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TMI Blog2013 (1) TMI 510X X X X Extracts X X X X X X X X Extracts X X X X ..... red income." 3. Brief facts of the case are that originally the assessee had filed return of income declaring income of Rs. 17,26,270/-. A survey was conducted in the premises of the assessee on 4.3.2005 and an additional income of Rs. 70,00,000/- was surrendered. Bi-furcation of the surrender income is as under: "Stock Rs. 7,50,000 Expenditure as detailed in loose papers i.e. Diesel, wages etc. Rs. 12,50,000/- Cash in hand Rs. 50,00,000/- Total Rs. 70,00,000/- " Assessment was completed by DCIT, Ambala determining the total income at Rs. 32,66,090. Later on the assessment records were examined by the ld. Commissioner, Panchkula wherein he found that the assessment order is erroneous and prejudicial to the interest of the Revenue. The Ld. CIT passed an order u/s 263 dated 3.12.2008 and opined that surrendered income of Rs. 70.00 lakhs should be treated as deemed income u/s 69, 69A, 69B of the Act and therefore, same was not eligible to be set off against carry forward business loss or depreciation in view of the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290. Though the order u/s 263 was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assessable under any head of the income. He also observed that Section 14 itself used the expression "Save as otherwise provided by this Act", clearly shows that scope of deemed income covered by scheme of Sections 69, 69A, 69B and 69C were to be treated separately because this kind of income is not income from head like salary, house property, business profits or capital gains etc. For this reliance was placed on the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan (supra). Since income surrendered during survey was also not recorded in the books of account therefore, no deduction or set off of loss or depreciation can be allowed. Accordingly surrender income was assessed separately as under: Add Unaccounted cash found and surrendered u/s 69A Rs. 50,00,000/- Unaccounted investments surrendered u/s 69B Rs. 7,50,000/- Unaccounted expenditure Surrendered u/s 69C Rs. 12,50,000/- 5. Before the ld. CIT(A) submissions made before the Assessing Officer were reiterated. 6. The ld. CIT(A) did not find force in these submissions and decided the issue against the assessee vide para 3.3 and 3.1 which is as under: 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n be properly identified. In this regard he relied on the decision of Ahmedabad Bench of the Tribunal in case of Fashion Word v. ACIT [ITA No. 1634/Ahd/2006] (copy of the order is filed at paper book page 9 to 22). In that case the decision of Hon'ble Gujarat High Court in case of Fakir Mohmed Haji Hasan (supra) was considered and it was observed that there seems to be some misunderstanding in the interpretation of the decision of Hon'ble High Court. It was further observed as under: "The expression "nature and source" used in this section should be understood to mean requirement of identification of source and is genuineness...................... Where the assessee is able to explain nature and source of investment/expenditure and also if they are recorded in the books of account then such investment/expenditure will not be treated as deemed income but where investment/expenditure is not recorded in the books of account." He further relied on the decision of Hon'ble Supreme Court in case of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) wherein it was observed as under: "Section 56 provides for the chargeability of income of every kind which has not to be excluded from the total in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 lakhs should be treated as business income so as to set off brought forward losses u/s 70 of the Act as well as the depreciation u/s 32(2). As far as the decision of Hon'ble Supreme Court in case of D.P. Sandu Bros. Chembur (P.) Ltd. (supra) is concerned, we find that facts in that case are totally different. In that case the assessee had sold tenancy rights for Rs. 35.00 lakhs which were claimed to be non-taxable. However, the Assessing Officer assessed the same as income from other sources u/s 10(3) of the Act. On assessee's appeal the Commissioner held that the sum was taxable under the head "capital gain". He determined the cost of acquisition on the basis of fair market value and subjected the receipt for tenancy rights after reducing the cost of such rights as assessable under the head 'capital gain". On further appeal, the Tribunal held that though the income was assessable under the head 'capital gain' but since there was no cost of acquisition and therefore, following the decision of Hon'ble Supreme Court in case of CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 it was held that since the capital gain cannot be computed, the same was not taxable. On revenue's appeal to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Court in case of Fashion Word (supra) has to give a way to interpretation put on the same decision by the Hon'ble Punjab & Haryana High Court in case of Kim Pharma (P.) Ltd. (supra), Hon'ble High Court clearly held that surrendered income can be taxed as deemed income without setting off of the losses u/s 70 & 71. We are bound to follow the decision of Hon'ble Punjab & Haryana High Court and following the same, we hold that surrendered income has to be assessed separately as deemed income. 12. Coming to the issue of setting off of depreciation u/s 32(2), first of all it has to be noticed that the decision of Hon'ble Punjab & Haryana High Court in case of Kim Pharma (P.) Ltd. (supra) held that surrendered income during the survey has to be assessed separately as deemed income and set off of losses u/s 70 & 71 was not possible against such income. However, it is clear that this decision does not deal with the issue of setting off of depreciation u/s 32(2). Section 32(2) reads as under: "32(2) Where, in the assessment of the assessee, full effect cannot be given to any allowance under sub-section (1) in any previous year, owing to there being no profits or gains chargeable for tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff of by such unabsorbed depreciation. Controversy also arose in this respect. Ultimately the matter travelled to the Special Bench of the Tribunal in case of Dy. CIT v. Times Guaranty Ltd. [2010] 40 SOT 14 (Mum.)(SB). In this case it was held as under:- "Under section 32(2) of the Income-tax Act, 1961, prior to its substitution, by the Finance (No. 2) Act, 1996 with effect from April 1,1997 the current depreciation under section 32(1) could be adjusted against income under any head including "Capital gains" and "Income from house property" in the same year. If there remained some unadjusted depreciation allowance, that was carried forward in the following year(s) for set off against income under any other heads just like current depreciation allowance under section 32(1) pertaining to such year. Under sub-section (2) of section 32 as substituted by the Finance (No. 2) Act, 1996, with effect from April 1,1997, the scope of set-off of the brought forward unabsorbed depreciation allowance was restricted to the income under the head "Profits and gains of business or profession". Under clause (i) of substituted sub-section (2), the unabsorbed depreciation allowance could be set off a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s normally prospective unless expressly stated otherwise or it appears so by necessary implication. It is nowhere seen either from the Notes on Clauses or Memorandum explaining the provision of the Finance Bill, 2001, that substitution of sub-section (2) of section 32 is retrospective. Therefore, the substantive provision contained in section 32(2) as substituted by the Finance Act, 2001 with effect from April 1, 2002, is prospectively applicable to the assessment year 2002-03 onwards. Section 32(2) is a deeming provision and by a legal fiction, the amount of depreciation allowance under section 32(1) which is not fully absorbed against income for that year is deemed to be part of the depreciation allowance for the succeeding year(s). A deeming provision cannot be extended beyond the purpose for which it is intended. Section 32(1) deals with depreciation allowance for the current year. It is only when the assessment of the assessee from assessment year 2002-03 onwards is made in which depreciation allowance for the current year under section 32(1) cannot be given full effect, owing to the inadequacy of profits, that the directive of the deeming provision under section 32(2) shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of section 32(2) is fulfilled. The "unabsorbed depreciation allowance" of the period after substitution by the Finance (No. 2) Act, 1996 cannot be given the character of current depreciation in the assessment years after substitution with effect from April 1, 2002. CIT v. Mother India Refrigeration Industries P. Ltd. [1985] 155 ITR 711 (SC) relied on. Therefore, the law prevailing as on the 1st April of the assessment year 2002-03 and subsequent years does not permit the brought forward un-absorbed depreciation allowance of the period after substitution by the Finance (No. 2) Act, 1996 to assume the character of depreciation under section 32(1) in these assessment years. If there is both repeal of the old provision and simultaneous insertion of a new provision in its place, it is called "substitution". But for the relaxation given by the Finance Minister in Parliament, the brought forward unadjusted depreciation of the period prior to the amendment made by the Finance (No. 2) Act, 1996 with effect from April 1, 1997 would have elapsed. There is no such concession given by the Finance Minister while substituting the provisions of section 32(2) with effect from April 1, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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