2017 (8) TMI 721 - AT - Income Tax

Income on account excess stock u/s 69B - set off of losses with the surrendered income - tax at normal rate on surrender income on account of undisclosed investment in stock assessed as deemed income u/s 69B OR tax charged at special rate u/s 115BBE - under which head of income the excess stock/investment found in search and offered by the assessee for tax is to be assessed? - No deduction or set off of business loss will be allowable as referred to the provisions of section 115BBE - Held that - In the present case the excess stock offered in survey is part of the business income. The excess stock is determined by valuing the business stock at current price instead of the purchase price. Nothing was brought to suggest that this was not a regular item of the stock dealt by the assessee. The provisions of section 115BBE says that no deduction in respect of any expenditure or allowance shall be allowed. It nowhere says that set off of the loss with any other income will not be allowed. In the memorandum explaining the provisions of amendment, the amendment to Section 115BBE is explained and has been stated that this amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years. Given the fact that the AO has invoked the provisions of section 11BBE in the instant case, the provisions of sub-section (2) to section 11BBE are equally applicable. The amendment brought in by the Finance Act, 2016 whereby set off of losses against income referred to in section 69B has been denied is stated clearly to be effective from 1 April 2017 and will accordingly, apply to assessment year 2017-18 onwards. Accordingly, for the year under consideration, there is no restriction to set off of business losses against income brought to tax under section 69B of the Act. Further, the provisions relating to set off of losses are contained in Chapter-VI relating to aggregation of income and set off of losses. Whenever legislature desires to restrict set-off of loss or allowance of loss, in a particular manner, usually, the provisions are made in Chapter-VI such as non-allowance of business loss against salary income as provided in section 71(2A), and treatment of short-term or long-term capital losses. There is no specific provision which restrict set off of business losses against income brought to tax under section 69B. Interestingly, both section 69B and section 71 falls under the same chapter VI. In the absence of any provisions in section 71 falling under Chapter-VI which restrict such set off, in the instant case, set off of business losses against income brought to tax under section 69B cannot be denied. Thus the assessee deserve to succeed in the subject appeal and will be eligible for set off business loss of ₹ 86,96,733 against the income of ₹ 2,31,41,217 which has been brought to tax under section 69B read with section 115BBE of the Act. In the result, grounds taken by Revenue are dismissed.

Issues Involved:
1. Treatment of undisclosed investment in stock as business income.
2. Allowability of set-off of business loss against excess stock offered for tax.
3. Application of tax rate on surrendered income under section 115BBE.

Detailed Analysis:

1. Treatment of Undisclosed Investment in Stock as Business Income:
The Revenue challenged the CIT(A)'s decision to treat undisclosed investment in stock as business income rather than as income under section 69B. The CIT(A) held that since the excess stock was a result of suppressed business profits and was part of the overall physical stock, it should be treated as business income. The Tribunal agreed with this view, referencing the ITAT Jaipur Bench decision in Ramnarayan Birla, which held that excess stock found during a survey that is part of regular business should be taxed as business income. The Tribunal emphasized that the excess stock did not have an independent identity and was part of mixed lots, thus supporting the CIT(A)’s decision.

2. Allowability of Set-off of Business Loss Against Excess Stock Offered for Tax:
The Revenue contended that the set-off of business loss against excess stock was not permissible under sections 70 or 71 when assessed as deemed income under section 69B. The CIT(A) allowed the set-off, noting that the amendment to section 115BBE, which disallows set-off of losses against income under section 69B, was effective from 01.04.2017 and thus not applicable to the assessment year 2013-14. The Tribunal upheld this, citing the Supreme Court's ruling in CIT vs. Vatika Township Pvt. Ltd., which states that amendments increasing tax burdens are prospective. The Tribunal also referenced the ITAT Vishakapatnam Bench in Pillalala Ramakrishna Rao, which supported set-off of losses for assessment years before 2017-18.

3. Application of Tax Rate on Surrendered Income Under Section 115BBE:
The Revenue argued that the surrendered income should be taxed at the special rate under section 115BBE. The CIT(A) directed that the tax be charged at the normal rate, noting the amendment to section 115BBE effective from 01.04.2017, which was not applicable to the year under consideration. The Tribunal supported this view, stating that the amendment was prospective and thus the set-off of business loss against the income from excess stock was permissible for the assessment year 2013-14.

Conclusion:
The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s order, confirming that:
- The excess stock should be treated as business income.
- The set-off of business loss against the income from excess stock is allowable.
- The tax on the surrendered income should be charged at the normal rate, not the special rate under section 115BBE, for the assessment year 2013-14.

Order Pronounced:
The appeal of the Revenue was dismissed, and the order was pronounced in the open court on 08/08/2017.

← Previous Next →