The order of the Bench was delivered by
Rano Jain, A.M.-The appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax(Central), Gurgaon dated 27.3.2014 for assessment year 2010-11, passed under section 263 of the Income Tax Act, 1961 (in short 'the Act').
2. Briefly, the facts of the case are that the assessee filed return of income for the relevant assessment year declaring total income of Rs. 6,79,273/-. The assessment under section 143(3) of the Act was completed as on 23.12.2011. Later on, on perusal of the record, the Commissioner of Income Tax formed an opinion that the order passed by the Assessing Officer is erroneous as well as prejudicial to the interest of the Revenue and hence, notice under section 263 of the Act was issued to the assessee. The main contention of the learned Commissioner of Income Tax was that the Assessing Officer has allowed the entire deduction without working out the allowbility of deduction as per the scheme of section 40(b) of the Act. As per the provisions of the Act, the remuneration is allowable only up to the extent as provided in the partnership deed and further restricted by the provisions of section 40(b) of the Act, which allows remuneration only out of book profit from business and profession of the firm. The learned Commissioner of Income Tax was of the view that this issue has not been examined by the Assessing Officer as per the legal connotations of section 40(b) of the Act and excess remuneration has been claimed by the assessee over and above the sum allowable under section 40(b) of the Act. The assessee treated the income of Rs. 16 lacs disclosed during the course of survey as unaccounted business income and thus, credited this amount to the Profit & Loss Account for computing the allowable remuneration to the partners. The Assessing Officer has allowed remuneration to the partners on the basis of the book profit computed after crediting the surrendered income of Rs. 16 lacs to the Profit & Loss Account. The assessee filed a reply to the Commissioner of Income Tax making submission that the said issue was duly considered by the Assessing Officer and the income surrendered, being business income, would qualify for calculation of the allowable remuneration to the partners under the Income Tax Act. Reliance was placed on a number of judicial pronouncements.
3. After considering the submissions of the assessee, the Commissioner of Income Tax did not find any force in the same. He relied on a judgment of Gujarat High Court in the case of Fakir Mohmed Haji Hasan Vs. CIT (2001) 247 ITR 290, whereby the scope and description of the scheme of sections 69, 69A, 69B and 69C of the Act were interpreted. The proposition laid down by the Gujarat High Court has also been approved by the Hon'ble Punjab & Haryana High Court in the case of M/s Kim Pharma (P) Ltd. Vs. CIT in ITA No 106 of 2011 (O&M). He further mentioned that the said proposition has also been considered in two orders of the I.T.A.T., Chandigarh Bench in the case of Mrs.Promila Jain Vs. DCIT in ia.1449/Chd/2010 dated 25.9.2012 and Liberty Plywood Pvt. Ltd. Vs. ACIT in ITA No.727/Chd/2012 dated 17.12.2012. The Commissioner of Income Tax further distinguished the judgment of Karnataka High Court in the case of CIT Vs. S.K. Srigiri & Bros. (2008) 298 ITR 13 (Kar). Reliance was placed by the assessee on this judgment stating that in the said judgment, the finding of fact was recorded that the assessee received additional income from business only and, therefore, it was entitled to deduction on account of remuneration paid to the partners. The Commissioner of Income Tax was of the view that in the present case no such finding has been recorded and no evidence was furnished before the Assessing Officer in support of the claim that the surrendered income partake the character of business income. In view of all this, he held the assessment order passed under section 143(3) dated 23.12.2011 to be erroneous and prejudicial to the interest of the Revenue in so far as the issue of allowability of remuneration to partners out of surrendered income is concerned. He further directed the Assessing Officer to recompute the remuneration to the partners by excluding surrendered income of Rs. 16 lacs from the book profits of the firm and reassess the income of the firm as well as the partners of the firm accordingly.
4. Aggrieved by this, the assessee has come up in appeal before us, raising the following grounds of appeal :
"1. That order passed u/s 263 of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Central), Gurgaon is against law and facts on the file in as much as he was not justified to arbitrarily hold that assessment order dated 23.12.2011 passed by the Ld, Deputy Commissioner of Income Tax, Central Circle-l, Chandigarh is erroneous and prejudicial to the interest of the revenue.
2. That he was further not justified to direct the Ld. Assessing Officer to recompute the allowability of remuneration to the Partners by excluding the surrendered income of 16,00,000/- f rom book prof its as the sum of Rs. 16,00,000/- surrendered during the course of survey were as a result of business activities and was declared as business income.
3. That the impugned order is void abinitio in as much asthe principles of natural justice have been grossly violated as the order was passed on 27-03-14 without affording a reasonable opportunity of hearing, whereas the proceedings were adjourned by the Ld. CIT for 10-04-14."
5. The learned counsel for the assessee mainly reiterated the submissions made before the Commissioner of Income Tax. His main force was on the argument that the issue of surrendered income being business income has been duly examined by the Assessing Officer during the course of original assessment proceedings. For this, our attention was invited to page No.15 of the Paper Book filed by the assessee, which is a letter of surrender made before the Addl. Director of Income Tax (Investigation), Chandigarh dated 10.10.2009, whereby it has been clearly mentioned that the surrender was being made on account of business income. Further attention was invited to a questionnaire issued by the Assessing Officer dated 24.10.2011 at page 17 of the Paper Book, whereby at Point No.11, a detailed query regarding surrendered amount was raised, which reads as under :
"11. During the course of survey operation at your business premises you have made a total surrender of Rs. 16.00,000/- as undisclosed income over and above your regular income. The relevant extract of your letter is reproduced as under:-
"Due to some loose papers, hooks etc found and difference in stocks found during the course of survey, I am unable to reconcile the issue at this moment, I hereby surrender Rs. 16 lacs which was siphoned out of business on account of discrepancies in the stocks and other unexplained documents and to cover others etc on behalf of the firm "
In this regard, please furnish the following information.
(i) Please furnish details of total disclosure made by you. Document wise/assets wise/investment wise.
(ii) Please furnish details of total disclosure made by you in your individual hand and in the hand of firm/company/trust in which you are a partner/director/member.
(iii) Please substantiate the manner in which the additional undisclosed was earned by you.
(iv) Please mention amount of the taxes paid on additional undisclosed income."
6. The reply of the said questionnaire was given by the assessee vide its letter dated 15.11.2011, whereby at Point No.10(c) it was clarified that the income surrendered in the hands of the firm was earned out of business of the assessee only. In another letter dated 19.12.2011 at Point No.2, it was again clarified that the surrendered income was over and above the normal business income of the assessee firm. Therefore, the Commissioner of Income Tax does not have any jurisdiction under section 263 of the Act to review the said order. In the alternative, reliance was placed on the judgment of Calcutta High Court in the case of MD.Serajuddin & Brothers Vs. CIT (2012) 80 DTR 46 (Cal), whereby it was held that even if the income from other sources is included in the Profit & Loss Account to ascertain the net profit qua book profit for computation of the remuneration of the partners, the same cannot be discarded.
7. The learned D.R. relied on the order of the Commissioner of Income Tax and stated that the Assessing Officer in the original proceedings has wrongly allowed remuneration to the partners on the basis of book profits computed after crediting the income of Rs. 16 lacs surrendered in the case of survey under section 133A of the Act. Reliance was placed on the following judgments :
a. Bassera Realtors P Ltd vs CIT - 55 taxmann.com 327 (ITAT, Chandigarh)
b. CIT vs Ansal Housing & Construction Ltd. - 51 taxmann.com 376 (SC)
c. CIT, Karnal vs Rajesh Mahajan - 16 taxmann.com 85 (P&H)
d. Vodafone South Ltd vs CIT (TDS) - 61 taxmann.com 108 (ITAT, Chandigarh)
e. CIT vs Shree Manjunathesware Packing Products And Camphor Works - 231 ITR 53(SC )- The Hon'ble Supreme Court has also explored the meaning of the word 'record 'as appearing in section 263.
f. CIT vs Vallabhdas Vithaldas 56 taxmann.com 300 (Guj) - The Hon'ble High Court has also explored the meaning of the word 'record' as appearing in section 263.
8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the Paper Book pages to which our attention was invited by the learned counsel for the assessee, we observe that the issue of surrendered income, its nature and manner of disclosure in the Profit & Loss Account was very much open before the Assessing Officer in the assessment proceedings and he had in fact raised the specific queries in this regard, which was duly replied by the assessee. In view of the evidences supporting the fact that the issue was clearly deliberated upon at the time of assessment proceedings, we are of the view that the Assessing Officer has applied his mind to the issue in question and only then he decided to treat the surrendered income as business income. Time and again in the letters submitted by the assessee before the Assessing Officer, it stuck to the stand that the surrendered income was its business income. The Assessing Officer was aware of this stand of the assessee and only then he allowed it the deduction available out of business income. With these plethora of evi dences on record, we cannot just brush aside the fact that the Assessing Officer without applyi ng his mind has allo wed the assessee deduction under secti on 40(b) of the Act. Further, we see that the Commissioner of Income Tax while holding the order of the Assessing Officer to be erroneous and prejudicial to the interest of the Revenue, has placed heavy reliance on the judgment of the Gujarat High Court in the case of Fakir Mohmmed Haji Hasan (supra). Reliance was placed by him for the proposition that the nature of incomes assessed under sections 69, 69A, 69B and 69C of the Act are to be treated as deemed incomes and no benefit, which is available out of business income can be availed by the assessee on these incomes. However, if we read closely the said judgment we also find some other proposition lying behind it. The findings of the Hon'ble Gujarat High Court in the case of have been recorded by the Commissioner of Income Tax in his order at page 2 onwards, which read as under :
"7. The scheme of Sections 69, 69A. 69B and 69C of the Income-tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under Section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" which have to be sources known or explained. When the income cannot be so classified under any one of the heads of income under Section 14, it follows that the question of giving any deductions under the provisions which correspond to such heads of income will not arise. If it is possible to peg the income under any one of those heads by virtue of a satisfactory explanation being given, then these provisions of Sections 69, 69A, 69B and 69C will riot apply, in which event, the provisions regarding deductions, etc., applicable to the relevant head of income under which such income falls will automatically be attracted.
8. The opening words of Section 14 "save as otherwise provided by this Act" clearly leave scope for "deemed income" of the nature covered under the scheme of Sections 69, 69A, 69B and 69C being treated separately, because such deemed income is not income from salary, house property, profits and gains of business or profession, or capital gains, nor is it income from "other sources" because the provisions of Sections 69, 69A, 69B and 69C treat unexplained investments, unexplained money, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, acquisition or expenditure, as the case may be, have not been explained or satisfactorily explained. Therefore, in these cases, the source not being known, such deemed income will not fall even under the head "Income from other sources". Therefore, the corresponding deductions which are applicable to the incomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of Sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions."
9. On reading of the very first paragraph of the judgment of Gujarat High Court, we see that the very first impression of the Hon'ble High Court as regards the nature of income under sections 69, 69A, 69B and 69C of the Act is that the moment when a satisfactory explanation is given about the nature and source of these incomes, source would stand disclosed and income would be treated under the appropriate head of income. Only on the basis of certain finding of fact later on in the same decision, the Hon'ble High Court has held that when the assessee has not been able to satisfactorily explained the nature and source of these kind of incomes, these will be treated as deemed incomes. Applying the said proposition in the facts of the present case, we see that the assessee has all along been saying that the surrendered income is out of its business. The Assessing Officer was seized off these explanations of the assessee and formed an opinion that the source of these surrendered incomes has been explained by the assessee to be out of its business. We should not forget that the assessee is a firm engaged in the business and most of the incomes even if not disclosed in its books of account primarily consists of its business income. In view of this, even applying the proposition laid down by the Gujarat High Court, we can very easily infer that the Assessing Officer only being satisfied by the explanation given by the assessee with regard to the nature of the surrendered income has allowed it to be treated as business income and in consequence, allowed the deduction under section 40(b) of the Act accordingly.
10. The Commissioner of Income Tax has also relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of M/s Kim Pharma (P) Ltd. (supra). We wish to state here that in that case, the only issue was with regard to the cash surrendered at the time of survey and no other incomes. Since other incomes were already treated by the Assessing Officer himself as business income, therefore, the proposition of that case is not applicable to the present case. Another point raised by the Commissioner of Income Tax in his order, while distinguishing the case of Karnataka High Court in the case of S.K. Srigiri & Bros. (supra), he has stated that in that case the finding was recorded that the additional income surrendered by the assessee was of business only, which is not there in the present case. In this regard, on perusal of the record, we find that ample queries regarding the nature and source of income were made by the Assessing Officer during the assessment proceedings, which were duly replied to by the assessee. We do not hesitate to hold that even if the Assessing Officer has not mentioned the fact of the surrendered income being business income, specifically in his order, we understand that the Assessing Officer was satisfied to the effect that the income surrendered pertained to the business of the assessee. In view of this, we see that the Assessing Officer had made detailed enquiries and formed an opinion which was not illegal and his opinion is based on material and evidences on record. This is not the case of any error having crept in the order of the Assessing Officer, therefore, the Commissioner of Income Tax was not right in holding the order of the Assessing Officer to be erroneous. For assuming jurisdiction under section 263 of the Act, twin conditions of the order being erroneous as well prejudicial to the interest of the Revenue are to be applied simultaneously. Since we have already recorded that there is no error in the order of the Assessing Officer, the Commissioner of Income Tax cannot assume jurisdiction under section 263 of the Act. Accordingly, we quash the order of the Commissioner of Income Tax passed under section 263 of the Act.
11. Before parting, we would like to deal with the case laws relied on by the learned D.R. The first order of the I.T.A.T. in the case of Bassera Realtors P. Ltd. (supra), the proposition was that mere acceptance of surrendered income without inquiry makes the order of the Assessing Officer erroneous. The present case is definitely not the one of no enquiry. The judgment of Hon'ble Supreme Court in case of CIT Vs. Ansal Housing & Construction Ltd. (supra) where SLP has been admitted, relates to a debatable issue, however, in the present case, no such debatable issue is involved. The order of the I.T.A.T., Chandigarh Bench in the case of Vodafone South Ltd. (supra) is with respect to notice under section 263 of the Act, which is not the controversy involved in the present case. Other two cases relied on by the learned D.R. in the case of Shree Manjunathesware Packing Products And Camphor Works (supra) and Vallabhdas Vithaldas (supra) are on the interpretation of the term 'record' appearing in section 263. In the present case, no controversy revolves around the meaning of the term 'record'. Therefore, none of the cases relied on by the learned D.R. are of any help to the cause of Revenue.
12. In the result, the appeal of the assessee is allowed.
The order pronounced in the open court on this 13th day of April, 2016.