2024 (1) TMI 795 - AT - Income Tax

Nature of Income as surrendered during survey proceedings - surrendered amount as business income OR deemed income i.e income from undisclosed sources - CIT (Appeals) sustained the surrendered amount u/s 68 of credit entry and u/s 69 of excess stock - appellant contended that surrendered amount represents the business income as the appellant has no other source of income Whether deeming provisions of Section 68 can be invoked in respect of amount introduced in the capital account of the assessee and found credited during the course of survey in the books of accounts of the assessee? - HELD THAT - The Survey team had asked a specific question to the assessee during the course of survey to explain the source of capital introduced during the financial year 2018-19 relevant to assessment year 2019-20 and in response, the assessee had stated that he was unable to explain the source of capital introduced during the during the financial year 201819 relevant to assessment year 2019-20, however, in order to buy piece of mind, he voluntarily surrendered the sum - Therefore, during the course of survey, the assessee has failed to offer any explanation regarding the source of such capital introduced in his capital account. Even during the course of assessment and appellate proceeding, we find that no explanation is forthcoming from the assessee. We therefore find that basis material available on record, the credit entry in the capital account of the assessee clearly demonstrate that the receipt of money by the assessee and in absence of any explanation from the assessee explaining the source of such capital introduced, the provisions of section 68 are clearly attracted and we therefore affirm the findings of the ld CIT(A) as far as bringing to tax the amount under section 68 of the Act. Whether the AO has invoked the deeming provisions of section 69 and brought to tax excess stock found during the course of survey which is sustained by the ld CIT(A)? - In the instant case there is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as business income. Thus the income surrendered during the course of survey cannot be brought to tax under the deeming provisions of section 69 of the Act and the same has to be assessed to tax under the head business income . In absence of deeming provisions, the question of application of section 115BBE doesn t arise and normal tax rate shall apply. The AO is thus directed to assess the income under the head Income from Business/profession and apply the normal rate of tax.

Summary

Issues Involved:

1. Legality of assessing the surrendered amount as "deemed income" under Section 69 of the Income Tax Act, 1961.
2. Justification for assessing the surrendered amount as deemed income contrary to Section 14 of the Income Tax Act, 1961.
3. Applicability of Section 68 versus Section 69 for assessing the surrendered amount.
4. Correctness of treating the surrendered amount as "deemed income" instead of "business income."

Summary:

Issue 1: Legality of Assessing Surrendered Amount as "Deemed Income" Under Section 69

The assessee contended that the surrendered amount of Rs. 31,77,029, which includes excess stock and credit entry in the capital account, was shown as "business income" in the return of income. However, the Assessing Officer (AO) treated it as "deemed income" under Section 69, which pertains to unexplained investments. The Tribunal noted that the surrender was made during a survey operation under Section 133A, and the entries were disclosed in the profit and loss account. The AO's assessment of the surrendered amount as "deemed income" was challenged as it was already included in the business income.

Issue 2: Justification for Assessing Surrendered Amount as Deemed Income Contrary to Section 14

The assessee argued that the AO assessed the surrendered amount as income from undisclosed sources but added it to business income, which contradicts Section 14 of the Income Tax Act. The Tribunal observed that the AO did not find any incriminating documents regarding bogus purchases or sales outside the books of accounts. The excess stock found was related to business transactions, and the assessee had no other source of income. Therefore, the surrendered amount should be assessed as business income.

Issue 3: Applicability of Section 68 Versus Section 69

The Tribunal examined whether the provisions of Section 68 or Section 69 should apply to the surrendered amount. Section 68 deals with unexplained cash credits, while Section 69 pertains to unexplained investments. The Tribunal referred to various judicial precedents and noted that the surrendered amount was recorded in the books of accounts, which aligns with Section 68. The AO's assessment under Section 69 was found to be incorrect as the amount was already recorded in the books.

Issue 4: Correctness of Treating Surrendered Amount as "Deemed Income" Instead of "Business Income"

The Tribunal held that the excess stock found during the survey was part of the business stock and had no independent identity. It was integral to the business operations, and the difference in stock value was due to valuation discrepancies. The Tribunal concluded that the surrendered amount should be treated as business income rather than deemed income under Section 69. Consequently, the normal tax rate should apply, and the provisions of Section 115BBE, which impose a higher tax rate on deemed income, were not applicable.

Conclusion:

The Tribunal directed the AO to assess the surrendered amount of Rs. 17,07,029 as "Income from Business/Profession" and apply the normal tax rate. The appeal of the assessee was partly allowed. The judgment emphasized the importance of correctly categorizing income based on its nature and source, ensuring that legal provisions are applied appropriately.