JOINT COMMISSIONER OF INCOME TAX (OSD), LUDHIANA vs. M/S SHEETAL INDUSTRIES , KHANNA

Returned income Rs.3,69,86,500 /- Addition as per para 7.5 Rs. 1,79,82,726/- Addition u/s 69 as per para 8.2 Rs.32,76,061/- Addition as per para 9 Rs.82,85,851 /- Rs.5,63,463/- Addition u/s 69 as per para 10.7 Total assessed income Rs.6,70,94,601/-

The ld. CIT(A) has further deleted addition of Rs.82,85,851/- which has been challenged in Ground No. 3 because this amount has also been telescoped against the surrendered income. In Ground No.4, grievance of the Revenue is that ld. CIT(A) has erred in treating the alleged surrendered income A.Y.2018-19 4 of Rs.2,80,00,000/- as normal business income as against the finding of the AO that this amount is to be assessed under Section 69A and deserves to be taxed under Section 115BBE of the Income Tax Act.

“4. The details of the surrender of Rs.3 Crores made by Sheetal Industries in respect of the assessment year 2018-19 and 2019-20 are as under:-

Assessment Year Amount offered 2018-19 Rs.2,80,00,000/- Building Rs.26,60,998/- Land Rs.72,43,000/- Gold Rs.94,50,000/- (withdrawal by Partners) Stock Rs.84,30,002/- Misc. fixed asset Rs.2,16,000/- 2019-20 Rs.20,00,000/- (Building Rs.20,00,000/-)

ITA No.420/CHD/2023 A.Y.2018-19 5

The aforementioned surrender has been included in the computation of income with a following note which is reproduced hereunder:

“Add : Income not included in P&L A/C There was a survey u/s 133A of the Income Tax Act,1961- on the said concern on 25.04.2018. During the course of survey certain documents depicting undisclosed business transactions/income were impounded. The assessee had surrendered addition business income of Rs. 3 Crores for the A.Y. 2018-19 and 2019-20. Out of the said additional business income of Rs. 3 Crores, a sum of Rs. 2.8 Crores has been disclosed in the Assessment Year 2018-19. The additional business income stood invested in various Assets/used in withdrawals. However, no entries have been made in the books of account for the Financial Year 2017-18. Rs. 2,80,00,000/-.”

8.1 Apart from this, the AO has observed that assessee has accounted sales of Rs.63,53,23,579/- on which it has adopted a gross profit rate at 8.80% which gives a GP figure of Rs.5,58,81,830/-. The AO was of the view that GP ought A.Y.2018-19 6 to be estimated at 10.10% instead of 8.80% adopted by the assessee because the ld. AO has rejected the book result on the basis of discovery of unaccounted sales. In this way AO has worked out the GP of accounted sales at Rs.6,41,67,681/-. If the GP declared by the assessee is being debited from the GP estimated by the assessee on accounted sales, then the difference of Rs.82,85,851/- would come. The AO has made addition of Rs.82,85,851/-.

8.2 The AO thereafter observed that surrendered income of Rs.2.80 Cr cannot be treated as normal business profit and its benefit cannot be given for telescoping purposes. In this way, in his computation of income reproduced above, he calculated the total income at Rs.6,70,94,601/- as against Rs.3,69,86,500/-.

9. On appeal, in principle, the ld. First Appellate Authority agreed with the AO but treated the alleged undisclosed income as a normal business profit and granted the telescoping benefit to the assessee. The finding of the ld. CIT(A) is recorded at page No.30 to 33. For the facility of reference, we take note of this finding, which read as under :

ITA No.420/CHD/2023 A.Y.2018-19 7

Issue of enhanced GP on regular sales and rejection of books of accounts In these grounds, the AR has contended that the AO has made an addition to the tune of Rs. 82,85,851/- by rejecting the books of accounts u/s 145(3) and applying an enhanced GP of 10.10% on the total declared sales as per regular books of accounts. The AR submitted that the said addition of Rs. 82,85,851/- and addition to the tune of Rs. 1,79,82,726/- on account of undisclosed extrapolated sales is part of total income offered in the return of income at Rs. 2,80,00,000/- (Table-1). The AR also submitted copy of surrender letter dated 23.05.2018 in which the additional income of Rs. 3 crores earned has been surrendered by taking into consideration the seized/impounded material found during the course of search/survey. A part of the surrender to the tune of Rs. 2.80 crores was offered in the return of income for Assessment Year 2018-19 and balance amount of Rs. 20 lacs was offered in the return for Assessment Year 2019-20. The surrender of Rs. 2.8 crores in the present assessment year has been further divided as investment under the following heads:

Sr.No. Head Amount 1. Building Rs. 26,60,918/- 2. Land Rs. 72,43,000/- 3. Gold/Withdrawal by partner Rs. 94,50,000/- 4. Stock Rs. 84,30,002/- 5. Miscellaneous fixed asset Rs. 2,16,000/-

The AR in the submissions has stated that the Assessing Officer while framing the assessment has made separate addition of Rs. 1,79,82,726/- on account of GP @10.10% on extrapolated sales and Rs. 82,85,851/- on account of rejection of books of accounts. The addition was made without giving the benefit of income already offered to the tune of Rs. 2.80 crores during the survey/search proceedings. As per the AR, the undisclosed income generated from the unaccounted sales as calculated by the Assessing Officer has been routed into the investments which have already been offered in the surrender and return of income has been filed for the same. The detail of the investments made has already been elaborated above.

The AO was justified in rejecting the books of accounts as the assessee is deriving benefit of the installed plant & machinery and building in A.Y.2018-19 8 making both disclosed as well as undisclosed sales. Also, the electricity component/direct expenses as claimed in trading account are used both for making disclosed as well as undisclosed sales. Therefore, the AO was justified in rejecting the books of accounts as the profits declared in the regular books of accounts, were not depicting the correct picture. Hence, the AO has rightly enhanced the GP as per regular books of accounts by the same. Accordingly, the Assessing Officer justified in making the addition of Rs. 82,85,851/- on account of rejection of s of accounts by enhancing the Gross Profit from 8.8% to 10.120%.

Though the addition on account of enhanced GP after rejection of the books accounts has been made in principle on genuine grounds but the income generated therefrom has already been considered by the assessee in the return of income under the head 'business' to the tune of Rs. 2.80 crores. The money generated from there has been invested as per surrendered heads of income (Table-1) and offered to taxation; hence the same money cannot be taxed twice. Hence the ground of appeal of the assessee with respect to the action of the AO of not allowing benefit of the income already offered as surrender viz. a viz. addition made on account of enhanced GP after rejection of books of accounts is allowed.

Issue of application of 115BBE to surrender income

The AR has further argued that the total addition of Rs. 2,62,68,577/- made by the AO taking into consideration Rs. 1,79,82,726/- in respect of Gross Profit on extrapolated sales and Rs. 82,85,851/- in respect of profit earned after rejecting books of accounts should be telescoped into the investment/surrender of Rs. 2.80 crores offered in the return of income. The said issue has been examined at length and the AR was asked to submit the chronology of generation of funds as per the unaccounted sales and the profit generated after rejection of books and the investment made in various assets surrendered during the course of survey/search. The said chronology is essential because to avail the benefit of telescopy there should be a clear generation of income followed by utilization of the same into making of any investments. The AR submitted the complete fund flow statement which has been reproduced in Table-3 above. The consolidated version of the table-3 has been put in Table-4 which is reproduced below for ready reference:

A.Y.2018-19 9 Sr. Sources of Funds Amount Application of Funds Amount No.

To understand the issue better, it is important to see that there may be a case where there is an unexplained income of an assessee in the first part of a year and also a corresponding unexplained investment of somewhat similar amount in the later part of the year, in such case unless there js evidence to the contrary, it may be treated that the unexplained investment has been made out of the unexplained income. Thus, in such case instead of adding both unexplained income as well as unexplained investment to the income of the assessee, it would be wise to add one of them, as both represent only one income. In simple words and as applied in the tax law, it means identifying a income and its application, so that ultimately tax is levied either only on the income or only on its application. In other words, in case where an assessee has certain undisclosed income and also certain undisclosed investments, then it could be reasonably presumed that the undisclosed investments have been sourced out of the undisclosed income, so that only the income may be taxed or only the investment may be taxed and not both, in the hands of the assessee under the provisions of the Act.”

9.1 Thus, the whole controversy revolves around a simple issue whether surrendered income declared by the assessee at Rs.2.8 Cr is to be treated as a normal business income and if it is to be treated as a normal business income, then A.Y.2018-19 10 this amount can take care of any anomalies or any undisclosed income worked out by the AO.

10.1 On the other hand ld. Counsel for the assessee submitted that if Section 69A is being perused, then it contemplates that wherein in a Financial Year, the assessee is found to be owner of any money, bullion, jewellery or other valuable articles and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery……..etc. thus, the emphasis is on the aspect whether assessee has A.Y.2018-19 11 explained the nature and source of acquisition and then nature and source has a direct nexus with the business activities of the assessee or not. He further contended that this issue has been examined by the ITAT Chandigarh and other Benches of the Tribunal in a large number of decisions. Some of them are being referred by the CIT(A) also.

11. On due consideration of the facts and circumstances, we find that this issue whether surrendered income during the course of survey deserves to be treated as an undisclosed income for the purpose of Section 69A automatically or its characters to be determined on the basis of facts and circumstances of a particular case. The ITAT Chandigarh Bench in the case of Veer Enterprises Vs DCIT reported in 158 taxmann.com 655/206 ITD 289 has examined this issue very lucidly and we cannot do better than taking note of the extensive discussion made by the Tribunal on the position of law as well as test required to be applied for determining this transaction. Therefore, for facility of A.Y.2018-19 12 reference, we take note of the finding of the Tribunal from this judgement from para 13 onwards :

“13. Heard. To appreciate the aforesaid rival positions, we refer to the provisions of Section 69A of the Act. Section 69A provides that where in any financial year the Assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the Assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the Assessee for such financial year. As per Section 69B where in any Financial Year, the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article, and the AO finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the hands of the AO, satisfactory, the excess amount may be deemed to be the income of the assessee for such Financial Year.

14. In the instant case, for the deeming provisions of section 69 to be attracted, there has to be a finding that the Assessee has made investments during the financial year in the stock and by way of advances, such investments are not recorded in the books of account so maintained by the Assessee, and the Assessee offers no explanation about the nature and source of the investments or the explanation so offered is not found satisfactory in the opinion of the AO. Similarly, for the deeming provisions of section 69A to be attracted, there has to be a finding that the Assessee was found to be owner of cash so found at the time survey, such cash has not been recorded in the books of account so maintained by the Assessee, and the Assessee offers no explanation about the nature and source of the cash or the explanation so offered is not found satisfactory in the opinion of the AO. Likewise, for the deeming provisions of Section 69B to be attracted. There has to be a finding that the amount expended on making investment in or acquiring any bullion, jewellery or other valuable article exceeds the amount recoded in this behalf in the books of account maintained by the assessee for any source of income and that the assessee has not offered any explanation about such excess amount, or that, in the hands of the AO, the explanation offered by the assessee is not satisfactory.

15. Therefore, the foundational requirement before invoking the deeming provisions is not that there were certain survey operations u/s 133A and some A.Y.2018-19 13 undisclosed income has been detected and surrendered by the Assessee and thus, the deeming provisions are automatically attracted. Rather the foundational requirement is whether the Assessee has made the investment/has been found to be owner of cash and the explanation offered by the Assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the Assessee keeping into account the facts and circumstances of the relevant case. In fact, if we look at the provisions of section 133A, clause (iii) of sub-section (3) provides that an income tax authority acting under this section shall record the statement of any person which may be useful for or relevant to any proceedings under this Act. Therefore, what explanation has been offered by the Assessee as part of his statement recorded u/s 133A needs to be analyzed and examined before drawing any conclusions in this regard.

18. In our view, what is relevant before invoking the deeming provisions is not just the factum of survey action but besides that, what is the explanation so offered by the Assessee explaining the nature and source of income so found during the course of survey proceedings and which has not been recorded in the books of account and the same is the essence of the statutory provisions as duly recognized by the Courts and various Benches of the Tribunal and which has been reiterated from time to time. The statement of the Assessee has to be read as a whole and not in piecemeal especially where the Revenue is relying on the same statement and in such circumstances, the defence available to the Assessee in terms of part of the statement not been considered by the Revenue cannot be ignored. The mere fact that survey/search proceedings have been initiated at the business premises of the Assessee doesn’t mandate the Assessing officer to automatically invoke the deeming provisions and before invoking the deeming provisions, he has to call for the explanation of the Assessee and only where the explanation so offered is not found satisfactory, he can proceed and invoke the deeming provisions.

ITA No.420/CHD/2023 A.Y.2018-19 16

Fashion World Vs. ACIT(IT Appeal No. 1634(Ahd.) of 2006, dt. 12/02/2010) wherein the Tribunal had observed as under:

“11. But this does not mean that loss computed under any of the five heads mentioned in section 14 – (i) ‘salary’, (ii) ‘income from house property’, (iii) ‘profits and gains from business or profession’, (iv) ‘capital gains’ and (v) ‘income from other sources’ – cannot at all be adjusted against unexplained investment or expenditure. What is necessary as per Hon. Gujarat High Court is that source of acquisition of asset or expenditure should be clearly identifiable. In the case before Hon. Gujarat High Court the source of gold confiscated was not identifiable and hence adjustment was not permitted.

12. Thus the important aspect that emerges from the entire discussion is that for invoking deeming provisions under sections 69, 69A, 69B & 69C there should be clearly identifiable asset or expenditure. In the present case we find that entire physical stock of Rs.25,14,306/- was part of the same business. Both kind of stock i.e. what is recorded in the books and what was found over and above the stock recorded in the books, were held and dealt uniformly by the Assessee. There was no physical distinction between the accounted stock or unaccounted stock. No such physical distinction was found by the Revenue either. The Assessee has repeatedly claimed that unaccounted business income is invested in stock and there is no amount separately taxable under section 69. The department has ignored this claim of the Assessee and sought to tax the difference between book-stock and physical-stock as unaccounted investment under section 69 without considering the claim of the Assessee that first the business receipt has to be considered and then investment should be treated as coming out of such unaccounted income. The difference in stock so worked out by the authorities below had no independent identity of its own and it is part and parcel of entire lot of stock. The difference between declared stock in the books and what is physically found would only be a mathematical expression in terms of value and not a separate independent identifiable asset. Therefore, it cannot be said that there is an undisclosed asset existed independently. Once this is so then what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset.

13. Thus in a case where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such A.Y.2018-19 17 excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the Assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is only where no nexus is established with any head then it should be considered as deemed income under section 69, 69A, 69B & 69C as the case may be. It is because when Assessee fails to explain satisfactorily the source of such investment then it should be taxed under section 69, 69A, 69B & 69C as the case may be. It should not be done at the first instance without giving opportunity to the Assessee to establish nexus. Therefore, there is no conflict with the decision of Hon. Gujarat High Court in the case of Fakir Mohmed Haji Hasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, we hold that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment.

14. To conclude sum of Rs.8,10,011/- being difference in stock is represented by undeclared business income. It does not have a separate physical identity. It is to be only taxed under the head ‘business’. Other assets have separate physical identity being furniture and fixtures, air conditioners etc. They cannot have a direct nexus with business and therefore investment therein has to be considered under section 69 only.”

22. Following the said decision of the Coordinate Ahmedabad Bench, the A.Y.2018-19 18

Jaipur Bench of the Tribunal in case of DCIT Vs. Shri Ram Narayan Birla(Supra) has taken a similar view holding that the excess stock so found during the course of survey was part of the stock and the Revenue has not pointed out the excess stock has any nexus with any other receipts other than the business being carried on by the Assessee. The relevant findings are contained at para 4.3 which read as under:

“4.3. We have heard rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that the Assessee is engaged in the business of jewellery. During the course of survey excess stock valuing Rs. 77,66,887/- was found in respect of gold and silver jewellery. The Coordinate Bench in the case of ChokshiHiralalMaganlal vs. DCIT, 131 TTJ (Ahd.) 1 has held that in a cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the Assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is observed that there is no conflict with the decision of Hon’ble Gujarat High Court in the case of Fakir Mohd. HajiHasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, the Hon’ble Coordinate Bench held that where asset in which undeclared independent identity but is integral and inseparable (mixed) part of declared asset, falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. In the present case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore, we do not find any fault with the decision of the ld. CIT (A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found.”

23. Thereafter, the Coordinate Jaipur Benches in the case of Bajargan Traders Vs. ACIT(Supra) has similarly held as under: “2.10. We have heard the rival contentions and perused the material available on record. During the course of survey, the Assessee has A.Y.2018-19 19

surrendered an amount of Rs. 70,04,814/- towards investment in stock of rice which had not been recorded in the books of accounts. Subsequently, in the books of accounts, the Assessee has incorporated this transaction by debiting the purchase account and crediting the income from undisclosed sources. In the annual accounts, the purchases of Rs. 70,04,814/-were finally reflected as part of total purchases amounting to Rs. 33,47,19,658/- in the profit and loss account and the same also found included as part of the closing stock amount to Rs. 1,94,42,569/-in the profit/loss account since the said stock of rice was not sold out. In addition to the purchase and the closing stock, the amount of RS. 70,04,814/- also found credited in the profit and loss account as income from undisclosed sources. The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known source, there was no necessity for Assessee to credit the profit/loss account and offer the same to tax. Accordingly, we do not see any infirmity in Assessee's bringing such transaction in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future.

2.11. Having said that, the next issue that arises for consideration is whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head "business income" or "income from other sources". In the present case, the Assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the Assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla (supra) supports the case of the Assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head "business income" and not under the head income from other sources". In the result, ground No. 1 of the Assessee is allowed.”

24. The said decision of Coordinate Jaipur Benches has since been confirmed by the Hon’ble Rajasthan High Court in case of PCIT vs Bajarang Traders (DB Appeal No. 258/2017 dt. 12/09/2017).

25. Similarly, the Coordinate Chandigarh Bench in case of M/s Gaurish Steels Pvt. Ltd. Vs. ACIT (Supra) has held as under:

ITA No.420/CHD/2023 A.Y.2018-19 20

“10. We have heard the rival contentions and perused the material available on record. This is a fact on record that the Assessee surrendered an amount of Rs.70 lacs as additional income during the course of survey conducted at its premises on account of following heads:

(i) Discrepancy on account Rs. 9 lacs of cash found (ii) Discrepancy on cost of Rs. 21 lacs construction of building (iii) Discrepancy in stock Rs. 10 lacs (iv) Discrepancy in advances Rs. 30 lacs and receivable

14. Nowhere in his order the Assessing Officer has been able to bring on record the fact that the income surrendered during the course of A.Y.2018-19 21

survey was not out of the business of the Assessee. Also nowhere he has objected to the heads under which the Assessee had surrendered these amounts, i.e. cash, construction of building, discrepancy in stock and discrepancy in advances and receivable. Further, even the survey team has not found any source of income except the business income. Now, following the judgment of Jurisdictional High Court, in the background of the facts of the present case, we can safely infer that apart from cash all other income surrendered may be brought to tax under the head 'business income' while the cash has to be taxed under the head deemed income under section 69A of the Act.”

“19. In the facts of the case in the income surrendered was on account of unaccounted receivables of the business of the Assessee amounting to Rs.1.25 crores. The Ld.CIT(A) in para 9 of the order has outlined the facts relating to the surrender made by the Assessee stating that during survey a pocket diary was found from the account section of the Assessee company which contained entry of receivables amounting to Rs.1.25 crores on pages 27, 28, 31 and 33, which were not recorded in the regular books of the Assessee and were subsequently surrendered stating that these entries were unaccounted sundry receivables being surrendered as income under the head business, to buy piece of mind and subjected to no penalty and further that the losses incurred by the Assessee in the impugned year will be adjusted against this surrendered income. The relevant facts as stated by the CIT(A) in para 9 of his order and which are not disputed, are reproduced hereunder:

“9. Adverting now to the facts of the instant case, it is seen that when survey proceedings were conducted at the business premises of the appellant company, a pocket diary was found from the accounts section which contained entries of receivables amounting to Rs.1.25 crores on page nos. 27, 28, 31 and 33, which were not recorded in the regular books of accounts. When these entries were confronted to the appellant company while recording the statement on 15/09/2012, it was stated: "that these entries are sundry receivables which has not been accounted for in the books of accounts and in order to buy peace of mind, the same is surrendered as income under the head business for F.Y.2012-13 relevant to asstt. Year 2013- 14 subject to no penalty and prosecution under the I.T. Act, 1961. Since the company is incurring losses in current F.Y.2012-13, the surrendered income will be adjusted against these losses." [Extracted from the impugned assessment order; pages 5 &6].”

ITA No.420/CHD/2023 A.Y.2018-19 22

20. Clearly, it is evident from the above that the surrender was on account of debtors/receivables relating to the business of the Assessee only. The Revenue has accepted the surrender as such, as being on account of receivables. It follows that the debtors were generated from the sales made by the Assessee during the course of carrying on the business of the Assessee, which was not recorded in the books of the Assessee. Though the said income was not recorded in the books of the Assessee but the source of the same stood duly explained by the Assessee as being from the business of the Assessee. Even otherwise no other source of income of the Assessee is there on record either disclosed by the Assessee or unearthed by the Revenue. The preponderance of probability therefore is that the debtors were sourced from the business of the Assessee. Therefore, there is no question of treating it as deemed income from undisclosed sources u/s 69, 69A, 69B and 69C of the Act and the same is held to be in the nature of Business Income of the Assessee. Having held so, the same was assessable under the head ‘business and profession’ and as stated above, the benefit of set off of losses both current and brought forward was allowable to the Assessee in accordance with law.

21. The contention of the Revenue therefore that the income be treated as deemed income u/s 69,69A/B/C of the Act is accordingly rejected and as a consequence thereto the plea that no set off of losses be allowed against the same u/s 115BBE of the Act also is rejected.

The appeal of the Revenue, therefore, in is dismissed.

disclosed and, therefore, the same is also to be assessed as deemed income u/ss 69, 69A, 69B and 69C of the Act.

“10.17 Ground Nos. 8 & 9 challenge the action of the lower authorities in applying the provisions of section 115BBE and thereby charging tax at the rate of 60%. The main thrust of the arguments of the Ld. AR has been that all the additions made or sustained relate only to the business income of the Assessee and that nowhere in the assessment order has it been alleged that some other source of income had been detected which gave rise to additional income. It is seen that during the course of assessment proceedings, the various explanations submitted by the Assessee have duly mentioned that the surrendered income was derived from the business. A perusal of the assessment order would also show that nowhere in the body of the assessment order, the AO has even contradicted this explanation of the Assessee. The AO has not brought on record any iota of evidence to demonstrate that the Assessee had any other source of income except income from business and, therefore, it is our considered view that deeming such income under the provisions of sections 68 or 69 would not hold good. In our view, in such a situation, the AO could not have legally and validly resorted to taxing the income of the Assessee at the rate of 60% in terms of provisions of section 115BBE of the Act.

10.18 The Hon'ble Andhra Pradesh High Court in the case of Principal Commissioner of Income Tax Vs. Deccan Jewellers Ltd. reported in (2021) 438 ITR 131 (AP) held that where the Assessee was engaged in the business of Gold and Diamond jewellery and Silver articles and during the search and seizure operation u/s 132, excess stock was found to be declared and the Assessee had submitted that excess stock was result of suppression of profit from business over the years and the same had not been kept identified separately and the AO had duly considered and accepted the Assessee’s explanation that investment in excess stock was to be treated as business income, the revisional powers invoked by the Principal Commissioner u/s 263 of the Act were not correct in the eyes of law.

10.19 The ITAT Chandigarh Bench in the case of Famina Knit Fabs Vs.

ITA No.420/CHD/2023 A.Y.2018-19 24

ACIT reported in (2019) 176 ITD 246 (Chd-Trib) has held that, wherein during the course of survey, a surrender was made by the Assessee on account of debtors / receivables which was based on a diary found during the course of survey and the Revenue had accepted that the surrender was on account of receivables, it followed that the debtors were generated from the sales made by the Assessee during the course of carrying on the business of the Assessee which was not recorded in the books of the Assessee. The Coordinate Bench of the ITAT went on to further hold that though the said income was not recorded in the books of the Assessee but the source of the same stood duly explained by the Assessee as being from the business of the Assessee and even otherwise no other source of income of the Assessee was on record either disclosed by the Assessee or unearthed by the Revenue. The Bench further held that the preponderance of probability, therefore, is that the debtors were sourced from the business of the Assessee. Therefore, there was no question of treating it as deemed income from undisclosed sources u/s 69, 69A, 69B, or 69C of the Act and the same was held to be in the nature of business income of the Assessee. 10.20 Thus, as in the present case, where the source of investment or expenditure is clearly identifiable and the alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment or expenditure, then, first, what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure can it be considered to be taxed u/s 69 of the Act and further where once such investment or expenditure is brought within the purview of tax as undeclared business receipt, then taxing it further as deemed income u/s 69 would be completely out of place.

10.21 Similar view was taken by the Coordinate Bench of ITAT Ahmedabad in the case of ChokshiHiralalMaganlal Vs. DCIT reported in 131 TTJ 1 (Ahd.) 10.22 It is also seen that the Ld. CIT(A) has relied on the judgement of the Hon'ble Punjab & Haryana High Court in the case of Kim Pharma Ltd. Vs. CIT in of 2011 (O&M) and the Ld. CIT DR has also quoted the same in his arguments before us. However, after going through the aforesaid judgement of the Hon'ble Punjab & Haryana High Court, it is seen that in that particular case, the only issue was with regard to the cash surrendered at the time of survey and no other income. The cash found could not be related to the already disclosed and accepted source of income of the Assessee and, therefore, the Hon'ble Punjab & Haryana High Court held that such surrendered cash was to be treated as deemed income u/s 69 of the Act. However, in the present case before us, the Assessee has only one source of income i.e. business income and nowhere has it been brought on record that the Assessee had any other source of income except business income and, therefore, we respectfully state that judgement of the Hon’ble Punjab and Haryana High Court in the case of Kim Pharma Pvt. Ltd (supra) would not apply on the facts of the present case.

A.Y.2018-19 25 10.23 Accordingly, keeping in view the various judicial precedents as cited above and respectfully following the same, we hold that the AO could not have legally invoked the provisions of section 115BBE of the Act in the present case and further the Ld. CIT(A) was also not legally correct in upholding of the application of provisions of section 115BBE of the Act. Accordingly, ground Nos. 8 and 9 are also allowed.”

“9. In the facts of the present case before us, we find that unaccounted cash was found during the course of survey operation in the possession of the Assessee company and the same was surrendered as additional income for the year under appeal. The Assessee has failed to explain the nature and source of the said cash found which was not recorded in the books of account, though while surrendering the additional income it was admitted by the Manager of the Assessee company, in the statement recorded during the course of survey that the said additional income is its income from other sources. The Hon'ble Gujrat High Court in Fakir Mohmed Haj Hussain Vs C IT had held as under :

"The scheme of sections 69, 69A, 69B, and 69C of the Income-tax Act, 1961, would show that in cases where the nature and source of acquisition of Money, bullion, etc., owned by the Assessee or the source of expenditure incurred by the Assessee are not explained at all, or not satisfactorily explained, then the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such Assessee." In the absence of the explanation / evidence regarding the sources of the additional income being satisfactorily explained by the Assessee and applying the ratio of the Hon'ble Gujrat High Court in Fakir Mohmed Haji Hasan Vs. C IT (supra), we hold that the additional income offered is deemed income assessable u/s 69A of the Act and no deduction is allowable against such deemed income assessed u/s 69A of the Act in the hands of the Assessee. Following the ratio laid down by the Gujrat High Court in Fakir Mohmed Haji Hasan Vs. CIT (supra), once the Assessee has failed to explain the nature and source of cash A.Y.2018-19 26 found available with it and the same is assessed as deemed income u/s 69A of the Act, therefore, the corresponding deductions under the head Profits and gains are not available to the Assessee. The business loss determined for the year is not allowed to be setoff against such deemed income included in the books of account. The alternative plea of the Assessee of assessing the income under the head income from other sources and allowing set off of losses u/s 71 of the Act also fail in view of the above.

10. In the facts of the present case, we find that Assessee during the course of survey had surrendered the income as income from other sources though a plea has been raised by the Assessee that the income was surrendered as income from job work but no evidence to prove the stand of the Assessee has been brought on record. The Assessee had also surrendered additional income of Rs. 10 lacs in Assessment Year 2005-06 on account of sundry credits, repairs to building and advances to staff, which being relatable to business carried on by Assessee was included as income from business. However, in respect of cash found during survey, which was not reflected in the books of account, no source was declared by the Assessee and in the absence of nature of source of cash being proved, the same is not assessable as income from business. In the circumstances, we uphold the order of the CIT(A) in including the additional income as deemed income u/s 69A of the Act and not allowing the benefit of the business losses determined against the said deemed income. The grounds of appeal raised by the Assessee are dismissed.”

29. Thereafter, the matter came up for consideration before the Hon’ble Punjab & Haryana High Court and the Hon’ble High Court has stated that the AO, the ld. CIT(A) and the Tribunal after considering the factual aspect noticed that the amount surrendered during the survey was not reflected in the books of account and no source from where it was derived was declared by the Assessee and therefore it was deemed income of the Assessee under section 69A of the Act and accordingly the findings of the Tribunal were affirmed and it was held that no substantial question of law arose and the appeal of the Assessee was dismissed. We therefore find that the statement of the General Manager as recorded during the course of survey played a decisive role and was taken into consideration by the Tribunal wherein he had admitted that cash has been generated out of income from other sources and in the absence of nature of A.Y.2018-19 27 source of cash being proved, it uphold the order of the CIT(A) and thereafter, on further appeal, the order of the Tribunal was upheld by the Hon’ble High Court. Unlike the said case, in the present case, as noted herein above, the partner of the assessee firm, in his statement recorded during the survey, had clearly stated that he was one of the two partners of the assessee firm, that the business of the assessee firm, i.e., manufacturing clothes of small children was the only source of income of the assessee firm. When he was confronted with discrepancies as found by the Department in the survey, the assessee was so confronted not only with the discrepancies found but also the nature and source thereof and it has emerged that the source of income of the assessee is from its business operations. This being so, the decision of the Hon'ble High Court does not support the case of the Revenue.

12. In the light of above, if we examine the facts of the present case, then it would reveal that alleged surrendered income has a direct nexus with the business income of the assessee, it must have been earned from those unaccounted sales, its source is not something different. The assessee has demonstrated the nature and source of acquisition and the ld. CIT(A) has rightly accepted this stand of the assessee while granting the benefit of telescoping. Thus, the separate additions made by the AO have rightly been deleted by the CIT(A) which are under challenge in Ground No. 1 and 3 of this appeal. A.Y.2018-19 28 12.1 Similarly, we do not find any merit in Ground No. 4 also. The ld. CIT(A) has rightly treated that this income is to be assessed as a normal business income and its benefit is to be given in other addition made to the income of the assessee. Hence, Ground No. 1, 3 and 4 are rejected.

Ground No. 5

13. In this ground of appeal, the Revenue has pleaded that ld. CIT(A) has erred in deleting the addition of Rs.5,63,463/- which was added by the AO on account of unexplained investment made in factory building.

On the basis of the value determined by the DVO and the value declared by the assessee in its books of account, he worked out a difference of Rs.5,63,463/- and added this amount as unexplained investment by the assessee in the factory building.

ITA No.420/CHD/2023 A.Y.2018-19 29

15. Dissatisfied with this addition, assessee carried the matter in appeal before the CIT(A). It has pointed out the source of funds available with it vis-à-vis application of funds. The ld. CIT(A) has reproduced source of funds and where such funds have been applied in Table No. 4 at page 28 of the impugned order. This table reads as under :

Sr. Sources of Funds Amount Application of Funds Amount No. GP @10.10% as per para Building, Land, Gold/ 1. Rs. 2,80,00,000 7.5 of the assessment Withdrawal by partner, Stock, 17982726 order Miscellaneous fixed assets (surrendered by the assessee) Difference in GP @1.3% Unaccounted additional 2. 813034 as pointed by the AO in 8285851 Capital as per para 8.2 of the the assessment order para assessment order 9 Opening cash available Excess valuation of Factory 3. 509141 (B/F from last year) as 7061707 building as per para 10.7 of the per para 5.5 of Appeal assessment order No. 10867/2016- 17/IT/CIT(A)- 5/Ldh/2021-22 4. Total funds available 33330284 Total application of funds 2,93,22,175

16. The ld. CIT(A) was of the view that total funds available with the assessee were more than Rs.3.3 Cr whereas investments/application of funds is only Rs. 2.93 Cr. Thus, according to the CIT(A), the assessee has sufficient funds which can take care of any alleged unexplained investment in the construction of factory building.

ITA No.420/CHD/2023 A.Y.2018-19 30

17. Before us, ld. DR relied upon the order of AO whereas ld. Counsel for the assessee submitted that this difference arose on account of adoption of different rates provided by the CPWD vis-à-vis PWD. The assessee's valuation is on the basis of PWD rates whereas DVO has adopted rates of CPWD. We have gone through the record and found that ld. CIT(A) did not accept all the legal arguments of the assessee that in an assessment passed under Section 153C, additions could only be made on the basis of seized materials recovered at the premises of the searched person. The ld. CIT(A) further rejected the arguments of the assessee on merits because she was of the view that assessee has more funds than expenditure in the shape of alleged unexplained investment. On due consideration of the source of funds available with the assessee, we are of the view that in case some unexplained expenditure is detected, then the alleged availability of surplus funds could take care of all such shortcomings.

Therefore, in our view, CIT(A) has rightly deleted the addition.

ITA No.420/CHD/2023 A.Y.2018-19 31

Order pronounced on 24.02.2025.