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TMI Blog2017 (3) TMI 1828X X X X Extracts X X X X X X X X Extracts X X X X ..... nst "Income from other Sources" assessed by the AO. (b) AO arrived at the profits of the business at Rs. 1,08,55,878/- by determining the credit to the Trading & Profit and Loss Account (excluding undisclosed stock amount) at Rs. 35,46,85,308/- and reducing there from the total of purchase and other expenses (excluding undisclosed stock amount) at Rs. 34,38,29,430/- but in that process not reducing the amount of Rs. 70,04,814/-credited by the assessee to the Trading & Profit and Loss Account which is separately assessed by him as "income from Other Sources" thus resulting into double addition. (2.) The ld. CIT(A) has erred on facts and in law in disallowing the interest expenses of Rs. 1,39,366/- on the ground that the advance is given to Smt. Rita Gupta at interest rate of 10% whereas assessee has paid interest on the borrowed funds @ 14% whereas the AO has made this addition on account of notional interest." 2. Regarding Ground No. 1, the facts of the case are that during the year under consideration, a survey u/s 133 of the Act was conducted at the business premises of the assessee on 08.11.2012. During the survey operation, the assessee has surrendered an amount of Rs. 70, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under the head "income from other Sources". 2.3 Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A). The findings of the ld. CIT(A) is reproduced as under: "I have considered the above mentioned facts. I have also noted the fact that appellant has further included the amount of Rs. 70,04,814/- both the credit side and debit side, thereby negating the impact of this excess stock to naught. Furthermore , I have also perused the statement given by the appellant during the course of survey operation where in response to the question No. 30 with regard to excess stock valued at Rs. 70,04,814/- he has categorically stated that the amount reflects the undisclosed investment he has made in the stock and offered for taxation. Not only this, in response to question No. 31 & 32 with regard to slips found and impounded as per Annexure A with regard to unaccounted sales", he has evaded the reply which ultimately suggests that such loose sheets reflected the generation of unaccounted income which ultimately is used for the investment made in the unaccounted purchase of excess stock. In view of these facts, it is my considered view that the AO has rightly added t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment order. This is because, though he has reduced the amount of Rs. 70,04,814/- from both the debit side and the credit side, he failed to consider that though this amount is a part of the sales/closing stock, assessee has further credited this amount in the profit and loss account. Therefore, he ought to have further reduced this amount from the credit side of the profit and loss account, once he intended to include it under the head income from other sources. Not excluding the same has resulted into double addition of the same amount in as much as it has remained as a part of the income under the head business and again assessed by him as income from other sources. Hence, the income assessed by the AO under the head profit & gains of business at Rs. 42,86,178/- is erroneous. The Ld. CIT(A) also wrongly observed that the assessee has backtracked from his statement ignoring that this amount is already offered to tax by the assessee separately. 2.7 It is further submitted that the real issue in this case is whether the excess stock surrendered should be made as a part of business income or not and if so, assessee can claim deduction on account of payment of remuneration to partner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith any head of income and thus was not available for set off against any loss under any other head. Therefore, the Hon'ble Coordinate Bench held that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. In the present case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore we do not find any fault with the decision of the Ld. CIT(A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found." 2.8 It was further submitted that even if it is assessed as income from other sources, once this amount is made a part of book profit, remuneration to partners on this amount is allowable to assessee in view of decision of ITAT, Jaipur Bench in case of S.P. Equipment & Services vs. ACIT (2010) 33 DTR 265, where it was held that: " for the purpose of computing allowable deduction under s. 40(b), book pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - were finally reflected as part of total purchases amounting to Rs. 33,47,19,658/- in the profit and loss account and the same also found included as part of the closing stock amounting to Rs. 1,94,42,569/- in the profit/loss account since the said stock of rice was not sold out. In addition to the purchases and the closing stock, the amount of Rs. 70,04,814 also found credited in the profit and loss account as income from undisclosed sources. The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known sources, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. Accordingly, we donot see any infirmity in assessee's bringing such transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der as well as submissions made by the appellant and find that the AO has given cogent reason about charging of interest at 10% while paying interest rate of 14-17%. Accordingly, the disallowance of interest amounting to Rs. 1,39,366/- is sustained and the appellant's ground of appeal is dismissed." 3.2 The ld. AR of the assessee submitted that at the outset, it may be noted that the AO has made addition on account of notional interest of Rs. 1,39,366/-. There cannot be any addition on account of notional income as held by the Hon'ble Supreme Court in case of E.D.Sassoon & Co. & Ors. Vs. CIT (1954) 26 ITR 27 and Godhra Electricity Co. Ltd. vs. CIT (1997) 225 ITR 746 where it was held that only real income can be taxed, hypothetical income cannot be taxed nor income can be taxed in vacuum. Therefore, the addition made by the AO is not as per law and the same be deleted. The ld. CIT(A) has confirmed the addition by stating that it is the disallowance of interest. It is submitted that the lower authorities have not disputed about the commercial expediency about the advance given to Smt. Rita Gupta. In fact, the advance was given to Smt. Rita Gupta in earlier years for construction of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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