JAIRAJ KALYANI,MUMBAI vs. ASSISTANT COMMISSIONER OF INCOME TAX - CIRCLE 2, MUMBAI

During the course of assessment proceedings, the AO noticed that although the assessee has credited additional income offered on account of unexplained expenditure incurred in respect of purchase of building material to the profit and loss account ,but the same has been added to closing working progress and carried forward to subsequent year.

Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld. CIT(A), the assesse has filed elaborate returns submissions on the issue which has been reproduced at Para No.4 on pages no 5 to 18 of Ld. CIT(A) order. The sum and substance of arguments of assessee before the Ld. CIT(A) are that once additional income is offered on account of unexplained expenditure u/s 69C of the Act, then the same can be brought into books of accounts and adjust against purchase as well as closing working progress even though, proviso provided to section 69C specifically states that no deduction shall be allowed in respect of unaccounted income being unexplained expenditure u/s 69C of the Act. The Ld. CIT(A) after considering relevant submission of the assessee and also an analysis of provision of section 69C and proviso provided thereto, observed that provision of section 69 to 69D are meant for bringing to tax unrecorded/non-genuine income and expenses and these would not form any heads mentioned u/s 14 of the I.T.Act, 1961, therefore from the proviso provided to section 69C, it is very clear that the assessee cannot claim any deduction either in the year under appeal or in the subsequent year towards unexplained expenditure referred to in section 69C as deemed income. Similarly, the Ld. CIT(A) has rejected alternate contention of the assessee that additional income offered during course of survey should be treated as amount of investments etc, not fully disclosed in books of accounts u/s 69B of the Act, on the ground that this plea was never taken before the AO at the time of assessment proceedings and also from the declaration made u/s 133A of the Act it was from clear that it is necessarily was on account of unexplained expenditure. Accordingly, dismissed appeal filed by the assesse. Aggrieved by the Ld. CIT(A) order, the assessee is in appeal before us.

The Ld. AR for the assessee submitted that the Ld. CIT(A) was erred in confirming action of the AO in reducing working progress to the extent of sum of Rs. 80,12,815/- being additional income offered on account of unexplained expenditure u/s 69C of the Act, without appreciating the fact that once income has been offered to tax, corresponding expenditure including purchases needs to be brought into books of accounts and appropriate treatment shall be given in the account. The AR, further submitted that the AO never disputed fact that income has been offered on account of unexplained expenditure in books of accounts which is clearly recorded in its assessment order at Para no.5, but excluded the same from working progress on the ground that any amounts represents unexplained expenditure within the meaning of u/s 69C ,then as per proviso to section 69C, no further deduction shall be allowed under any head of income ignoring the fact that when unexplained expenditure represents purchases of materials, the same needs to be added to purchase accounts and corresponding adjustment shall be made to working progress /stock accont, if such materials are consumed in the business of the assessee. In this regard, he relied upon various judicial precedents, including the decision of Hon’ble Rajasthan High Court in the case of CIT vs Bajargan Traders-in and also the decision of ITAT, Mumbai ‘A’ Bench in the case of Amarsingh Naryansingh Thakur in ITA No. 908/Mum/2018.

The Ld. DR, on the other hand strongly supporting the order of the CIT(A) submitted that it is very clear from the proviso provided to section 69C, as per which such unexplained expenditure which is deemed to be the income of the assesee shall not be allowed as a deduction under any head of income. Although, the Ld. AR for the assessee has relied upon various judicial precedents, but fact remains that none of the case laws have considered proviso provided to section 69C and hence all decisions rendered contrary to provision of Act and accordingly, need not to be followed.

We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee has admitted additional income on account of unexplained expenditure being unrecorded purchases and expenses of its business in the books of accounts u/s 69C of the I.T.Act, 1961. It is also an admitted fact that assessee had admitted additional income in its return of income filed for the relevant year. This fact has not been disputed by the AO. The only dispute is with regard to bringing such unexplained expenditure in the books of accounts under corresponding head of expenditure and adjustment to closing working progress/stock entry for the end of the Financial Year. According to the lower authorities, in view of specific provision of section 69C and proviso provided thereto, such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income. It is the contention of the assessee that when unexplained expenditure represents purchases or expenses incurred in the business, the same needs to be bring into books of accounts and suitable adjustment needs to be made to closing working progress, if such unexplained purchases/expenditure is consumed in the business of the assessee. We find that the assessee has relied upon various judicial precedents including the decision of Hon’ble Rajsthan High Court in the case of Pr.CIT vs. Bajargan Traders (supra) where the Hon’ble High Court has upheld the findings of the Tribunal in respect of recording unexplained expenditure in the books of accounts and adjustment to closing stock. We further noted that the ITAT, Jaipur Bench, in the case of Bhajargan Traders in ITA.No. 137/JP/17 had recorded the findings in light of surrender of additional income towards unexplained expenditure and consequent entry in the books of accounts with adjustment to closing working progress and held that the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been in the books of accounts and offered to tax by crediting in the said amount in profit and loss account. Had this investment being out of known sources, there was no necessity for assessee to credit the profit and loss account and offered the same to tax accordingly, there is no error in recording such transactions in books of accounts and the accounting treatment thereof so as to regularise its books of accounts. A similar view has been taken by the Co-ordinate Bench of ITAT, Mumbai in the case of Amarsingh Narayansingh Thakur in and also in the case of M/s. KK Infrastructures, where similar view has been expressed by the Tribunal. But, but fact remains that in none of the above cases the proviso to section 69C has not been considered by the Tribunal. Although, proviso provided to section 69C is very clear, as per which such unexplained expenditure which is deemed to be the income of the assessee shall not be allowed as a deduction under any head of income, but bound by the judicial precedents and also consistent with view taken by the Co-ordinate Bench of ITAT in number of cases and also fact that the High Court of Rajasthan has approved such findings, we are of the considered that the AO as well as the Ld. CIT (A) were erred in reducing working progress to the extent of additional income offered, being unexplained expenditure u/s 69C of the I.T.Act, 1961. Therefore, we reverse the finding of the Ld.CIT(A) and direct the AO to include additional income offered during the course of survey towards unexplained expenditure to the closing working progress.

In the result, the appeal filed by the assessee is allowed. Order pronounced in the open court on this 17/07/2019