A.J Desai, J.:— By way of the present appeal filed under section 260A of the Income-tax Act, 1961, the appellant-assessee has challenged the validity of the order dated February 28, 2005, passed by the Income-tax Appellate Tribunal (hereinafter referred to as “the ITAT” for short), by which the appeal preferred by the assessee challenging the judgment and order dated July, 7, 2004, passed by the Commissioner of Income-tax (Appeals), Ahmedabad (hereinafter referred to as “the CIT (Appeals)” for short) is confirmed and the claim made by the assessee with regard to set off of undisclosed stocks against his losses for the assessment year 2001-02 has not been accepted and enhancement made by the Commissioner of Income-tax (Appeals), vide order dated July 7, 2004, is confirmed.
2. The following two substantial questions of law were framed at the time of admission of the appeal:
(1) Whether, in the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in law in holding that the stock of raw material disclosed at the time of survey can be added both under section 69B as well as section 69C of the Act?
(2) Whether, in the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was right in not allowing set off of business loss with income from other sources for the same year?
3. Brief facts arise from the record are as under:
3.1 The appellant-assessee is a partnership firm having business in yam sizing and its accounts are regularly audited along with relevant material. The assessee was used to submit the same while filing the return under the provisions of the Income-tax Act, 1961 (hereinafter referred to as “the Act” for short). For the assessment year 2001-02, the assessee filed a return under the provision of the Act on October 29, 2001, declaring a total income of Rs. 3,06,984 together with audit report as provided under the provision of section 44AB of the Act. The return of the income of the assessee was selected for scrutiny and, accordingly, notices under sections 143(2) and under section 142(1) of the Act came to be issued to the asees-see. In response to the notices, the authorised income-tax practitioner attended the hearing along with the accountant of the assessee. The relevant documents including the books of account were produced before the Assessing Officer to scrutinise the case of the assessee.
3.2 During the course of scrutiny of trading account, it was noticed that the assessee had declared a gross profit of Rs. 49,60,845 on the total turn over of Rs. 9,62,63,584. It was worked out at 5.15 per cent, of the total turn over. It was also noticed that the value of the closing stock was to the tune of Rs. 33,21,944 shown in the trading account, which included the excess stock amounting to Rs. 10,06,987. The said stock was disclosed by the assessee himself during the course of survey operation carried out under section 133A of the Act on November 30, 2000. Therefore, it comes to fact that if the excess stock disclosed to the tune of Rs. 10,06,987 is not taken into consideration for the gross profit, which comes to Rs. 39,53,867.
3.3 The return submitted by the assessee for the year 2001-02 was finally scrutinised and the Assessing Officer had passed an order on October 28, 2003, however, did not consider certain allowance, which the assessee had claimed. As far as the excess stock to the tune of Rs. 10,06,987 is concerned, the submission made by the assessee was accepted by the Assessing Officer.
3.4 The assessee challenged the order of the Assessing Officer with regard to non-granting of certain set off claimed by the assessee apart from Rs. 10,06,987 with regard to excess stock.
3.5 The Commissioner of Income-tax (Appeals), by an order dated July 7, 2004, dismissed the appeal. However, enhanced the income by Rs. 10,06,987 treating the same as deemed income under section 69B of the Act and also issued notice under section 271(1)(c) of the Act on the ground that the undisclosed stock to the tune of Rs. 10,06,987 is an income and, therefore, the petitioner was bound to pay the tax on the said undisclosed stock and was asked to pay penalty.
3.6 The said decision was challenged by the assessee before the Income-tax Appellate Tribunal. By judgment and order dated August 12, 2005, the appeal preferred by the assessee came to be partly allowed, however, did not consider the case of the assessee with regard to set off to the tune of Rs. 10,06,987 available under section 71 of the Act as well as his claim with regard to losses incurred during the said assessment year. Hence, the present appeal.
4. Mr. B.S Soparkar, learned advocate for the assessee, would submit that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal have committed an error of law not allowing the set off to the tune of Rs. 10,06,987 against the losses under section 71 of the Act. He would further submit that during scrutiny, the assessee had disclosed the income with regard to the undisclosed stock to the tune of Rs. 10,06,987. Though, as per the books of account, the value of stock was shown to the tune of Rs. 3,26,498. He would further submit that the Commissioner of Income-tax (Appeals) has accepted the fact that post-survey the stock was fully disclosed in the books of account, however, the Commissioner of income-tax (Appeals) has erred in coming to the conclusion that the said investment was totally unexplained and, hence, the said unexplained expenditure has been shown in the books of account. He would further submit that the Commissioner of Income-tax (Appeals) has treated the case that the assessment falling under section 69B of the Act and the Commissioner of Income-tax (Appeals) has erred in not allowing the set off of business expenses out of unexplained investments. He would further submit that the Assessing Officer had rightly given set off against the losses caused by the assessee against the said undisclosed stock relying upon the proviso to section 71 of the Act read with section 69B of the Act. He would further submit that the observation made by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal are contrary to the facts of law, and, therefore, requires to be quashed and set aside.
5. By taking me through the operative part of the order of the Commissioner of Income-tax (Appeals) and particularly showing the total income in paragraph 17 of the order, he would submit that the Commissioner of Income-tax (Appeals) has committed an error holding the said amount of Rs. 10,06,987 as deemed income under section 69B of the Act. In support of his submission, he relied upon the case of CIT v. Shilpa Dyeing and Printing Mills (P.) Ltd. reported in [2013] 219 Taxman 279 (Guj) delivered by the Division Bench of this court and would submit that the present case is covered under the said decision and, therefore, the appeal be allowed and the orders passed by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal be quashed and set aside.
6. On the other hand, Ms. Mauna Bhatt, learned advocate for the Revenue, has opposed this appeals. By taking me through the orders passed by the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal and particularly, the reasons assigned by the Income-tax Appellate Tribunal with regard to the applicability of the proviso to section 69C of the Act, she would submit that the assessee had not disclosed the amount to the tune of Rs. 10,06,987, the case would fall under the proviso to section 69 of the Act. By relying upon the case of Attar Singh Gurmukh Singh v. ITO reported in (1991) 191 ITR 667 (SC), learned advocate would submit that the apex court has considered the unexplained expenditure not to be given set off under the proviso to section 71 of the Act. Learned advocate would further submit that for the assessment year 2001-02, the closing stock was to the tune of Rs. 10,06,987, which might have carried forward by the assessee of the non-assessment year of 2002-03, which the assessee might have taken advantage of the next year. Hence, the appeals be dismissed.
7. We have heard learned advocates for the respective parties Perused the orders of the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal. 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 to section 69B 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 Commissioner of Income-tax (Appeals) have rightly observed that the case of the assessee would fall under the proviso to section 69B of the Act.
8. We are also of the opinion that the submissions made by the learned advocate is that the case would fall under the proviso to section 69C 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 to this Act and, therefore, the assessee would not be entitled for the set off under the proviso to section 71 of the Act. As far as the applicability of the case of CIT v. Shilpa Dyeing and Printing Mills (P.) Ltd. (supra) is concerned, the same would be applicable since the court had held that the amount of excess stock would fall under the definition of income as per section 14 of the Act and, therefore, the assessee would be entitled for the set off under proviso to section 71 of the Act. As far as the case of Attar Singh Gurmukh Singh v. ITO (supra) is concerned, the same would not be applicable in the present facts and circumstances of the case since it is not the case that there was unexplained expenditure made by the assessee. Therefore, we are of the opinion that the Commissioner of Income-tax (Appeals) as well as the Income-tax Appellate Tribunal have committed an error in refusing giving set off to the assessee under section 71 of the Act and, accordingly, we allow these appeals by setting aside the order dated February 28, 2005, passed by the Income-tax Appellate Tribunal (“the ITAT”) and order dated July 7, 2014, passed by the Commissioner of Income-tax (Appeals), Ahmedabad (“the CIT (Appeals)”).
9. As far as Tax Appeal No. 1846 of 2005 is concerned since we have allowed the appeal preferred by the assessee and have quashed and set aside the order dated February 28, 2005, passed by the Income-tax Appellate Tribunal (“the ITAT”) and the order dated July 7, 2014, passed by the Commissioner of Income-tax (Appeals), Ahmedabad (“the CIT (Appeals)”), there is no question of imposing penalty upon the assessee. Hence, the present appeal is also allowed.