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Facts
A search and seizure operation under Section 132 was conducted on the assessee's premises. The assessee e-filed a return of income, and the AO added Rs. 4,42,00,000/- based on amounts surrendered by Shri Sachin Arora on behalf of the assessee. The CIT(A) subsequently allowed the assessee's appeal, which prompted the Department of Revenue to file the present appeal before the ITAT.
Held
The ITAT held that the surrendered amount of Rs. 4,42,00,000/-, declared as 'Cessation of Creditors', falls under Section 41(1) of the Income Tax Act, allowing it to be set off against business losses/unabsorbed depreciation. The AO failed to provide evidence classifying this as 'deemed income' under Sections 68 to 69D. Therefore, the tribunal upheld the CIT(A)'s decision, dismissing the revenue's appeal.
Key Issues
Whether income surrendered during a search operation, categorized as 'cessation of liabilities' (sundry creditors), can be set off against business losses/unabsorbed depreciation and taxed under normal provisions (Section 41(1)) rather than as undisclosed income under Section 68 r.w.s. 115BBE.
Sections Cited
Section 132, Section 143(2), Section 142(1), Section 115BBE, Section 41(1), Section 68, Section 69, Section 69D, Section 132(4)
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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI M BALAGANESH & SHRI VIMAL KUMAR
The Department of Revenue’s appeal is against order dated 04.08.2021 of the Learned Commissioner of Income Tax (Appeals) [hereinafter referred as “Learned CIT(A)”] through which appeal was allowed and assessment order dated 29.12.2018 of the Learned Deputy Commissioner of Income Tax, Central Circle, Ghaziabad (herein after referred as “Learned AO”) on account of set off surrendered income was set aside.
Brief facts of the case are that search and seizure operation under section 132 of the Income Tax Act, 1961 (hereinafter referred to “the Act”) was conducted on 3.11.2016 at the premises of the assessee comprising M/s. VVIP & SSG Group of cases. Assessee e-filed return of income on 29.10.2017 declaring total income of Rs. 68,02,420/-. Notice under section 143(2) of the Act was issued on 05.09.2018. Notice under section 142(1) of the Act along with questionnaire was issued. After completing the assessment Learned AO made addition of Rs. 4,42,00,000/- being the amounts surrendered by Shri Sachin Arora on behalf of the assessee.
Assessee preferred appeal before the Learned CIT(A) which was allowed vide order dated 4.8.2021. 4. Being aggrieved the Department of Revenue preferred present appeal. 5. Learned representative for Department submitted that Learned CIT(A) erred in changing the rate of interest from section 115BBE of the Act to the normal rate of tax as the income was surrendered during the course of search proceedings. 6. Learned representative for the Department submitted that Learned CIT(A) erred in holding that undisclosed income of the assessee is income of the assessee u/s 41(1) of the Act and accordingly allowed set off of surrendered/undisclosed income with the business losses/unabsorbed depreciation claimed by the assessee without considering the fact that the assessee surrendered the amount of Rs. 4,42,00,000/- against bogus sundry creditors which was added to the total income of the 2 assessee u/s 68 of the I.T. Act r.w.s. 115BBE of the Act treating the same as undisclosed income as the assessee was unable to explain the source and nature of the same. Further provisions of section 115BBE of the Act provides that no deduction in respect of any expenditure or allowance (or set off of any loss) shall be allowed to the assessee under any provisions of this Act in computing income referred to in clause (a) and clause (b) of sub- section (1) of Sec. 115BBE of the Act.
Learned representative for Department submitted that Ld. CIT (A) has erred in applying provisions of section 41(1) of the Act without considering the fact that the assessee has surrendered the amount of Rs. 4,42,00,000/- under the head 'Other Income'.
Learned representative for Department submitted that Learned CIT(A) had erred in stating that the assessee has suo- moto written off an amount of Rs. 1,81,32,377/- as “Cessation of Creditors” as against Rs. 4,42,00,000/- surrendered by the assessee in his statement whereas the assessee in statement has never stated that it had written the said amount back in its books of account in view of Explanation 1 of section 41(1) of the Act.
Learned representative for assessee submitted that the AO has invoked the provisions of Section 115BBE of the Act with reference to Section 68 of the Act by stating that the assessee firm has shown its undisclosed fund as sundry creditors which the assessee firm has earned through its undisclosed sources and hence the provisions of section 115BBE of the Act are applicable. However, this finding is not as per law since the Sundry Creditors of preceding years cannot be considered as unexplained credit coming in the current year. From the plain reading of Section 68 of the Income Tax Act, it is evident that the provisions of Section 68 of the Act are invoked when any “Sum is found credited in the books of an assessee maintained for the previous year”. Thus, it is mandatory that there should be a credit in the books of accounts in the previous year for the same to be part of deemed income in terms of accounts in that previous year for the same to be part of deemed income in terms of section 68 of IT Act. In this regard, it is observed that the write off of Sundry Creditors against purchase, forms part of section 41(1) of Income Tax Act and hence the income is covered as under cession of trading liabilities. It has been found that the appellant has suo-moto written off an amount of Rs. 4,42,00,000/- as “Cessation” of Creditors as stated by him in his Statement.
Learned representative for assessee submitted that the Ld. AO could not bring any evidence on record from which it may be concluded that income of Rs. 4,42,00,000/- may be categorized as 'deemed income', as per the provisions of section 68 to 69D of IT Act since the essential conditions of these sections are not fulfilled in case of this disclosure of income which has been made on account of cessation of liabilities of long standing Sundry Creditors.
Learned representative for assessee submitted that Hon’ble ITAT Delhi Benches in the case of ACIT vs. Shri Dhiraj Jain in dated on 3rd April, 2024 held that:-
“13. In our considered opinion, transaction reflected on the seized paper represents future contract of purchase and sale of gold and silver on various dates. Since the income has been accepted by the Assessing Officer, it can be safely presumed that the transactions recorded in the seized documents do not have any different character than that reflected on the seized paper and that is income of the assessee.
14. We are of the considered view that the assessee has clearly explained the source of profit earned by him and as the source of income is identifiable, deeming provisions of section 69 cannot be applied.”
From examination of record in light of aforesaid rival submissions it is crystal clear that Learned representative for assessee submitted that Learned AO has made addition based on the statement given by Shri Sachin Arora S/O Late Shri Satish Arora during the search proceedings at D-988. New Friends Colony, New Delhi on 03/04.11.2016 u/s 132(4) of IT Act. Shri Sachin Arora in response to question no 21 of the said statement has stated that he offers an additional income of Rs 4,42,00,000/- under HPS Concerete Pvt. Ltd i.e the assessee to meet out possible leakage of revenues and to cover up all the long pending liabilities and expenditure. Learned AO could not bring any evidence on record from which it may be concluded that this income of Rs. 4,42,00,000/- may be categorized as ‘deemed income’ , as per the provisions of sections 68 to 69D of the IT Act since the essential conditions of these sections of these sections are not fulfilled in case of this disclosure of income which has been made on account of cession of liabilities of long standing Sundry Creditors.
In view of the above material facts apparent on record the arguments on behalf of the department of revenue being devoid of merits are untenable. Hence the appeal of the Revenue deserves dismissal.
No other point was argued.
Hence, the appeal of the revenue is dismissed.
Order pronounced in the open court on 3rd July 2024.