TMI Blog2017 (3) TMI 1828X X X X Extracts X X X X X X X X Extracts X X X X ..... so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future. Whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head business income or income from other sources ? - In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla [ 2016 (9) TMI 1354 - ITAT JAIPUR] supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head business income and not under the head income from other sources . In the result, ground No.1 of the assessee is allowed. Addition of interest - assessee has given loan and advances to Smt. Rita Gupta and charged interest @ 10%, whereas assessee firm was paying in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven 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 ₹ 70,04,814/- on account of a major discrepancy in stock of rice which had hitherto not been recorded in books of accounts . Further, the partner of the assessee firm admitted that the investment had been made out of undisclosed sources. The due tax amount has been paid by the assessee on such undisclosed amount of stock. On perusal of Note on accounting policy filed alongwith audit report, it was noticed by the AO that a major discrepancy in stock of rice of ₹ 70,04,814/- was observed during the course of survey which was offered for taxation as arised on account of income from undisclosed sources and during the year under audit, account of the assessee reflects this transaction as debiting purchase account and crediting the u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the amount of ₹ 70,04,814/- as surrendered amount on account of excess stock which has been accepted by the appellant as his investment. Therefore, there is no reason to backtrack from the statement given by the appellant during survey operation about the undisclosed investment of ₹ 70,04,814/-. Hence the addition of ₹ 57,46,980/- is sustained. Accordingly appellant s ground of appeal on this issue is dismissed. 2.4 Now the assessee is in appeal against the order of the ld CIT(A). In this regard, the ld. AR has submitted that the assessee is a partnership firm dealing in sale of food grain, rice and oil seeds. A survey u/s 133A was conducted on the business premises on 08.11.2012. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Hence, the income assessed by the AO under the head profit gains of business at ₹ 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 partners on account u/s 40b(v). In this regard, our reference was drawn to the decision of Co-ordinate Bench in case of Shri Ramnarayan Birla (in ITA No. 482/JP/15 dated 30.09.2016). In that case, the question before the Coordinate Bench was whether the CIT(A)-2, Udaipur has erred in directing the AO to assess the unexplained investment surrendered by the assessee under the head Income from Business ignoring the decision of the Hon ble Gujarat High Court in the case of Fakir Mohd. Hazi Hasan 247 ITR 290 that unaccounted income ought to be categorized under the residuary head of Income from other sources . In respect to the said issue, the findings of the Coordina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th 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 profit has been defined under Expln. 3 thereto to mean the net profit as shown in the P L a/c of the relevant previous year computed in the manner laid down in Chapter IV-D subject to specified adjustments. Selection of any head of income, more particularly profit and gains of business or profession is nowhere required or envisaged by the legislature. There is no substance in the contention of the Revenue that the receipts credited to P L a/c should be assessed under different heads of income as classified under s.14. Legislature has not authorized exclusion of some receipts from P L a/c even though they are non-business receipts. Explanation 3 nowhere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future. 2.11 Having said that, the next issue that arises for consideration is whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head business income or income from other sources . In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 godown and the same was given on rent by the assessee. Therefore once commercial expediency for giving the advance is established, no part of the interest expenditure can be disallowed in view of the decision of Hon ble Supreme Court in case of S.A. Builders 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT 379 ITR 347 where it was held that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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