2017 (2) TMI 30 - AT - Income Tax

Set off of loss incurred on sale of polished diamond goods against deemed income assessed u/s. 69A - set off against the income declared during the course of search - assessee is a diamond merchant - Held that - Identical additions were made in assessee group case wherein held Section 115BBE bar from claiming any expenses or allowance from the income taxable under section 68, 69, 69A, 69B, 69C, or 69D of the Act. In the instant case before us the claim was of set off of business loss against income declared during search. There is vital difference between the loss and expenses/ allowance. Hon b1e Supreme Court in case of CIT Vs. Wallford share & Stock brokers Pvt. Ltd ( 2010 (7) TMI 15 - SUPREME COURT ) while discussing the issue that losses incurred in mutual fund from which dividend received, cannot be considered for the purpose of section 14A of the Act and held that one must keep in mind the conceptual difference between loss expenditure, cost of acquisition, etc. while interpreting the scheme of the Act. In view of the decision of Hon ble Supreme Court, business loss cannot be treated at par with the expenses / allowances and such business loss can be set off against any type of income as section 71 do not debar from setting off such losses.

Issues Involved:
1. Set off of loss incurred on sale of polished diamond goods against deemed income assessed under Section 69A.
2. Classification of sales from undisclosed stock of diamond goods as business sales.
3. Treatment of loss on sale of diamonds as genuine despite lower sale rates than those determined by the Government valuer.
4. Deletion of addition of gross profit at the rate of 3.30% made by the Assessing Officer by rejecting the books of accounts.

Issue-wise Detailed Analysis:

1. Set off of loss incurred on sale of polished diamond goods against deemed income assessed under Section 69A:
The Tribunal examined whether the loss incurred on the sale of polished diamond goods could be set off against the deemed income assessed under Section 69A. It was argued that the provisions of Section 115BBE, which bar the set-off of business loss against income declared during the course of search, do not apply to the assessment year 2011-12 as they were inserted with effect from 1.4.2013. The Tribunal held that since the income declared was in the nature of business income, it was not taxable under sections 68, 69, 69A, 69B, 69C, or 69D, and thus Section 115BBE had no application in this case.

2. Classification of sales from undisclosed stock of diamond goods as business sales:
The Tribunal upheld the CIT(A)'s finding that the undisclosed stock of diamonds should be treated as business income. It was noted that the stock was part of the customary trading of the business, and the declaration was related to business stock in trade. The Tribunal referenced the statement of the partner confirming that the undisclosed income was generated through unrecorded trading of diamonds, thus supporting the classification as business sales.

3. Treatment of loss on sale of diamonds as genuine despite lower sale rates than those determined by the Government valuer:
The Tribunal agreed with the CIT(A) that the loss on the sale of diamonds was genuine. The valuation carried out by the Government valuer at the time of search was not binding, and the actual sale price could be lower. The Tribunal found that the assessee had fully disclosed the stock and offered it as income, and the valuation by another Government-approved valuer was to demonstrate that the value of the diamonds was much less, necessitating a lower sale price.

4. Deletion of addition of gross profit at the rate of 3.30% made by the Assessing Officer by rejecting the books of accounts:
The Tribunal found that the books of accounts maintained by the assessee were consistent with applicable accounting standards and were complete and accurate, including the undisclosed stock of diamonds. The CIT(A) had noted that the Assessing Officer had not pointed out any defects in the books of accounts. The Tribunal upheld the CIT(A)'s decision to delete the addition of gross profit, noting that the valuation made at the time of search was a summary and did not provide a detailed description of the diamonds, making meaningful comparison impossible.

Conclusion:
The Tribunal dismissed the appeal of the revenue, upholding the CIT(A)'s order on all issues. The Tribunal found that the income declared during the search was part of the business income and not taxable under Section 69A, and thus the set-off of business loss was permissible. The Tribunal also confirmed that the loss on the sale of diamonds was genuine and that the books of accounts were accurately maintained, justifying the deletion of the addition of gross profit.

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