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TMI Blog2012 (12) TMI 1204X X X X Extracts X X X X X X X X Extracts X X X X ..... sorbed depreciation by the Assessing Officer against the surrendered income. 3. Brief facts of the case are that originally the assessee had filed return of income declaring income of ₹ 17,26,270/-. A survey was conducted in the premises of the assessee on 4.3.2005 and an additional income of ₹ 70,00,000/- was surrendered. Bi-furcation of the surrender income is as under: Stock ₹ 7,50,000 Expenditure as detailed in loose papers i.e. Diesel, wages etc. ₹ 12,50,000/- Cash in hand ₹ 50,00,000/- Total ₹ 70,00,000/- Assessment was completed by DCIT, Ambala determining the total income at ₹ 32,66,090. Later on the assessment records were examined by the ld. Commissioner ,Panchkula wherein he found that the assessment order is erroneous and prejudicial to the interest of the Revenue. The Ld. CIT passed an order u/s 263 dated 3.12.2008 and opined that surrendered income of ₹ 70.00 lakhs should be treated as deemed income u/s 69, 69A, 69B of the Act and therefore, same was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n impounded by the Department showing that the assessee had some other business activity from where he had drawn the income. It was further observed that deemed income u/s 69, 69A, 69B and 69C are to be treated separately as deemed income and are not assessable under any head of the income. He also observed that Section 14 itself used the expression Save as otherwise provided by this Act , clearly shows that scope of deemed income covered by scheme of Sections 69, 69A, 69B and 69C were to be treated separately because this kind of income is not income from head like salary, house property, business profits or capital gains etc. For this reliance was placed on the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan V CIT (supra). Since income surrendered during survey was also not recorded in the books of account therefore, no deduction or set off of loss or depreciation can be allowed. Accordingly surrender income was assessed separately as under: Add Unaccounted cash found and surrendered u/s 69A ₹ 50,00,000/- Unaccounted investments surrendered u/s 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion against deemed income on account of surrender. Therefore the addition is sustained and claim of set off of unabsorbed depreciation is disallowed. As a result these grounds are dismissed. 7 Before us, the ld. counsel of the assessee submitted that the income surrendered during survey can not be assessed as deemed income u/s 69, 69A, 69B and 69C of the Act if nature of source can be properly identified. In this regard he relied on the decision of Ahmedabad Bench of the Tribunal in case of Fashion Word V ACIT, ITA No. 1634/Ahd/2006 (copy of the order is filed at paper book page 9 to 22). In that case the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan V CIT (supra) was considered and it was observed that there seems to be some misunderstanding in the interpretation of the decision of Hon'ble High Court. It was further observed as under: The expression nature and source used in this section should be understood to mean requirement of identification of source and is genuineness . Where the assessee is able to explain nature and source of investment/expenditure and also if they are recorded in the books of account then such investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jab Haryana High Court in case of M/s Kim Pharma (P) Ltd. V. CIT, ITA No. 106 of 2011 (O M) wherein the Court held that in case of surrendered income brought forward losses can not be set off under sections 70 71 of the Act against the surrendered income. 10 We have heard the rival submissions carefully. The main controversy involved is whether the surrender income amounting to ₹ 70.00 lakhs should be treated as business income so as to set off brought forward losses u/s 70 of the Act as well as the depreciation u/s 32(2). As far as the decision of Hon'ble Supreme Court in case of CIT V. D.P. Sandhu Bros. Chembur P. Ltd. (supra) is concerned, we find that facts in that case are totally different. In that case the assessee had sold tenancy rights for ₹ 35.00 lakhs which were claimed to be non-taxable. However, the Assessing Officer assessed the same as income from other sources u/s 10(3) of the Act. On assessee s appeal the Commissioner held that the sum was taxable under the head capital gain . He determined the cost of acquisition on the basis of fair market value and subjected the receipt for tenancy rights after reducing the cost of such rights as assessa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular head then the same cannot be charged alternatively under another head particularly under the head income from other sources . This observation can not lead to the conclusion if income does not belong to a particular head same cannot be charged at all. As far as the decision of Ahmedabad Bench of the Tribunal in case of Fashion Word V ACIT, ITA No. 1634/Ahd/2006 (supra) is concerned interpreting the decision of Hon'ble High Court in case of Fashion Word V ACIT, ITA No. 1634/Ahd/2006 (supra) has to give a way to interpretation put on the same decision by the Hon'ble Punjab Haryana High Court in case of M/s Kim Pharma (P) Ltd. V. CIT, ITA No. 106 of 2011 (O M), Hon'ble High Court clearly held that surrendered income can be taxed as deemed income without setting off of the losses u/s 70 71. We are bound to follow the decision of Hon'ble Punjab Haryana High Court and following the same, we hold that surrendered income has to be assessed separately as deemed income. 12 Coming to the issue of setting off of depreciation u/s 32(2), first of all it has to be noticed that the decision of Hon'ble Punjab Haryana High Court in case of M/s Kim Pharma (P) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r provisions of section 32(2) unabsorbed depreciation are deemed as part of current year s depreciation to the extent of available income. Further there is no provisions under the Income Tax Act to prohibit set off of current year s business loss against income of the assessee which is assessable under the head income from other sources. Section 70 does not prohibit such set off. 13 However, this provision has been amended twice w.e.f. 1.41997 by Finance Act (No. 2 of 1996) and against on 1.4.2002 by Finance Act, 2001. Certain restrictions were introduced again set off of by such unabsorbed depreciation. Controversy also arose in this respect. Ultimately the matter traveled to the Special Bench of the Tribunal in case of DCIT V. Times Guaranty Ltd. (2010) 4 ITR (Trib ) 210 (Mum)(SB). In this case it was held as under:- Under section 32(2) of the Income-tax Act, 1961, prior to its substitution, by the Finance (No. 2) Act, 1996 with effect from April 1,1997 the current depreciation under section 32(1) could be adjusted against income under any head including Capital gains and Income from house property in the same year. If there remained some unadjusted depreciation allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) and then, profits and gains in clause (i). The expression profits and gains as used in clause (i) or (iii)(a) refers only to income under the head Profits and gains of business or profession . Section 32(2) was again substituted by the Finance Act, 2001 with effect from April 1, 2002 restoring the provision as prevailing prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1,1997. Sub-section (2) of section 32 is a substantive provision and not a procedural one. It is settled legal position that the amendment to a substantive provision is normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of the Finance Bill 2001, that substitution of sub-section (2) of section 32 is retrospective. Therefore, the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from April 1, 2002, is prospectively applicable to the assessment year 2002-03 onwards. Section 32(2) is a deeming provision and by a legal fiction, the amount of depreciation allowance under section 32(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of first year becomes part and parcel of depreciation under section 32(1) of the second year. If again in the second year, the total of depreciation under section 32(1) (including the amount of allowance which came from first year and became depreciation under section 32(1) in the second year) cannot be absorbed, it shall become current depreciation for the third year to be dealt with in the same manner as the amount of depreciation in the third year and so on. Once the unabsorbed depreciation for the first year is given the character of current depreciation in the second year, the purpose of section 32(2) is fulfilled. The unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002. CIT v. MOTHER INDIA REFRIGERATION INDUSTRIES P. LTD. [1985] 155 ITR 711 (SC) relied on. Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward unabsorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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