2018 (4) TMI 19 - AT - Income Tax

Set off of amount so surrendered during the course of search against business loss - Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D - Held that - The amendment brought in section 115BBE wherein no set off of losses against surrendered income brought to tax is prospective in nature and doesn t apply for the assessment year under consideration. The decisions relied upon by the Revenue have also been examined and doesn t support its case. For the year under consideration, there is no bar for set off of current year business loss u/s 71 against income brought to tax under the head income from other sources . We are therefore of the view that the assessee will be eligible for set off of current year business loss of ₹ 767,768 against the undisclosed investment of ₹ 36,00,000 towards purchase of plot of land which has been surrendered during the course of search, and subsequently offered and brought to tax under section 69 read with section 115BBE of the Act. - Decided in favour of assessee

Issues Involved:
1. Whether the income surrendered during the course of search under section 132(4) of the Income Tax Act, 1961, can be set off against the current year’s business loss.

Issue-Wise Detailed Analysis:

1. Set Off of Surrendered Income Against Business Loss:

The primary issue in this case is whether the income surrendered during a search operation under section 132(4) of the Income Tax Act, 1961, can be set off against the current year’s business loss. The facts of the case reveal that the assessee, a member of the Motisons Group, was subjected to a search and seizure operation. During the search, an undisclosed investment of ?36,00,000 in a residential plot was admitted by the Director of the assessee company. This amount was subsequently offered for taxation under the head "income from other sources" in the return of income filed by the assessee, who also claimed a set off of this surrendered income against the current year’s business loss of ?7,67,768.

2. Assessing Officer's (AO) Stand:

The AO issued a show cause notice to the assessee, questioning the set off of business loss against the surrendered income. The AO referred to the decision of the Hon’ble Punjab & Haryana High Court in the case of M/s Kim Pharma P Ltd. Vs. CIT, which held that surrendered income has to be taxed as "deemed income" without setting off losses under sections 70 and 71 of the Act. Additionally, the AO cited the decision of the Co-ordinate Bench of the Tribunal in the case of Liberty Plywood Pvt. Ltd. vs. ACIT, which supported the view that no set off of expenses could be claimed against surrendered income. The AO also invoked the provisions of Section 115BBE(1)(a) of the Act, which mandates a tax rate of 30% on undisclosed income, and concluded that the surrender made by the assessee was binding, leading to the addition of ?7,67,768 to the taxable income.

3. CIT(A)'s Confirmation:

The CIT(A) upheld the AO’s decision, relying on the judgment of the Hon’ble Gujarat High Court in the case of Fakir Moh. Hazi Hassan vs. CIT, which supported the non-allowance of set off of losses against disclosed income during a search. The CIT(A) confirmed the disallowance of the set off of business loss against the surrendered income.

4. Assessee's Argument:

The assessee argued that the surrendered income declared under "income from other sources" is taxable under sections 69/69A of the IT Act, 1961, and should be governed by Section 115BBE, introduced by the Finance Act, 2012, effective from A.Y. 2013-14. The assessee contended that the judgments cited by the AO pertained to periods before the introduction of Section 115BBE and that the amendment by the Finance Act, 2016, which barred the set off of losses against such income, was applicable only from A.Y. 2017-18 onwards. The assessee also referred to the CBDT Circular No. 3/2017, which clarified that the amendment was to avoid litigation and was prospective in nature.

5. Tribunal's Analysis and Decision:

The Tribunal examined the rival contentions and the material on record. It noted that the surrendered income of ?36,00,000 was offered to tax and that the assessee had incurred a business loss of ?7,67,768 during the year. The Tribunal referred to its own decision in the case of ACIT CC-2 Vs. Sanjay Bairathi Gems Ltd, where it was held that the amendment to Section 115BBE by the Finance Act, 2016, was prospective and did not apply to earlier assessment years. The Tribunal also referred to various judicial pronouncements, including the decisions of the Hon’ble Gujarat High Court in the cases of Shilpa Dyeing & Printing Mills (P) Ltd. and Krishnamegh Yarn Industries, which supported the set off of business losses against income brought to tax under sections 69B and 115BBE.

The Tribunal concluded that for the assessment year under consideration, there was no bar on the set off of current year business loss against income brought to tax under the head "income from other sources." It allowed the set off of the business loss of ?7,67,768 against the surrendered income of ?36,00,000 and ruled in favor of the assessee.

Conclusion:

The appeal filed by the assessee was allowed, with the Tribunal holding that the current year’s business loss could be set off against the surrendered income, and the amendment to Section 115BBE was not applicable for the assessment year in question. The order was pronounced in the open Court on 21/03/2018.

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