and printing. During the course of scrutiny for the assessment year 2008-09, the Assessing Officer noticed that in a survey action conducted at the business premises of the assessee, it had declared a sum of Rs. 100.98 lacs (rounded off) on account of excess stock. In the return, the assessee had suggested current year's loss against such income. Assessing Officer holding a belief that income from unlisted source would not fall under any of the heads of the income, the same has to be taxed separately, the current losses cannot be set off against such income.
2. Assessee opposed such proposal and relied on Section 71 of the Income-tax Act, 1961 ('the Act' for short) as also a decision of Madras High Court in case of CIT v. Chensing Ventures (2007)291 ITR 258/163 Taxman 175. Assessing Officer, however, basing reliance on the decision of this Court in case of Fakir Mohmed Haji Hasan v. CIT (2001)247 ITR 290/(2002) 120 Taxman 11, rejected the assessee's claim.
3. Assessee carried the matter in appeal and contended that the assessee had declared such income in its profit and loss account. After adjusting the business loss suffered during the year under consideration net income of Rs. 15.40 lacs was offered for taxation. Before the Appellate Authority, the assessee has placed reliance on the decision of this Court in case of Dy. CIT v. Radhe Developers India Ltd. (2010) 329 ITR 1/(2011) 198 Taxman 58 (Mag.) to suggest that the decision in case of Fakir Mohmed Haji Hasan (supra) has been explained.
4. Commissioner (Appeals) allowed the assessee's appeal making following observations:
2.3 I have gone through the facts of the case. The A.O. has accepted the current year business loss. He has not allowed set off of this loss against income disclosed during survey as, relying upon the decision in Fakir Mohmed Haji Hassan, he held that income disclosed in survey did not fall under any head of income and therefore was not eligible for set off with current year business loss. The decision in the case of Fakir Mohmed Haji Hassan has been overturned by the Hon'ble Gujarat High Court itself in their decision in Radhey Developers Pvt. Ltd. which held that income that does not fall within the prescribed heads of income could not be taxed. Therefore, for the income declared in survey to be taxed, it has to fall under one of the heads of income. Once a head of income is assigned to the additional income disclosed, whether business or other source, it becomes available for set off against current year business loss as current year business loss is allowed to be set off against current year income under any other head (Section 71). The assessee was therefore eligible to set off current year business loss with income declared during survey. The A.O. is directed to set off current year business loss against additional income declared during survey.
5. Revenue carried the matter in appeal before the Tribunal. Tribunal dismissed the revenue's appeal in following manner:
5. Having heard the submissions of both the sides and on careful examination of the facts, we are of the considered view that the AO has incorrectly appreciated the facts as also the law involved in this case. We have noted that the impugned amount was disclosed under the head "other income" as miscellaneous income. The Schedule-12 of the balance sheet contained sales along with other income and the total of this Schedule was at Rs. 11,30,85,527/-. As per the profit & loss account, it was carried over as income of "sale of products" and "other income". Against the said total income, as expenditure of Rs. 11,03,85,047/- was claimed. A resultant profit of Rs. 29,16,195/- was computed. This was the profit which was computed by the AO and made part of the total income computed which was disclosed; after claiming deduction; at Rs. 15,40,400/-. This computation thus made it clear that in the said profit there was an amount of undisclosed income which was offered at the time of survey. As per the statement made at the time of survey, the assessee has stated that there was additional cloth of 10,18,340 meters which was valued at Rs. 1,00,98,672/-. The AO's only objection is that the said disclosure ought not to be reduced from the income from the business being not part of the business income and the resultant loss ought not to be adjusted against the said undisclosed income which is to be taxed independently in the hands of the assessee. In our considered opinion, the AO had gone wrong by not considering the provisions of section 71 of the it act. In this regard, the law pronounced in the case of Chensing Ventures (supra) is to be followed, wherein it was held that once a loss is determined, the same should be set off against the income determined under any other head of income and there was no reason for denial of benefit u/s. 71 of IT Act by the Revenue Department. In the result, we find no force in this ground of the Revenue, hence dismissed.
6. Before us, learned counsel for the revenue placed strong reliance on the decision in case of Fakir Mohmed Haji Hasan (supra) and submitted that when the income from undisclosed source does not fall in any of the heads specified in Section 14 of the Act, the business loss of the current year could not have been set off against such income. He submitted that in Radhe Developers India Ltd.'s case (supra) this Court had not, in any manner, disagreed with the view in case of Fakir Mohmed Haji Hasan (supra) and thus, such ratio still hold the field.
7. We, however, find that Section 71 of the Act permits an assessee to set off loss other than that of capital gains against income from other head. This very issue came-up for consideration before the Madras High Court in case of Chensing Ventures (supra). The Division Bench of the Court considered the issue in following manner:
6. Heard counsel. The Assessing Officer has not given any reason whatsoever to deny the set off of the business loss against the income declared under the head "other sources". Section 71 deals with set off of loss against income under any other head. After setting off losses against the income under the same head, if the net result is still a loss, the assessee can set off the said loss under Section 71 of the Act against income of the same year under any other head, except for losses which 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 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 the same is in accordance with the provisions of Section 71 of the Act. We find no error or legal infirmity in the impugned order.
8. We may further notice that the decision in case of Fakir Mohmed Haji Hasan (supra) came-up for consideration in case of Radhe Developers India Ltd. (supra), it was observed as under:
The decisions of this Court in the case of Fakir Mohmed Haji Hasan (supra) and Krishna Textiles (supra) are neither relevant nor germane to the issue considering the fact that in none of the decisions the Legislative Scheme emanating from conjoint reading of provisions of sections 14 & 56 of the Act have been considered. The Apex Court in the case of D.P. Sandu Bros. Chembur P. Ltd., (supra) has dealt with this very issue while deciding the treatment to be given to a transaction of surrender of tenancy right. The earlier decisions of the Apex Court commencing from case of United Commercial Bank Ltd. v. CIT (1957)32 ITR 688 (SC) have been considered by the Apex Court and, hence, it is not necessary to repeat the same. Suffice it to state that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. In the circumstances, there is no question of trying to read any conflict in the two judgments of this Court as submitted by the learned Counsel for the Revenue.
In our opinion, the statutory provisions contained in section 71 was applicable in the present case. By applying the decision in case of Fakir Mohmed Haji Hasan (supra) as explained in case of Radhe Developers India Ltd. (supra), the same cannot be declined. In the result, no question of law arises. Tax appeal is, therefore, dismissed.
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