2011 (8) TMI 611 - HC - Income Tax

Survey - inventory prepared showing excess stock of 88,918 - surrendered income can be deemed income under 69B - Can it be treated as business income - Held That - The Income-tax Appellate Tribunal found that the surrendered income was on account of undisclosed investment the assessee was not able to explain the source of investment in the excess stock. It was held that this was not a business income as it was not taken directly to the computation of income but in the trading account or the profit and loss account only.

Summary

Issues:
1. Treatment of surrendered income under section 69B
2. Accounting of surrendered income in trading account
3. Assessment of surrendered income under section 69B without specifying head

Analysis:

Issue 1: Treatment of surrendered income under section 69B
The appeal raised questions regarding the treatment of surrendered income as deemed income under section 69B instead of business income. The facts revealed that a partnership firm had offered excess stock for taxation following a survey under section 133A of the Income-tax Act, 1961. The assessing authority concluded that the excess stock amount constituted income under section 69, leading to penalty proceedings under section 271(1)(c). The Commissioner (Appeals) later deleted the addition of the excess stock amount, emphasizing that it had already been credited to the trading account. However, the Income-tax Appellate Tribunal determined that the excess stock was undisclosed investment and should be taxed as the assessee's income under section 69B. The Tribunal reasoned that the surrendered income was not business income as it was not directly computed in the income but only reflected in the trading account or profit and loss account.

Issue 2: Accounting of surrendered income in trading account
The Tribunal correctly observed that the surrendered income was shown in the trading account but not in the computation of income for taxation purposes. This discrepancy led to the conclusion that the income could not be considered as business income since it was not included in the computation of income. The Tribunal's decision aligned with the legal requirement that business income must be reflected in the computation of income to be considered as such.

Issue 3: Assessment of surrendered income under section 69B without specifying head
The judgment delved into the provisions of sections 69 and 69B of the Income-tax Act, 1961, which pertain to undisclosed investments and deemed income from investments or valuable articles. The court clarified that the surrendered income should have been treated as deemed income under section 69, despite being assessed under a different provision. The absence of specific valuable articles like bullion or jewelry indicated that the excess stock could not be categorized as such. The court emphasized that the surrendered income should have been treated as deemed income under section 69, even if assessed under section 69B.

In conclusion, the court dismissed the appeal, affirming the decisions of the lower authorities. The judgment highlighted the importance of proper accounting and compliance with tax provisions while determining the tax treatment of surrendered income.