2010 (7) TMI 620 - AT - Income Tax

Deduction u/s 80IB - Set-off against carried forward business losses - Unabsorbed brought forward depreciation - The assessee company filed a return of income declaring a net income of Rs. 17,26,270/-, which inter-alia included a claim of deduction u/s 80IB of the Act amounting to Rs. 7,39,829/r. - The assessment u/s 143(3) of the Act was finalized on 28.12.2007 whereby the total income was determined at Rs. 32,66,100 - As per the Commissioner, the total income declared by the assessee, included set-off of carry forward losses of Rs. 31,62,376/-. survey u/s 133A - The assessee had offered additional income of Rs. 70,00,000/- over and above the income disclosed in the regular books of account - According to the Commissioner, the entire income of Rs. 70,00,000 which was liable to be assessed as deemed income u/s 69/69A/69B of the Act and the same was not eligible to be set-off against carried forward business losses - the assumption of jurisdiction by the Commissioner u/s 263 of the Act in principle, we modify the order of the Commissioner by directing the Assessing Officer to allow opportunity to the assessee to explain nature and source of income comprised in the amounts surrendered during the survey in the form of stocks, cash in hand and unexplained expenditure amounting to Rs. 70,00,000/ - Consijtiering the submissions of the assessee, the Assessing Officer shall adjudicate as to whether the same is assessable as business income as contended by the assessee or under Sections 69/69A/69B/69C of the Act as professed by the Commissioner - the case laws relied by the appellant, since the propositions canvassed therein are not in conflict with the principles laid down by the Hon ble Supreme Court in the case of Malabar Industrial Company Ltd.(supra), which have been kept in mind by us, while adjudicating the appeal of the assessee. - The appeal of the assessee is partly allowed

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Classification and assessment of surrendered income.
3. Eligibility of set-off against carried forward business losses and unabsorbed depreciation.
4. Conflict of judicial opinions on the treatment of deemed income.

Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act
The primary issue in this appeal is whether the Commissioner of Income Tax (the Commissioner) was justified in invoking his revisionary powers under Section 263 of the Income Tax Act, 1961. The provisions of Section 263 empower the Commissioner to revise an order passed by the Assessing Officer if it is considered erroneous and prejudicial to the interests of the Revenue. The Supreme Court in Malabar Industrial Co. Ltd. (243 ITR 83) has held that both conditions-error and prejudice to Revenue-must be satisfied for Section 263 to be invoked.

2. Classification and Assessment of Surrendered Income
The Commissioner argued that the income surrendered during the survey should be assessed as deemed income under Sections 69, 69A, or 69B of the Act. The surrendered income included Rs. 7,50,000 on account of stocks, Rs. 50,00,000 on account of cash in hand, and Rs. 12,50,000 on account of discrepancies in expenditure. The Commissioner concluded that these amounts should not be classified as business income but as deemed income, which is not eligible for set-off against carried forward business losses or unabsorbed depreciation.

3. Eligibility of Set-off Against Carried Forward Business Losses and Unabsorbed Depreciation
The assessee had claimed set-off of carried forward business losses and unabsorbed depreciation against the surrendered income. The Assessing Officer allowed this set-off, but the Commissioner found this to be erroneous based on the judgment of the Gujarat High Court in Fakir Mohmed Haji Hasan (247 ITR 290), which held that deemed income under Sections 69, 69A, or 69B could not be set-off against business losses or depreciation.

4. Conflict of Judicial Opinions on the Treatment of Deemed Income
The assessee's counsel argued that the view taken by the Assessing Officer was a possible view and cited contrary judgments from the Bombay High Court (Kevalchand Nemchand Mehta, 67 ITR 804) and the Madras High Court (CIT V K.Thangamani, 221 CTR 742), which implied that deemed income could be classified under one of the heads of income. The Tribunal noted the conflict between the judgments of the Gujarat High Court and the Bombay High Court on this issue.

Conclusion:
The Tribunal upheld the Commissioner's assumption of jurisdiction under Section 263, agreeing that the Assessing Officer's failure to examine the source of the surrendered income rendered the original assessment order erroneous and prejudicial to the interests of the Revenue. However, the Tribunal modified the Commissioner's order by directing the Assessing Officer to re-examine the nature and source of the surrendered income. The Assessing Officer was instructed to allow the assessee to explain whether the surrendered income should be assessed as business income or under Sections 69, 69A, or 69B, and then pass a fresh order in accordance with the law. The appeal was thus partly allowed.