Dhanush General Stores vs Commissioner of Income Tax

Satish K. Agnihotri, J.—The instant appeal filed under s. 260A of the IT Act, 1961 (for short "the Act, 1961"), is against the order dt. 15th July, 2003 (Annex. A/2) passed by the Tribunal, in ITA No. 348/Nag/2001 (the asst. yr. 1998-99) (ITO vs. Dhanush General Stores). The appeal was admitted on the following substantial questions of law:

(i) In the facts and circumstances of the case whether the Tribunal was justified in treating the surrendered income as deemed income under s. 69B and not treating it as income from business particularly in the absence of such deeming provisions in survey operations, as are available for search and seizure operation.

(ii) In the facts and circumstances of the case whether the Tribunal was justified in holding that the accounting of surrendered income in the trading account is not in consonance with any system of accounting relevant for accounting any deemed income.

(iii) In the facts and circumstances of the case whether the Tribunal was justified in holding that the income offered in return of income as business income can be assessed as deemed income under s. 69B without holding that under which head of income it is assessable.

The facts in brief as projected by the assessee are that the assessee is a partnership firm and as such it is assessed. Survey under s. 133A of the Act, 1961, was conducted in the shop premises of the assessee on 27th Oct., 1997. Physical verification of the stock was done and ah inventory was accordingly prepared showing excess stock of Rs. 88,918. The assessee offered the same for taxation. In the trading and P & L a/c for the financial year 1997-98, the assessee showed an excess stock of Rs. 89,000 and thereby inflated the gross profit and net profit by that amount.

The assessing authority issued a notice thereto a reply was filed on 23rd Aug., 2000, stating that the excess stock worked out at the time of survey at Rs. 87,000 has been taken to account and stock and profit has been taken to account and stock and profit has increased by Rs. 89,000.

The assessing authority came to the conclusion that the assessee has surrendered the amount of Rs. 88,918 as excess stock, however, the assessee did not disclose the surrendered amount in its return of the income. Thus, it became the income for the year 1997-98 under the provisions of s. 69 of the Act, 1961, and also a penalty was initiated separately under s. 271(1)(c) of the Act, 1961.

The AO held as under :

These credits are appearing in the books of account for which no description as regard to from whom money on account of credits have been received also there is no mention in the ledger regarding these transactions. The practice followed by the assessee is that the assessee used to issue receipts in token of having received the amount and make the entries in the register captioned as daily wage from 1st April, 1997, to 31st March, 1998. The entries relating to the above credits are not reflected in this register nor any receipts have been issued. During the course of assessment proceedings, the assessee was required to explain the position no explanation has been put forth. In this view of the matter, vide this office letter No. ITO/Wd-3/BHI/D-308/98-99/837, dt. 12th Jan., 2001, the assessee was confronted that an amount of Rs. 1,94,088 has been proposed to be assessed as income of the assessee under s. 69 of the IT Act, 1961. Further, scrutiny of register for credit sales on 5th April, 1997, showed total receipts of Rs. 2,700, vide cash receipt Nos. 905 and 906 issued by the firm. However, in the cash book dt. 5th April, 1997, an amount of Rs. 3,700 has been credited towards receipt from credit sales. The assessee was, therefore, required to show-cause why Rs. 1,000 should not be added to its total income. For this purpose, the case was fixed for final hearing on 18th Jan., 2001, at 15.30 hours sharp. The above said letter was duly served on the assessee on 17th Jan., 2001. However, on the date of hearing, i.e., 18th Jan., 2001, none attended nor any application seeking adjournment has been received till the date of passing of the assessment order. From the discussion made above, it is crystal clear that the assessee has introduced the cash of Rs. 1,94,088 and since no satisfactory explanation is offered, a sum of Rs. 1,75,088 is being added to the total income of the assessee. For concealment of income penalty proceedings under s. 271(1)(c) are separately initiated.

There against, an appeal was preferred before the CIT(A). The CIT(A), vide order dt. 24th May, 2001 (Annex. P/7) deleted the addition of Rs. 88,918. The relevant portion of the said order reads as under:

The total effect of enhancement of expenditure under the above heads was the reduction of net profit by Rs. 34,500. It appears that in tin; absence of reflection of the entire value of the excess stock found during survey in the income returned by the assessee, the AO was under the impression the value of excess stock found during survey has not been added and shown in the return of income filed by the assessee. But the fact remains that the value of the excess stock found during survey has been duly credited to trading account with the result that the percentage of NP before depreciation and salary and interest to the partners increased from 3.077 per cent in the last year to 4.30 per cent for the year under appeal. Since the assessee has already included the excess stock in his account there is no question of making another addition of the identical amount to the income returned by the assessee. Accordingly, the addition of Rs. 88,918 made by the AO is deleted.

There against, an appeal was preferred by the assessee (sic-Revenue) before the Tribunal on the following grounds :

On the facts and circumstances of the case, the learned CIT(A) was not justified in:

Deleting the addition of Rs. 88,900 made by the AO on account of excess stock found during survey.

Restoring back the issue to the file of the AO to decide afresh the matter of addition of Rs. 1,75,088 made by the AO as unexplained loan on account of ''Udhari Khate Ka Jama,

The Tribunal found that the surrendered income was on account of undisclosed investment and the excess stock found at the time of survey because the assessee was not able to explain the source of investment in the excess stock, therefore, the investment was to be taxed as the assessee''s income under the deeming provisions of s. 69B of the Act. It was held that this was not a business income as it was not taken directly to the computation of income but in the trading account or the P & L a/c only.

We have heard learned counsel appearing for the parties perused the pleadings, orders and the documents appended thereto.

It is crystal clear that the assessee had shown the surrendered income in the trading account or P & L a/c, but not in the computation of income. Thus, it cannot be held as business income, as if the income was treated as business income that must find place in the computation of income, which has not been done in the case.

The Tribunal has rightly come to the conclusion that on survey the excess stock valued at Rs. 89,000 was found which was not shown in the computation of income. Thus, the assesses had not deposited the income tax on the real income by showing in the trading account or the P & L a/c. The assessee cannot claim that this be treated as income, thus, the substantial question of law (ii) is answered accordingly.

With regard to substantial questions of law (i) and (iii), it is necessary to quote the relevant provisions, i.e., ss. 69 and 69B of the Act, 1961 which read as under:

Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the AO, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.

69B. Where in any financial year the assessee has made investments, or is found to be the owner of any bullion, jewellery, or other valuable article, and the AO finds that the amount expended on making such investments or in acquiring such bullion, jewellery or other valuable article exceeds the amount recorded in this behalf in the books of account maintained by the assessee for any source of income, and the assessee offers no explanation about such excess amount or the explanation offered by him is not, in the opinion of the AO, satisfactory, the excess amount may be deemed to be the income of the assessee for such financial year.

If there is undisclosed investment in bullion, jewellery of other valuable articles, which are not fully disclosed in the books of account the case would fall under the ambit of s. 69B of the Act, 1961. In the case on hand, there was excess stock, which can be held as unexplained investment, not investment in bullion, jewellery or other valuable articles. In the entire survey, it was not found that any bullion, jewellery or other valuable articles has been found. The Kirana articles cannot be held as other valuable articles.

"Valuable article" means an article which is valuable and having a high price, not other ordinary articles, as in the instant case.

The surrendered income ought to have been treated as deemed income under the provisions of s. 69 of the Act, 1961, however, on the wrong provision applied in the assessment order though the effect is one and the same the surrendered income cannot be held that it was not an income under the provisions of s. 69 of the Act, 1961. As such, the substantial question of law, i.e., (i) and (iii) are answered accordingly.

Reliance of the learned counsel appearing for the assessee upon the decision of the I High Court of COMMISSIONER OF INCOME TAX Vs. HINDUSTAN MILLS and ELECTRICAL STORES., is not applicable to the facts of the present case, as in the case of Hindustan Mills & Electrical Stores (supra), the ITO adopted pick and choose method in applying the gross profit rate on sale of two varying periods. Other decisions cited by the assessee are also not applicable to the facts of the present case.

In respect of question No. (ii), since the income surrendered was shown in the trading account but not in the computation of income for the purpose of taxation, it cannot be held that the observations of the Tribunal that the amount should not be treated as business income is unsustainable. Thus, the question No. (ii) is answered affirmatively.

The finding of the AO as aforestated, was confirmed by the CIT(A) as well as the Tribunal. In the result, the appeal fails and is accordingly dismissed. No order as to costs.