2017 (7) TMI 496 - HC - Income Tax

Claim of deduction u/s 40(b) - book profit - amount surrendered in the course of survey U/s. 133A - surrender amount was shown as business income and assessed as business income - Held that - It is undisputed that the Assessing Officer has brought to tax the amount of ₹ 1,50,000/shown as other income in profit and loss account as income from business under Section 28 of the Act. The assessment order does not classify the same as income from other sources or under any other head. Once the aforesaid position is accepted, then for the purpose of computing book profit as defined in section 40(b) of the Act, the other income of ₹ 1,50,000/has also to be considered to be part of income from business arrived at in accordance with the Chapter IVD of the Act. It is not open to the Revenue to contend that the amount of ₹ 1,50,000/is part of business income while computing the tax payable but not so for the purposes of Section 40(b) of the Act. The character of the income does not change dependent upon the section to be applied. This issue has not been examined at all by the authorities under the Act. It goes to the root of the dispute. - Decided in favour of appellant/assessee and against the Revenue.

Summary

Issues involved:
Interpretation of Section 40(b) of the Income Tax Act, 1961 regarding the allowance of a claim on amount surrendered during a survey under Section 133A of the Act, and the treatment of surrendered amount as business income or unexplained investment under Section 69 of the Act.

Detailed Analysis:

1. Interpretation of Section 40(b) of the Income Tax Act:
The appellant challenged the order of the Income Tax Appellate Tribunal, Nagpur, regarding the treatment of an amount surrendered during a survey under Section 133A of the Act. The key question was whether the claim under Section 40(b) of the Act is allowable on the surrendered amount shown as business income and assessed as such. The appellant contended that the Assessing Officer had accepted the surrendered amount as part of the business income, which was crucial for determining the net profit. The Tribunal, however, held that the surrendered amount did not have a nexus with the business activities and thus should not be included in computing income to determine book profits. The High Court analyzed the provisions of Section 40(b) and emphasized that the character of income should not change based on the section applied. Ultimately, the Court ruled in favor of the appellant, stating that the surrendered amount should be considered part of the income from business for computing book profits.

2. Treatment of Surrendered Amount as Business Income or Unexplained Investment:
During the survey, it was found that the appellant had excess stock and had received an unexplained amount as cash loans/advances, which was not entered in the books of account. The appellant initially credited this amount to the profit and loss account under 'other income' but included it in the business income for tax computation purposes. The Assessing Officer added this amount to the gross profit for Section 40(b) calculations but also included it as business income in the assessment order. The Commissioner of Income Tax (Appeals) dismissed the appellant's appeal, stating that crediting an amount to the profit and loss account did not automatically make it part of the business profit. The Tribunal upheld this decision, emphasizing that the surrendered amount lacked a business nexus. However, the High Court concluded that since the Assessing Officer had treated the surrendered amount as business income for tax purposes, it should also be considered as part of the income from business for computing book profits. The Court highlighted the importance of consistent treatment of income across different sections of the Act.

In conclusion, the High Court allowed the appeal, emphasizing the need for uniform treatment of income and ruling in favor of the appellant regarding the interpretation of Section 40(b) of the Income Tax Act in the context of surrendered amounts during a survey.