2015 (11) TMI 631 - AT - Income Tax

Treatment of surrendered income - whether the income surrendered is to be taxable as business income or income from other sources or as deemed income under sections 69A, 69B and 69C - Held that - Assessing Officer has nowhere disputed the business losses incurred by the assessee. The books have not been rejected. It was stated at the Bar that even at the time of survey, in the trading account prepared by the survey team, there were losses incurred by the assessee. All these facts have not been disputed by the Assessing Officer. Further, the surrender made by the assessee was on account of cash found during the course of survey, discrepancy in the cost of construction of building, discrepancy in stock and discrepancy in advances and receivables. By no stretch of imagination, any of these incomes apart from cash can be considered as income under any head other than the business income . Nowhere in his order the Assessing Officer has been able to bring on record the fact that the income surrendered during the course of survey was not out of the business of the assessee. Also nowhere he has objected to the heads under which the assessee had surrendered these amounts, i.e., cash, construction of building, discrepancy in stock and discrepancy in advances and receivable. Further, even the survey team has not found any source of income except the business income. Now, following the judgment of jurisdictional High Court, in the background of the facts of the present case, we can safely infer that apart from cash all other income surrendered may be brought to tax under the head business income while the cash has to be taxed under the head deemed income under section 69A of the Act. Now, as regards the business losses incurred by the assessee during the year, these can be set off against the income surrendered during the course of survey except for the amount of cash surrendered, as per the mandate of section 71 of the Act. No loss can be set off against the cash surrendered as the same has already been held to be taxed under a different head. The Assessing Officer is hereby directed to set off business losses suffered by the assessee out of the surrendered income except the element of cash surrendered. - Decided partly in favour of assessee.

Issues Involved:
1. Treatment of surrendered income of Rs. 70 lakhs.
2. Set off of business losses against surrendered income.
3. Applicability of various judicial precedents.
4. Set off of unabsorbed depreciation against surrendered income.

Issue-wise Detailed Analysis:

1. Treatment of Surrendered Income of Rs. 70 Lakhs:
The primary issue revolves around the classification of the surrendered income of Rs. 70 lakhs during a survey. The assessee contended that the surrendered income should be treated as business income, as it was reflected in the profit and loss account and was related to discrepancies in cash, stock, construction costs, and advances. The Assessing Officer, however, classified this as deemed income under sections 69, 69A, and 69C of the Income-tax Act, 1961, and not as business income. This classification was upheld by the Commissioner of Income-tax (Appeals) based on the precedent set by the Punjab and Haryana High Court in the case of Kim Pharma P. Ltd. v. CIT. The Tribunal noted that the surrendered income, except for the cash component, should be treated as business income, following the jurisdictional High Court's guidance.

2. Set Off of Business Losses Against Surrendered Income:
The assessee argued that the business losses incurred during the year should be set off against the surrendered income. The Tribunal agreed with this contention, noting that the business losses could be set off against the surrendered income, except for the cash component, which should be taxed as deemed income under section 69A. The Tribunal directed the Assessing Officer to allow the set-off of business losses against the surrendered income, excluding the cash portion.

3. Applicability of Various Judicial Precedents:
The assessee cited several judicial precedents, including the Supreme Court's decision in CIT v. D. P. Sandu Bros. Chembur P. Ltd. and the Gujarat High Court's decision in CIT v. Shilpa Dyeing and Printing Mills P. Ltd., to argue that the surrendered income should be treated as business income. The Tribunal, however, emphasized the binding nature of the jurisdictional High Court's decision in Kim Pharma P. Ltd. v. CIT, which held that the surrendered cash should be treated as deemed income. The Tribunal distinguished the present case from Kim Pharma, noting that the surrendered income components, except for cash, were relatable to the business and should be taxed as business income.

4. Set Off of Unabsorbed Depreciation Against Surrendered Income:
The assessee raised an additional ground regarding the set-off of unabsorbed depreciation against the surrendered income. The Tribunal admitted this ground, noting that it was a purely legal issue with all facts on record. The Tribunal directed the Assessing Officer to set off the unabsorbed depreciation against the surrendered income, except for the cash component. Since the surrendered income (excluding cash) was treated as business income, the unabsorbed depreciation could be set off against it, making the issue of adjusting it against deemed income academic.

Conclusion:
The Tribunal partly allowed the appeal, directing the Assessing Officer to classify the surrendered income (excluding cash) as business income and to allow the set-off of business losses and unabsorbed depreciation against it. The cash component of the surrendered income was to be taxed as deemed income under section 69A, with no set-off allowed against it. The order was pronounced on September 17, 2015.

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