2015 (7) TMI 694 - HC - Income Tax

Stock of raw material disclosed at the time of survey - Whether can be added both u/s 69B as well as 69C of the Act? - Held that - It is an undisputed fact that during scrutiny, the assessee himself has disclosed the fact that in his books of account, he had shown less stock to the tune of ₹ 10,06,987/-. It is also an admitted fact that when the physical stock was examined by the authority, the value of the said stock was ₹ 13,33,485/-, however, as per the books of account, the value of stock was to the tune of ₹ 3,26,498/i.e. amount to the tune of ₹ 10,06,987/- was not recorded in the books of account. However, it is admitted by the assessee himself that he has not completely disclosed the stock in the books of account. Now, considering the proviso of Section 69(B) of the act, we are of the opinion that the assessee had not fully disclosed the stocks in the books of account and therefore, the Assessing Officer as well as the CIT (Appeals) have rightly observed that the case of the assessee would fall under the proviso of Section 69(b) of the act. Disallowance of set off of business loss with income from other sources for the same year? - Held that - We are also of the opinion that the submissions made by the learned advocate is that the case would fall under the proviso of Section 69(c) of the act does not apply to the facts of the present case. It is not the case of the revenue that there is an unexplained expenditure, which would cover under the proviso of this Act and therefore, the assessee would not be entitled for the set off under the proviso of Section 71 of the act. As far as applicability of the case of Commissioner of Income Tax V. Shilpa Dyeing & Printing Mills (P.) Ltd. 2015 (7) TMI 691 - GUJARAT HIGH COURT is concerned, the same would be applicable since the Court had held that the amount of excess stock would fall under the definition of income as per Section 14 of the Act and therefore, the assessee would be entitled for the set off under proviso of section 71 of the act. Therefore, we are of the opinion that the CIT (Appeals) as well as the ITAT have committed error in refusing giving set off to the assessee under Section 71 of the act - Decided in favour of assessee.

Summary

Issues:
1. Validity of order challenging the judgment and order passed by the Commissioner of Income Tax.
2. Set off of undisclosed stocks against losses for assessment year 2001-02.

Issue 1: Validity of Order
The appellant challenged the order passed by the Income Tax Appellate Tribunal (ITAT) confirming the judgment and order of the Commissioner of Income Tax (Appeals) Ahmedabad. The key questions of law were whether the stock of raw material disclosed during a survey can be added under sections 69B and 69C of the Income-tax Act, and whether set off of business loss with income from other sources was permissible. The appellant, a partnership firm in yarn sizing, filed a return for the assessment year 2001-02 declaring total income, which was selected for scrutiny. During scrutiny, it was found that excess stock was disclosed during a survey operation, leading to an increase in the gross profit. The Assessing Officer accepted the submission regarding the excess stock but did not consider certain allowances claimed by the assessee. The Commissioner of Income Tax (Appeals) dismissed the appeal but enhanced the income by treating the excess stock as deemed income under Section 69(B) of the Act. The ITAT partly allowed the appeal but did not consider the set off available under Section 71 of the Act. The appellant contended that the CIT (Appeals) and the ITAT erred in not allowing the set off against losses and treating the undisclosed stock as unexplained expenditure.

Issue 2: Set off of Undisclosed Stocks
The appellant argued that the Assessing Officer rightly allowed set off against losses caused by the undisclosed stock under the provisions of Section 71 of the Act. The appellant maintained that the CIT (Appeals) and ITAT misinterpreted the law and sought to quash their orders. The appellant cited a relevant case to support their position. The revenue's advocate opposed the appeal, arguing that the undisclosed stock fell under the proviso of Section 69 of the Act and should not be eligible for set off. The advocate referenced a case to support this argument and suggested that the closing stock amount might have been carried forward to the next year. The High Court analyzed the facts and concluded that the appellant had not fully disclosed the stocks in the books of account, thus falling under the proviso of Section 69(B) of the Act. The Court found that the case did not align with the provisions of Section 69(C) and that the appellant was entitled to set off under Section 71 of the Act. The Court allowed the appeals, setting aside the orders of the ITAT and the CIT (Appeals) and dismissing the penalty imposition due to the successful appeal.

This detailed analysis of the judgment highlights the legal intricacies and arguments presented by both parties, leading to a comprehensive understanding of the case's outcome and implications.