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ITA No.15 of 2021 -1-
IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE S.V.BHATTI & THE HONOURABLE MR.JUSTICE BASANT BALAJI THURSDAY, THE 25TH DAY OF AUGUST 2022 / 3RD BHADRA, 1944 ITA NO. 15 OF 2021 AGAINST THE ORDER IN ITA 208/2018 OF I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/Appellant:
M/S BHIMA JEWELLERS 6/785 A1, MYSORE ROAD, CHUNGUM JUNCTION, SULTHAN BATHERY, WAYANAD-673 592.
BY ADV S.ARUN RAJ RESPONDENT/Respondent/Revenue:
COMMISSIONER OF INCOME TAX, AAYAKAR BHAVAN, MANANCHIRA, KOZHIKODE-673 001.
BY ADV CHRISTOPHER ABRAHAM
THIS INCOME TAX APPEAL HAVING COME UP FOR ADMISSION ON 25.08.2022, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:
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JUDGMENT
Dated this the 25th day of August 2022
S.V.BHATTI, J.
We have heard Mr.Arunraj S., learned counsel for the appellant and Mr.Christopher Abraham, learned counsel for the respondent. 2. Bhima Jewellers/Assessee is the appellant. The Commissioner of Income Tax, Central Circle, Calicut/Revenue is the respondent.
The appeal is directed against the order dated 20.8.2018 in I.TA.No.208/Coch/2018 of the Income Tax Appellate Tribunal, Cochin Bench. The issue in appeal pertains to the assessment year 2013-2014. The appeal was admitted on the following substantial questions of law: 1. Whether the Tribunal is correct in law and in the facts of the case in confirming the order of
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the Principal Commissioner of Income Tax passed under Section 263 of the Income Tax Act? 2. Whether the Tribunal is correct in law and in the facts of the case in not considering the aspect that the Principal Commissioner of Income Tax erred in exercising jurisdiction under Section 263 of the Income Tax Act? 3. Whether the Income Tax Appellate Tribunal was correct in law and facts of the case in not considering whether the Commissioner of Income Tax could have exercised jurisdiction under Section 263 of the Act in the light of the binding judgment of the jurisdictional High Court in the case of Commissioner of Income Tax v P.D.Abraham alias Appachan? 4. Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal and the Commissioner of Income Tax was correct in not noticing/adverting to Section 115BBE of the Income Tax Act and the amendment to sub-section (2) of Section 115 BBE vide Finance Act, 2016 and also the binding departmental circular clarifying sub-section (2) of section 115BBE to be prospective in nature. 5. Whether the Tribunal and the Principal CIT have erred or not in holding disallowance of the set-off of the brought forward losses against the deemed income allowed by the assessing authority in its original order and whether or not such disallowance is contrary to law in-so far as assessment year 2013-14 is concerned?
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The circumstances relevant for disposing of the appeal are in a limited sphere and are stated thus:
On 30th of September 2013, the assessee filed the returns of the assessment year 2013-2014 declaring Rs.14,12,120/- as taxable income. During the financial year 2012-2013, the assessee had shown net loss of Rs.1,76,24,221/-. The partners of assessee firm have introduced capital of Rs.1,93,00,000/- each amounting to Rs.3,86,00,000/-. As against the capital introduced amounting to Rs.3,86,00,000/-, a sum of Rs.1,86,00,000/- was declared as unexplained cash credits into capital account and claimed set off of net loss amounting to Rs.1,76,24,221/-. The Assessing Officer accepted the capital contribution both explained and unexplained by assessment order dated 18.3.2016 made a lumpsum addition of Rs.3 lakhs to the income already returned. Thus determined the assessed income of assessee at Rs.17,12,120/-.
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The Commissioner, in exercise of power under Section 263 of Income Tax Act, 1961 issued notice dated 18.03.2016 on the following grounds proposing to re-open the assessment. “It is seen from the records that the assessee had unexplained credits to the tune of Rs.1,86,00,000/- in capital account and net loss of Rs.1,76,24,221/- was set off against this cash credit. As per Section 115BBE, where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or Section 69D, the income tax payable shall be the aggregate of the amount of income tax calculated on income referred to in section 68, at the rate of 30% and b) the amount of income tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause (a). As such, the above unexplained credit u/s 68 should be taxed at 30%. The Hon’ble High Court of Kerala in the case of M/s Kerala Sponge Iron Ltd. held that unexplained cash credit cannot be treated as business income because it is not an income classifiable under any head of income as per section 14 and such incomes are not eligible for set off of brought forward business loss and unabsorbed depreciation. On the basis of this judgment unexplained cash credit of Rs.1,86,00,000/- is not eligible for set off of business loss of Rs.1,76,24,221/-.”
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The assessee replied briefly that the unexplained credit into the capital account has been treated as deemed income under Section 68 of the Income Tax Act (for short ‘the Act’). Therefore, it falls under one of the other heads under Section 14 of the Act. Once the deemed income becomes an income earned under one head or the other of Section 14, for the relevant assessment year, there was no prohibition from setting off business loss from the business income. The Commissioner rejected the explanation and recorded the following finding while directing re-assessment. “The submissions and evidences filed have been considered. Though the submissions made are reasonable and have force, the issue is that the AO has not applied his mind to the issue, verified the facts and therefore the order is erroneous and prejudicial to the interest of revenue. Hence, the assessment for the AY 2013- 14 is hereby set aside for consideration afresh by the AO, after going through relevant circulars and case laws, and such verification as may be necessary with sufficient opportunity to the assessee of being heard. However technical error should not cause the assessee a hardship, or disentitle it to a relief which would otherwise
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arise in the normal course. Therefore the AO will consider the issue in the light of the submission made by the assessee as above.”
The assessee filed ITA No.208/Coch/2018 and the Tribunal through the judgment impugned in the appeal dismissed the appeal filed by the assessee. Hence the appeal to this Court under Section 260A of the Act.
Mr.Arunraj argues that the order of the Commissioner under Section 263 of the Act is completely erroneous and illegal in as much as the assessment order dated 18.3.2016 is not erroneous and not prejudicial to the interest of the revenue. Therefore, the revision order of the Commissioner suffers from a patent illegality. Explaining the argument, it is contended, the Commissioner proceeded on the assumption that Section 68 of the Act deals with deemed to be income and such deemed income cannot be classified under one head or the other of Section 14 of the Act. Therefore, the set off is unavailable. The said pre-assumption, it is argued, is illegal. The deemed income
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falls, according to him, under one head or the other under Section 14. The adjustment viz. allowance, set off is admittedly governed by Section 115BBE of the Act. The section as it stood for the applicable assessment year did not have the words “or set off of any loss”. Therefore, the insertion to Section 115BBE regulates what can be allowed and what cannot be allowed. As per the applicable section set off of business loss is not one of the prohibited items for setting off of loss from the income earned by the assessee. He places strong reliance on the judgment of this Court in Vijaya Hospitality and Resorts Ltd. v Commissioner of Income Tax and others (2019) 419 ITR 322 and CBDT Circular No.11 of 2019 dated 19.6.2019. He prays for answering the questions in favour of assessee and against the revenue.
Mr.Christopher Abraham, referring to the order of Commissioner dated 30.3.2018 argues that the order when made by the Commissioner, the precedent binding on the department
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was M/s Kerala Sponge Iron Ltd. The Commissioner has directed re-assessment by following a binding precedent and no exception to the order in revision made under Section 263 of the Act could be made out by referring to a view taken by this Court in Vijaya Hospitality case and the CBDT Circular.
We have taken note of the contentions and perused the record. We are of the view that a comprehensive and simple question arises for consideration in the subject tax appeal, viz. whether the unexplained receipt treated as deemed to be income under Section 68 of the Act falls under one head or the other of Section 14 of the Act and if so Section 115BBE as applicable for the assessment year bars adjusting business loss from income. In Vijaya Hospitality case, the possible and probable arguments available for denying the claim of business loss set off are considered. We are of the view that by referring to the relevant portions in Vijaya Hospitality case, most of the objections now noted either to the Tribunal or tried to be canvassed for and on
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behalf of the revenue are answered fully. The relevant portions in Vijaya Hospitality case read thus: “8. We may refer to the decisions cited above at the first instance. First among in point of time is the decision of the High Court of Gujarat in Fakkir Mohmed Haji Hasan (supra). It is held that the provisions of sections 69, 69A, 69B or 69C apply when no source is disclosed tall. It would not be possible to classify the deemed income under anyone of the heads specified under section 14. Therefore such deemed income will not fall even under the head of income from other sources and corresponding deductions which are allowable under various heads cannot be allowed in the case of such income. It is observed that if it is possible to peg the income under any one of the heads enumerated under section 14, by virtue of satisfactory explanation being given, then the provisions of sections 69, 69A, 69B and 69C will not apply, in which event the provisions regarding deductions etc applicable to the relevant head of income under which such income falls will automatically be attracted. The decisions in Fakir Mohmed Haji Hasan (supra) was rendered in August 2000. But the High Court of Gujarat in the decision in Radhe Developers (supra), rendered in April 2009, made reference to the decision in Fakkir Mohmed Haji Hasan (supra) and observed that the decision Mohmed Haji Hasan (supra) is not relevant or germane to the issue involve therein because the scheme emanating from a conjoint
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reading of the provisions of section 14 and 56 of the Act was not considered. Referring to the decisions of the Hon’ble Supreme Court in CIT v. D.P. Sandu Bros. Chembur Pvt. Ltd. MANU/SC/0070/2005 [2005] 273 ITR 1 (SC); [2005] 193 CTR (SC) 578 and in Untied Commercial Bank Ltd. v. CIT MANU/SC/0060/1957 (1957) 32 ITR 688 (SC) it was held that the Act does not envisage taxing of any income under any head not specified in section 14 of the Act and therefore there is no question of trying to read any conflict in the judgment of that court.
But the High Court of Gujarat itself in a still later decision in Shilpa Dyeing and Printing Mills Pvt. Ltd. (supra) found that by applying the decision in Fakkir Mohmed Haji Hasan (supra), as explained in Radhe Developers (supra) the benefit of section 71 as applicable to the facts involved in the said case cannot be declined when the question of set-off was considered. While deciding the issue as to whether set-off can be given with respect to income from an unlisted source, the benefit of section 71 with respect to set-off was denied by the Assessing Officer by relying on Fakkir Mohmed Haji Hasan (supra). Relying on to the decision of the Madras High Court in CIT v. Chensing Ventures MANU/TN/8359/2007 [2007] 291 ITR 258 (Mad) it is held that, once a head of income is assigned to the additional income disclosed whether business or other source, it becomes available for set-off against
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the current year's business loss, as the current year's business loss is allowed to be set off against the current year's income under any other head, by virtue of section 71. In CIT v. Chensing Ventures (supra) it was held that, the income-tax is only one tax levied on the sum total of the income classified and chargeable under various heads. Section 14 has classified different heads of income and the income-tax under each head is separately computed. The income which is computed in accordance with law is one income and it is not a collection of distinct taxes levied separately on each head of income and does not become a category of various tax 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 the income-tax of his total income, though his income under each head may be well below the taxable limit. Hence, the law sustained in any year under any head of income will have to be set off against income under any other head. Based on the above principle it was held that set-off cannot be declined. 10. This court while deciding the case of Kerala Sponge Iron Ltd. (supra) in the year 2015 had placed reliance on Fakkir Mohmed Haji Hasan's case (supra) and considered the question as to whether income determined under section 68 will fall under any head of section 14 and is not such income beyond section 17 which deals with set-off and held that when the income cannot be classified under any one of the heads under this
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section, it follows that giving any deductions under the provisions which correspond to such heads of income will not arise. Once the income is treated as unexplained cash credit under section 68 of the Act, for the purpose of setoff or any other purpose, the said unexplained income cannot be treated as business income under any one of the heads provided under section 14, in which the question of set off does not arise.
The contention raised by Sri A. Kumar, learned counsel for the appellant is that while deciding the case in Kerala Sponge Iron Ltd. (supra), this court had failed to take note of the principle settled in the decisions of the High Court of Gujarat in Radhe Developers (supra) and Shilpa Dyeing and Printing Mills (P) Ltd. (supra) and also the decision of the High Court of Madras in Chensing Ventures (supra) as well as the decisions of the honourable Supreme Court relied upon in those cases. It is further pointed out that this court while deciding Kerala Sponge Iron Ltd. (supra) had also omitted notice of an earlier decision of this court in PD. Abraham (supra), which was decided in March 2014. One of the issues considered in PD. Abraham (supra) was whether in the absence of any satisfactory explanation regarding the source of the creditor, it can be said that the credit is not a business income. Referring to the decisions of the honourable Supreme Court in Lakhmichand Baijnath v CIT MANU/SC/0063/1958 (1959) 35 ITR 416 (SC), in which it was found that it is not unreasonable
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to infer that the addition made under section 68 is receipt from the business of the assessee, and also relying on the decision of this court in Annamala Reddiar v. CIT MANU/KE/0120/1963 [1964] 53 ITR 601 (Ker), the Tribunal in the said case had formed an opinion that exercise of section 263 was not warranted. But this court in the said case found that the finding of the Assessing Officer based on the above said proposition cannot be treated as erroneous. In Lakhmi Chand Baijnath (supra) the apex court found that even if the explanation given by the assessee as to how the amount came to be received is rejected as untenable, the credits were treated as business receipt which are chargeable. It was found that in view of such a proposition held by the honourable Supreme Court, the exercise made under section 263 by the Commissioner was unsustainable. 12. On the basis of the contentions as mentioned above, it was argued on behalf of the appellant that the income assessed, with respect to which it was found that there is no proper explanation forthcoming and which was found credited in the books of account needs to be treated as "income from other sources with respect to which set-off can be permitted under section 72 of the Act against the unabsorbed portion of depreciation which will fall within the category of section 32(2) of the Act. It is further contended that the carry forward unabsorbed portion of depreciation can be allowed to be set off against the profits and gains of any business and going by sub-section (2) of section 72, such carry
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forward amounts coming within the purview of section 32(2) shall be adjusted. In this regard, the learned counsel had placed reliance on a decision of the High Court of Madras in CIT v Spell Semi Conductor Ltd. MANU/TN/2170/2012: [2013] 212 Taxman 506 (Mad). It is held therein that, if the assessee had income under other heads, section 32(2) provides relief and section 72(2) does not prevent set-off of the carried forward depreciation being given under head of income from business or income from other sources. It was explained that as far as the income from other sources is concerned, there is provision for set-off of the unabsorbed depreciation allowance as against the income from other sources as contemplated under section 32(2). Therefore, it is not necessary that one should wait for the assessee to earn income from business so as to exhaust the carry forward of loss to be set off against the business income and then apply the unabsorbed depreciation. A reading of section 32(2) thus makes it clear that if the unabsorbed depreciation allowance could not be wholly set off under clause (i) and clause (ii), the amount of depreciation not set off can be set off from income from other head, if any, available for the assessment year. It was observed that the language of section 32(2) is, very clear and there is hardly anything contained in section 32(2) to prevent such set-off of carried forward depreciation being given to the assessee under the head of income from business or income from other sources.
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Controverting the arguments on behalf of the appellant, the learned standing counsel for the Government of India (Taxes) made an elaborate scanning of the various provisions under which the scheme of the Act is framed. Referring to the charging provision in section 4, it is pointed out that the income-tax shall be charged with respect to the total income of every person for the previous year. Section 5 provides that the total income includes all income from whatever sources derived. Such income takes in the income which is deemed to have accrued, going by sub-section-1(d) of section 5. The method of computation of tax is governed under the provision 14 to section 59. Section 14 would provide that while computing the total income for the purpose of charging of income-tax, the income shall be classified under different heads, provided therein. Therefore, for the purpose of computation of income tax, the income need to be classified under any one of the heads contained in section 14, but apart from the classifications contained in section 14, there are other groups or class of income for which separate method of computation is provided under different provisions of the Act. For example, it is pointed out that section 1588(b) provides special procedure for assessment of undisclosed income unearthed through search or seizure conducted under section 132 of the Act. It is pointed out that section 15BBE is a similar special provision introduced with respect to any undisclosed income coming within the purview of sections 68, 69, 69A, 69B, 69C and 69D, It is pointed out that section
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115BBE was introduced in the statute book through Finance Act, 2012 with effect from April 1, 2013. Sub-section (2) of section 115BBE as it stood with effect from April 1, 2013 provides that, notwithstanding anything contained in the Act, no deductionin respect of any expenditure or allowance shall be allowed to the assessee under any provisions of this Act in computing his income referred to in clause (a) of sub section (1). Therefore it is clear that with respect to any sum for which proper explanation is not forthcoming and which is credited in the books, which is liable to be assessed under section 68, no deduction in respect of any expenditure or allowance can be permitted. It is pertinent to note that by virtue of a further amendment introduced to section 115BBE through the Finance Act, 2016, which was brought with effect from April 1, 2017 set off of any loss was also excluded with respect to the income referred to under section 68 of the Act. The contention of the standing counsel is that the method of computation with respect to profits and gains of business, the provision enumerated under sections 28 and 29 of the Act provides that it has to be computed in accordance with the methods provided under sections 30 to 43D. The depreciation, which remains unabsorbed, needs to be treated as carried forward loss in accordance with provisions contained under section 32. Since the undisclosed income cannot be treated as an income from profits and gains of the business, no set-off can be allowed against the unabsorbed portion of depreciation carried forward, is the contention.”
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Section 115BBE is inserted by Finance Act 2012 with effect from 1.4.2013. Through Finance Act 2016, an amendment to sub-section 2 of Section 115BBE was carried out. The section reads as follows: “After section 115BBD of the Income-tax Act, the following section shall be inserted with effect from the Ist day of April, 2013, namely:- “115BBE. Tax on income referred to in section 68 or section 69 or section 69A or section 69B or section 69C or section 69D.-(1) Where the total income of an assessee includes any income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, the income-tax payable shall be the aggregate of-
(a) The amount of income-tax calculated on income referred to in section 68, section 69, section 69A, section 69B, section 69C or section 69D, at the rate of thirty per cent; and
(b) The amount of income-tax with which the assessee would have been chargeable had his total income been reduced by the amount of income referred to in clause(a).
(2) Notwithstanding anything contained in this Act, no deduction in respect of any expenditure or allowance shall be allowed to the assessee under any provision of this Act in computing his income referred to in clause (a) of sub-section (1)”.
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Circular No.11 of 2019 dated 19.6.2019 of CBDT guides the department as procedure followed in cases arising under Sections 14, 68 and 115 has dealt with the procedure pre and post 1.4.2017 on the entitlement of business loss set off by the assessee. The CBDT Circular reads thus: “In this regard, it has been brought to the notice of the Central Board of Direct Taxes (the Board) that in assessments prior to assessment year 2017- 18, while some of the Assessing Officers have allowed set off of losses against the additions made by them under Section(s) 68/69/69A/69B/69C/69D, in some cases, set off of losses against the additions made under Section 115BB(1) of the Act have not been allowed. As the amendment Inserting the words or set off of any loss is applicable with effect from 1 of April, 2017 and applies from assessment year 2017-18 onwards, conflicting views have been taken by the Assessing Officers in assessments for years prior to assessment year 2017-18. The matter has been referred to the Board so that a consistent approach is adopted by the Assessing Officers while applying provision of section 115BBE in assessments for period prior to the assessment year 2017-18. 3. The Board has examined the matter. The Circular No. 3/2017 of the Board dated 20th January, 2017 which contains Explanatory notes to the provisions of the Finance Act, 2016, at para
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46.2, regarding amendment made in section 115BBE(2) of the Act mentions that currently there is uncertainty on the issue of set-off of losses against income referred to in section 115BBE. It also further mentions that the pre-amended provision of section 115BBE of the Act did not convey the intention that losses shall not be allowed to be set-off against income referred to in section 115BBE of the Act and hence, the amendment was made vide the Finance Act, 2016. 4.Thus keeping the legislative intent behind amendment in section 115BBE(2) vide the Finance Act, 2016 to remove any ambiguity of interpretation, the Board is of the view that since the term ‘or set off of any loss’ was specifically inserted only vide the Finance Act 2016, wef 01.04.2017, an assessee is entitled to claim set-off of loss against income determined under section 115BBE of the Act bill the assessment year 2016- 17”.” 12. The above excerpts squarely answer the objections noted either by the Tribunal or the reasons weighed with the commissioner for setting aside the assessment order dated 18.3.2016. 13. By following Vijaya Hospitality and Resorts Ltd. case and by referring to the CBDT circular, the questions are answered in favour of the assessee and against the revenue.
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The order of the Tribunal and the Commissioner are set aside. The order of the assessing officer dated 18.3.2016 is restored. Appeal allowed as indicated above.
Sd/- S.V.BHATTI, JUDGE
Sd/- BASANT BALAJI, JUDGE css/
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APPENDIX OF ITA 15/2021
PETITIONER ANNEXURES ANNEXURE A TRUE COPY OF THE ASSESSMENT ORDER DATED 18.3.2016 FOR THE ASSESSMENT YEAR 2013-14 ANNEXURE B TRUE COPY OF THE ORDER DATED 30.3.2018 PASSED BY THE PRINCIPAL COMMISSIONER OF INCOME TAX, KOZHIKODE FOR THE AY 2014-14 ANNEXURE C TRUE COPY OF THE IMPUGNED ORDER DATED 20.8.2018 OF THE INCOME TAX AAPPELLATE TRIBUNAL, COCHIN BENCH FOR THE AY 2013-14