2023 (11) TMI 386 - AT - Income Tax

Applicability of Higher Rate of Tax u/s 115BBE - assessee disclosed the surrendered income as business income with explanation of source during the survey and assessment proceedings - HELD THAT - As the expenditure incurred for creating a business asset must have been generated through the business carried out by the assessee and that expenditure laid out for the purpose of business is to be allowed deduction either as expenditure or to be capitalized on which depreciation will be allowed. In the present case, to the extent of the expenditure incurred for construction of the building, out of unexplained source is concerned, it is to be construed as income earned from the business and it will take character of the business income. The case law relied upon by the CIT(A) is distinguishable on the facts as in that case the amount surrendered during survey was not reflected in the books of account and the source from where it was derived was not declared/explained whereas in the present case the amount surrendered during survey was duly reflected in the books of account and the source it was declared/explained as business activity with due payment of Tax liability and the authorities below failed to prove the contrary to disprove source of income other than Business income. Respectfully following the order of the Co-ordinate Bench, Chandigarh in the case of M/S. ARORA ALLOYS LTD 2019 (11) TMI 410 - ITAT CHANDIGARH we direct the Assessing Officer to treat surrendered income to the extent of expenditure on building as business income.

Summary

Issues Involved:
1. Applicability of provisions of Section 115BBE of the Income Tax Act, 1961.
2. Treatment of surrendered income as business income or deemed income under Section 69.

Summary:

Issue 1: Applicability of provisions of Section 115BBE of the Income Tax Act, 1961

The assessee challenged the confirmation of the order by the CIT(A) regarding the applicability of Section 115BBE. A survey conducted on 15.07.2016 led to the surrender of Rs. 1.61 crores as additional business income. The AO accepted the surrendered income but disputed Rs. 81,95,000/- used for building construction, taxing it under Section 69 r.w.s 115BBE. The CIT(A) upheld this, bifurcating the surrendered amount and treating Rs. 81,95,000/- as unexplained investment, thus taxable under Section 115BBE.

Issue 2: Treatment of surrendered income as business income or deemed income under Section 69

The assessee argued that the surrendered income was from business activities, including sales/purchases outside the books. The CIT(A) failed to prove that the income was from non-business activities. The counsel cited various case laws supporting that such income should be treated as business income. The ITAT observed that the AO accepted the surrendered income as business income but taxed the building expenditure under Section 69. The ITAT found that the expenditure for constructing a business asset should be treated as business income, as it was generated through business activities and recorded in the books. The CIT(A) did not appreciate this and failed to disprove the business income source.

Conclusion:

The ITAT directed the AO to treat the surrendered income of Rs. 81,95,000/- as business income, following the precedent set by similar cases. The appeal was disposed of accordingly, with the order pronounced on 13.09.2023.