GOPAL JADWANI,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(4), BENGALURU

The relevant facts are that the assessee is an individual and claimed to be engaged in business of money lending and finance. The assessee was subject to search under section 132 of the Act. During the search various documents of incriminating nature found were suggesting that the assessee has advanced loan in cash and collected interest income from impugned loan in cash. The cash transactions are not accounted in the books of account. The assessee during the search proceeding admitted the unaccounted income. In the return of income, filed for the year under dispute, under section 153A of the Act, he has offered additional income from cash transaction to the tune of ₹ 1,84, 60,000/- and treated the same as normal income by paying taxes at the rate of 30% (regular slab rates). During the assessment proceedings, the assessee in support of treatment of the impugned income, submitted that the unaccounted cash was found during the search from the residence and the bank locker which was declared as extra income from business. Therefore, the same cannot be made subject to the addition under section 69 of the Act.

However, the AO disagreed with the submission of the assessee on the reasoning that the loan and advances extended by the assessee represents investment made by the assessee which were not recorded in the books of accounts and similarly, the source of which was not provided by the assessee. Therefore, the income declared by the assessee for ₹ 1,84,60,000 was treated as income from other sources Page 3 of 9

The aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the view of the AO by observing as under: 8.3 For the assessment year under consideration, the appellant had returned an income of ₹1,84,60,000/- which was brought to tax under Section 69 of the Act read with Section 115BBE of the Act. The appellant both during the assessment and appellate proceedings submitted that the unaccounted cash found during the course of search has been already included in the additional income under the head Income from other sources. Taxes were also paid on the additional income at regular slab rates. The appellant submitted that his only source of income is from money lending business and the additional income declared was out of the money lending business and hence the provisions of Section 115BBE are not applicable to him. 8.5 However, the AO treated the same as unexplained investment under Section 69 as no details were provided by the appellant with regards to the source. It is observed that the appellant had declared ₹7.2 crores towards unaccounted cash advances which were yet to be recovered. In the return of income this amount of ₹1,84,60,000/- was offered as income from other sources. Section 69 is reproduced as under: 69.Unexplained investments.

On the other hand, the learned DR vehemently supported the order of the authorities below.

We have heard the rival contentions of both the parties and perused the materials available on record. The sole dispute in this appeal is whether the additional income of ₹1,84,60,000/- declared by the assessee in pursuant to search should be assessed as “business income” arising from money lending activities, as contended by the assessee, or as “unexplained investment” taxable under section 69 read with section 115BBE of the Act, as held by the AO and confirmed by the learned CIT(A).

1 It is an undisputed fact that the assessee has been engaged in the business of money lending for several years. During the course of search, documents revealed that the assessee had advanced loans in Page 5 of 9

2 However, the AO rejected this claim by holding that the loans and advances represents unexplained investments which were not recorded in the books and, as no satisfactory source was explained, brought them to tax under section 69 read with section 115BBE of the Act. The learned CIT(A) confirmed this view.

3 We find merit in the contention of the assessee that the unaccounted activity was part of his regular line of business i.e., money lending. The seized documents themselves show that the transactions pertain to systematic money lending activity. The department has not produced any material establishing that the impugned income emanated from sources outside the assessee’s business. Once it is established that the assessee was engaged in money lending and the unaccounted transactions were also in the same line, the income should be assessed as “business income” and not under the deeming provisions of section 69 of the Act. The fact that the transactions were not recorded in the books does not by itself justify invoking the provisions of section 69 when the character of the income as business income is clearly identifiable. In holding so, we also draw support and guidance from the decision of the coordinate bench of this Tribunal in the case of Raghav Diagnostic & Research Centre Pvt Ltd vs. CIT in ITA No. 423/Bang/2022 Page 6 of 9

From the plain reading of the section, it is clear that when an assessee offers no explanation or the explanation offered is not satisfactory in the opinion of the AO, then the amount of such expenditure is to be taxed as income u/s. 69C of the Act. The satisfaction to be recorded by the AO should not be objective satisfaction exercised at his discretion, but a subjective satisfaction based on the facts of the case. It would then mean that justification for exercise of the power has to be found by the authority by making a subjective satisfaction on the basis of objective material and such satisfaction must be reflected in the reasons recorded in writing while exercising the power. (Vide: Dee Vee Projects Ltd. v/s. Union of India & Ors., Writ Petition No.2693/2021, dated 11.02.2022 (Bombay High Court)). In the present case, the assessee is in the business of running a diagnostic centre and the only source of income is the receipts from patients which is stated to be the source for unexplained expenditure. That being the case the AO has not brought any contrary material on record to state that the source for the expenditure was other than from business income and has formed the opinion based on conjectures and surmises. While exercising the quasi-judicial functions, the administrative authorities have to reach satisfaction on the basis of material available and not on conjectures and surmises. The test of reasonableness has to be satisfied which in our view failed in the case under consideration. Therefore, we are of the view that the additional income offered cannot be taxed u/s. 115BBE and the impugned addition is hereby deleted. Accordingly the assessee is allowed to set off the current year loss against the additional income offered to tax as business income.

4 We also draw support and guidance from the decision of Ahmedabad Bench of ITAT in the case of Chokshi Hiralal Maganlal vs. DCIT bearing ITA No. 486/Ahd/2008 reported in 9 taxmann.com 300/ 45 SOT 349. The relevant finding of the bench in the said case is extracted as under: 9. Since in the present case excess stock found during the survey is not separately and clearly identifiable but is part of mixed lots of stock found at the premises which included declared stock as per books and also the excess stock as computed by the survey officers, the provisions of section 69B cannot be made applicable as primary condition for invoking the provisions of sections 69A, 69B is that the asset should be separately identifiable and it should have independent physical existence of its own. Since excess stock is a result of suppression of profit from business other the years and has not been kept identifiable separately but is the part of overall physical stock found, the investment in the excess stock has to be treated as business income as per Page 7 of 9

5 Without prejudice to the above, we also examined the query raised during the hearing regarding the initial cash fund deployed in the unaccounted money lending business. The learned AR explained that the assessee has been in the money lending business for several years and such unaccounted transactions were also carried on in earlier years. He further submitted that in the financial year 2016-17, corresponding to AY 2017-18, the assessee had declared an income of Rs. 19 crores under the IDS, 2016 Scheme. At that point of time its opening balance stood as on 1-04-2016 at Rs. 3,40,94,338.68.00. The ld. AR on the direction of the Bench has also filed necessary forms relating to IDS-2016 along financials/ capital account which are available on record for the year ending 31-03-2017. Therefore, it was argued that the initial fund deployed for advancing loans must be presumed to have come from such earlier undisclosed income already subjected to tax under IDS- 2016. 9.6 We find force in this argument of the ld. AR, particularly in the absence of any documents brought by the Revenue on record suggesting there was income of the assessee from some unexplained sources. Once the assessee has admitted undisclosed income in earlier years under IDS-2016 Scheme, the presumption is that the funds available from such taxed income would have formed the basis of the initial capital in the unaccounted business. Page 8 of 9

8 Accordingly, in view of the above detailed discussion we hold that the additional income of ₹1,84,60,000/- offered by the assessee is liable to be assessed as business income from money lending which is to taxed. Hence, the orders of the lower authorities invoking section 69 read with section 115BBE of the Act are unsustainable and are hereby set aside. Hence, the ground of appeal raised by the assessee is hereby allowed.

In the result, the appeal of the assessee is hereby allowed.

The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file