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Gaurish Steels (P.) Ltd. v. Assistant Commissioner of Income-tax
Tribunal Order Summary — Appeal against CIT(A)-II, Ludhiana order dated 25.9.2014 (Assessment Year 2011-12)
Factual and Procedural Background
The assessee is engaged in manufacturing of steel round, flat, scrap and trading of iron and steel. The return for assessment year 2011-12 was filed declaring total income of Rs. 23,04,500 on 23 September 2011. A survey was conducted at the assessee's premises on 6 October 2010, during which the assessee surrendered additional income totalling Rs. 70,00,000 under the following heads:
| Head | Description | Amount (Rs.) |
|---|---|---|
| (i) | Discrepancy on account of cash found | 9,00,000 |
| (ii) | Discrepancy on cost of construction of building | 21,00,000 |
| (iii) | Discrepancy in stock | 10,00,000 |
| (iv) | Discrepancy in advances and receivable | 30,00,000 |
The Assessing Officer (AO) observed that the surrendered amount arose from investments, cash and expenses not reflected in books, and treated the surrendered income as deemed income (referring to principles under section 69 and related provisions), refusing to allow set off of business losses of Rs. 58,19,120 against the surrendered amount. The assessee appealed to the Commissioner of Income Tax (Appeals) (CIT(A)-II), Ludhiana. The CIT(A) sustained the AO's approach and treated the surrendered income as deemed income, relying on jurisdictional authority. The assessee then appealed to the Tribunal. During Tribunal proceedings the assessee did not press certain grounds (4(b) and 5) and the appeal proceeded on the remaining issues concerning treatment of the Rs. 70 lacs and related set-offs.
Legal Issues Presented
- Whether the Rs. 70,00,000 surrendered during the course of survey is taxable as business income, as income from other sources, or as deemed income under sections 69A/69B/69C of the Income Tax Act, 1961.
- Whether the business losses incurred in the year (amounting to Rs. 58,19,120) can be set off against the surrendered income.
- Whether unabsorbed depreciation may be adjusted/set off against the deemed/surrendered income (additional ground admitted by the Tribunal).
- Whether the authorities erred in treating the surrendered amount as deemed income and thereby denying set-off and other benefits claimed by the assessee (including arguments based on section 14 and precedents cited by the assessee).
Arguments of the Parties
Appellant (Assessee) — Key Arguments
- The surrendered Rs. 70 lacs represented amounts relatable to the regular business of the assessee; the amount was reflected in the profit & loss account and therefore should be treated as business income.
- At the time of survey and as per trading account prepared by the survey team, the assessee was showing losses; hence the surrendered income should be available for set-off against business losses under section 71 of the Act.
- Section 14 of the Act restricts taxation to the heads provided therein; the assessee relied on decisions (including CIT v. D.P. Sandu Bros., Kevalchand Nemchand Mehta and Shilpa Dyeing) to support the contention that amounts relatable to business cannot be taxed as deemed income under a different head.
- The Punjab & Haryana High Court decision in Kim Pharma (P.) Ltd., which the revenue relied upon, had been distinguished by higher courts (e.g., Gujarat High Court in Shilpa Dyeing); the assessee argued that Kim Pharma concerned primarily cash surrender and other surrendered items in that case were already held to be business-related.
- In the alternative, even if some portion (cash) is held to be deemed income, all other components (construction-cost discrepancy, stock discrepancy, advances/receivables) are relatable to business and should be taxed as business income, against which business losses and unabsorbed depreciation can be set off.
- An additional legal ground was raised and admitted by the Tribunal: the deemed income assessed under sections 69 (and confirmed by CIT(A)) should be adjusted against unabsorbed depreciation determined by AO in an order passed under section 154 (dated 18.02.2015).
Respondent (Revenue / Assessing Officer / CIT(A)) — Key Arguments
- The Assessing Officer treated the surrendered amount as deemed income (relying on ITAT and High Court precedents) on the basis that the surrendered income represented cash, investments and expenses not reflected in books.
- The AO and the CIT(A) rejected the assessee's contention that surrendered amounts were business income and denied set-off of business losses against the surrendered amount.
- The Departmental Representative (D.R.) at the Tribunal supported the orders of the AO and the CIT(A) and relied on those orders and the decisions cited therein.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (as described in the opinion) |
|---|---|---|
| Kim Pharma Ltd. v. ITO (ITA No.189/Chd/2010) — (ITAT) | Held that deemed income covered under section 69 is to be treated separately and not as income under any of the heads of the Income Tax Act. | The AO referred to this ITAT decision to treat surrendered income as deemed income; the Tribunal notes the decision but examines the factual matrix and its applicability. |
| Kim Pharma (P.) Ltd. v. CIT [2013] (Punjab & Haryana High Court) | Authority relied upon by AO/CIT(A) for treating surrendered income as deemed income (principle applied in the jurisdictional High Court). | The Tribunal considered this to be the binding jurisdictional High Court proposition brought to its notice but analyzed that the Kim Pharma decision primarily addressed surrender of cash, leading the Tribunal to distinguish the present facts and apply the principle only insofar as it concerned cash surrender. |
| CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] (Supreme Court) | Cited by the assessee before the CIT(A) (specific rule relied upon is not detailed in the opinion). | The opinion records that the assessee relied on this Supreme Court judgment before CIT(A); the Tribunal's order does not set out a detailed application of this case's principle. |
| Kevalchand Nemchand Mehta v. CIT [1968] (Bombay High Court) | Cited by the assessee before the CIT(A) (specific rule relied upon is not detailed in the opinion). | The opinion records reliance by the assessee on this decision; no further detailed application is recorded in the Tribunal's reasoning. |
| CIT v. Shilpa Dyeing & Printing Mills (P.) Ltd. [2013] (Gujarat High Court) | Held/distinguished the decision in Kim Pharma; relied upon to challenge the proposition that surrendered income must be taxed as deemed income in all circumstances. | The assessee relied on this decision to show Kim Pharma had been distinguished by the Gujarat High Court. The Tribunal noted that Shilpa Dyeing distinguished earlier authorities and supported the assessee's contention that non-cash components may be business-related. |
| Fakir Mohmed Haji Hasan v. Commissioner Of Income-Tax [2001] (Gujarat High Court) | Earlier decision relied upon by ITAT/High Court decisions (as recorded by parties); the Gujarat High Court (Shilpa Dyeing) distinguished this case. | The opinion records that Kim Pharma and ITAT had relied on Fakir; the Tribunal notes that Shilpa Dyeing distinguished Fakir, which the assessee relied upon to counter the AO's reliance on Kim Pharma. |
| Commissioner Of Income-Tax v. Chensing Ventures [2007] (Madras High Court) | Relied upon by the Gujarat High Court (in Shilpa Dyeing) in distinguishing earlier authorities. | The assessee relied on the chain of decisions (Shilpa Dyeing referring to Chensing Ventures) to demonstrate divergence in authority; the Tribunal records this reliance but grounds its decision on the jurisdictional High Court Kim Pharma while distinguishing it on facts. |
| Smt. Promila Jain v. Dy. CIT (ITA No.1449/Chd/2010) — (ITAT Chandigarh Bench) | ITAT decision relied upon by CIT(A) to support treatment of surrendered income as deemed income under sections 69/69A. | The CIT(A) relied on this ITAT order along with Kim Pharma; the Tribunal records that CIT(A) regarded these authorities as supporting treatment of surrendered income as deemed income, but the Tribunal examined factual differences and limited the application to cash surrender. |
Court's Reasoning and Analysis
The Tribunal's analysis proceeds from undisputed factual findings and then applies the law and precedents brought to its attention:
- Undisputed facts: The Tribunal records that the assessee surrendered Rs. 70 lacs under specified heads (cash, building cost discrepancy, stock, advances/receivables) and that these facts were not disputed by the AO or CIT(A). The books were not rejected; the survey team's trading account indicated losses at the time of survey.
- Framing the legal question: The Tribunal states the central issue — whether the surrendered Rs. 70 lacs is business income, income from other sources, or deemed income under sections 69A/69B/69C.
- Precedential constraint: The Tribunal acknowledges the jurisdictional Punjab & Haryana High Court decision in Kim Pharma (P.) Ltd. as a binding proposition presented to it and therefore gives it due consideration.
- Factual distinction: On examining Kim Pharma, the Tribunal agrees with the assessee's submission that the Kim Pharma decision primarily concerned surrender of cash; other surrendered items in that case had already been held relatable to business. The Tribunal therefore finds a factual distinction between Kim Pharma and the present case for the non-cash elements.
- Application to present facts:
- The AO had not disputed that the surrendered amounts (except cash) were out of the business of the assessee, nor had he objected to the heads under which the amounts were surrendered (cash, construction cost, stock discrepancy, advances/receivables).
- The survey team had not found any source of income other than the business of the assessee.
- Following the jurisdictional authority but applying it sensibly to the present factual matrix, the Tribunal concluded that apart from cash, the other surrendered components should be taxed as business income; the cash component should be treated as deemed income under section 69A.
- Set-off and adjustments:
- Under section 71 of the Act, business loss of the current year can be set off against income under any other head; consequently, the Tribunal directed that business losses be set off against the surrendered income except for the cash element (which is taxed as deemed income under a different head and therefore cannot be set off against business loss).
- The Tribunal admitted an additional legal ground concerning adjustment of unabsorbed depreciation and directed that unabsorbed depreciation be set off out of those surrendered amounts that are held to be business income (i.e., apart from the cash element). Because both business losses and unabsorbed depreciation will be set off out of the business-representative surrendered income, the Tribunal considered it unnecessary to decide whether these could be adjusted against the cash/deemed income element — that issue was rendered academic.
Holding and Implications
APPEAL PARTLY ALLOWED
Holding (core ruling):
- The Tribunal held that the Rs. 70,00,000 surrendered during the survey must be split for tax treatment: the cash element of Rs. 9,00,000 is to be treated as deemed income taxable under section 69A of the Income Tax Act, while the remaining components (cost of construction discrepancy Rs. 21,00,000; stock discrepancy Rs. 10,00,000; discrepancy in advances and receivables Rs. 30,00,000) are to be treated as business income.
- The Assessing Officer is directed to set off the assessee's business losses of the year against the surrendered income except for the cash component; the business losses are therefore allowable to be set off against the business-related surrendered amounts pursuant to section 71.
- The additional ground concerning adjustment of unabsorbed depreciation was admitted; the Tribunal directed that unabsorbed depreciation be set off against those surrendered amounts treated as business income (i.e., excluding the cash element).
Implications (direct consequences):
- The Assessing Officer must re-compute the assessment in accordance with the Tribunal's directions: (a) treat Rs. 9,00,000 as deemed income under section 69A and (b) treat Rs. 61,00,000 as business income and allow set-off of business losses and adjustment of unabsorbed depreciation against this business-related surrendered income.
- The Tribunal's order is fact-specific: it follows the jurisdictional High Court's authority (Kim Pharma) but distinguishes that authority on the facts before it; the decision produces a directed outcome for this assessee rather than laying down a broad new rule unforeseeable from the cited authorities.
- No broader alteration of precedent is announced by the Tribunal; the Tribunal limited its ruling to the factual matrix and applied binding authority to the extent appropriate, treating the question of adjustment against the cash element as academic and therefore not adjudicated further.
Result: Appeal partly allowed pursuant to directions to the Assessing Officer for re-computation consistent with the Tribunal's factual and legal conclusions.
ORDER
Rano Jain, Accountant Member - This appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-II, Ludhiana dated 25.9.2014 for assessment year 2011-12.
2. The assessee has raised the following grounds of appeal :
3. The learned counsel for the assessee during the course of hearing preferred not to press ground No.4(b) and ground No.5. In view of the same, ground Nos.4(b) and 5 are dismissed as being not pressed.
4. All the other grounds i.e. ground Nos.1,2,3 and 4(a) relate to common issue of treatment of surrendered income of Rs.70 lacs. Therefore, we will adjudicate the same together.
5. Briefly, the facts of the case are that the assessee is engaged in the business of manufacturing of steel round, flat, scrap and trading of iron and steel. The assessee filed the return declaring income of Rs.23,04,500/- on 23.9.2011. The Assessing Officer noted that as per the Profit & Loss Account, the income of Rs.70 lacs surrendered by the assessee during the course of survey conducted at its premises on 6.10.2010 was shown by the assessee as its business income. The Assessing Officer observed that the additional income surrendered is on account of investments, cash, expenses, which could not be explained or which were not reflected in the books of account. The Assessing Officer referred to the decision of the ITAT in the case of Kim Pharma Ltd. v. ITO In ITA No.189/Chd/2010, wherein the ITAT has held that the deemed income covered under section 69 of the Income Tax Act, 1961 (in short 'the Act') is to be treated separately and not as income under any of the heads of income provided in the Income Tax Act. The contention of the assessee before the Assessing Officer was that the surrendered income should be treated as business income. However, the Assessing Officer rejected the contention of the assessee and treated the surrendered income as deemed income and not as business income. The effect of the said finding was that the Assessing Officer did not allow the benefit of the set off of business losses incurred by the assessee during the year amounting to Rs.58,19,120/- against the income surrendered at the time of survey.
6. The assessee went in appeal before the learned CIT (Appeals). It was submitted that the source of cash and stock found during the course of survey was from the regular business carried on by the assessee and this fact was disclosed at the time of survey only. The assessee had accordingly, added the said surrendered amount of Rs.70 lacs in the regular books of account. It was also contended that as per section 14 of the Act, the income can be taxed only under five heads provided in that section and any income cannot be taxed under any other head which is not given in the Act. The assessee referred to the judgment of Hon'ble Supreme Court in the case of CIT v. D.P. Sandu Bros. Chembur (P.) Ltd. [2005] 273 ITR 1/142 Taxman 713 and that of the Hon'ble Bombay High Court in the case of Kevalchand Nemchand Mehta v. CIT [1968] 67 ITR 804 . The assessee also referred to a recent decision of the Hon'ble Gujarat High Court in the case of CIT v. Shilpa Dyeing & Printing Mills (P.) Ltd. [2013] 39 taxmann.com 3/219 Taxman 279 . It was also submitted that the judgment of the Hon'ble Punjab & Haryana High Court in the case of Kim Pharma (P.) Ltd. v. CIT [2013] 35 taxmann.com 456/216 Taxman 153 (Mag.) , which the Assessing Officer had relied upon has been distinguished in this judgment of Gujarat High Court. However, the learned CIT (Appeals) rejected the said contentions of the assessee and held that the income has to be taxed only under any one of the heads provided in section 14 of the Act, is not a legally tenable position. Further, he relied again on the judgment of the Punjab & Haryana High Court in the case of Kim Pharma (P.) Ltd. (supra) which he also supported by the order of the ITAT, Chandigarh Bench in the case of Smt. Promila Jain v. Dy. CIT, in ITA No.1449/Chd/2010. As per the learned CIT (Appeals), in this decision, the ITAT had held that the surrendered income on account of discrepancies in cash, stock and investment was taxable as deemed income under sections 69 and 69A of the Act. In view of this factual and legal position, he held that the Assessing Officer was fully justified in treating the income surrendered during the course of survey amounting to Rs.70 lacs as deemed income and was right in not giving the benefit of set off of business losses from this income.
Aggrieved, the assessee has come in appeal before us against the said order of the learned CIT (Appeals).
7. The learned counsel for the assessee during the course of hearing before us submitted that during the course of survey surrender of Rs.70 lacs was made under the following heads :
| (i) | Discrepancy on account of cash found | Rs.9 lacs |
| (ii) | Discrepancy on cost of construction of building | Rs.21 lacs |
| (iii) | Discrepancy in stock | Rs.10 lacs |
| (iv) | Discrepancy in advances and receivable | Rs.30 lacs |
8. He further submitted that all the reasons for the purposes of business loss suffered during the year were duly explained to the Assessing Officer and all the purchases and sales were fully vouched. The Assessing Officer has not doubted this aspect, nor the learned CIT (Appeals) has raised any objection to this. It was also submitted that the objection of the Assessing Officer precisely is that Rs.70 lacs surrendered at the time of survey is not business income of the assessee and also the income was outside the books of account and the surrender so made has been made in some different head not relatable to the business of the assessee. The learned counsel for the assessee also invited our attention to section 71 of the Act, whereby business loss of current year can be set off against the income under any of the other heads. As per him, even if the surrendered income is taxed under the head 'income from other sources', the business losses suffered during the year are allowable to be set off against the same. As regards the judgment of the Punjab & Haryana High Court in the case of Kim Pharma (P.) Ltd. (supra) relied upon by the Assessing Officer and the learned CIT (Appeals), it was submitted that the ITAT and the Hon'ble High Court had relied upon the judgment in the case of Fakir Mohmed Haji Hasan v. Commissioner Of Income-Tax [2001] 247 ITR 290/[2002] 120 Taxman 11 (Guj.) , which has been distinguished by the Hon'ble Gujarat High Court in the case of Shilpa Dyeing & Printing Mills (P.) Ltd. (supra). Further, in the case of Shilpa Dyeing & Printing Mills (P.) Ltd. (supra), the Hon'ble Gujarat High Court has relied on the case of Commissioner Of Income-Tax v. Chensing Ventures [2007] 291 ITR 258/163 Taxman 175 (Mad) of the Hon'ble Madras High Court. In this way, it was submitted that the judgment of Kim Pharma (P.) Ltd. (supra) stands distinguished by the latest judgment of Hon'ble Gujarat, Madras and Rajasthan High Courts. In the alternative, it was submitted that in the case of Kim Pharma (P.) Ltd. (supra), the issue was of the surrender of cash only, as surrender on account of sundry credits, repairs to building and advances to staff were already held to be relatable to business income. In this way, it was stated that all the components of surrendered income except the cash so surrendered may please be treated as part of business income. In view of these submissions, it was prayed that the business losses suffered by the assessee during the year may be allowed to be set off against the surrendered income.
9. The learned D.R. relied upon the order of the Assessing Officer as well as the learned CIT (Appeals).
10. We have heard the rival contentions and perused the material available on record. This is a fact on record that the assessee surrendered an amount of Rs.70 lacs as additional income during the course of survey conducted at its premises on account of following heads :
| (i) | Discrepancy on account of cash found | Rs.9 lacs |
| (ii) | Discrepancy on cost of construction of building | Rs.21 lacs |
| (iii) | Discrepancy in stock | Rs.10 lacs |
| (iv) | Discrepancy in advances and receivable | Rs.30 lacs |
11. These facts have not been disputed by any one at any stage. The only issue to be considered by us is whether the income of Rs.70 lacs surrendered is to be taxable as business income or income from other sources or as deemed income under sections 69A, 69B and 69C of the Act as held by the Assessing Officer. A number of judicial pronouncements have been cited during the course of hearing, however, we have to bow down to the proposition laid down by the Jurisdictional Punjab & Haryana High Court in the case of Kim Pharma (P.) Ltd. (supra) since this is the only judgment of the Jurisdictional High Court which were brought to our notice.
12. On perusal of the said judgment, we find ourselves in agreement with the submission of the learned counsel for the assessee, that the only issue in that case was the taxability of cash surrendered during the course of survey, as the assessee had also surrendered income of Rs.10 lacs in assessment year 2005-06 on account of sundry credits, repairs to building and advances to staff, which being relatable to business carried on by the assessee was already included as income from business.
13. In the present case, we see that the Assessing Officer has nowhere disputed the business losses incurred by the assessee. The books have not been rejected. It was stated at the Bar that even at the time of survey, in the trading account prepared by the survey team, there were losses incurred by the assessee. All these facts have not been disputed by the Assessing Officer. Further, the surrender made by the assessee was on account of cash found during the course of survey, discrepancy in the cost of construction of building, discrepancy in stock and discrepancy in advances and receivables. By no stretch of imagination, any of these incomes apart from cash can be considered as income under any head other that the 'business income'.
14. Nowhere in his order the Assessing Officer has been able to bring on record the fact that the income surrendered during the course of survey was not out of the business of the assessee. Also nowhere he has objected to the heads under which the assessee had surrendered these amounts, i.e. cash, construction of building, discrepancy in stock and discrepancy in advances and receivable. Further, even the survey team has not found any source of income except the business income. Now, following the judgment of Jurisdictional High Court, in the background of the facts of the present case, we can safely infer that apart from cash all other income surrendered may be brought to tax under the head 'business income' while the cash has to be taxed under the head deemed income under section 69A of the Act.
15. Now, as regards the business losses incurred by the assessee during the year, these can be set off against the income surrendered during the course of survey except for the amount of cash surrendered, as per the mandate of section 71 of the Act. No loss can be set off against the cash surrendered as the same has already been held to be taxed under a different head. The Assessing Officer is hereby directed to set off business losses suffered by the assessee out of the surrendered income except the element of cash surrendered.
16. During the course of hearing, the learned counsel for the assessee also raised an additional ground, which reads as under :
"Notwithstanding the other grounds of appeal as already taken in ITA No. 1080/Chd/2014 for Asstt. Year 2011-12, it is submitted that the deemed income as assessed by the Assessing Officer U/s 69 and confirmed by the Commissioner of Income Tax (Appeals) is to be adjusted against the unabsorbed depreciation, which has been determined by the Assessing Officer in the order passed u/s 154, dated 18.02.2015."
17. Since, this is a purely legal ground and all the facts are borne out from the record, we hereby admit the same.
18. The additional ground raised by the assessee relates to the set off of unabsorbed depreciation. As we have already held the surrendered income apart from cash to be taxed under the head 'business income', the Assessing Officer is directed to set off the amount of unabsorbed depreciation out of these income. Since both unabsorbed depreciation as well as business losses will be set off out of these incomes, there is no need to adjudicate the issue whether the same can be adjusted out of cash surrendered taxed as deemed income or not. This issue having become academic, we do not find any necessity to adjudicate the same.
19. In the result, the appeal of the assessee is partly allowed.
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