DCIT, PATIALA vs. M/S STANDARD CORPORATION INDIA LTD., BARNALA

आदेश/Order PER ANNAPURNA GUPTA, A.M. : The present appeal has been filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-5, Ludhiana (in short CIT (Appeals) dated 16.3.2017 passed u/s 250 (6) of the Income Tax At, 1961 (hereinafter referred to as ‘Act’).

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“1. Whether the Ld. CIT(A) has erred in allowing the adjustment of business loss against the surrendered amount of Rs.2,21,00,000/- on account of undisclosed GP arising out of undisclosed sale surrendered during search.” 4. Brief facts relating to the issue are that the assessee is

limited company engaged in the business of manufacturing

of tractors, harvesters combines, hydraulic mobile cranes,

etc. During the impugned year, a search u/s 132 of the Act

was conducted at the premises of the assessee on 30.1.2013.

During search proceedings, the search party found

discrepancies in the stock and has given below in the table:

STOCK POSITION AS ON 30.01.2013 Name of Stock as per books as Actual Discrepancy SR NO Company (in rupees) on 30-1-2013 (after Stock Found reconciliation) (in on 30-01- rupees) 2013 (in rupees) 1 All the divisions of 37,85,32,491 20,10,82,157 17,74,50,334 standard group of stock short companies 2 M/s G.G Books of account are 82,94,220 82,94,220 Agriculture not maintained stock excess industries, handiaya chowk Barnala 5. During assessment proceedings, the assessee was

required to explain the difference in stock as given in the

table above i.e. stock short by Rs.17,74,50,334/- at the

assessee’s premises and stock excess by Rs.82,94,220/- at

the premises of M/s G.G. Agriculture Industries, a sister

concern. After considering submissions of the assessee,

confirmations of M/s G.G. Agriculture Industries, the

Assessing Officer concluded net stock shortage of

Rs.16,91,56,114/- i.e. (Rs.17,74,50,334/- minus

Rs.82,94,220/-). Treating the same as sale outside the books

of the assessee and applying thereon GP rate of 13.05%, as

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shown by the assessee during the year under consideration

i.e. assessment year 2013-14, the Assessing Officer

computed the additional profits on the stock found short at

Rs.2,20,74,837/-, which when confronted to the assessee,

was surrendered by him to buy peace of mind and to avoid

litigation and subject to no penalty imposed. The assessee

surrendered the said amount, rounded off Rs.2.21 crores,

and included the same in its return of income by filing the

requisite computation during the assessment proceedings

giving effect to the surrendered income. Subsequently the

case was assessed u/s 143(3) of the Act at an income of

Rs.2.21 crores without adjusting business losses returned

for the year of Rs.4,76,16,256/-. by applying the decision in

the case of Kim Pharma Pvt. Ltd. Vs. CIT in ITA No.106 of

2011 (O&M) .

Ld.CIT(Appeals) who deleted the addition so made holding

that on the facts of the case since the surrender had been

made on the discrepancy of stock, the same was to be

assessed as business income and as per law set off of

business losses for the year as per the provisions of sections

70 and 71 of the Act, had to be allowed. The relevant

findings of the Ld.CIT(Appeals) at page 17 of the order are as

under:

“The facts of the case, the basis of assessment made by the A.O. and the submissions/arguments of the AR during the appellate proceedings have been considered. It is a fact that no surrender was made by the assessee, during the course of search, under section 132(4). As per the assessment order there was a discrepancy in the stock physically

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found/inventoried on the date of search and the value of the stock as per the books of account of the assessee on the date of search. The assessee was asked to explain the difference and in response, the assessee filed a revised computation offering an additional amount of Rs. 2,21,00,000/- as income for the assessment year 2013-14 on account of discrepancy in the stock. It is clear that the surrender was made during the course of assessment proceedings before the AO and the basis of the surrender was the discrepancy in the stock. On these facts, the surrendered income has to be assessed as business income. There is thus merit in the argument of the AR that the decision of the Hon'ble High Court in the case of Kim Pharma Pvt. Ltd. vs. CIT is not applicable in the facts and circumstances of the present case. Any addition during the assessment proceedings before the AO on account of discrepancies found relating to the stock, has to be made as 'business income' and as per law such an income can be adjusted and set off against the 'business loss' of the same year as per section 70 and 71 of the I.T. Act, 1961. The AR during the course of appellate proceedings submitted that the AO while making assessment and treating the surrendered income of Rs.2,21,00,000/- has accepted the current year business losses, but has not allowed set off of this loss against income disclosed during assessment proceeding as business income on account stock found short during search proceedings. As per AR, once an income is assessed as business income or even from other sources, it becomes available for set off against current year business loss as current year business loss is allowed to be set off against current year income under any other head as per Section 71. The assessee is therefore eligible to set off current year business loss with addition made during assessment. The arguments of the AR are found acceptable on this point and the additional income of Rs. 2,21,00,000/- is allowed to be set off against the returned loss of Rs. 4,76,16,256/- for the year Consideration.” 7. Aggrieved by the same, the Revenue has come up in

appeal before us, raising the following grounds:

relied upon the order of the Assessing Officer stating that no

adjustment of losses against the surrendered income could

be made in view of the decision of the Hon'ble Jurisdictional

High Court in the case of Kim Pharma Pvt. Ltd. (supra).

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upon the order of the Ld.CIT(Appeals) and further relied

upon the following decisions to support the order of the

CIT(A):

1) Gaurish Steels P. Ltd. Vs. ACIT (2015)

127 DTR 266

2) Mohd. Akbar Vs. ITO (2016) 46 CCH 0555 (Hyd.Trib) 3) Prashanti Surya Construction Co.P.Ltd. DCIT (2017) 49 CCH 0303 (Chd.Trib) 10. We have heard rival contentions and have gone through

the order of the Ld.CIT(Appeals). We do not find any

infirmity in the same. The factual findings of the

CIT(Appeals) that the surrender related to profits estimated

by treating the stock found short at the assessees premises

during search as sales made outside the books of the

assessee ,has not been controverted by the Revenue. It is not

disputed also that the surrender so made was accepted by

the Revenue. The surrender being accepted as on account of

profits earned on sales made outside the books,there is no

iota of doubt that the same was in the nature of business

income of the assessee. The Ld.CIT(Appeals),we hold, has

rightly held the impugned addition made of the surrender

on account of discrepancies relating to stock, as business

income. Further the observation of the CIT(A) that against

business income ,set off of business losses of the current

year is allowed as per law ,has also not been controverted

by the Revenue. We, therefore, see no reason to interfere in

the order of the CIT(Appeals).

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Kim Pharma(supra) has been dealt with and distinguished in

subsequent decisions, as cited by the Ld.Counsel for the

assessee, wherein it has been pointed out that while in the

case of Kim Pharma(supra) the surrender was on account of

cash which in the absence of any explanation was held to be

unexplained and hence not classifiable under any head of

income, the said ratio was not applicable to cases where the

surrender clearly related to the business of the assessee.

The said distinction has been clearly brought out in the case

of Gaurish Steels (supra) as under:

“The only issue to be considered by us is whether the income of Rs.70 lacs surrendered is to be taxable as business income or income from other sources or as deemed income under sections 69A, 69B and 69C of the Act as held by the Assessing Officer. A number of judicial pronouncements have been cited during the course of hearing, however, we have to bow down to the proposition laid down by the Jurisdictional Punjab & Haryana High Court in the case of M/s Kim Pharma Pvt. Ltd.(supra) since this is the only judgment of the Jurisdictional High Court which were brought to our notice. 12. On perusal of the said judgment, we find ourselves in agreement with the submission of the learned counsel for the assessee, that the only issue in that case was the taxability of cash surrendered during the course of survey, as the assessee had also surrendered 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 the assessee was already included as income from business. 13. In the present case, we see that the Assessing Officer has nowhere disputed the business losses incurred by the assessee. The books have not been rejected. It was stated at the Bar that even at the time of survey, in the trading account prepared by the survey team, there were losses incurred by the assessee. All these facts have not been disputed by the Assessing Officer. Further, the surrender made by the assessee was on account of cash found during the course of survey, discrepancy in the cost of construction of building, discrepancy in stock and discrepancy in advances and receivables. By no stretch of imagination, any of these

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incomes apart from cash can be considered as income under any head other that the ‘business income’. 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 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.14.”

treating the surrendered income of Rs.2.21 crores as

business income and allowing set off of business losses

therefrom.

therefore, dismissed.

Order pronounced in the Open Court.

Sd/- Sd/- संजय गग� अ�नपणा� ग�ता (ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 22nd October, 2018 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar