CENTRAL CIRCLE-1, JAIPUR vs. LATE SHRI SATISH KUMAR AGARWAL, L/H SMT. SANTOSH AGARWAL, JAIPUR

PER VIJAY PAL RAO, JM :

This appeal by the revenue is directed against the order dated 31ST May, 2017

of ld. CIT (A)-4, Jaipur for the assessment year 2013-14. The revenue has raised

the following grounds :-

“ 1. Whether on the facts and in the circumstances of the case the CIT (A) was right in deleting the addition under the head “Income from house property” of Rs. 31,780/-.

2 ITA No. 643/JP/2017 Late Shri Satish Kumar Agarwal, Jaipur.

value of excess stock as on date of search by Rs. 2,32,09,339/- in view of the prescribed cost formulas as per AS-2 mandated by section 145(2) to be followed by the assessee.

Ground No. 1 is regarding the addition made by the AO under the

head Income from House property was deleted by ld. CIT (A).

which was engaged in the business of trading and manufacturing of gems and

jewellery items mainly on wholesale basis. During the course of assessment

proceedings, the AO noted that the assessee has declared the annual rent of Rs.

65,000/- in respect of property no. 462, Ekta Block, Mahaveer Nagar, Jaipur whereas

for the preceding year the assessee has declared the annual rent of the same

property at Rs. 1,10,400/-. Accordingly, the AO made an addition by considering

ALV of the property at Rs. 1,10,400/- which was declared by the assessee in the

preceding year and consequently made a net addition of Rs. 31,780/- after allowing

the deduction under section 24(a ) 24(b) of the Act. On appeal, the ld. CIT (A) has

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deleted the addition on the ground that part of the property was used by the

assessee for his own residential purposes and, therefore, the actual rent declared by

the assessee has to be considered as ALV of the property.

fact that the assessee had let out part of his house in question and declared the ALV

of Rs. 65,000/- as against the rental income from the same house of Rs. 1,10,400/-

declared during the preceding year. Thus the ld. D/R has submitted that when the

same let out portion part of the house of the assessee was declared at Rs.

1,10,400/- then the difference of Rs. 45,400/- was rightly taken as an addition in the

ALV of the property.

3.1. On the other hand, the ld. A/R of the assessee has submitted that the AO has

not considered the fact that the part of the house was self-occupied by the assessee

only during the year under consideration and not in the earlier year and, therefore,

the ALV declared by the assessee is proper for the portion which was let out. He

has supported the order of the ld. CIT (A).

record. The AO has made the addition in the ALV of the property in question on the

ground that in the immediately preceding year the assessee has declared the rental

income of Rs. 1,10,400/- as against the annual rental income of Rs. 65,000/- during

the year under consideration. The AO has not disputed that one portion of the said

house is being used by the assessee for his residential purposes. The ld. CIT (A)

after considering these facts as decided this issue in para 3.1.2 as under :-

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“ 3.1.2. I have duly considered assessee’s submission and also taken a note of assessment order passed u/s 143(3) r.w.s. 153B(1)(b) of the Act. I have also taken a note of factual matrix of the case as well as applicable case laws as relied upon by the assessee. It is submitted that during the period under appeal, assessee had let out a portion of his home located at 462, Ekta Block, Mahaveer Nagar, Jaipur; for an annual rent of Rs. 65,000/- while the other portion of the house was occupied by the assessee for his residential purpose. Accordingly, assessee had allocated the interest paid on housing loan towards SOP and rented property. However, AO took the ALV for the let out portion at Rs. 1,10,400/- and accordingly enhanced the rental income by Rs. 45,400/- in the ALV for the year which is based as per ALV of the last year. After allowing statutory deduction @ 30%, AO has made the addition of Rs. 31,780/- (Rs. 45,400 – 13,620) to the house property income. As per provision of sub-sec (2)& (4) of section 23 the Act, Assessee is entitled for one house to be kept as ‘SOP’, on which no notional rent can be taken into a/c for computation of House Property Income. In view of this facts, addition of Rs. 31,780/- is hereby deleted. Assessee’s Gr. No. 1 to 1.1 stands allowed.”

Thus the ld. CIT (A) has given the finding that the ALV of the last year was

determined for the entire house whereas the assessee has occupied part of the

house for his residential purposes during the year under consideration and,

therefore, the ALV for the last year for entire house cannot be adopted as ALV of the

part portion of the house let out by the assessee. Hence we do not find any error or

illegality in the order of the ld. CIT (A).

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Ground No. 2 is regarding the disallowance under section 14A of the

Act.

shares which is exempt under section 10(38) of the Act. The AO noted that the

assessee has incurred an expenditure of Rs. 14,44,298/- and accordingly the AO

made a disallowance of Rs. 73,332/- under section 14A read with rule 8D of the Act.

The assessee challenged the action of the AO before the ld. CIT (A). The ld. CIT (A)

restricted the disallowance to the amount of dividend income of Rs. 31,034/- under

section 14A of the Act.

considered the relevant material on record. The ld. D/R has contended that the

restriction of the disallowance to the amount of exempt income can be considered

only in respect of indirect administrative expenditure and not in respect of the

interest expenditure incurred by the assessee for making investment in the shares.

The ld. D/R has further submitted that the interest expenditure is incurred the

moment investment is made and does not depend on the earning of exempt income

on such investment. Only the indirect administrative expenditure being 0.5% of the

average investment can be restricted to the amount of dividend income as it is

considered to be incurred for earning the dividend income. He has relied upon the

order of the A.O.

6.1. On the other hand, the ld. A/R of the assessee has submitted that the Hon’ble

Delhi High Court in the case of Joint Investment Pvt. Ltd. vs. CIT as well as in the

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case of Cheminvest vs. CIT, 378 ITR 33 (Delhi) has held that disallowance under

section 14A cannot exceed the amount of exempt income and further if there is no

exempt income, no disallowance could be made under section 14A of the Act. He

has supported the order of the ld. CIT (A).

record, we note that the ld. CIT (A) while deciding this issue has followed the

decision of Hon’ble Delhi High Court in para 3.2.2 as under :-

“ 3.2.2. I have duly considered assessee’s submission and carefully perused the assessment order. In the year under appeal, AO has invoked the provision of sec. 14A read with Rule 8D and made the addition of Rs. 73,332/-. It is submitted that during the FY relevant to AY 2013-14, assessee had claimed interest expenditure of Rs. 14,44,298/- on unsecured loan and also received dividend of Rs. 31,034/-. In this regard, AO has observed that assessee had invested fund in shares from where exempt income arises and has incurred interest expenses on loans and advances. AO has also observed that there is direct nexus between loan amounts and investments in shares. In view of these facts, AO invoked the provisions of sec. 14A read with Rule 8D and disallowed Rs. 73,332/-. Assessee submits that interest expenditure is incurred for the business purpose where provisions of sec. 14A will not apply. However, relying on the decision of Hon’ble ITAT Delhi in case of DCM Ltd (supra), assessee has made alternative plea to sustain total disallowance upto Rs. 31,034/- i.e. to be restricted to exempt income earned of Rs. 31,034/- only.

I have carefully gone through the assessment order. On perusal, it is seen that the AO has neither recorded his satisfaction for invoking the provision of sec. 14A of the Act nor given proper reason as to how

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the claim of expenditure in relation to exempt income has not been correctly made by the assessee as envisaged by the provision of sec. 14A(2) of the Act. Therefore, AO has mechanically invoked Rule 8D whereas section 14A(2) of the Act provides the manner in which the AO is to determine the amount of expenditure incurred in relation to income, which does not part of the total income. Further, AO has also not established any nexus between the investments made and the expenditure incurred under the head interest expenditure and administrative expenses. It is pertinent to mention here that the Hon’ble Delhi High Court the case of M/s. Joint Investment Pvt. Ltd. (ITA 117/2015) has held that disallowance u/s 14A of the Act cannot exceed the exempt income; accordingly, in this case disallowance has to be restricted to Rs. 31,034/-. Assessee gets part relief of Rs. 42,298/- (73,332 – 31,034).

Assessee’s appeal in Gr No. 2 & 2.1 is partly allowed to the extend mentioned above.”

Though we find merits in the contention of the ld. D/R that the quantum of exempt

income is relevant only for the indirect expenditure apportioned for earning the

exempt income and not the interest expenditure which has been incurred for making

the investment in the shares and security yielding exempt income. However, since

the ld. CIT (A) has followed the decisions of Hon’ble Delhi High Court and no

contrary precedent has been brought to our notice, we do not find any reason to

interfere with the impugned order of ld. CIT (A) qua this issue.

Ground nos. 3 to 5 are regarding the addition made by the AO based

on the value of excess stock found during search and survey operation

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which was deleted by the ld. CIT (A) by accepting the less valuation of excess stock as on 31st March, 2013.

surrendered income on account of excess stock of Rs. 16,11,07,328/-. However, in

the return of income the assessee has offered the income on account of excess

stock by taking the value at Rs. 12,11,17,822/- and took a plea that the prevailing price of gold has fallen as on 31st March, 2013. Since there was a search and

seizure action under section132 of the Act in case of assessee group, therefore, the

AO has framed the assessment under section 143(3) read with section 153B(1)(b) of

the Act. The assessee filed its return of income declaring total income of Rs.

9,43,99,690/-. However, the AO has framed the assessment at the total income of

Rs. 12,09,86,280/- by making the additions as under :-

Return Income Rs. 9,43,99,690/-

Add: Addition of Income from House property Rs. 31,780/- as discussed in para no. 6 Add : Disallowance u/s 14A as discussed in para Rs. 73,332/- no. 7 Add : Disallowance u/s 80G as discussed in para Rs. 2,685/- no. 8 Add : Addition of unexplained Cash found Rs. 32,69,455/- during search as discussed in para no. 9. Add : Addition of on account of excess stock Rs. 2,32,09,339/- found as discussed in para no. 10. Assessed Total Income Rs. 12,09,86,281/-

R/O Rs. 12,09,86,280/-

The dispute in ground nos. 3 to 5 of the revenue’s appeal is regarding the addition

made under section 69 read with section 115BBE on account of excess stock of Rs.

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12,11,17,822/-. The ld. CIT (A) deleted the said addition made by the AO by accepting the claim of the assessee that the price of gold as on 31st March, 2013

was much less than the price at the time of valuation done during survey.

recorded under section 133A but a statement under section 131 of the IT Act was recorded subsequently on 1st March, 2013 wherein the assessee has affirmed the

excess stock found during the survey and value of the said stock as taken at the

time of survey. Therefore, there was no whisper about the reduction of market

price of gold during the intervening period from January to March when the

statement of the assessee was recorded under section 131 of the Act. Further, the

excess stock found during the survey and search was not in dispute so far as the

quantity of the gold was found at the premises of the assessee. The valuation as on

the date of survey was also not in dispute. However, the assessee has claimed the reduction of market price of gold as on 31st March, 2013 and, therefore, valued the

excess stock at Rs. 12,11,17,822/- without bringing on record any material to show that the same stock which was found at the time of survey remained unsold till 31st

March, 2013. Thus the ld. D/R has contended that the ld. CIT (A) without examining

the relevant material has accepted the contention of the assessee and further

without taking into consideration the provisions of section 115BBE of the Act. He

has relied upon the order of the A.O.

9.1. On the other hand, the ld. A/R of the assessee has submitted that sub-section

(2) of section 115BBE has been amended with effect from 1.4.2017 and, therefore,

the said amended proviso to section 115BBE is not applicable for the assessment

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year under consideration. He has further contended that the assessee has duly

honoured the surrender during the course of survey. However, due to the prevailing price of gold fallen down as on 31st March, 2013 to Rs. 2215/- per gram as against

the price which was taken at the time of valuation of the stock during the course of

survey at Rs. 2336.53 per gram, the assessee has valued the stock by considering the prevailing price as on 31st March, 2013. The AO has not disputed the prevailing price as on 31st March, 2013 and, therefore, the addition made by the AO by

considering the price of gold as on the date of survey is not justified. He has further

contended that as soon as the excess stock was introduced in the books of accounts

it becomes part of the regular stock-in-trade and, therefore, the valuation of that stock as on 31st March, 2013 has to be taken at the prevailing price which was done

by the assessee. The provisions of section 115BBE(2) are applicable only for the

assessment year 2017-18 and not for the year under consideration. Hence the

reliance placed by the AO on sub-section (2) of section 115BBE is misconceived. In

support of his contention he has relied upon the following decisions :-

ACIT vs. Sanjay Bairathi Gems Ltd. In ITA No. 157/JP/2017 ( Jaipur Trib.)

M/s. Pitamber Commodity Futures Pvt. Ltd. vs. ACIT In ITA No. 863/JP/2017 (Jaipur Trib.)

CIT vs. Shilpa Dyeing & Printing Mills (P) Ltd. 219 Taxman 279 (Guj. HC)

record. As far as the excess stock found during the survey, the assessee has not

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disputed the quantity of excess stock and the only dispute is regarding the amount

surrendered on account of excess stock during the survey as well as in the statement recorded under section 131 of the Act in post survey enquiry on 1st

March, 2013 which was not offered to tax in the return of income filed by the

assessee. The AO found that the assessee has claimed deduction of Rs.

2,32,09,339/- from undisclosed investment in stock of Rs. 12,11,17,822/-. The

assessee has explained the claim of deduction and reduction in the amount of

undisclosed investment in the stock due to the reduction of the prevailing price of gold as on 31st March, 2013 in comparison to the prevailing price of gold as on 23rd

January, 2013 when the valuation of excess stock was done at the time of survey.

The AO has placed reliance on the provisions of section 115BBE and consequently

taxed the entire amount of unexplained investment @ 30%. However, the assessee

disputed the application of said provision on the ground that the provisions of

section 115BBE was introduced by Finance Bill 2016 with effect from 1.4.2017 and,

therefore, the said provisions and amendment will take effect from 1.4.2017 and not

prior to that. In support of his contention, the assessee has relied upon the

decisions of this Tribunal as well as the decision of Hon’ble Gujarat High Court. We

note that this Tribunal in the case of ACIT vs. Sanjay Bairathi Gems Limited (supra)

as well as in case of M/s. Pitamber Commodity Futures Pvt. Ltd. (supra) has taken a

view that the amended provisions of section 155BBE are not applicable prior to the

assessment year 2017-18. In case of M/s. Pitamber Commodity Futures Pvt. Ltd. vs.

ACIT (supra), the Tribunal has held in para 6 to 8 as under :-

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“6. We have heard the rival contentions and purused the material available on record. It is not in dispute that the amount of Rs 36,00,000 of undisclosed investment which has been surrendered during the course of search has been offered to tax subsequently while filing the return of income. It is also not disputed that the assessee has incurred business loss of Rs 767,768 during the year under consideration. Only limited dispute relates to whether the amount so surrendered during the course of search can be set off against business loss for the year under consideration. In case of ACIT CC-2 Vs. Sanjay Bairathi Gems Ltd (supra), speaking through one of us, we had an occasion to examine a similar issue and therein, we have also referred to the various authorities which have been relied upon by the AO and the ld CIT(A) in the instant case. It would therefore be relevant to refer to the findings in the said decision which are reproduced herein:

“7. We have heard the rival contentions and perused the material available on record, the factual matrix and various decisions relied upon by both the parties. The Assessing officer has brought to tax, undisclosed investment in excess stock of stones, gold & jewellery found and surrendered during the course of search proceedings which has not been recorded in the books of accounts of the assessee, under the provisions of section 69B read with section 115BBE of the Act. Further, the Assessing officer has not allowed the set off of business loss of Rs 86,96,733 against the said income of Rs 2,31,41,217 which has been brought to tax under section 69B read with section 115BBE of the Act. The Assessing officer has however allowed the carry forward of said business loss to be set off in the subsequent assessment years. The fact that the business loss has been incurred during the year is thus not in dispute. The limited dispute relates to set off of said business loss against the income which has been brought to tax under section 69B read with section 115BBE of the Act.

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computation of total income and therefore, the amendment brought in by the Finance Act 2016 would not affect the computation of total income. It was accordingly contended that the business losses in the instant case cannot therefore be allowed set off against the amount brought to tax under section 69B in terms of undisclosed investment in stock of stones, gold and jewellery.

“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.”

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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.

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

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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 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

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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 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

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shown less 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.

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“ 3.5 We have heard the rival contentions and perused the materials available on record including the Circular No. 3/2017 dated 20th Jan. 2017 issued by the CBDT, Ministry of Finance, New Delhi. It is not imperative to repeat the facts of the case as it is found that the issue in question is covered by the Circular No. 3/2017 dated 20-01-2017 issued by the CBDT, Ministry of Finance, New Delhi relating to the issue of section 115BBE of the Act and this section is operative from the assessment year 2017-18 and not related to the issue prior to it. Hence, the application of Section 115BBE of the Act applied by the AO on the assessee is not applicable in the present facts and circumstances of the case. In view of the above deliberations, the Ground No. 2 of the Revenue is dismissed.”

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Therefore, so far as the applicability of amended provisions of section 115BBE of the

Act is concerned, the same is applicable with effect from 1.4.2017 and not prior to

that. However, the question arises whether the entire stock which was found excess at the time of survey remained as unsold till 31st March, 2013 so that the assessee

can take the benefit of reduction in the prevailing price of gold against the

surrendered income on account of unexplained investment in the stock. Since this

issue was not considered by the authorities below as the AO disallowed the claim of

the assessee by placing reliance on the provisions of section115BBE and the ld. CIT (A) has accepted the prevailing price of gold as on 31st March, 2013 without

verifying the actual details of the remaining stock out of the excess stock found at

the time of survey, therefore, this factual aspect of the matter is required to be

verified and examined by considering all the relevant details at the level of the AO.

Accordingly, we set aside this issue for limited purposes of verification and examination of the quantity of stock which was remained unsold as on 31st March,

2013 out of the total excess stock found at the time of survey.

Order is pronounced in the open court on 21/06/2018.

Sd/- Sd/- (foØe flag ;kno) (fot; iky jkWo ½ (VIKRAM SINGH YADAV ) (VIJAY PAL RAO) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Jaipur Dated:- 21/06/2018. Das/

20 ITA No. 643/JP/2017 Late Shri Satish Kumar Agarwal, Jaipur.

आदेश की प्रतिलिपि अग्रेषित@ब्वचल वf जीम वतकमत वितूंतकमक जवरू

सहायक पंजीकार@ Aेेपेजंदज. त्महपेजतंत

21 ITA No. 643/JP/2017 Late Shri Satish Kumar Agarwal, Jaipur.