By TIOL News Service

AMRITSAR, NOV 27, 2015: THE issue is - Whether in survey proceedings, additional income surrendered by the assessee over and above normal profits of concern as business income, has to be assessed under ‘business income’ and not as ‘deemed income’ u/s 69A. YES is the answer.

Facts of the case

The assessee is a manufacturer of Rice Sheller Machineries and its parts. A survey was carried out on the premises of the assessee u/s 133A. During the course of survey, the assessee surrendered an additional income over and above the normal income for the year under consideration. The case of the assessee was selected for scrutiny. During the assessment proceedings, the assessee was asked to justify the low returned income as compared to the surrendered income. The assessee was asked to file with the documentary evidences in the form of breakup of various expenses before and after the survey, as well as a comparison chart showing the breakup and comparison with reasons. The AO after examination of the reply of assessee completed the assessment and made disallowances of Rs.2,02,690/- and Rs.7,68,019/- on account of expenses and Gross Profit rate respectfully.

On appeal, the CIT(A) after examination of assessment records of the assessee observed that during the survey u/s 133 A, the Assessee had surrendered certain amount of income and such surrendered income was to be taxed under the provisions of Section 69A and whereas, the assessee had credited the surrendered income to the Profit and Loss account and had debited various expenses against the surrendered income. He observed that AO had completely ignored this factor while completing the assessment and therefore, a notice u/s was issued to the assessee. After considering assessee’s objections, the CIT(A) passed an order u/s 263 directing the AO to pass necessary assessment.

Having heard the parties, the Tribunal held that,

++ the only question to be answered by this Tribunal in the present appeal is as to whether the surrender made by assessee can be considered as business income or can be taxed as deemed income u/s 69A. From the surrender letter, it is apparent that assessee had made a surrender as additional income over and above the normal profits of the concern and since the income has been declared as business income, the same has to be assessed under the head business income and not as deemed income under the provisions of section 69A. The AO had taken a plausible view while accepting the contention of the assessee. It is seen that the main reason for decrease in taxable profits was due to increase in depreciation and increase in bank interest. The AO after considering this explanation had passed the assessment order, however, he did not mention the fact of considering this explanation in the assessment order. The only none-mentioning of certain enquiries and explanations thereof in the assessment order in itself does not give a right to Commissioner to pass order u/s 263. The Bombay High Court in one of the identical case has held that where the AO had made enquiries in regard to nature of expenditure incurred by assessee and assessee had given detailed explanation in that regard and AO had accepted the explanation of the assessee, the decision of AO could not be held to be erroneous simply because in his order he did not make an elaborate discussion in this regard;

++ in the present case the AO had made enquiries and assessee had explained the taxable income viz-a-viz surrendered income and the has AO found the explanation as satisfactory. It was found that the letter filed by assessee for "Justification of Taxable Income" has demonstrated the reasons for lower returned income as compared to surrendered income which was primarily for excess claim of depreciation to the extent of Rs.50.44 lacs as compared to earlier year. The increase in depreciation has occurred because the assessee had installed and put to use new machinery worth Rs.143.29 lacs and this machinery was imported from Germany and was installed in the month of July, 2009, much before the date of survey which was on 14.09.2009. This fact of purchase of additional machinery was conveyed to AO. In the same letter the assessee had conveyed that for purchase of machinery the assessee had increased its bank borrowings and therefore there was an increase in interest costs and further the reasons for increase in the electricity charges was also explained in the same letter. Therefore, the assessee had submitted all details and the AO had examined all factors leading to decrease in normal profits as compared to earlier year. As regards surrendered income, the assessee has clearly credited the same to the P&L A/c over and above the normal profits of the concern. Therefore, this Tribunal opines that the AO had taken a plausible view as the assessee had surrendered the income as business income which was separately credited to P&L A/c.

(See 2015-TIOL-1931-ITAT-AMRITSAR)