2019 (8) TMI 438 - AT - Income Tax

Treatment of income surrendered during the survey - deemed income u/s 69 69B - whether in the nature of Business Income or deemed income - whether eligible to set off of losses against the same - HELD THAT - The I.T.A.T. in the case of Famina Knit Fabs 2019 (5) TMI 8 - ITAT CHANDIGARH has further held that besides the nature of income, the Act also recognizes certain incomes which are deemed to be so on account of fact that any investment asset, income or expenditure incurred by the assessee is not disclosed in its books and the source of which is also not explained. These deemed incomes are subjected to tax u/ss 69, 69A, 69B, 69C 69D and the I.T.A.T. further held that such incomes are subjected to tax at a special rate as per the provisions of section 115BBE without allowing set off of expenses or any allowance against the same and w.e.f. 1.4.2017 without allowing set off of losses also against the same. The I.T.A.T. held this amendment to section 115BBE as prospective in nature and not applicable to earlier years. In the facts of the present case, it is not disputed that the surrender had been made on account of undisclosed debtors. Since the facts are identical to that in the case of Famina Knit Fabs (supra) and no distinguishing facts have been brought to our notice by the Ld.DR, the decision rendered in that case will also apply to the present case, following which we hold that the Ld.CIT(A) had rightly treated the surrendered income as in the nature of business income of the assessee and accordingly, allowed the benefit of set off of losses against the same. The order of the Ld.CIT(A) is accordingly, upheld. The ground raised by the Revenue is dismissed. Disallowance u/s 36(l)(iii) on investment made in the sister concern - HELD THAT - We have gone through the order in the case of Reliance Industries Ltd. 2019 (1) TMI 757 - SUPREME COURT and we find that it is now settled law that where sufficient own funds are available, the presumption is that the same were used for the purpose of making the investment calling for no disallowance of interest u/s 36(1)(iii)- CIT(A) in the present case, we find, has given factual findings of there being sufficient own interest free funds with the assessee in the form of share capital and reserves amounting to ₹ 1.49 crores against the investment of ₹ 10 lacs in relation to which disallowance of interest expenses was made. The factual findings of the CIT(A) have not been controverted by the Ld. DR before us. Therefore, in view of the settled position of law as above and the uncontroverted factual findings of the Ld.CIT(A) regarding the sufficiency of own funds available with the assessee, we find no reason to interfere in the order of the CIT(A) in deleting the disallowance of interest made u/s 36(1)(iii) - Decided against revenue.

Summary

Issues Involved:
1. Treatment of income surrendered during the survey: Business Income vs. Deemed Income.
2. Allowability of set-off against business loss/depreciation loss or other expenses.
3. Disallowance of interest under Section 36(1)(iii) of the Income Tax Act on investment made in a sister concern.

Issue-wise Detailed Analysis:

1. Treatment of Income Surrendered During the Survey: Business Income vs. Deemed Income:

The primary issue in both appeals was whether the income surrendered during the survey should be treated as business income or deemed income under Sections 69 and 69B of the Income Tax Act, 1961. The facts revealed that during the financial year 2011-12, a survey was conducted on the assessee's premises, resulting in a surrender of ?1,00,00,000/- based on paper slips found. The Assessing Officer (A.O.) treated this surrendered income as deemed income under Sections 69 and 69B, disallowing any set-off against business losses or depreciation.

The Commissioner of Income Tax (Appeals) [CIT(A)] reversed the A.O.'s decision, holding that since no evidence indicated that the surrendered income represented undisclosed investments or expenditures, it could not be deemed income under Sections 68, 69, 69A, 69B, and 69C. The CIT(A) noted that the surrender was made on account of advances receivables, which were considered under "business income." The CIT(A) relied on the ITAT Chandigarh Bench's decision in M/s Gaurish Steels (P) Ltd. vs. ACIT, which supported the treatment of the surrendered income as business income.

2. Allowability of Set-off Against Business Loss/Depreciation Loss or Other Expenses:

The CIT(A) allowed the set-off of business losses against the surrendered income, emphasizing that the A.O. had not established that the surrendered income was not from the business of the assessee. The CIT(A) cited several judicial precedents, including the Hon'ble Supreme Court's decision in CIT vs. D.P. Sandhu & Bros., which held that income could not be taxed under Section 56 if it fell under any of the heads specified in Section 14 of the Act.

The ITAT upheld the CIT(A)'s decision, agreeing that the surrendered income should be treated as business income and allowing the set-off of business losses against it. The ITAT referenced its own decision in Famina Knit Fabs vs. ACIT, where it was held that income surrendered on account of undisclosed debtors was business income and eligible for set-off against business losses.

3. Disallowance of Interest Under Section 36(1)(iii) on Investment Made in a Sister Concern:

In the second appeal, the A.O. had disallowed ?1,20,000/- under Section 36(1)(iii) on the grounds that the assessee had invested ?10 lakhs in a sister concern, M/s Noble Steel Pvt. Ltd., without demonstrating that the investment was for business purposes. The CIT(A) deleted this disallowance, noting that the assessee had sufficient interest-free funds to cover the investment and that the investment in shares could not be equated with an interest-free loan for non-business purposes.

The ITAT upheld the CIT(A)'s decision, citing the Hon'ble Supreme Court's decision in CIT vs. Reliance Industries Ltd., which established that where sufficient own funds are available, it is presumed that the same were used for making the investment, thereby negating the need for disallowance under Section 36(1)(iii).

Conclusion:

The ITAT dismissed both appeals filed by the Revenue, upholding the CIT(A)'s decisions. The ITAT confirmed that the surrendered income should be treated as business income and allowed the set-off of business losses against it. Additionally, the ITAT upheld the deletion of the disallowance of interest under Section 36(1)(iii) on the investment made in the sister concern, given the availability of sufficient own funds.