Pr. Commissioner Of Income Tax, Alwar v. Bajargan Traders

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 258 / 2017 Pr. Commissioner of Income Tax, Alwar ----Appellant Versus Bajargan Traders C/o. Kalani & Co., CA, 5th Floor, the Mile Stone, Gandhi Nagar Turn, Tonk Road, Jaipur ----Respondent _____________________________________________________ For Appellant(s) : Ms. Parinitoo JainFor Respondent(s) : _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 12/09/2017 1.By way of this appeal, the appellant has assailed thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the assessee. 2.Counsel for the appellant has framed the following substantial questions of law:- “i) Whether the Tribunal was legally justified inreversing the findings of the CIT(A) and deletingthe addition of Rs. 70,04,814/- which wassurrendered by the assessee by holding thatsuch amount was included in the purchases andwas reflected in the sales and closing stock,specifically when the assessee failed to showthat the said amount was included in the salesand closing stock? ii) Whether the Tribunal was legally justified intreating the investment in excess stock for Rs.70,04,814/- found during the course of survey as ‘business income’ instead of ‘income fromother sources’ which was to be liable to tax u/s69? iii) Whether the Tribunal was legally justified inreversing the findings of the CIT(A) and deletingthe addition of Rs. 1,39,366/- made on account5of less interest charged by the firm from the wifeof one of the partner specifically when theinterest was paid at higher rates on the loanstaken?” 3.The Tribunal while considering the matter has observed as under:- “2.7. It is further submitted that the real issue in thiscase is whether the excess stock surrendered shouldbe made as a part of business income or not and ifso, assessee can claim deduction on account ofpayment of remuneration to partners on account u/s40b(v). In this regard, our reference was drawn tothe decision of Co-ordinate Bench in case of ShriRamnarayan Birla (in ITA No. 482/JP/15 dted30.09.2016). In that case, the question before theCoordinate Bench was “whether the CIT(A)-2,Udaipur has erred in directing the AO to assess theunexplained investment surrendered by the assesseeunder the head “income from Business” ignoring thedecision of the Hon’ble Gujarat High Court in the caseof Fakir Mohd. Hazi Hasan 247 ITR 290 thatunaccounted income ought to be categorized underthe residuary head of ‘Income from other sources’. Inrespect to the said issue, the findings of theCoordinate Bench are as follows: “We have heard the rival contentions and perused thematerial available on record. Undisputed factsemerged from the record that at the time of surveyexcess stock was found. It is also not disputed thatassessee is engaged in the business of jewellery.During the course of survey excess stock valuing Rs.77,66,887/- was found in respect of gold andjewellery. The Coordinate Bench in the case of ChoksiHiralal Mangnlal vs. DCIT 131, TTJ (Ahd.) 1 has heldthatinacaseswheresourceofinvestment/expenditure is clearly identifiable andalleged undisclosed asset has no independentexistence of its own or there is no separate physicalidentity of such investment/expenditure then firstwhat is to be taxed is the undisclosed businessreceipt invested in unidentifiable unaccounted assetand only on failure it should be considered to betaxed u/s 69 on the premises that such excessinvestment is not recorded in the books of account and its nature and source is not identifiable. Oncesuch excess investment is taxed as undeclaredbusiness receipt then taxing it further as deemedincome under section 69 would not be necessary.Therefore, the first attempt of the assessing authorityshould be to find out link of undeclaredinvestment/expenditure with the known head, giveopportunity to the assessee to establish nexus and ifit is satisfactorily established then first suchinvestment should be considered as undeclaredreceipt under that particular head. It is observed thatthere is no conflict with the decision of Hon’bleGujarat High Court in the case of Fakir Mohd.Jajihasan (supra) where investment in an asset orexpenditure is not identifiable and no nexus wasestablished then with any head of income and thuswas not available for set off against any loss underany other head. Therefore, the Hon’ble CoordinateBench held that where asset in which undeclaredinvestment is sought to be taxed is not clearlyidentifiable or does not have independent identity butis integral and inseparable (mixed) part of declaredasset falling under a particular head, then thedifference should be treated as undeclared businessincome explaining the investment. In the presentcase the excess stock was part of the stock. Therevenue has not pointed out that the excess stockhas any nexus with any other receipts. Therefore, wedo not find any fault with the decision of the ld.CIT(A) directing the AO to treat the surrenderedamount as excess stock qua the excess stock found.” 2.10. We have heard the rival contentions andperused the material available on record. During thecourse of survey, the assessee has surrendered anamount of Rs. 70,04,814/- towards investment instock of rice which had not been recorded in thebooks of accounts. Subsequently, in the books ofaccounts, the assessee has incorporated thistransaction by debiting the purchase account andcrediting the income from undisclosed sources. In theannual accounts, the purchases of Rs. 70,04,814/-were finally reflected as part of total purchasesamounting to Rs. 33,47,19,658/- in the profit andloss account and the same also found included aspart of the closing stock amount to Rs. 1,94,42,569/-in the profit/loss account since the said stock of ricewas not sold out. In addition to the purchase and theclosing stock, the amount of RS. 70,04,814/- alsofound credited in the profit and loss account asincome from undisclosed sources. The net effect ofthis double entry accounting treatment is that firstlythe unrecorded stock of rice has been brought on the books and now forms part of the recorded stockwhich can be subsequently sold out and theprofit/loss therefrom would be subject to tax as anyother normal business transaction. Secondly, theunreco4rded investment which has gone in purchaseof such unrecorded stock of rice has been recorded inthe books of accounts and offered to tax by creditingthe said amount in the profit and loss account. Hadthis investment been made out of known source,there was no necessity for assessee to credit theprofit/loss account and offer the same to tax.Accordingly, we do not see any infirmity in assessee’sbringing such transaction in its books of accounts andthe accounting treatment thereof so as to regulariseits books of accounts. In fact, the same provides acredible base for Revenue to bring to tax subsequentprofit/loss on sale of such stock of rice in future. 2.11. Having said that, the next issue that arises forconsideration is whether the amount surrendered byway of investment in the unrecorded stock of rice hasto be brought to tax under the head “businessincome” or “income from other sources”. In thepresent case, the assessee is dealing in sale offoodgrains, rice and oil seeds, and the excess stockwhich has been found during the course of survey isstock of rice. Therefore, the investment inprocurement of such stock of rice is clearlyidentifiable and related to the regular business stockof the assessee. The decision of the Co-ordinateBench in case of Shri Ramnarayan Birla (supra)supports the case of the assessee in this regard.Therefore, the investment in the excess stock has tobe brought to tax under the head “business income”and not under the head income from other sources”.In the result, ground No. 1 of the assessee isallowed. 3.2. The ld. AR of the assessee submitted that at theoutset, it may be noted that the AO has madeaddition on account of notional interest of Rs.1,39,366/-. There cannot be any addition on accountof notional income as held by the Hon’ble SupremeCourt in case of E.D. Sassoon & Co. & Ors. vs. CIT(1954) 26 ITR 27 and Godhra Electricity Co. Ltd. vs.CIT (1997) 225 ITR 746 where it was held that onlyreal income can be taxed, hypothetical incomecannot be taxed nor income can be taxed in vacuum.Therefore, the addition made by the AO is not as perlaw and the same be deleted. The ld. CIT(A) hasconfirmed the addition by stating that it is thedisallowance of interest. It is submitted that thelower authorities have not disputed about thecommercial expediency about the advance given toSmt. Rita Gupta. In fact, the advance was given to Smt. Rita Gupta in earlier years for construction ofgodown and the same was given on rent by theassessee. Therefore once commercial expediency forgiving the advance is established, no part of theinterest expenditure can be disallowed in view of thedecision of Hon’ble Supreme Court in case of S.A.Builders 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT379 ITR 347 where it was held that the Revenuecannot justifiably claim to put itself in the arm-chairof the businessman or in the position of the Board ofDirectors and assume the role to decide how much isreasonable expenditure having regard to thecircumstances of the case. If further held that nobusinessman can be compelled to maximize his profitand that the income tax authorities must putthemselves in the shoes of the assessee and see howa prudent businessman would act. The authoritiesmust not look at the matter from their own viewpointbut that of a prudent businessman. Further, in past,no such disallowance/addition was made. Therefore,neither the addition of notional interest made by theAO or disallowance of interest as held by the ld.CIT(A) is Rs. 1,96,73,637/-. Partners are paidinterest @ 12% the balance in the partners accountis much more than the amount advanced to Smt. RitaGupta who is a wife of one of the partner. Therefore,even the disallowance made @ 4% is not justifiedand the same should be restricted @ 2% only.Reliance is also placed on the following cases..CIT vs. Ram Kishan Verma (2016) 132 DTR 107/132Taxman 107 (Raj.)(HC) . CIT vs. Vijay Solvex Ltd. (2015) 113 DTR 382 (Raj.)(HC)(HC) 4.We are in complete agreement with the view taken by theTribunal. No substantial question of law arises. 5.Hence, the appeal stands dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. A.Sharma/23