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Section 68 in The Income- Tax Act, 1995
Section 14 in The Income- Tax Act, 1995
The Income- Tax Act, 1995
Section 69A in The Income- Tax Act, 1995
Section 69 in The Income- Tax Act, 1995

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Income Tax Appellate Tribunal - Chennai
Akr Poly Industries, , Trichy vs Department Of Income Tax on 15 January, 13
         IN THE INCOME TAX APPELLATE TRIBUNAL
                    ' B' Bench Chennai

       BEFORE DR.O.K.NARAYANAN, VICE PRESIDENT
                        AND
          SHRI S.S.GODARA, JUDICIAL MEMBER

                                  .....

                    ITA No.1042/Mds./2012
                   Assessment year:2003-04


Income-Tax Officer,                         M/s.AKR Poly Industries,
Ward-III(1),                                No.6/31,A&B North
Trichy.                           Vs.       Street,
                                            Mannarpuram,
                                            Trichy 620 002.

                                            PAN AAGFA 3935 N
        (Appellant)                             (Respondent)


              Department by             :     Shri Guru Bhashyan,
                                              JCIT
                Assessee by             :     Shri S.Sridhar,
                                              Advocate

                        Date of Hearing             :    15.01.13
              Date of Pronouncement                 :     29.01.13

                              ORDER

PER S.S.GODARA JUDICIAL MEMBER:

This Revenue's appeal is directed against the order of CIT(A),Tiruchirapalli dated 24.02.2012 passed in ITA No.199/2006-07 for A.Y. 2003-04 in proceedings under section 143(3) of the Income Tax Act, 1961 (hereafter 'the Act').

2 ITA. 1042 /Mds/12

2. The Revenue has pleaded its grievance in the grounds raised as follows:-

"1. The learned CIT(A) has erred in treating the unexplained cash credits as 'business income' and allowing deduction under section.80-IB of the Income tax Act, 1961 after considering the remand report of the Assessing Officer.
2. The assessee has not anywhere stated that the unexplained cash credits were out of his business income.
3. The cash credits assessable under section.68 of the Income tax Act falls under Chapter VI of the Income tax Act, 1961 as per which this does not appear under any of the heads of income.
4. The learned CIT(A) has failed to notice that the deduction under section.80 IB of the Income tax is allowable and eligible against income earned from the business under Chapter IV D of the Income tax Act, 1961."

In the course of hearing, the D.R representing Revenue has reiterated the above said pleadings and vehemently argued that the CIT(A) has wrongly held that unexplained cash credits in question deserve to be treated as assessee's business income.

In support of the arguments, he has placed reliance on the case law of CIT Vs.Abdul Rahman Industries ( [2007] 293 ITR 475 (Mad.) ) Fakir Mohmed Haji Hasan Vs. CIT ( [2001] 247 ITR 290(Guj.) ) and of ITO Vs Dulari Digital Photo Services (P) Ltd.

                                  3                       ITA. 1042 /Mds/12



([2012]   24   Taxman.com.31(ITAT       CHD))    and   prayed       for

acceptance of the appeal.



3. On the other hand, the assessee has chosen to support the CIT(A)'s order on the basis of reasons contained therein. In support thereof, the A.R has referred to case law in the case of CIT Vs. Margaret's Hope Tea Co. Ltd. ( [1993] 201 ITR 747(Cal.) CIT Vs. Abdul Rahman Industries (293 ITR 475(Mad.) ) and prayed for rejection of the appeal.

4. Undisputed facts of the case that the assessee is a firm engaged in the business of manufacturing disposal plastic cups.

It is a registered Small Scale undertaking in Pondicherry. On 28.1.03, it had filed its 'return' declaring its income as ` Nil and also raised claim of deduction of `9,10,600/- under section 80-IA of the Act. In scrutiny proceedings, the Assessing Officer examined the entitlement of the assessee's claim and came to conclusion that it satisfied all conditions so as to claim deduction under section 80-IA(4) of the Act.

4.1. At the same time, the Assessing Officer also noticed that in its balance sheet, the assessee had claimed an amount of 4 ITA. 1042 /Mds/12 `30,17,891.78 as sundry creditors. In support, assessee failed to submit all necessary details of the creditors i.e. their names, amounts and addresses etc. and did not submit confirmations in support. Per Assessing Officer, the said failure amounted to not discharging its onus in establishing identity of the creditors, capacity, genuineness and credit worthiness etc. On this, the assessee prayed before the Assessing Officer that the addition in question under section 68 of the Act be made under the head "Business income". The Assessing Officer disagreed to assessee's aforesaid prayer. In his view, the assessee's accounts had been duly certified so as to make it eligible for deduction above said, which led to an inference that the sundry credits in question had to be treated under the head "other sources" as no evidence had been led to prove that the same had arisen in assessee's ordinary course of business. Therefore, in the assessment order dt.13.3.06, he added an amount of ` 16,42,093/- under the head 'income from other sources' and determined the total income as ` 16,42,093(supra).

5. The assessee carried the matter in appeal. In appellate proceedings, it raised two folded arguments i.e., 5 ITA. 1042 /Mds/12

i) that the Assessing Officer had wrongly made addition regarding sundry credits in question

(ii) that the addition was wrongly made under the head 'other sources'.

We notice that in appeal, the CIT(A) sought a remand report;

wherein the Assessing Officer had confirmed an amount of `4,55,355/-. In the light thereof, the CIT(A) has restricted the addition of `16,42,093/- to `11,86,758/- (`16,42,093 - 4,55,355).

Further, the CIT(A) has also held that since the assessee is entitled for deduction under section 80-IB of the Act, the addition in question under section 68 of the Act is liable to be treated as 'business income'.

5.1. In this backdrop of the facts, the Revenue is aggrieved by the second portion of the CIT(A)'s order wherein the addition/s 68 of the Act has been ordered to be treated as 'business income'. It is also revealed that there is no pleading to challenge the relief of `4,55,355/- granted to the assessee.

6. We have heard both parties at length, perused the relevant findings of the Assessing Officer as well as the CIT(A) and the case laws cited by both parties have also been gone through. It 6 ITA. 1042 /Mds/12 emerges that in the assessment proceedings, the Assessing Officer has returned categorical finding that the assessee has not treated the sundry credits in question as its income from income derived from the industrial undertaking in question. It had also failed to prove the identity, capacity and credit worthiness of the creditors in question, which led to the addition under section 68 of the Act to the tune of `11,86,758/-(supra). Now, the only issue between the parties is that per Revenue; since the addition in question under section 68 of the Act is not income from the assessee's business, it has been wrongly ordered to be treated as assessee's business income, which is opposed by the assessee. We notice that while deciding the issue in assessee's favour, case law of CIT Vs. Abdul Rahman Industries (supra) has been relied upon by the CIT(A) which is sought to be distinguished by the Revenue. We notice that the facts of the said are entirely different. In the said case, unclaimed balance in question emanated from trading transactions and findings had also been recorded that the transactions were very much connected or closely linked with the assessee's business activities and the receipt had arisen only out of assessee's trading transactions, which were held to be rightly assessed under the head 'business'. When we apply the said case law in the facts of 7 ITA. 1042 /Mds/12 instant case, we find the factual position is entirely different as the assessee has not proved the source of unexplained credit, the identity, capacity, genuineness and credit worthiness of the transactions in question and further, it has also not shown the amount in its duly audited accounts as its business income. In other words, the assessee had itself not treated the receipt in question as business income. This leads to the inference that once the assessee has not shown the receipt as its business income, there is no reason as to how the accounting treatment given by the assessee can be overruled by the CIT(A).

Therefore, in our opinion, the aforesaid case law is not applicable in the assessee's case.

6.1. Now, we come to the case law of CIT Vs. Margaret's Hope Tea Co. Ltd.( [1993] 201 ITR 747(cal.) ). In the said case, the facts before the Hon'ble Calcutta High Court were clearly different as the cash credit in question had appeared in the assessee's books of accounts. Therefore, Hon'ble High Court had rightly held that the cash credits were result of assessee's main business activity. After perusing the said case law, we notice that therein the concerned assessee had duly filed confirmations from the creditors in question. It was in the said circumstances 8 ITA. 1042 /Mds/12 that the Hon'ble Calcutta High Court had rightly upheld the claim of assessee. Again we reiterate that the facts of the instant case as cited above are different from those involved in the above said case. Therefore, both the above judgements do not help the assessee's case.

7. This leave us with the case law of Fakir Mohmed Haji Hasan Vs. CIT ( [2001] 247 ITR 290 (Guj.) ) cited by the Revenue wherein the addition was under the Chapter VI of the Act (under section 69A). The scheme of the Act makes it clear that Sections 68, 69, 69A to 69D deal with cash credits, unexplained investments, unexplained money, amount of investments not fully disclosed in the books of account, unexplained expenditure and amount borrowed or repaid at hundi. A perusal of the above provisions make it clear that same language, although in different spheres of additions, has been used by the legislature. In this backdrop, we proceed to deal with the case law of Hon'ble Gujarat High Court regarding addition had been made under section 69A held that the deemed income under section 69A of the Act does not fall under the head of income 'Profits and gains of business or 9 ITA. 1042 /Mds/12 profession' as well as any other head. The relevant portion of the aforesaid judgement is reproduced as under:-

"6. Under section 4 of the Act, income-tax is to be charged in accordance with the provisions of the Act in respect of the total income of the previous year of every person. As provided by section 5 of the Act, total income of any previous year of a person would, inter alia, include all income from whatever source derived which is received or is deemed to be received by such person, subject to the provisions of the Act. It will be seen from section 69A that where the bullion, jewellery or other valuable article is not recorded in the books of account and there is no explanation about the nature and source of its acquisition, or the explanation is not satisfactory, the value thereof may be deemed to be the income of the assessee of the financial year immediately preceding the assessment year in which the assessee is found to be the owner of such bullion, etc. 6.1. The scheme of sections 69, 69A, 69B and 69C of the Act 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 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 not 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.

6.2. 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 and 69C being treated separately, because such deemed income is not income from salary, 10 ITA. 1042 /Mds/12 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 case, 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 case of deemed incomes which are covered under the provisions of sections 69,69A, 69B & 69C in view of the scheme of those provisions.

7. It is therefore, clear that, when the investment in or acquisition of gold, which was recovered from the assessee was not recorded in the books of account and the assessee offered no explanation about the nature and source of such investment or acquisition and the value of such gold was not recorded in the books of account, nor the nature and source of its acquisition explained, there could arise no question of treating the value of such gold, which was deemed to be the income of the assessee, as a deductible trading loss on its confiscation, because such deemed income did not fall under the head of income 'Profits and gains of business or profession'.

8. In our opinion, therefore, the Tribunal was perfectly right in holding that the value of the gold was liable to be included in the income of the assessee as the source of investment in the gold or of its acquisition was not explained and that the assessee was not entitled to claim that the value of the gold should be allowed as a deduction from his income."

Similarly in the case law of ITO Vs Dulari Digital Photo Services (P) Ltd. ( [2012] 24 Taxman.com.31(CHD) ), the question before the Co-ordinate Bench was whether unexplained cash credit under section 68 of the Act can be considered for set-off against losses under various heads of income. After examining the relevant provisions in detail, Co-ordinate Bench has held that since the setting off of business losses can only be against the income under one of the heads in the 'Act' and not the income 11 ITA. 1042 /Mds/12 which does not come under the five different heads. To make it clear, it has been held that since Sec.68 addition is not an income under any heads of income and a business loss cannot be set off against the said addition. The relevant observations read as follows:

"10. We shall now deal with the issue as to whether unexplained cash credits, which are deemed to be the income of the assessee under section 68, can be considered for set-off against losses under heads of income as enumerated in section14. The answer to the aforesaid question lies in the fact as to whether unexplained cash credits taxed under section 68 are assessable under a known source or head of income as enumerated under section 14. If they are so assessable under a head of income specified in section 14, they would then and then only need to be set off against the loss from other heads of income in terms of section 71. Chapter IV of the Income tax Act deals with 'COMPUTATIN OF TOTAL INCOME" under various heads of income. Section 14, which enumerates head of income, falls under Chapter IV and reds as under:

Heads of income.

14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income :--

A.--Salaries.
B.--[omitted by the Finance Act 1989] C.--Income from house property.
D.--Profits and gains of business or profession. E.--Capital gains.
F.--Income from other sources.

11. Some of the salient features of section 14 insofar as they have maerial bearing on the issue under appeal are as under:-

(i) Section 14 merely classifies the income under various heads of income for the purpose of computation of total income under them. Section 14 does not deal with aggregation of income; it merely deals with classification of income under various heads of income. 'Computation of total income under various heads of income' under Chapter IV is altogether different from 'Aggregation of income" under Chapter VI of the Income-tax Act. They do not mean one and the same thing. They are fundamentally different from each other.

12 ITA. 1042 /Mds/12

(ii) Section 14 is not a charging section; it merely classifies income under various heads of income. It is the total income of the previous year and not the head of income which is chargeable to income-tax under section 4.

Opening words of section 14 are "Save as otherwise provided by this Act", all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the heads of income specified therein. Thus, section 14 is subject to the other provisions of the I.T. Act. Taxability of income under the specific provisions of the I.T. Act outside Chapter IV is not affected by heads of income as classified in section 14. As a corollary, it follows that income liable to be taxed under the specific provisions of the I.T. Act outside Chapter IV can be taxed without bringing the same under a head of income as specified under section 14/Chapter IV.

12. At this stage it may be relevant to consider Chapter VI in general and the provisions of Sec.68 in particular, They read as under:-

Chapter VI Aggregation of income and set off or carry forward of loss Cash credits:

68. Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer , satisfactory, the sum so credited may be charged to income tax as the income of the assessee of that previous year.

13. Some of the salient features of Chapter VI and section 68 in so fr as they have material bearing on the issue ulnder appeal are as under::

(i) Any sum, which is deemed to be the income of the assessee in term of sections 68,69,69A, 69B and 69C, falls within the "Scope of total income" as defined in section 2(45)/5 and is therefore chargeable to tax under section 4. In terms of Chapter VI it is aggregated with the income computed under Chapter IV. Aggregation of income under Chapter VI is not the same thing as computation of income under various heads of income in terms of Chapter VI of the IT Act.

(ii) Computation of income under each head of income in terms of Chapter IV requires determination of excess of gross receipts over expenses legally permissible in that behalf under the relevant head of income. Aggregation of income under Chapter VI does not provide for any deduction towards any expenditure. It brings the entire sum to the charge of income-tax and thus there is no element of 'computation' of income under Chapter VI as in the case of income falling under specific heads in terms of Chapter IV. It could be for this reason that the sums 13 ITA. 1042 /Mds/12 taxed under Chapter VI have been kept outside the computational provisions of Chapter IV.

(iii) Amounts are taxed under the provisions of Chapter VI for the reason that their nature and sources are not known. Once their nature and source are known, they have to be pegged to that source / head of income and taxed under the respective heads of income as enumerated in Chapter IV and not under the provisions of Chapter VI. Conversely, if the nature and source of such amounts are not known, they have to be taxed under the specific provisions of Chapter VI. It therefore necessarily follows that what is taxed under the specific provisions of Chapter VI cannot be pegged to any of the sources/heads of income as specified in Chapter IV.

14. The aforesaid view is supported by the scheme of taxation under the Income tax Act. Section 2(45) defines 'total income' as 'the total income referred to in section 5, computed in the manner laid down in this Act". It is relevant to note that the principal charging section 4 makes the 'total income referred to in the principal charging section. Section 14 classifies the heads of income while sections 15 to 59 provide for its quantification. Chapter VI of the Income tax Act provides for aggregation of income and set off or carry forward of loss. Thus Chapter VI is in two parts; first part deals with aggregation of income while the second part deals with set off or carry forward of losses. Chapter has been placed after Chapter IV and V. It comes into play only after the computation of total income under the various heads of income in terms of in terms of Chapter IV has been done. Income falling under Chapter VI is taxed by aggregating the same with the income quantified in terms of Chapter IV. Chapter VI is not subservient to Chapter IV. Besides, section 14 allows the taxability of income under specific provisions of the I.T. Act outside Chapter IV. For the reasons aforestated, the income assessable under section 68 cannot be assessed as income from other sources under section 56.

15. Thus what is taxed under Chapter IV is income from a known source including income from other sources. A source of income means a specific source from which a particular income springs or arises. Once a source giving rise to a particular income is identified, it has then to be placed under a particular head of income as specified in section 14. Thus income can be taxed under a specific head of income as enumerated in section 14 only when it is possible to peg the same to a know source/head of income. If the nature and source of a particular receipt is not known, it cannot then be pegged to a known source/head of income. Chapter IV contemplates computation of income arising from known sources/heads of income whereas Chapter VI, on the other hand, contemplates aggregation of the entire sum the nature and sources of which are not known. The aforesaid two Chapters are completely different in their nature, scope and effect. Though the income assessable under them are part of total income as defined in sections 2(45)/4/5 of the I.T. Act yet that does not mean that income assessable under section 68 has to be assessed under section 56. In 14 ITA. 1042 /Mds/12 the case before us, source of unexplained cash credits is not known and hence they cannot be linked to any known source/head of income including income from other sources. In order to constitute 'income from 'other sources', the source, namely, the "other sources", has to be identified. Income from unexplained or unknown sources cannot therefore be considered or taxed as income from other sources. The aforesaid view is fortified by the judgement of the Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan V. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 in which the Hon'ble High Court has held as under:-

"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 the 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 of those heads by virtue of a satisfactory explanation being given, then these provisions of sections 69, 69A, 69B and 69C will not 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.

The opening words of section 14 are "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 investment, unexplained money, bullion, etc., and unexplained expenditure as deemed income where the nature and source of investment, 15 ITA. 1042 /Mds/12 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,69A and 69C of the Act in view of the scheme of those provisions."

16. In view of th foreging, we are unable to hold that unexplained cash credits assessed under section 68 are to be assessed as income from other sources under section 56.

17. The ld. Counsel for the assessee, however, relied uponthe judgements in Lakhmichand Bajnath's case (supra) and Kevalchand Nemchand Mehts's case (supra). We have carefully gone though them. They have been rendered in the context of old India Income-tax Act of 1922 in which there was no provision corresponding to section 68 or Chapter VI of the Income-tax Act 1961. In the absence of any specific provision in the old Indian Income-tax Act of 1922, a view was taken that unexplained cash credits would be assessable as income from other sources. Section 68 under Chapter VI has been inserted in the present Income-tax Act to provide that any sum found recorded in the books of the assessee would be taxed as income of the assessee if he failed to satisfactorily explain the nature and source thereof. In this view of the matter, unexplained cash credits have to be brought to tax under section 68 and not under section 56. Both the aforesaid sections operate in the fields reserved for them. It cannot therefore be said that what is assessable as income under section 68 must be assessed as income from other sources under section 56.Judgements rendered in the context of the old Income- tax Act are therefore hardly relevant to decide the issue under appeal.

18. The assessee claims set off of loss from business assessed by the Assessing Officer under section 28 againt the income being unexplained cash credits assessed by the Assessing Officer under section 68 on the ground that income assessed by the Assessing Officer under section 68 is income from other sources under section 56. Sec. 71 permits set off of loss from one head against income from another head of income as enumerated in section 14. We have already held earlier that income assessable under section 68 cannot be assessed under any particular head of income including income from other sources under section 56. In this view of the matter, the business loss assessed by the Assessing Officer cannot be set off against the amount taxed under section 68 as unexplained cash credits taxed under section 68 cannot be pegged to any head of income."

16 ITA. 1042 /Mds/12 The legal position as it emanates from catena of above case laws is that since an addition under section 68 or for that purpose cannot be taken as income under any specific heads of income, it cannot also be treated as 'business income'. In this view of the matter, we hold that the CIT(A) has erred in holding that the addition under section 68 of the Act in assessee's case is liable to be treated as assessee's 'business income'. Therefore, we allow the instant appeal and restore the findings of the Assessing Officer.

8. The Revenue's appeal stands accepted.

Order pronounced on Tuesday, the 29th January, 2013 at Chennai.

            Sd/-                         Sd/-
     (DR.O.K.NARAYANAN)                (S.S.GODARA )
       VICE PRESIDENT                JUDICIAL MEMBER


Chennai,
Dated the 29th January, 2013.

K S Sundaram

Copy to:    Assessee/AO/CIT (A)/CIT/D.R./Guard file
 17   ITA. 1042 /Mds/12
 18   ITA. 1042 /Mds/12