Commissioner of Income Tax vs Mehta Gwar Gum and Company

This appeal has been filed by the Revenue, against the judgment of the Tribunal, confirming the order of the CIT(A), whereby he had allowed deductions to the assessee, u/s 80IA of the IT Act, on the amount of Rs. 4,76,154, finding it to be business income.

The appeal was admitted on 22nd Aug., 2006, by framing following substantial question of law:

Whether on the facts and in the circumstances of the case, additions made in the income of the assessee as income from the undisclosed sources can be considered as income from the business, which is eligible for deduction u/s 80IA of the IT Act, 1961.

The necessary facts are that a survey was conducted on the business premises of the assfssee, on 31st Dec, 1999, and according to the Department, excess stock, in the tune of Rs. 4,51,010 was found. The assessee did not object to this excess stock. Thereafter, the assessee filed return for the relevant previous year, on 31st Oct., 2000, which was selected for scrutiny, and notice u/s 143(2) was issued on 18th April, 2001, and onwards. The assessee, in the return has shown the total sales worth Rs. 5,48,01,800, and had shown GP @ 0.93 per cent.

The AO, for the reasons recorded, rejected the books of account, within the meaning of Section 145(3), and then applied the GP rate of 3 per cent, as against 0.93 per cent, shown by the assessee, and accepting the amount of total sales, at the figure shown by the assessee, addition of an amount of Rs. 19,57,521 was made; then the AO proceeded to find, that during the course of survey, excess stock to the above extent was found, this figure of excess stock was included by the assessee, in the P&L a/c only, and it was treated by the AO to be income of the assessee, from undisclosed sources, u/s 69, and charged to the tax.

In appeal, the learned CIT(A) found, that since 100 per cent of the profits and gains, declared by the assessee, during the relevant year, is eligible to deduction u/s 80IA, and such deduction had been allowed by the AO, he failed to allow the deductions in respect of the addition without assigning any reason. It was held, that even after the addition, the income so worked out, is eligible for deduction u/s 80IA. For this purpose, learned CIT(A) relied upon two other judgments of the Tribunal.

In appeal by the Revenue, the learned Tribunal found, that the Departmental Representative has not been able to substantiate the claim, that such an exemption is not allowable to the assessee. It was found, that the business of the assessee firm, which falls in the category of Section 80IA(4), thereunder, the assessee is eligible for deduction, equal to 100 per cent of profits and gains from business, for ten consecutive assessment years, and that the AO did not consider this amount, to be eligible, for deduction, u/s 80IA, without assigning any reason. Thus, the appeal was dismissed.

In our view, the question as framed on 22nd Aug., 2006, does not really, arise in the appeal. On the other hand, the question, that precisely arises is, as to whether addition could be made, with respect to the aforesaid amount, u/s 69?

Obviously, the assessee had filed regular return, and had disclosed therein a particular amount of sales, and had shown the GP, at the rate of 0.93 per cent. Obviously, the return was for the entire financial year, and the stock in question was also duly accounted for thereunder, in the books of account. Much stress was laid to the effect, that the books of account has been rejected u/s 145 and, therefore, the stock was required to be taken in the account for addition. In our view, it would suffice to say, that of course, books of accounts were rejected, but then, at the same time, the exact figure of sales, as given by the assessee, had been accepted, by the AO, and that figure has not been disputed. According to the books of account, even as rejected, the figure of sales was arrived at after duly accounting for, the alleged excess stock, found during survey on 31st Dec, 1999. In that view of the matter, mere rejection of books of accounts, which has come out to be only for the purpose of assessing GP rate, which has been increased from 0.93 per cent to 3 per cent, it cannot be said, that the stock in question could be added, as income from undisclosed sources.

Then, even according to the AO, the addition was made, treating the amount, to be the undisclosed investment u/s 69 of the IT Act. We may here gainfully quote the provisions of Section 69, which reads 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.

A reading of above section makes it clear, that the basic condition, for attracting the provisions of Section 69 is, that the investments made in the financial year concerned, should not be recorded in the books of account, maintained by the assessee, for any source of income, and secondly, the assessee should have not offered any explanation, about the nature and sources of investments, or the explanation offered should not be satisfactory, in the opinion of the AO.

In the present case, the relevant financial year is 1999-2000, and in the books of accounts of that year, this stock has been duly accounted for, and after so accounting for the same, the figure of sales, as noticed above, has been accepted by the Department, and enhanced GP rate has been applied thereto.

In that view of the matter, it cannot be said, that an investment has been made, which was not recorded in the books of account. Thus, in our view, the provisions of Section 69 cannot be said to be attracted to the price of stock in question. Though, not necessary, but still it may be considered and observed, that during the relevant year, the entire income of the assessee was exempted u/s 80IA, and thus there was, possibly no reason, for the assessee to conceal the stock-in-trade, as thereby, the assessee was not to gain anything.

The net result is that, we do not find any force in the appeal, and the same is therefore, dismissed.