SH. GURINDER MAKKAR,LUDHIANA vs. DCIT, CC-3, LUDHIANA

That the Ld. CIT(Appeals) 5, Ludhiana has assessed the amount of Rs. 50,53,000/- u/s 68/69A/69B and taxed the same u/s 115BBE instead of normal rates, ignoring the fact that the surrendered amount was a part of the business income of the assessee.

That the Ld. CIT(Appeals)5, Ludhiana has erred in confirming addition amounting to Rs. 29,23,000/- u/s 143(3) of the Income Tax Act, 1961 framing the assessment at an income of Rs. 85,86,130/- against the returned income of Rs. 56,63,130/-.

That Ld. CIT(Appeals)5, Ludhiana has passed order by applying double taxation on amount of Rs. 29,23,000/-, without considering the fact that the same amount has been already surrendered by the assessee on account of “excess stock” found during the course of survey and taxes were paid accordingly.

That the Ld. CIT(A)5, Ludhiana has erred in disallowing depreciation amounting to Rs. 70,000/- on the building.

Notwithstanding, the above said grounds of appeal, the Ld. CIT(Appeals) has wrongly confirmed the order passed u/s 143(3).

That the Ld. CIT(A), Ludhiana has erred in confirming the action of the Assessing Officer in invoking the provision of Section 68 of the Income Tax Act, 1961 on account of the additions has made by the Assessing Officer.

That the appellant craves leave to add, amend, alter any of the above grounds during the appellate proceedings have been considered.

Briefly the facts of case are that the assessee is engaged in the business of manufacturing of Fabrics and Readymade Garments under the name and style of M/s Ganesh Fabrics. A survey action under section 133A was conducted at the business premises of the assessee on 16/03/2018 wherein the assessee surrendered a sum of Rs. 50,53,000/- on account of excess stock, discrepancy in cost of building and expenditure in violation of Section 40A(3) of the Act. Subsequently, the assessee filed its return of income on 27/10/2018 declaring total income of Rs. 56,63,130/- including the surrendered income.

1 During the course of assessment proceedings, the AO observed that the surrender relates to unexplained investment which is covered under section under section 69/69B/69C and accordingly a show cause was issued as to why the surrender amount of Rs. 50,53,000/- should not be taxed as per the provisions of Section 115BBE of the Act. In response, the assessee filed his submission which were considered but not found acceptable to the AO.

2 As per the AO, the surrender income on account of excess stock, unexplained expenditure in the construction of building and cash expenditure are chargeable under section 68/69A/69B and to be taxed as per the provisions of Section 115BBE of the Act. Further, the AO observed that from the perusal of the Income Tax Return, it has been found that the assessee has shown such income as income from other sources but not as business income which itself shows that the assessee himself has not treated such surrender income as business income. Further, from the perusal of the trading account, the AO

3 Further, the AO observed that the surrender of Rs. 14,00,000/- on account of construction of building cannot be considered as part of actual cost of the building for the reason that the assessee has failed to show as to how the provision of Section 43(1)do not apply in the instant case and depreciation on the said amount @ 5% of Rs. 14,00,000/- amounting to Rs. 70,000/- was disallowed under section 32 r.w.s 43(1) of the Act.

Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has since sustained the said findings of the AO.

Against the said findings and the direction of the Ld. CIT(A), the assessee is in appeal before us.

During the course of hearing, the Ld. AR submitted that during the course of survey action at the business premises of the assessee on 16/03/2018, certain discrepancies were found on account of physical verification of stock vis-a-vis regular books of account and there was a difference of Rs. 28,53,000/- and in order to buy peace of mind, the assessee surrendered an amount of Rs. 28,53,000/- on account of excess stock over and above its normal business income. Besides that, the assessee surrendered a sum of Rs 14,00,000/- on account of discrepancy in cost of building and Rs 8,00,000/- on account of disallowance u/s 40A(3) of the Act.

1 It was submitted that during the course of survey action as well as during the course of assessment proceedings, no other source of income has been identified and all the income which accrues to assessee is on account of its regular business of manufacturing and selling of hosiery goods and fabrics which the assessee is carrying on for last so many years. It was accordingly submitted that the excess stock of Rs. 28,53,000/- pertains only to the regular business of the assessee and be therefore be assessed under the head “business income”.

2 It was further submitted that the excess stock so found was the only stock in which the assessee was regularly dealing and the department has itself compared the said stock with the stock as per books of account which makes it clear the department itself accepted that the stock pertains to the regular books of the assessee. It was submitted that after the surrender, the assessee has recorded the said stock in its books of account maintained for the regular business.

3 It was further submitted that the assessee debited the manufacturing and trading account with an amount of Rs. 28,53,000/- with account "Addition by Tax Auth. In stock" specifically instead of "Purchase Account" which was duly reflected in the Manufacturing and Trading Account for the year ended 31.03.2018. In this regard, it was submitted that the assessee has duly paid the taxes at normal rates on surrender amount by treating it under the head "Income from other Sources" although the same is the business income of the assessee and hence, the treatment of the assessee in the manufacturing and trading account has not resulted in nullifying the effect of surrender. Instead, the assessee has duly paid taxes on such amount of surrender under a different head of income, and as the surrender is only on account of the business of the assessee, the same is credited to the capital account of the assessee. Hence, when the tax has already been paid by the assessee on certain income, then

4 It was further submitted that the additions made by the Ld. AO only on account of a mistaken view of law taken by the assessee are invalid. Reliance in this regard was placed on the judgment of Jaipur Bench of ITAT in the case of Smt. Rekha Shekhawat vs PCIT as reported in 218 DTR 161 wherein the matter has been decided in the favor of the assessee and wherein, it has been held as under: "Therefore, merely because the assesse had taken the mistaken view of the correct legal position by wrongly showing such additional income under head income from other sources, of the surrounding circumstances and the binding decisions of Hon'ble Rajasthan High Court and ITAT, Jaipur. Such an acquaintance cannot take away the right of a party to which he is otherwise entitled to, or in other words, to be assessed as business income. Law is also, well settled that, no tax can be collected without the authority of law as guaranteed by Article 265 of the Constitution of India. Therefore, even if the assessee has made some commitment but later on found wrong in law, it cannot work as an estoppel and the assessee, if still feels aggrieved in any manner, can pursue legal remedy. Hence, showing income under a wrong head in the return of income cannot be taken as an admission

In support of his aforesaid contentions, reliance was further placed on the Coordinate Benches decision in case of M/s Sham Jewellers in ITA No. 375/Chd/2022, M/s Sham Fashion mall in ITA No. 315/Chd/2022, M/s Khurana Rolling Mills Pvt. Ltd. in ITA No. 745/Chd/2016, M/s DDK Spinning Mills in ITA No.

8 It was submitted that as the assessee has duly paid tax on all such amount of surrender made by the assessee, therefore, making additions of the same amount to the total income of the assessee are wholly invalid as it results 'double

Per contra, the Ld. DR submitted that for the unaccounted stock found during the survey proceedings, there can be no presumption to treat the value representing such excess stock as application of business income in absence of any evidence of earning that income or details as to when, how and from whom such income was derived which has been invested in stock. It was submitted that the assessee has not been able to establish nexus between the excess stock and normal business income. Further no documentary evidence has been submitted to justify the additional income of Rs. 50,53,000/- as business income. It was accordingly submitted that the action of the AO in applying the rate as prescribed u/s 115BBE of the Act on the surrendered income included in the tax return and which has been treated by the AO as income under section 69B of the Act is justified and the Ld. CIT(A) has rightly affirmed the order of the AO in treating the surrender on account of unaccounted stock found during the course of survey as deemed income under section 69B of the Act and which has been brought to tax as per the provisions of Section 115BBE of the Act. It was accordingly submitted that the order so passed by the Ld. CIT(A) be confirmed and the appeal so filed by the Assessee be dismissed.

We have heard the rival contentions and purused the material available on record. The AO has invoked the deeming provisions of Section 69B and brought to tax excess stock found during the course of survey which is under challenge before us. It is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.

1 In particular, for the deeming provisions of Section 69B to be attracted in the instant case, there has to be a finding that the assessee has made investments in the stock during the financial year and such investments are not fully recorded in the books of accounts 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, the latter can proceed and the value of the investment may be deemed as income of the assessee for such financial year. Therefore, the explanation so offered by the assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the assessee needs to be analysed and examined to draw necessary conclusions in this regard and discretion so vested in the AO for invocation of the deeming fiction so envisaged in the statute can accordingly be exercised.

2 For the purposes, we refer to the statement so recorded of the assessee during the course of survey on 16/03/2018. In Question no. 22, it was stated that during the course of survey proceedings u/s 133A, physical verification of stock lying in the business premises was done and after physical verification, it comes to Rs 67,42,240/- whereas as per profit/loss account, the stock is Rs 42,93,058/- and the assessee was asked to explain the difference. In response, the assessee submitted that as per last year gross profit, the value of closing stock should be Rs 42.93 lacs and the difference in stock value is due to gross margin increase in sale due to good season for the current financial year, however, to buy piece of mind, he declares the difference of Rs 28,53,182/- which also includes the value of stock sent for job work as his income for the current financial year subject to no penal action. We therefore find that the stock physically found has been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the assessee firm has been offered to tax. There is thus no dispute that there is a commonality in the stock so found and as recorded in the books and in absence of which, the comparison would not have been possible and difference would not have been worked out. The Revenue has not pointed out that the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. There is thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found is clearly in nature of business income. The statement of the assessee is available on record and related documents so found during the course of survey are stated to be in possession of the Revenue authorities. Apparently, the AO has failed to appreciate the statement of the assessee recorded during the course of survey and other documents and findings of the survey team which are very much part of the records in correct perspective. We therefore find that the nature and source of such unaccounted stock is nothing but arising out of assessee’s business operations. No doubt, these transactions were not recorded at the time of survey thus qualify as unrecorded transactions satisfying one of the essential conditions, at the same time, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and the necessary nexus with assessee’s business has been established, thus, it cannot be said that these are unexplained transactions thus, doesn’t satisfy the second condition for invoking the deeming provisions of section 69B of the Act.

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

In view of the above, AO is directed to consider the sum of Rs.8,10,011/- as undisclosed business income assessable under the head ‘business’ and other two sums under section 69. The business income including application of section 40(b) has to be considered accordingly. For calculation of income in view of our above observations, we restore the matter to the file of AO.

4 In the instant case as well, we find that the difference in stock so found out by the authorities has no independent identity and is part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, 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 and the difference should thus be treated as undeclared business income.

5 Following the said decision of the Coordinate Ahmedabad Bench, the Jaipur Bench in case of DCIT Vs. Shri Ram Narayan Birla (ITA No. 482/JP/2015 dt. 30/09/2016) 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:

6 Thereafter, the Coordinate Jaipur Benches in case of Bajargan Traders Vs. ACIT (in ITA No. 137/JP/2017 dt. 17/03/2017) has similarly held as under:

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

8 Similarly, the Coordinate Chandigarh Benches in case of Gaurish Steels Pvt. Ltd. Vs ACIT 43 ITR (Trib) 414 has held as under:

9 Similarly, the Coordinate Chandigarh Bench in case of Famina Knit Fabs Vs. ACIT reported in (2019) 176 ITD 246 (Chd-Trib) has held as under:

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.

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.

Therefore, as per the facts of the case in ITA No.408/Chd/2018 and as per the provisions of law relating to the issue, the surrendered income, we hold, was assessable as business income of the assessee and set off of losses was to be allowed against the same as rightly claimed by the assessee.

Now coming to the facts of the case in ITA No/1494/Chd/2017, the income surrendered was on account of the following as narrated above in earlier part of our order:

As far as the surrender made on account of investment in Kothi of Rs.60 lacs, neither is the same disclosed in the books of the assessee nor source of the same disclosed. Therefore, the same is to be assessed as deemed income u/s 69 of the Act. The same applies to the surrender of Rs.10 lacs made to cover the miscellaneous discrepancies in loose paper of Rs.10 lacs. Neither the nature of the discrepancies, nor any source relating to the same has been disclosed and, therefore, the same is also to be assessed as deemed income u/ss 69, 69A, 69B and 69C of the Act.

As far as the surrender of Rs.132 lacs made on account of sundry creditors and advances received from customers and Rs.198 lacs on account of gross profit on sale out of the books, both of them clearly are in relation to the business carried on by the assessee and are thus in the nature of business income. Therefore, the set off of business losses, both current and brought forward are to be allowed as per the provisions of law. As far as the income surrendered and to be assessed u/s 69, 69A, 69B and 69C of the Act, as held above before us, the same is to be subjected to tax as per the provisions of section 115BBE of the Act.”

10 In the instant case as well, the surrender on account of excess stock, being the regular stock in which assessee deals in and thus related to the business being carried on by the assessee.

11 Similarly, the Coordinate Chandigarh Bench in case of M/s Sham Jewellers Vs. The DCIT (Supra) has held as under:

In the instant case as well, there is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, 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 and the difference should thus be treated as business income.

In light of aforesaid discussion and in the entirety of facts and circumstances of the case, the income so surrendered on account of investment in excess stock during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same has to be assessed to tax under the head “business income”. In absence of deeming provisions, the question of application of section 115BBE doesn’t arise and normal tax rate shall apply. The AO is thus directed to assess the income under the head “Income from Business/profession” and apply the normal rate of tax.

Coming to the matter relating to surrender on account of cost of building amounting to Rs 14,00,000/-, from the perusal of the statement of the assessee recorded during the course of survey, it is noted that the building was constructed way back in the year 2014-15 and during the year under consideration, certain renovation and extension work has been undertaken by the assessee. In terms of cost of such renovation and extension, no bills, vouchers etc were found during the course of survey, however, based on estimate, an amount of Rs 14 lacs was surrendered by the assessee. We therefore find that there is no dispute that certain renovation and extension to the building has been carried out by the assessee during the year, however, as far as the quantum of expenditure on renovation and extension was concerned, no material/documentation was found during the course of survey and the estimated amount of expenditure has been taken basis the statement of the assessee recorded at the time of survey. Even during the course of assessment proceedings, the AO has not taken any action in terms of referring the matter to the valuation officer and in determining the amount of expenditure basis physical examination and applying specified rates.

15 It is a settled position that the statement of the assessee recorded during the course of the survey on a standalone basis has no evidentiary value, at the same, the said statement can be considered as relevant material, but for that, there has to be further material to corroborate and substantiate the same which is manifestly absent in the instant case. Therefore, basis the statement on a standalone basis, there is no legal basis for taking action against the assessee. At the same time, it is also a matter of record that the assessee has not retracted from the said surrender either as part of filing of the return of income or during

16 Coming to the related issue of disallowance of depreciation on such cost of construction, we find that there is no legal and justifiable basis to disallow the depreciation. Once the assessee has surrendered the amount on account of cost of extension, renovation and the same has been brought in the books of accounts, the same will form part of block of the building and the assessee will be eligible for claim of depreciation thereon. As we have noted earlier, no bills/vouchers have been found during the course of survey, therefore, there is no basis to invoke section 43(1) in the instant case and thus, the depreciation so claimed is directed to be allowed.

17 Now coming to the issue of surrender of Rs 8,00,000/- on account of disallowance u/s 40A(3) of the Act, there is no finding that cash expenditure has been found and which has not been accounted for and in such a situation, we fail to understand as to how the deeming provisions can be invoked in this regard. Where the expenditure has been held disallowable in terms of section 40A(3) of the Act which means that certain expenditure has been incurred, accounted for in books of accounts and has been found to be incurred in cash in violation of section 40A(3), the question of unexplained expenditure or unaccounted expenditure doesn’t arise for consideration. Hence, the action of the AO in invoking the deeming provisions in this regard is set-aside.

18 In light of aforesaid discussions, the income so surrendered amounting to Rs 50,53,000 during the course of survey cannot be brought to tax under the deeming provisions and has to be assessed to tax under the head “business income”. In absence of deeming provisions, the question of application of section 115BBE doesn’t arise and normal tax rate shall apply. The AO is thus directed to assess the income under the head “Income from Business/profession” and apply the normal rate of tax.

In the result, the appeal of the assessee is disposed off in light of aforesaid directions.

""यथ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File