2012 (3) TMI 142 - AT - Income Tax

Whether surrender made on account of discrepancies found in the books/cash and also considering that entire sales/purchases be treated as income under 69A - Held That - In view of Fakir Mohamed Haji Hasan (2000 - TMI - 14629 - GUJARAT High Court), additional income offered is deemed income assessable u/s 69A of the Act and no deduction is allowable against such deemed income assessed u/s 69A of the Act in the hands of the assessee. Set of Business loss against undisclosed Income - Held That - In view of Fakir Mohamed Haji Hasan (2000 - TMI - 14629 - GUJARAT High Court), appeal dismissed. Additions on account of difference in Stock - Held That - Addition of Rs.53,379/- on account of unexplained investment in the stock is fully covered by the amount surrendered by the assessee as unexplained investments. The impugned addition is, therefore, deleted. Rejection of books of account - Held That - Assessee has surrendered a sum of Rs.25 lakhs on account of unexplained transactions also shows that the books of account maintained by the assessee are neither complete nor correct nor reliable. In this view of the matter, the order passed by the CIT(A) rejecting the books of account is confirmed. Additions on account of low GP rate - AO has applied the previous year GP as declared by the appellant which is held to be just and fair. The addition of Rs. 3,26,556/- made by the AO is upheld.

Issues Involved:
1. Treatment of surrendered amount during survey as deemed income under Section 69A.
2. Set-off of business loss against deemed income assessed under Section 69.
3. Addition on account of difference in stock.
4. Rejection of books of account and addition on account of low gross profit rate.

Detailed Analysis:

1. Treatment of Surrendered Amount as Deemed Income under Section 69A:
The assessee surrendered Rs. 35 lakhs during a survey operation, out of which Rs. 25 lakhs was for the assessment year 2006-07. The surrendered amount was due to unexplained cash, unexplained investment in stock, and unexplained advances to agriculturists. The Assessing Officer (AO) treated the surrendered amount as unexplained investment and taxed it accordingly. The CIT(A) confirmed this action, relying on the judgment of the Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan, which held that unexplained investments and money are deemed income under Sections 69, 69A, 69B, and 69C of the Income-tax Act. The Tribunal upheld the CIT(A)'s order, stating that the assessee could not satisfactorily explain the nature and source of the surrendered amount, and thus, it was correctly treated as deemed income under Section 69A.

2. Set-off of Business Loss Against Deemed Income Assessed under Section 69:
The assessee argued that the business loss should be set off against the deemed income. However, the CIT(A) and the Tribunal dismissed this argument, citing the judgment of the Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan and the Tribunal's decision in Kim Pharma Pvt Ltd. The Tribunal noted that unexplained investments assessed as deemed income under Sections 69, 69A, and 69B cannot be linked to any specific source or head of income, and thus, set-off provisions under Sections 70 and 71 do not apply.

3. Addition on Account of Difference in Stock:
During the survey, a discrepancy in the stock was found, with the physical stock being higher by Rs. 53,379 than the stock as per the books of account. The AO treated this difference as unexplained investment and taxed it under Section 69B. The CIT(A) confirmed this addition, rejecting the assessee's explanation regarding inventory valuation. The Tribunal, however, noted that the surrendered amount included unexplained investment in stock, and thus, the addition of Rs. 53,379 was covered by the surrendered amount. Consequently, this addition was deleted.

4. Rejection of Books of Account and Addition on Account of Low Gross Profit Rate:
The AO rejected the books of account due to discrepancies and added Rs. 3,26,556 on account of low gross profit rate. The CIT(A) upheld this addition, noting that the gross profit rate for the year under appeal was lower than the preceding year. The Tribunal confirmed the CIT(A)'s order, stating that the net profit rate was higher due to the inclusion of the surrendered amount in the profit and loss account. The Tribunal also rejected the assessee's argument that the addition was covered by the surrendered amount, as there was no evidence to support this claim.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the treatment of the surrendered amount as deemed income under Section 69A, the rejection of set-off of business loss against deemed income, and the addition on account of low gross profit rate. However, it deleted the addition on account of the difference in stock, as it was covered by the surrendered amount.

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