2019 (11) TMI 410 - AT - Income Tax

Source of surrendered income - Deemed income against which no deduction/set off - HELD THAT - In the case of Famina Knit Fabs 2019 (5) TMI 8 - ITAT CHANDIGARH the Tribunal has examined this issue elaborately and propounded that onus is on the assessee to establish the source of surrendered income. If it failed to demonstrate such source, then, it is to be characterized as deemed income under sections 69,69A/B/C, and if that be happened, then such income to be taxed on the gross amount without setting off any expenditure or allowance against the same under section 115BBE The stand of the assessee is that expenditure incurred for construction of building was from the routine business, and such addition of ₹ 32 lakhs ought to be treated as business income. We find force in this contention of the ld.counsel for the assessee, because the expenditure incurred for creating a business asset and it must have been generated through the business carried out by the assessee. It is pertinent to bear in mind that expenditure laid out for the purpose of business is to be allowed deduction either as expenditure or to be capitalized on which depreciation will be allowed. The assessee might have earned income from the business which has not been accounted and used for constructing the business asset, though specific details have not been discussed either in the impugned order about the nature of evidence found during the course of survey. We also need not to ponder on this aspect because the assessee has admitted this unexplained expenditure on construction of building. This admission has to be accepted as given by the assessee, wherein it was alleged that it is for the purpose of the business. Therefore, to the extent the expenditure incurred for construction of the building, out of unexplained source is concerned, it is to be construed as earned from the business and it will take character of the business income. Once this income is to be assessed under the business income , then all incidental benefits for set off from brought forward loss or any other expenditure is to be given to the assessee. In the judgments relied upon the ld.counsel for the assessee, similar treatment has been given on the amounts which were admitted as trade receivable during the course of search/survey. Respectfully following the order of the Co-ordinate Bench, we direct the Assessing Officer to treat surrendered income to the extent of ₹ 32 lakhs as business income. As far as excess cash balance is concerned, the assessee failed to explain the source of such income, and it is to be treated as deemed income, and it is to be assessed on gross basis, as treated by the Assessing Officer. In view of the above discussion, the appeal of the assessee is partly allowed.

Issues Involved:
1. Treatment of ?40 lakhs disclosed during the survey as income from other sources.
2. Eligibility for set off on account of business expenditure/loss against the disclosed income.

Detailed Analysis:

Treatment of ?40 Lakhs Disclosed During the Survey:
The primary issue for adjudication was whether the sum of ?40 lakhs disclosed during the survey should be treated as income from other sources, against which no set off on account of business expenditure/loss is available to the assessee.

The facts of the case reveal that the assessee filed its return of income declaring ?18,67,485/-. During a survey under section 133A, discrepancies were found, leading to a voluntary disclosure of ?40 lakhs (?8 lakhs for excess cash and ?32 lakhs for unexplained expenditure in the building account). The Assessing Officer (AO) treated this ?40 lakhs as deemed income under sections 69, 69A, 69B, and 69C, and assessed it separately without allowing any set off of business expenditure or losses.

Eligibility for Set Off on Account of Business Expenditure/Loss:
The Tribunal examined whether the ?40 lakhs should be assessed as deemed income against which no deduction/set off is available. The assessee argued that ?8 lakhs should be treated as deemed income under sections 69, 69A, etc., and ?32 lakhs as business income derived from business activity. The Tribunal referred to the case of Famina Knit Fab Vs. ACIT, which stated that the onus is on the assessee to establish the source of surrendered income. If the source is not established, it is deemed income under sections 69, 69A/B/C, and taxed on the gross amount without setting off any expenditure or allowance under section 115BBE.

Tribunal's Findings:
1. ?32 Lakhs as Business Income:
- The Tribunal found merit in the assessee's contention that the ?32 lakhs incurred for constructing a building should be treated as business income. It held that the expenditure for creating a business asset must have been generated through business activities. The Tribunal emphasized that expenditure laid out for business purposes should be allowed as a deduction or capitalized with depreciation benefits.
- The Tribunal directed the AO to treat the ?32 lakhs as business income, allowing the assessee to set off brought forward losses or other expenditures against this amount.

2. ?8 Lakhs as Deemed Income:
- For the ?8 lakhs excess cash balance, the Tribunal noted that the assessee failed to explain the source of this income. Consequently, it upheld the AO's treatment of this amount as deemed income, to be assessed on a gross basis without any deductions.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to treat ?32 lakhs as business income, thereby permitting set off against business expenditure/losses, while the ?8 lakhs was to be treated as deemed income, assessed on a gross basis without deductions.

Pronouncement:
The judgment was pronounced in the Open Court on 6th November 2019.

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