ORDER
Smt. Annapurna Gupta, Accountant Member. - Both the present appeals filed by the assessee and the Revenue respectively, are directed against separate orders of the Commissioner of Income Tax (Appeals)-1, Ludhiana (in short 'CIT (A)' dated 24.8.2017 and 4.1.2018 respectively, passed in the case of different assessees, u/s. 250(6) of the Income Tax Act, 1961 (hereinafter referred to as 'Act').
2. It was common ground that the issue involved in both the appeals was identical, being related to the characterization of income surrendered during survey proceedings, whether in the nature of income from undisclosed sources under sections 68, 69, 69A, 69B and 69C of the Act, or in the nature of business income and further whether the set off of losses against the same was allowable or not. It was pointed out that while in one case the issue had been decided against the assessee, the other had been decided in favour of the assessee and hence, the above appeals by the assessee and the revenue respectively. Both the appeals were therefore taken up together for hearing.
3. Taking us through the facts of the case in ITA No.408/Chd/2018 it was pointed out that the assessee in this case was deriving income from manufacturing and sale of different types and sizes of auto parts. That during the impugned assessment year the assessee's premises was surveyed under the provisions of section 133A of the Act on 14.9.2012, whereupon it was noticed that there were unaccounted receivables of Rs. 1.25 crores. The same was surrendered by the assessee. However, at the time of finalization of the accounts, as at the close of the year, though the additional income surrendered during survey proceedings was credited as income, the same was off set by debit entries resulting in net profit of Rs. 49,12,262/-. This amount was entirely set off with the brought forward business losses amounting to Rs. 52,66,385/- from the preceding assessment year i.e. A.Y. 2012-13, resulting in the return of nil income for the impugned assessment year, and claim of carry forward of losses of the balance i.e. Rs. 3,54,123/-. In the assessment proceedings the Assessing Officer (in short referred to as "A.O.") treated the additional income surrendered as deemed income under the provisions of sections 69A and 69B of the Act separately without allowing set off of the same with the business losses of the assessee (both assessed and brought forward), following the decision of the Hon'ble Jurisdictional High Court in the case of Kim Pharma (P.) Ltd. v. CIT [2013] 35 taxmann.com 456/216 Taxman 153 (Mag.) (Punj. & Har.) and the decision of the Hon'ble ITAT Chandigarh Bench in the case of Liberty Plywood (P.) Ltd. v. Asstt. CIT [2013] 29 taxmann.com 268/140 ITD 490 .
4. Aggrieved by the same, the matter was carried in appeal before the Ld. CIT (A). The Ld. CIT (A) found that the assessee's case was identical with the case of Asstt. CIT v. Sanjay Bairathi Gems Ltd. decided by Jaipur Bench of the ITAT [2017] 84 taxmann.com 138/166 ITD 445 and following the same held that the income surrendered, pertaining to unrecorded receivables, squarely fell within the provisions of section 69A/69B of the Act, since they were hitherto undeclared income of the assessee but being part and parcel of the business undertaken by the assessee, the Ld. CIT (A) held that it was to be classified under the head 'profits and gains of business and profession'. Thereafter he stated that since the impugned business income was assesssed u/s. 69A and 69B of the Act, the provisions of section 115BBE of the Act, would come into operation, which prescribed the levy of a special rate of tax on such deemed incomes and as per the prevailing provisions of the said section, the set off of losses against the deemed income was allowable. Ld. CIT (A) held that the amendment made to the section, ruling out set off of losses against such deemed incomes, brought about by the Finance Act, 2016 w.e.f. 1.4.2017, was prospective in nature. Following the decision of the ITAT in the case of Sanjay Bairathi Gems Ltd. (supra), accordingly, he held that since the assessment year involved in the impugned case was 2013-14 the assessee could not be denied the benefit of set off of current year business losses including depreciation as also brought forward business losses of earlier assessment year from the surrendered income assessed under the provisions of sections 69A and 69B of the Act and accordingly, allowed the assessee's appeal.
5. In the case of appeal filed in ITA No.1494/Chd/2017, it was pointed out that the assessee had surrendered the additional income of Rs. 4 crores during survey operations carried out on the assessee u/s. 133A of the Act on 02-01-14 on account of the following :
(i)
investment of Rs. 60 lacs in Kothi at Sukhmani Enclave in the name of Smt. Rekha Miglani;
(ii)
Sundry creditors and advances received from customers amounting to Rs. 132 lacs;
(iii)
Gross profit on sale out of books amounting to Rs. 198 lacs and;
(iv)
Surrender to cover miscellaneous discrepancies in loose papers etc. amounting to Rs. 10 lacs.
6. In this case also, the assessee had set off debit entries against the aforesaid surrender showing net profit of Rs. 96,31,647/- and also set off business loss of Rs. 3,39,85,902/-. The A.O. in this case also had assessed the entire surrendered income to tax and denied the set off of losses. The Ld. CIT (A) treated the entire surrendered income as deemed income as per the provisions of sections 69, 69A, 69B and 69C of the Act and further held that the same was to be taxed as per the applicable provisions of section 115BBE of the Act. The Ld. CIT (A) thereafter held that the amendment to section 115BBE of the Act, denying the set off of losses against the aforesaid deemed incomes was clarificatory in nature having retrospective application. Accordingly, he upheld the order of the A.O. denying set off of losses against the surrendered income of the assessee.
7. Accordingly, aggrieved by the aforesaid orders, the Revenue has come up in appeal in ITA No.408/Chd/2018, while the assessee has come up in appeal in ITA No.1494/Chd/2017 challenging the action of the Ld. CIT (A) and the grounds raised in both the appeals are as under:
ITA No.1494/Chd/2017(Assessee's Appeal):
"1.
That the Ld.CIT(A) is not justified in dismissing appellant's appeal and confirming the action of the Assessing Officer.
2.
That the Ld. CIT(A) is not justified in holding that disclosure of Rs. 4 Crore at the time of survey undoubtedly represented unexplained income and there cannot be any treatment of this amount other than deemed income under the Provisions of Sections 69, 69A, 69B & 69C of the Act, even if, the same accrued to the appellant from the business undertaking them.
3.
That under the facts and circumstances of the case and decisions of Hon'ble ITAT, Chandigarh, the Ld. CIT(A) ought to have treated the Surrendered Income as Business Income and allowed the set off of current years losses and unabsorbed depreciation from the surrendered income.
4.
That provisions of sections 68, 69, 69A, 69B and 69C, 72 and 115BBE of the I.T. Act, 1961 have been misconstrued and misapplied in the Appellant's case.
5.
The Appellant craves leave to add, amend, modify and/or add new Grounds of Appeal before the Appeal is heard and disposed off.
ITA No.408/Chd/2018(Revenue's Appeal):
1.
Whether upon facts and circumstances of the case, the Ld. CIT (A) was justified in law and on facts in allowing setting off of the losses against the income assessed under section 69A and 69B of the Income Tax Act, 1961 in view of amendment in section 115BBE (2) by the Finance Act, 2016 w.e.f. 01.04.2017, whereas the "Explanatory Notes to the Provisions of the Finance Act, 2016 [Circular No. 03/2017, F. NO. 370142/20/2016-TPL, CBDT]" dated 20.01.2017 makes it clear that the said amendment in section 115BBE has been made only to convey the desired intention of the legislature and to avoid unnecessary litigation?
2.
Whether the Ld. CIT(A) was justified in relying upon the decision of Hon'ble Tribunal, Jaipur Bench, in the case of
Sainjay Bairathi [ITA No. 157/JP/17, dated 08.08.2017], whereas, the decision of the jurisdictional High Court in the case of
Kim Pharma Ltd. v.
CIT, in ITA No. 106 of 2011, has held that the "deemed income covered under the scheme of sections 69, 69B and 69C of the Act is to be treated separately and it is not income from salary, house property, profit and gains from business or capital gain, nor it is income from other sources. No set off is allowable against this income?
3.
That the order of the Ld. CIT (A) be set aside and that of the Assessing Officer be restored.
4.
That the appellant craves leave to add or amend any ground of appeal before it is finally disposed off."
8. The arguments and contentions made by both the parties in both the appeals were identical.
9. Briefly stated, the contentions of the Ld. counsel for assessee were that the income surrendered was in the nature of business income of the assessee relating to the business of the assessee and set off of losses, therefore, was to be Allowed against the same as per the provisions of law. Reliance was placed on the decision of the ITAT Chandigarh Bench in the case of Gaurish Steels (P.) Ltd. v. Asstt. CIT [2017] 82 taxmann.com 337 . It was also alternatively contended that even if the income was to be assessed under sections 69, 69A, 69B and 69C of the Act and taxes charged as a consequence thereto under the provisions of section 115BBE of the Act, the set off of losses was to be given since the denial of set off as provided in the section w.e.f. 1.4.2017 was prospective in nature. Reliance was placed on the following decisions of the ITAT:
(1)
Renny Strips (P.) Ltd. v.
ACIT [IT Appeal No.1018 (Chd.) 2014 dated 28-12-2015].
(2)
DCIT v.
Marshal Machines (P.) Ltd. [IT Appeal No.57 (Chd.) 2017, dated 22-5-2018].
(3)
Sanjay Bairathi Gems Ltd. (
supra)
(4)
Pitamber Commodity Futures (P) Ltd. v.
ACIT [IT Appeal No.863 (Jp.) of 2017, dated 21-3-2018].
(5)
Gaurish Steels (P.) Ltd. (
supra).
10. The contention of the Revenue, on the other hand, was that the character of the income surrendered was in the nature of deemed income as provided u/ss. 69, 69A, 69B and 69C of the Act, having not been disclosed for tax earlier and accordingly, the said incomes were to be charged to tax as per the provisions of section 115BBE of the Act and the benefit of set off losses was not available since the amendment made to section denying the benefit of set off of losses w.e.f. 1.4.2017 was retrospective in nature being curative in character. Alternatively it was contended that the issue was covered by the decision of the Jurisdictional High Court in the case of Kim Pharma Ltd. (supra), as per which these incomes could not be assessed under any heads as provided under the Act and therefore were not eligible to set off any losses against the same.
11. We have heard the rival contentions, perused the orders of the authorities below and have also considered various case laws referred to by both the parties before us.
12. The issues to be addressed in the present case can be summarized as relating to the categorization/characterization of income surrendered by the assessee during survey proceedings, whether from disclosed or undisclosed sources, and the allowability of claim of set off of losses ,both current and brought forward, against the same.
13. The controversy arises on account of the scheme of the Act which mandates incomes to be categorized under specific heads depending on their nature/source, for computation purposes under chapter IV and thereafter provides for setting off of losses in a specific manner under chapter VI of the Act. If it is from any of the sources as specified in the heads for taxation under Chapter-IV of the Act, the income therefrom it is to be computed as per the provisions provided thereunder. Therefore, if the source/nature of the income is from business and profession, the income to be subjected to tax is to be assessed as provided u/ss. 28 to 44DB of the Act and the set off of current/brought forward losses is to be allowed as per the provisions of sections 70 to 80 of the Act, which allows set off of business losses against current year business losses subject to fulfilment of certain conditions. There is no dispute about the above position of law.
14. Further the Act also provides for treating certain credits, investments, expenses from undisclosed sources, as deemed incomes u/s. 68,69,69A/B/C of the Act, which is also dealt with in chapter VI of the Act. Such deemed incomes are subjected to tax at a special rate without allowing set off of expenses or losses against the same, as provided under section 115BBE of the Act, introduced vide Finance Act 2012, w.e.f. 01-04-2013. Since both the appeals before us relate to A.Ys. 2013-14 & 2014-15, the provisions of section 115BBE are applicable to both of them and to this effect there is no dispute also before us. The provisions of sections 69 to 69C of the Act & section 115BBE of the Act are reproduced hereunder for clarity :
SECTION 69
Unexplained investments.
Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the [2016][Assessing Officer], satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.
SECTION 69A
[2017][Unexplained money, etc.
Where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the [2018][Assessing Officer], satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee of such financial year.]
SECTION 69B
[2019][Amount of investments, etc., not fully disclosed in books of account.
Where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery, or other valuable article, and the [2020][Assessing Officer] finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the [2021][Assessing Officer], satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.]
SECTION 69C
[2022][Unexplained expenditure, etc.
Where in any financial year an assessee has incurred any expenditure and he offers no explanation about the source of such expenditure or part thereof, or the explanation, if any, offered by him is not, in the opinion of the [2023][Assessing Officer], satisfactory, the amount covered by such expenditure or part thereof, as the case may be, may be deemed to be the income of the assessee for such financial year:]
[2024] [Provided that, notwithstanding anything contained in any other provision of this Act, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income.]
SECTION 115BBE
[3052] [Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.
[3052] ["(1) Where the total income of an assessee,—
(a)
includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D and reflected in the return of income furnished under section 139; or
(b)
determined by the Assessing Officer includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, if such income is not covered under clause (
a) [3052a][and clause (
b)],
the income-tax payable shall be the aggregate of—
(i)
the amount of income-tax calculated on the income referred to in clause (
a) and clause (
b), at the rate of sixty per cent; and
(ii)
the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (i)."
[3052] Subs. by The Taxation Laws (Second Amendment) Act, 2016. The Clause before subs. read as under. (w.e.f. 1-04-2017)
(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 amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and
(b)
the amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (
a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance [3052a]["or set off of any loss"] shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1).]
[3052] Omitted the words, figures and letters "for the previous year relevant to the assessment year beginning on the 1st day of April, 2012 or beginning on the 1st day of April, 2013 or beginning on the 1st day of April, 2014" by Finance (No. 2) Act, 2014 (w.e.f. 1-4-2015).
Ins. by Finance Act, 2016 (w.e.f. 1-04-2017).
[3052a] Ins. by Finance Act, 2018 (w.e.f. 1-04-2017).
15. As is evident from a bare reading of the above sections any investments, moneys and expenditure which are not disclosed in the books of the assessee, if any, maintained by it and the source of which has also been not explained satisfactorily by the assessee are treated as deemed incomes of the assessees. Thus, the amounts to be treated as deemed incomes are investments, moneys, or expenditure fulfilling the twin criteria of:
(a)
not being recorded in the books if any maintained and,
(b)
the source of which the assessee is unable to explain satisfactorily.
16. In other words, to put it simply, the unrecorded investments/assets/expenditures made out of unexplained sources are treated as deemed incomes of the assessee. The onus is on the assessee to establish the source of the surrendered income failing which it is to be categorized as deemed income u/s. 69/69A/B/C of the Act. And establishing the source of income is a factual matter. The Ld. DR, had drawn our attention to the decision of the Hon'ble jurisdictional High Court in the case of Pr.CIT v. Khushi Ram & Sons Foods (P) Ltd in [IT Appeal No.126 of 2015, dated 29-07-16], wherein the assessee had set off unabsorbed losses u/ss. 70 & 71 against income surrendered on account of building renovation, office equipment and sundry receivable, to which ,the Hon'ble High Court had held that it is for the assessee to establish that the source of the surrendered income was from business to claim it as such and set off business losses against the same. Our view therefore is fortified by the aforesaid judgment of the Hon'ble High Court.
17. Further the legislature requires such type of deemed incomes to be taxed on the gross amount so determined without setting off any expenditure or allowances against the same, u/s. 115BBE of the Act. Subsequently the section was amended w.e.f 1.4.2017 by the Finance Act, 2016, prohibiting set off of losses also against the said deemed income.
18. Having explained the provisions of law as above, we now proceed to apply the same to the facts of both the cases before us.
19. In the facts of the case in ITA No. 408/Chd/2018, the income surrendered was on account of unaccounted receivables of the business of the assessee amounting to Rs. 1.25 crores. The Ld. CIT (A) in para 9 of the order has outlined the facts relating to the surrender made by the assessee stating that during survey a pocket diary was found from the account section of the assessee-company which contained entry of receivables amounting to Rs. 1.25 crores on pages 27, 28, 31 and 33, which were not recorded in the regular books of the assessee and were subsequently surrendered stating that these entries were unaccounted sundry receivables being surrendered as income under the head business, to buy piece of mind and subjected to no penalty and further that the losses incurred by the assessee in the impugned year will be adjusted against this surrendered income. The relevant facts as stated by the CIT (A) in para 9 of his order and which are not disputed, are reproduced hereunder:
"9. Adverting now to the facts of the instant case, it is seen that when survey proceedings were conducted at the business premises of the appellant company, a pocket diary was found from the accounts section which contained entries of receivables amounting to Rs. 1.25 crores on page Nos. 27, 28, 31 and 33, which were not recorded in the regular books of account. When these entries were confronted to the appellant company while recording the statement on 15/09/2012, it was stated: "that these entries are sundry receivables which has not been accounted for in the books of account and in order to buy peace of mind, the same is surrendered as income under the head business for F.Y. 2012-13 relevant to Asstt. Year 2013-14 subject to no penalty and prosecution under the I.T. Act, 1961. Since the company is incurring losses in current F.Y. 2012-13, the surrendered income will be adjusted against these losses." [Extracted from the impugned assessment order; pages 5 &6]."
20. Clearly, it is evident from the above that the surrender was on account of debtors/receivables relating to the business of the assessee only. The Revenue has accepted the surrender as such, as being on account of receivables. It follows that the debtors were generated from the sales made by the assessee during the course of carrying on the business of the assessee, which was not recorded in the books of the assessee. Though the said income was not recorded in the books of the assessee but the source of the same stood duly explained by the assessee as being from the business of the assessee. Even otherwise no other source of income of the assessee is there on record either disclosed by the assessee or unearthed by the Revenue. The preponderance of probability therefore is that the debtors were sourced from the business of the assessee. Therefore, there is no question of treating it as deemed income from undisclosed sources u/ss. 69, 69A, 69B and 69C of the Act and the same is held to be in the nature of Business Income of the assessee. Having held so, the same was assessable under the head 'business and profession' and as stated above, the benefit of set off of losses both current and brought forward was allowable to the assessee in accordance with law.
21. The contention of the Revenue therefore that the income be treated as deemed income u/s. 69,69A/B/C of the Act is accordingly rejected and as a consequence thereto the plea that no set off of losses be allowed against the same u/s. 115BBE of the Act also is rejected.
22. Therefore, as per the facts of the case in ITA No.408/Chd/2018 and as per the provisions of law relating to the issue, the surrendered income, we hold, was assessable as business income of the assessee and set off of losses was to be allowed against the same as rightly claimed by the assessee.
The appeal of the Revenue, therefore, in ITA No.408/Chd/2018 is dismissed.
23. Now coming to the facts of the case in ITA No./1494/Chd/2017, the income surrendered was on account of the following as narrated above in earlier part of our order:
(i)
investment of Rs.60 lacs in Kothi at Sukhmani Enclave in the name of Smt.Rekha Miglani;
(ii)
Sundry creditors and advances received from customers amounting to Rs. 132 lacs;
(iii)
Gross profit on sale out of books amounting to Rs. 198 lacs and;
(iv)
surrender to cover miscellaneous discrepancies in loose papers etc. amounting to Rs. 10 lacs.
24. As far as the surrender made on account of investment in Kothi of Rs. 60 lacs, neither is the same disclosed in the books of the assessee nor source of the same disclosed. Therefore, the same is to be assessed as deemed income u/s. 69 of the Act. The same applies to the surrender of Rs. 10 lacs made to cover the miscellaneous discrepancies in loose paper of Rs. 10 lacs. Neither the nature of the discrepancies, nor any source relating to the same has been disclosed and, therefore, the same is also to be assessed as deemed income u/ss. 69, 69A, 69B and 69C of the Act.
25. As far as the surrender of Rs. 132 lacs made on account of sundry creditors and advances received from customers and Rs. 198 lacs on account of gross profit on sale out of the books, both of them clearly are in relation to the business carried on by the assessee and are thus in the nature of business income. Therefore, the set off of business losses, both current and brought forward are to be allowed as per the provisions of law. As far as the income surrendered and to be assessed u/ss. 69, 69A, 69B and 69C of the Act, as held above before us, the same is to be subjected to tax as per the provisions of section 115BBE of the Act.
26. Now the next question whether the set off of losses is to be allowed against the same, which the Revenue has vehemently contested saying that the amendment denying the set off of losses which was made by the Finance Act, 2016 w.e.f. 1.4.2017 was clarificatory in nature and was retrospective, thus entitling the assessee to claim set off of losses against the income so surrendered. The assessee, on the other hand, has drawn our attention to several decisions of the ITAT, which have held the amendment to be prospective in nature. No contrary decision either of the ITAT or of any higher judicial authority has been brought to our notice by the Revenue. The decisions rendered by the ITAT will, therefore, apply, following which, we hold that in the impugned year the assessee was entitled to claim set off of losses against the income assessed as deemed income u/ss 68, 69, 69A, 69B and 69C of the Act as per the provisions of section 115BBE of the Act as it stood prior to amendment by Finance Act, 2016.
27. Thus, we hold that the income surrendered by the assessee is partly assessable as business income and partly assessable as deemed income and against both of them, the assessee was entitled to claim set off of business losses, both the current and brought forward. We, therefore, set aside the order of the Ld. CIT (A) and allow the appeal of the assessee.
28. In the result, the appeal of the assessee in ITA No.1494/Chd/2017 is allowed and the appeal of the Revenue in ITA No.408/Chd/2018 is dismissed.
s.b.