2015 (9) TMI 233 - HC - Income Tax

Assessment of profit from commodity trading as cash credit under Section 68 - set off of current years business loss as well as brought forward losses/unabsorbed depreciation against the income assessed - transactions showing generation of commodity trading profit were sham and bogus transactions without any element of genuineness as confirmed by ITAT - Whether having confirmed the addition of the alleged commodity trading profit as unexplained cash credit under Section 68 of the Act, whether the Tribunal was justified in allowing set off? - Held that - Answer to this question should be in the negative. This is evident from the judgment of the Gujarat High Court in Fakir Mohmed Haji Hassam v. CIT (2000 (8) TMI 44 - GUJARAT High Court) distinguished by the Tribunal itself where it has been held that when income cannot be classified under any one of the heads of income under Section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. Insofar as this case is concerned, admittedly the income has been treated as unexplained cash credit under Section 68 of the Act. Once it is so done for the purpose of set off or any other purpose, the said unexplained income cannot be treated as business income under any one of the head provided under Section 14 in which case the question of set off does not arise. Insofar as the Supreme Court judgment in Lakhmichand Baijnath v. Commissioner of Income Tax, West Bengal (1958 (11) TMI 3 - SUPREME Court) relying on which the Calcutta High Court has rendered its judgment in Daulatram Rawat Mull v. CIT (1966 (4) TMI 73 - CALCUTTA HIGH COURT) is concerned, reading of the judgment itself show that the disputed income therein was assessed by the Assessing Officer as concealed profits of the business. This finding of the Assessing Officer was confirmed by the First Appellate Authority, Tribunal, High Court and the Supreme Court. Therefore, the decision rendered on the basis of such a conclusion could not have been of any assistance to arrive at the conclusion of the Tribunal that the assessee was entitled to set off the unexplained income under Section 68 of the Act in accordance with the provisions of the Act relating to set off. We, therefore, set aside the order passed by the Tribunal, to the extent it has set aside the order of the Commissioner of Income Tax (Appeals) directing the Assessing Officer to allow the set off of current year business loss as well as brought forward business loss/unabsorbed depreciation against income assessed under Section 68 of the Act. - Decided in favour of the Revenue.

Summary

Issues:
1. Assessment of profit from commodity trading as cash credit under Section 68 of the Income Tax Act.
2. Legality of rejecting the claim of the assessee to set off business loss and carry forward business loss/depreciation.

Issue 1: Assessment of profit from commodity trading as cash credit under Section 68 of the Income Tax Act:
The appeal was filed by the Revenue challenging the order passed by the Income Tax Appellate Tribunal concerning the assessment of profit from commodity trading as cash credit under Section 68 of the Income Tax Act for the assessment year 2010-2011. The Assessing Officer found that a substantial sum was credited in the books of accounts of the assessee as commodity trading profit allegedly received from a specific entity. However, investigations revealed that the entity was expelled by the commodity exchange for fraudulent activities, and the assessee was a non-existent client. Consequently, the Assessing Officer treated the commodity trading profit as unexplained cash credit under Section 68. The First Appellate Authority upheld this decision. The Tribunal, after considering the facts and relevant portions of the assessment order, affirmed the Assessing Officer's decision, stating that the profit from commodity trading was a sham transaction. The Tribunal held that the assessee failed to provide any material to counter the Assessing Officer's findings and that the responsibility lies with the assessee to explain the nature and source of any sum credited in the books of accounts.

Issue 2: Legality of rejecting the claim of the assessee to set off business loss and carry forward business loss/depreciation:
The Tribunal examined the rejection of the claim of the assessee to set off business loss and carry forward business loss/depreciation. The assessee contended that it had no other source of income apart from business income, and the profit from commodity trading was credited as business income. The Assessing Officer treated the loan amount and profit from commodity trading as deemed income under Section 68 due to the inability of the assessee to explain their nature and source. The Tribunal observed the magnitude of the company's operations based on the figures provided and concluded that it may not be unreasonable to treat the receipts as income from the business activity. Consequently, the Tribunal directed the Assessing Officer to allow the set off of current year business loss and brought forward losses/unabsorbed depreciation against the income assessed. However, the High Court held that since the income determined under Section 68 does not fall under any head in Section 14, the set off cannot be allowed. Referring to relevant case laws, the High Court concluded that unexplained income under Section 68 cannot be treated as business income under any head provided under Section 14, thereby disallowing the set off.

In conclusion, the High Court set aside the Tribunal's order allowing the set off of business losses against the income assessed under Section 68 of the Income Tax Act. The appeal was disposed of in favor of the Revenue, emphasizing that unexplained income under Section 68 cannot be considered for set off against business losses.