2016 (7) TMI 1130 - AT - Income Tax

Undisclosed investment in stock under the head income from other sources - Held that - Commissioner of Income-tax(Appeals) has accepted the trading result of the assessee without surrendered stock which is a loss and thus even if the surrendered excess stock as directed by the learned Commissioner of Income-tax (Appeals) is assessed under the head income from other sources the net result will be the same as loss under the head profit and gains of business will be eligible for adjustment against the income from other sources as per the provisions of section 71 of the Act. The learned Commissioner of Income-tax (Appeals) has not mentioned as why the excess stock declared by the assessee should be assessed under the head income from other sources. In our opinion the excess stock was as a result of business activity of the assessee and there was nothing wrong in adding the same with the closing stock of the business and therefore the direction of the learned Commissioner of Income-tax (Appeals) in assessing the surrendered stock under the head income from other sources is not justified and accordingly we direct to assess the same under the head profit and gains of business and give benefit to allow carry forward this stock as opening stock of the succeeding year. Addition under the head other sources - Held that - We find that without the excessive stock of Rs. 3, 81, 13, 064/- the trading result of the assessee was a loss of Rs. 64, 41, 401/- which was rejected by the Assessing Officer and assessed into profit of Rs. 20 65 885/-thus making the total addition of Rs. 85, 07, 286/-. The learned Commissioner of Income-tax (Appeals) in the impugned order has accepted the trading results of the assessee however directed to delete the addition of Rs. 20, 65, 885/-. In our opinion once the trading results of the assessee have been accepted the entire addition of Rs. 85, 07, 286/- was required to be deleted by the learned Commissioner of Incometax (Appeals). Accordingly we direct to delete the addition of Rs. 64, 41, 401/- - Decided in favour of assessee. Disallowance under section 14A read with Rule 8D Held that - We find that there is no dispute on the fact that no exempt income was earned by the assessee during the year. Thus, the disallowance made by the Assessing Officer and sustained by the learned Commissioner of Income-tax(Appeals) is directed to be deleted. - Decided in favour of assessee.

Issues Involved:
1. Validity of the order passed under Section 143(3) of the Income Tax Act, 1961.
2. Classification of surrendered undisclosed investment in stock as 'income from other sources' vs. 'income from business'.
3. Confirmation of addition of Rs. 64,41,401.
4. Alleged double taxation due to the addition of Rs. 64,41,401.
5. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules.

Detailed Analysis:

1. Validity of the Order Passed Under Section 143(3):
The appellant contended that the order passed by the Income Tax Officer (ITO) under Section 143(3) was erroneous in law and on facts. However, this general ground was not adjudicated upon by the Tribunal as it was considered too broad and non-specific.

2. Classification of Surrendered Undisclosed Investment in Stock:
The primary issue was whether the surrendered amount of Rs. 3,81,13,064/- should be classified as 'income from other sources' or 'income from business'. The appellant argued that the surrendered stock, found during the survey, was part of the business stock and should be treated as business income. The Tribunal agreed with the appellant, noting that the excess stock was a result of business activity and was recorded as part of the closing stock in the books of accounts. The Tribunal found no justification in the Commissioner of Income Tax (Appeals)'s direction to assess the surrendered stock separately under 'income from other sources'. The Tribunal directed that the surrendered stock should be assessed under 'profit and gains of business' and allowed to carry forward as opening stock for the succeeding year.

3. Confirmation of Addition of Rs. 64,41,401:
The appellant challenged the confirmation of the addition of Rs. 64,41,401/- by the Commissioner of Income Tax (Appeals). The Tribunal observed that without the excessive stock, the trading result was a loss of Rs. 64,41,401/-. The Assessing Officer had rejected this result and assessed a profit of Rs. 20,65,885/-, leading to a total addition of Rs. 85,07,286/-. Since the Commissioner of Income Tax (Appeals) had accepted the trading results, the Tribunal concluded that the entire addition of Rs. 85,07,286/- should be deleted. Thus, the Tribunal directed the deletion of the addition of Rs. 64,41,401/-.

4. Alleged Double Taxation Due to the Addition of Rs. 64,41,401:
The appellant argued that the addition of Rs. 64,41,401/- would result in double taxation. Given the Tribunal's decision to delete the addition of Rs. 64,41,401/-, this issue was resolved in favor of the appellant, eliminating the concern of double taxation.

5. Disallowance Under Section 14A Read with Rule 8D:
The appellant challenged the disallowance under Section 14A read with Rule 8D, arguing that no exempt income was earned during the year. The Tribunal noted that similar disallowance in the preceding assessment year was deleted by the Tribunal. The Tribunal referenced the judgment of the Hon’ble Jurisdictional High Court in the case of Cheminvest Ltd. vs. ITO, which held that Section 14A would not apply if no exempt income was received or receivable during the relevant previous year. Since no exempt income was earned by the appellant during the year, the Tribunal directed the deletion of the disallowance made under Section 14A read with Rule 8D.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing that the surrendered stock be assessed under 'profit and gains of business' and the addition of Rs. 64,41,401/- be deleted. Additionally, the disallowance under Section 14A read with Rule 8D was also deleted, as no exempt income was earned during the year. The decision was pronounced in the open court on 14th June, 2016.

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