ACIT CIRCLE 1(1), UJJAIN vs. A ONE ENCLAVE, UJJAIN

PER MANISH BORAD, AM.

The above captioned appeal of revenue pertaining to

Assessment Year 2012-13 is directed against the orders of Ld.

Commissioner of Income Tax (Appeals), Ujjain (in short ‘CIT(A)’),

dated 04.07.2018, which is arising out of order u/s 143(3) r.w.s.

263 of the Income Tax Act (In short the ‘Act’) dated 28.12.17 framed

by ACIT-1(1), Ujjain.

A One Enclave ITA No.828/Ind/2018 2. Brief facts of the case as culled out from the records are that

the assessee is a partnership firm engaged in the business of letting

out garden for various programs and running hotel and restaurant.

Assessee filed its return declaring total income of Rs.33,78,890/-

on 31.7.2012. Assessment u/s 143(3) was completed on

05.03.2015 assessing total income at Rs.39,78,890/-.

Subsequently Ld. Pr. CIT exercised his powers u/s 263 of the Act

for revision of orders prejudicial to the revenue and set aside the

assessment order directing it to be framed afresh as per the

directions given in the order u/s 263 of the Act. In compliance

thereto Ld. A.O initiated the assessment proceedings afresh by

serving u/s 143(2) and 142(1) of the Act to the assessee.

of the Act was conducted at the business premises of the assessee.

During the survey proceedings it was found that unaccounted

investment was made out of books in the construction of hotel.

Assessee agreed to declare the unaccounted investment as income

at Rs.1,25,01,135/- in the Income Tax return. In the Income Tax

return filed by the assessee as per audited profit and loss account,

net profit was shown at Rs.81,91,990/- which was arrived at after 2

A One Enclave ITA No.828/Ind/2018 considering income declared during the income tax survey at

Rs.1,25,01,135/-. Apart from showing the income from regular

business operations, assessee also claimed the expenses towards

interest, remuneration to partners and deprecation. The income

declared during Income Tax survey was shown as business income

and after claiming necessary expenses including the set off of

brought forwarded depreciation and losses, balance income was

offered for taxation. Ld. A.O was however not convinced with this

claim and was of the view that the assessee is not eligible for any

deduction from the income surrendered during the course of

survey. He accordingly treated the unaccounted investment in

hotel building at Rs. 1,25,01,135/- as income from undisclosed

sources. Ld. A.O also made disallowance for deduction of donation

expenses of Rs.53,000/- and assessed income at Rs.1,25,54,135/-.

Ld. A.O also worked out the loss for the year at Rs.25,64,726/- on

estimate basis taking the figures of gross profit and expenses shown

by the assessee in the financial statements.

challenging the disallowances claimed on the expenses including 3

A One Enclave ITA No.828/Ind/2018 the depreciation, interest and remuneration to partners totaling to

Rs.91,75,248/-. Ld. CIT(A) allowed the assessee’s appeal thereby

giving detailed finding of fact and placing reliance on various

judgments and also taking note that the amendment in the statue

by way of inserting Section 115BBE of the Act was brought into

effect from 1.4.2013 by the Finance Act 2012 which provides that

no deduction in respect of any expenditure or allowance or set off of

any loss is to be allowed against the income declared or assessed

u/s 68, 69, 69A,69B, 69C & 69D. Ld. CIT(A) also held that before

the amendment came into effect, the assessee is eligible for claiming

the expenses against the income surrendered during the course of

survey which was offered as business income.

appeal;

A One Enclave ITA No.828/Ind/2018 2. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) is justified in allowing claim of deductions on account of depreciation, interest, remuneration to the partners. expenses and carry forward depreciation out of additional unexplained income surrendered during the survey u/s. 133A as unexplained investment in hotel building, without considering the evidentiary value of the partner of the assesses firm during the course of survey u/s 133A.

The appellant reserves his right to add, amend or alter the grounds of appeal on or before the date the appeal is finally heard for disposal.

supporting the order of Ld. A.O.

submissions made before the lower authorities and findings of Ld.

CIT(A). Reliance was also placed on the recent decision of Co-

ordinate Bench of ITAT, Jaipur Bench in the case of ACIT V/s

Sanjay Bairathi Gems Ltd, Jaipur ITA No. 157/JP/17.

placed before us. Though the revenue has raised two grounds of

appeal but the sole issue is against the finding of Ld. CIT(A)

allowing the claim of deduction of Rs.91,75,248/- being the

expenses on account of depreciation, interest, remuneration and

A One Enclave ITA No.828/Ind/2018 other expenses claimed against the income of Rs.1,25,01,135/-

surrendered by the assessee as unaccounted investment in hotel

building during the course of survey u/s 133A of the Act conducted

on 12.7.2011.

133A of the Act on 12.7.2011 assessee agreed to offer income of

Rs.1,25,01,135/- towards unexplained investment in hotel building

being business income earned from undisclosed source. However

when the Income Tax return was filed along with the audited

balance sheet the assessee included the alleged surrendered income

as part of business income and after claiming necessary expenses

including depreciation, interest, remuneration paid to partners and

other incidental expenses offered net income of Rs.33,78,890/- for

tax. Ld. A.O did not allow the claim of any expenditure against the

surrendered income which in his view was taxable u/s 69 as

unexplained investment and assessee was liable to tax on the

amount of Rs.1,25,01,135/-.

the claim of expenses made by the assessee were allowed observing 6

A One Enclave ITA No.828/Ind/2018 as follows:-

“4.2 Ground No.2, 5 & 6:- Through these grounds of appeal the appellant has challenged for not allowing the remuneration, interest, depreciation and expenses out of the additional income declared by the appellant amounting to Rs.1,25,01,135/_. The appellant declared a sum of Rs.1,25,01,135/- during the survey on account of difference in investment in the construction/interior of hotel premises as represented by undeclared business income. The same is undisclosed business income assessable under the head business.

The appellant also relied upon the following judgments;

- Hon’b!e Calcutta High Court in the case of Md. Serajuddin & Brothers, Vs. CIT '(2012) 80 DTR 46. - Kamataka' High Court in the. case of Commissioner of IncomeTax vsS.K. Srigiri & Bros. (2008)298 lTR 13KAR.

The Hon'ble Pune bench while delivering the judgment on 28/11/~014 in the case of Venktesh Textile Mills, Sangli Vs. Joint Commissioner of Income Tax Range - 2, Sangli, decided in the favour of assessee. The relevant portion is reproduced hereunder:-

.............. At the outset, it is to be observed that whether or not additional income surrendered during the course of survey is feasible as income from business or not is essentially a question, which has to be decided having regard to the particular facts and circumstances of each case. Ostensibly, there cannot be an absolute proposition that any income surrendered during the survey is a business income or vice versa. Even before the Hon'ble Punjab & Haryana High court in the case of Kim Pharma (P) Ltd.(supra), assessee was found to have failed to explain the source of the cash found during the course of survey, which was offered as an 7

A One Enclave ITA No.828/Ind/2018 additional income, and, therefore in the absence of the nature of source of cash being proved it was held not to be assessable as income from business. We may also refer to a judgement of the Hon'ble Karnataka High Court in the case of CIT vs. S. K. Srigiri and Bros. (2008) 298 11R 13 (Kar), which has been rendered in the context of section 40(b )(iii) of the Act. In the case before the Hon'ble Karnataka High Court, the Tribunal had come to a factual finding that the additional income declared in the course of survey was from business and' therefore the remuneration paid to the partners was held liable to be deducted.”..

Hon'ble Supreme Court has laid down a principle that "if two reasonable constructions of a taxing provisions are possible, that construction which favours the assessee: must be adopted". This principle has been consistently followed by. the various authorities as also by the Hon'ble Supreme Court itself. In another Supreme Court judgment, Petron Engg. Construction (P) Ltd. & Anr. vs.CBDT & Ors, (1988) 75 CTR (SC) 20 (1989) 175 ITR 52~(SC)

The provision of taxing income of the nature referred to in the specified Sections at the normal rate / applicable rate of income-tax applicable on total income of the assessee has been changed w.e.f. 1.4.2013 by the Finance Act, 2(H2 as a result of introduction of section 115BBE dealing with a special rate of tax applicable to Income of the nature referred to in sections 68, 69, 69A, 69B, 69C & 69D.

It is also provided that no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of the Act in computing . deemed income under the said sections. This amendment will take effect from lst April, 2013 and will, accordingly, apply in relation to the assessment year 2013 -14 and .subsequent assessment years."

The section has since its introduction by the FA, 2012 w.e.f. AY, 2013-14 8

A One Enclave ITA No.828/Ind/2018 been amended twice - once vide ~A, 2016 w.e.f. 1.4.17 when sub-section (2) was amended to prohibit setting off of any loss against income of the nature referred .to in specified sections and second time by the Taxation Laws (Second Amendment) Act, 2016 w.ef 1.4.2017;

The provision of section 115BBE reproduced' as under.-

From AY 2013-14 up to AY 2016- AY 2017-18 onwards 17 115BBE. (1) Where the total 115BBE. (1) Where the total income of income of an assessee includes an assessee,- any income referred to in section (a) includes any income referred to 68, section 69, section 69A, in section 68, section 69, section 69B, section 69C or section 69A, section 69B, section 69D, the income tax section 69C or section 69D and payable shall be the aggregate of reflected in the return of income (a) The amount of income tax furnished under section 193; or calculated on income (b) determined by the Assessing referred to in section 68, Officer includes any income section 69, section 69A, referred to in section 68, section section 69B, section 69C or 69, section 69A, section 69B, Section 69D at the rate of section 69C or Section 69D, if thirty percent; and such income is not covered (b) the amount of income tax under clause a), the income tax with which the assessee payable shall be the aggregate would have been of – chargeable and his total (i) the amount of income-tax income been reduced by the calculated on the income amount of income referred to referred to in clause(a) and in clause(a)

A One Enclave ITA No.828/Ind/2018 clause (b), at the rate of sixty per cent; and (ii) the amount of income tax with which the assessee would have been chargeable and his total income been reduced by the amount of income referred to in clause(i) (2) Notwithstanding anything (2) ) Notwithstanding anything contained in this Act, no deduction contained in this Act, no deduction in in respect of any expenditure or respect of any expenditure or allowance shall be allowed to the allowance 46a (or set off of any loss) assessee under any provision of shall be allowed to the assessee this Act in computing his income under any provision of this Act in referred to in clause (a) f sub- computing his income referred to in section (1). clause (a) of sub-section (1).

The sub-section (2) provides that notwithstanding anything contained in the Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provisions of the Act in computing his income referred to in clause (a) of sub-section(1). With effect from AY 2017-18, sub-section (2) prohibits setting off any loss against income of the nature referred to in specified sections. In this way, in respect of the income covered by clause(a) of sub- section (1) of the above section, basic exemption, deductions and set-off of losses are also not allowable.

All these provisions will take effect from 1st April, 2013 and will, accordingly, apply in relation to the assessment year

A One Enclave ITA No.828/Ind/2018 2013-14 and subsequent assessment years. It may further be observed that while calculating “Gross total income”, an assessee may, up to AY 2017-18, set-off current year’s losses under section 71 with income of the nature referred to in specified sections. However, w.e.f. AY 2017-18, sub-section (2) of section 115BBE prohibits set off of any loss against the income of the nature referred to in specified sections. The investment is made in the property which is used for the purpose of business. The income arising from the said business has been shown as a business income. Against this business income depreciation for the assets used for the purpose of business is an allowable expenditure. The depreciation has been claimed on the enhanced value of the assets which is an allowable expenses under the business income. This will increase the loss from business which is an allowable deduction under the head business income. This business loss can be set off against the income from other sources under section 71 of the Income tax act.

The appellant is not having other source of income and the excess income declared during the course of survey is nothing but income arising from business of the appellant firm. There is no income then there could have not been investment and as the appellant firm has no other source of income, its additional investment could have been taken only out of business income of the appellant firm. This view has also been upheld by the Hon’ble ITAT, Indore Bench, Indore in the case of M/s Shahnai V/s ITO 1(1), Ujjain, vide ITA No.658/Ind/2014, dated 15.05.2015. The relevant portion of the Hon’ble ITAT’s order is reproduced as under;-

A One Enclave ITA No.828/Ind/2018 “I have heard both the side. The amount of Rs.4 lacs disclosed during the course of survey was on the basis of excess stock found and loose papers relating to business found during survey operation. Thus, both these aspects on the basis of which disclosure was made were relating to the business of the assessee. Whatever income was declared was related to the business of the assessee and it was assessee’s business income. The assessee shall be entitled to pay remuneration to its partners as per clauses of partnership deed. Therefore, we allow this ground of appeal of the assessee”.

In view of above, the claim of deduction on account of :-

Total Rs.91,75,248/-

is an allowable expenditure.

Therefore, the addition made by the AO amounting to Rs.33,25,887/- is confirmed. The appellant will get the relief of Rs.91,75,248/-. Therefore the appeal on these grounds is partly Allowed.

A One Enclave ITA No.828/Ind/2018 11. We further find that the similar issue was dealt by the

Coordinate Bench, Jaipur in the case of M/s. Sanjay Bairathi Gems

Ltd, Jaipur vide ITA No.157/JP/17(supra) wherein also the

Tribunal after considering the various judgments of Hon’ble courts

held that the assessee is eligible for set off of business loss against

the income brought to tax u/s 69B r.w.s 115 BBE of the Act. The

relevant portion of the judgment is reproduced below;

“6. Per contra, the ld AR drawn our reference to the decision of the Coordinate Bench in case of Satish Kumar Goyal vs JCIT (2016) 70 taxmann.com 382 (Agra) wherein it was held that business losses of the assessee could be set off under section 71 against the income assessable under section 68 under the head "income from other sources" taking into consideration the conflicting decisions of various High Courts on the subject and also the amendment made by the Finance Act 2012 to section 115BBE is prospective in nature. He also drawn our reference to the decision of Hon'ble Gujarat High Court in case of CIT vs Shilpa Dyeing & Printing Mills (P) ltd (2013) 219 TAXMANN 279 (Gujarat) for the proposition that section 71 permits assessee to set off loss other than of capital gains against income from other head. It was further submitted that in the said decision, the Gujarat High Court has taken into consideration its earlier decisions rendered in case of Fakir Mohmed HajiHasan vs CIT (247 ITR 290), the decision of DCIT vs Radhe Developers India Ltd (329 ITR 1) and decision of Madras High Court in case of CIT vs Chensing Ventures (291 ITR 258). It was further submitted that the Hon'ble Punjab & Haryana High Court in case of Kim Pharma (P) ltd (258 CTR 454) has in fact relied on the decision of Gujarat High Court in case of Fakir Mohmed HajiHasan 13

A One Enclave ITA No.828/Ind/2018 (supra) which has subsequently been explained in subsequent decision of Radhe Developers India Ltd (supra).

A One Enclave ITA No.828/Ind/2018 be allowed to the assessee under any provision of this Act in computing his income as referred to clause (a) of subsection (1) of the Act. If we were to accept the contentions of the ld CIT(DR), the question that arises is would that interpretation render sub-section (2) otiose and what was the necessity for bringing in the subject amendment. The intent of the legislature has been provided in the memorandum explaining the said amendment which reads as under:

"Currently, there is uncertainty on the issue of set-off of losses against income referred in section 115BBE of the Act. The matter has been carried to judicial forums and courts in some cases has taken a view that losses shall not be allowed to be set-off against income referred to in section 115BBE. However, the current language of section 115BBE of the Act does not convey the desired intention and as a result the matter is litigated. In order to avoid unnecessary litigation, it is proposed to amend the provisions of the sub- section (2) of section 115BBE to expressly provide that no set off of any loss shall be allowable in respect of income under the sections 68 or section 69 or section 69A or section 69B or section 69C or section 69D."

A One Enclave ITA No.828/Ind/2018 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.

A One Enclave ITA No.828/Ind/2018 would therefore to relevant to refer to the facts and the legal proposition laid down by the Hon'ble Gujarat High Court decision in case of Shilpa Dyeing & Printing Mills (P) ltd.

Facts of the case Brief facts are that, the respondent-assessee is a company engaged in the business of dying and printing. During the course of scrutiny for the assessment year 2008-09, the Assessing Officer noticed that in a survey action conducted at the business premises of the assessee, it had declared a sum of Rs. 100.98 lacs (rounded off) on account of excess stock. In the return, the assessee had suggested current year's loss against such income. Assessing Officer holding a belief that income from unlisted source would not fall under any of the heads of the income, the same has to be taxed separately, the current losses cannot be set off against such income.

Findings and legal proposition "8. We, however, find that Section 71 of the Act permits an assessee to set off loss other than that of capital gains against income from other head. This very issue came-up for consideration before the Madras High Court in case of Chensing Ventures (supra). The Division Bench of the Court considered the issue in following manner:

"6. Heard counsel. The Assessing Officer has not given any reason whatsoever to deny the set off of the business loss against the income declared under the head & "other sources". Section 71 deals with set off of loss against income under any other head. After setting off losses against the income under the same head, if the net result is still a loss, the assessee can set off the said loss under Section 71 of the Act against income of the same year under any other head, except for losses which arise under the head "capital gains". The income tax is only one tax and levied on the sum total of the income classified and chargeable under the various heads. Section 14 has classified the different heads of income and 17

A One Enclave ITA No.828/Ind/2018 income under each head is separately computed. Income which is computed in accordance with law is one income and it is not a collection of distinct tax levied separately on each head of income and it is not an aggregate of various taxes computed with reference to each of the different sources separately. There is only one assessment and the same is made after the total income has been ascertained. The assessee is subject to income-tax on his total income though his income under each head may be well below the taxable limit. Hence the loss sustained in any year under any heads of income will have to be set off against income under any other head. In this case, the Assessing Officer made addition of Rs.28,50,000/- as undisclosed income under Section 69 of the Act. Once the loss is determined, the same should be set off against the income determined under any other head of income. In the assessment, no reasons were given by the Assessing Officer to deny the benefit of Section 71 of the Act. The benefit provided under Section 71 of the Act cannot be denied and the learned Standing Counsel appearing for the Revenue is also unable to explain or give reasons why the assessee is not entitled to the benefit of Section 71 of the Act. The reasons given by the Tribunal are based on valid materials and evidence and the same is in accordance with the provisions of Section 71of the Act. We find no error or legal infirmity in the impugned order."

"The decisions of this Court in the case of Fakir Mohmed Haji Hasan (supra) and Krishna Textiles (supra) are neither relevant nor germane to the issue considering the fact that in none of the

A One Enclave ITA No.828/Ind/2018 decisions the Legislative Scheme emanating from conjoint reading of provisions of sections 14 & 56 of the Act have been considered. The Apex Court in the case of D.P. Sandu Bros.Chembur P. Ltd.,(supra) has dealt with this very issue while deciding the treatment to be given to a transaction of surrender of tenancy right. The earlier decisions of the Apex Court commencing from case of United Commercial Bank Ltd. v. CIT [1957] 32 ITR 688 (SC) have been considered by the Apex Court and, hence, it is not necessary to repeat the same. Suffice it to state that the Act does not envisage taxing any income under any head not specified in section 14 of the Act. In the circumstances, there is no question of trying to read any conflict in the two judgments of this Court as submitted by the learned Counsel for the Revenue."

"8. We have learned advocates for the respective parties. Perused the orders of the CIT (Appeals) as well as the ITAT. It is an undisputed fact that during scrutiny, the assessee himself has disclosed the fact that in his books of account, he had shown less 19

A One Enclave ITA No.828/Ind/2018 stock to the tune of Rs.10,06,987/-. It is also an admitted fact that when the physical stock was examined by the authority, the value of the said stock was Rs. 13,33,485/-, however, as per the books of account, the value of stock was to the tune of Rs.3,26,498/- i.e. amount to the tune of Rs.10,06,987/- was not recorded in the books of account. However, it is admitted by the assessee himself that he has not completely disclosed the stock in the books of account. Now, considering the proviso of Section 69(B) of the act, we are of the opinion that the assessee had not fully disclosed the stocks in the books of account and therefore, the Assessing Officer as well as the CIT (Appeals) have rightly observed that the case of the assessee would fall under the proviso of Section 69(b) of the act.

We are also of the opinion that the submissions made by the learned advocate is that the case would fall under the proviso of Section 69(c) of the act does not apply to the facts of the present case. It is not the case of the revenue that there is an unexplained expenditure, which would cover under the proviso of this Act and therefore, the assessee would not be entitled for the set off under the proviso of Section 71 of the act. As far as applicability of the case of Shilpa Dyeing & Printing Mills (P.) Ltd. (Supra) is concerned, the same would be applicable since the Court had held that the amount of excess stock would fall under the definition of income as per Section 14 of the Act and therefore, the assessee would be entitled for the set off under proviso of section 71 of the act. As far as the case of Attar Singh Gurmukh Singh (Supra) is concerned, the same would not be applicable in the present facts and circumstances of the case since it is not the case that there was unexplained expenditure made by the assessee.

A One Enclave ITA No.828/Ind/2018 setting aside the order dated 28.02.2005 passed by the Income Tax Appellate Tribunal (the ITAT) and order dated 07.07.2014 passed by the Commissioner of Income Tax (Appeals) Ahmedabad [the CIT (Appeals)]."

In the result, in the appeal of Revenue is dismissed”.

Bench, Jaipur we find that the issue before us is squarely covered

by this decision. Ld. Departmental Representative failed to place

any other material or judgment favouring the revenue in order to

controvert the finding of Ld. CIT(A). At any stage revenue has not

disputed the fact that the alleged amount surrendered during the

survey was unaccounted business income of the assessee and not

from any other sources. Section 115BBE of the Act was inserted by

Finance Act, 2012 w.e.f. 1.4.2013 which restricts the claim of

deduction in respect of any expenditure or allowance or set off of

any loss against the income shown by the assessee or assessed u/s

68, 69, 69A,69B, 69C & 69D of the Act. The instant appeal relates

A One Enclave ITA No.828/Ind/2018 to Assessment Year 2012-13 and therefore the assessee’s case will

not be hit by provisions of Section 115BBE(2) of the Act. We

therefore find no inconsistency in the finding of Ld. CIT(A) and the

same requires no interference.

The order pronounced in the open Court on 26.07.2019.

Sd/- Sd/-

( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER �दनांक /Dated : 26 July, 2019 /Dev

Copy to: The Appellant/Respondent/CIT concerned/CIT(A) concerned/ DR, ITAT, Indore/Guard file.

By order Assistant Registrar, ITAT, Indore