2010 (2) TMI 1171 - AT - Income Tax

Invoking deeming provisions u/s 69, 69A, 69B 69C - Physical distinction between the accounted stock or unaccounted stock -unexplained investment/expenditure - undeclared business income - HELD THAT - The first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is only where no nexus is established with any head then it should be considered as deemed income u/ss 69, 69A, 69B 69C as the case may be. It is because when assessee fails to explain satisfactorily the source of such investment the nit should be taxed under section 69, 69A, 69B 69C as the case may be. It should not be done at the first instance without giving opportunity to the assessee to establish nexus. Following the decision in the case of Fakir Mohmed Haji Hasan 2000 (8) TMI 44 - GUJARAT HIGH COURT held that where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, we hold that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. To conclude sum being difference in stock is represented by undeclared business income. It does not have a separate physical identity. It is to be only taxed under the head business . Other assets have separate physical identity being furniture and fixtures, air conditioners etc. They cannot have a direct nexus with business and therefore investment therein has to be considered u/s 69 only. In view of the above, AO is directed to consider the su as undisclosed business income assessable under the head business and other two sums u/s 69. The business income including application of section 40(b) has to be considered accordingly. For calculation of income in view of our above observations, we restore the matter to the file of AO.

Issues Involved:
1. Inclusion of income disclosed during survey based on partner's statement.
2. Evidential value of statements recorded under section 133A.
3. Treatment of disclosed amount as unexplained investment/income under section 69.
4. Determination of income representing unexplained stock.
5. Segregation of income disclosed during survey and regular income.
6. Computation of total income and carry forward of business loss.
7. Applicability of jurisdictional rulings on set-off of business loss against declared income.
8. Consideration of higher remuneration to partners under section 40(b).

Detailed Analysis:

1. Inclusion of Income Disclosed During Survey:
The assessee argued that the income disclosed during the survey, based on the partner's statement, should not be included in the total income as it was contrary to CBDT instructions. The Tribunal upheld the CIT(A)'s decision, confirming the inclusion of this income.

2. Evidential Value of Statements Recorded Under Section 133A:
The assessee contended that statements recorded under section 133A do not have evidential value. However, this ground was not pressed by the appellant's representative and was thus rejected.

3. Treatment of Disclosed Amount as Unexplained Investment/Income Under Section 69:
The AO treated the disclosed amount of Rs. 10,06,250 as unexplained investment/income under section 69. The Tribunal, referring to the decision of the Gujarat High Court in Fakir Mohmed Haji Hasan vs. CIT, held that the addition under section 69 should be separately made as deemed income.

4. Determination of Income Representing Unexplained Stock:
The CIT(A) held that the income representing unexplained stock declared during survey proceedings was earned in earlier years. The Tribunal found that the stock difference of Rs. 8,10,011 was part of the same business and should be treated as undisclosed business income, not a separate investment.

5. Segregation of Income Disclosed During Survey and Regular Income:
The AO segregated the income disclosed during the survey from regular income and taxed it separately under section 69. The Tribunal directed the AO to consider the sum of Rs. 8,10,011 as undisclosed business income assessable under the head 'business' and other sums under section 69.

6. Computation of Total Income and Carry Forward of Business Loss:
The CIT(A) confirmed the AO's computation of total income at Rs. 10,06,250 and allowed the carry forward of normal business loss to the succeeding assessment year without setting it off against the declared income. The Tribunal noted that the business loss could not be set off against deemed income under sections 69, 69A, 69B, and 69C as per the provisions of Chapter VI.

7. Applicability of Jurisdictional Rulings on Set-off of Business Loss Against Declared Income:
The CIT(A) applied the Gujarat High Court ruling in Fakir Mohmed Haji Hasan and denied the set-off of business loss against the declared income. The Tribunal upheld this decision, emphasizing that deemed income under section 69 does not fall under any head of income and thus cannot be set off against business loss.

8. Consideration of Higher Remuneration to Partners Under Section 40(b):
The assessee's alternative claim for higher remuneration to partners under section 40(b) was not considered by the CIT(A) as the business income was determined to be a loss. The Tribunal directed the AO to consider the business income, including the application of section 40(b), accordingly.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to reassess the income by considering Rs. 8,10,011 as undisclosed business income and other sums under section 69. The matter was restored to the AO for recalculating the income in line with the Tribunal's observations.

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