BAJARGAN TRADERS, Jaipur V. ACIT, Alwar

ITA 137/JPR/2017

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9673 (ITAT-JAIPUR)
• Duration Of Justice: 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2013-2014
• Appeal Filed On: 13-02-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PREM PRAKASH MEENA JCIT DHK
• Keywords: Business income; Income from undisclosed sources; Deemed to accrue or arise in india; Notional interest; Commercial expediency
• Section: 133A; 69

Judgement Text

+++VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH DQY HKKJR] U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS [KK LNL; DS LE{K BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YAD AV, AM VK;DJ VIHY LA-@ ITA NO. 137/JP/17 FU/KZKJ.K O'K Z@ ASSESSMENT YEAR : 2013-14 BAJARGAN TRADERS C/O KALANI & CO., CA, 5 TH FLOOR , THE MILE STONE , GANDHI NAGAR TURN, TONK ROAD, JAIPUR CUKE VS. THE ACIT, CIRCLE-2, ALWAR LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN NO. AABFB 2413 K VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY : SHRI P.C. PARWAL (C. A) JKTLO DH VKSJ LS@ REVENUE BY : SHRI PREM PRAKASH MEENA (J CIT ) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 14.03.2017 ?KKS'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 17/03/2017. VKNS'K@ ORDER PER SHRI VIKRAM SINGH YADAV, A.M. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF LD. CIT(A), ALWAR DATED 05.01.2017 WHEREIN THE ASSESSEE HAS TA KEN FOLLOWING TWO GROUNDS OF APPEAL: (1). THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 70,04,814/- (WRONGLY MENTIONED AS RS. 57,46,980 -/-) ON ACCOUNT OF EXCESS STOCK FOUND DURING THE SURVEY BY WRONGLY STA TING THAT ASSESSEE HAS BACKTRACKED FROM THE STATEMENT GIVEN IN COURSE OF SEARCH AND BY IGNORING THAT ASSESSEE HAS HIMSELF CREDITED THE INC OME ON ACCOUNT OF EXCESS STOCK FOUND IN SURVEY IN THE PROFIT AND LOSS ACCOUNT AND THUS, OFFERED SUCH EXCESS STOCK FOUND IN SURVEY FOR TAX. HE HAS FURTHER ERRED IN NOT CONSIDERING THAT: ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 2 (A) THE EXCESS STOCK FOUND IN SURVEY IS TO BE ASS ESSED UNDER THE HEAD PROFITS AND GAINS FROM BUSINESS AS OFFERED BY THE ASSESSEE AS AGAINST 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. 35,46,8 5,308/- 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 T HE ASSESSEE TO THE TRADING & PROFIT AND LOSS ACCOUNT WHICH IS SEPARATE LY ASSESSED BY HIM AS INCOME FROM OTHER SOURCES THUS RESULTING INTO DOU BLE ADDITION. (2.) THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW I N DISALLOWING THE INTEREST EXPENSES OF RS. 1,39,366/- ON THE GROUND THAT THE A DVANCE IS GIVEN TO SMT. RITA GUPTA AT INTEREST RATE OF 10% WHEREAS ASS ESSEE 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 AR E THAT DURING THE YEAR UNDER CONSIDERATION, A SURVEY U/S 133 OF THE ACT W AS CONDUCTED AT THE BUSINESS PREMISES OF THE ASSESSEE ON 08.11.2012. D URING THE SURVEY OPERATION, THE ASSESSEE HAS SURRENDERED AN AMOUNT OF RS. 70,04 ,814/- ON ACCOUNT OF A MAJOR DISCREPANCY IN STOCK OF RICE WHICH HAD HITHER TO NOT BEEN RECORDED IN BOOKS OF ACCOUNTS . FURTHER, THE PARTNER OF THE AS SESSEE 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 A MOUNT OF STOCK. ON PERUSAL OF NOTE ON ACCOUNTING POLICY FILED ALONGWIT H AUDIT REPORT, IT WAS NOTICED BY THE AO THAT A MAJOR DISCREPANCY IN STO CK OF RICE OF RS. 70,04,814/- WAS OBSERVED DURING THE COURSE OF SURVEY WHICH WAS OFFERED FOR TAXATION AS ARISED ON ACCOUNT OF INCOME FROM UNDISCLOSED SOURCE S AND DURING THE YEAR UNDER AUDIT, ACCOUNT OF THE ASSESSEE REFLECTS THIS TRANSACTION AS DEBITING PURCHASE ACCOUNT AND CREDITING THE UNDISCLOSED INCO ME BY RS.70,04,814/-. ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 3 2.1 THE ASSESSEE WAS THEREAFTER ISSUED A SHOW-CAUSE STATING THAT THE ASSESSEE FIRM HAS TAKEN THE DOUBLE BENEFIT OF UNDIS CLOSED INCOME SURRENDERED DURING SURVEY OPERATION IN THE FOLLOWING MANNER: THE ASSESSEE HAS CREDITED THE TRADING AND PROFIT AND LOSS ACCOUNT BY TAKING THE AMOUNT OF UNDISCLOSED INCOME TO THE CRED IT SIDE, WHILE ON THE OTHER HAND, THE ASSESSEE HAS DEBITED THE SAME AMOUNT AND CLUBBED IT WITH PURCHASES MADE DURING THE YEAR. IN THE RESULT, THE ASSESSEE HAS REDUCED ITS TAX LIABILITY BY DOING SO. DURING THE SURVEY OPERATION , THE EXCESS STOCK OF RICE RS.70,04,814/- WHICH WAS ITS INVESTMENT FROM UNDISC LOSED SOURCES AND HAS TO BE TAXED UNDER THE HEAD OF INCOME FROM OTHER SOURCE S EXCLUSIVELY. IT IS NOT PART OF TRADING AND PROFIT AND LOSS ACCOUNT. FURTH ER THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE PURCHASES SHOULD NOT BE REDUC ED BY RS. 70,04,814/-. 2.2 IN RESPONSE TO THE SHOW-CAUSE, THE ASSESSEE SUB MITTED THAT IT TRADES IN RICE AND THAT THE INCLUSION OF THE AMOUNT OF UNDISC LOSED INVESTMENT IN PURCHASES SHALL NOT RESULT IN DECLINE IN GP RATIO. THE CONTENTION OF THE ASSESSEE WAS HOWEVER NOT ACCEPTED BY THE AO. AS PER AO, IF THE ASSESSEE IS ALLOWED TO INCLUDE THE AMOUNT OF UNDISCLOSED INVESTMENT IN STO CK IN BOTH CREDIT AS WELL AS DEBIT SIDE OF THE TRADING AND PROFIT & LOSS ACCOUNT , IT NEGATES THE ENTIRE PURPOSE OF SUCH SURRENDER DURING SURVEY AND THE COR RECT TREATMENT SHALL BE TO TREAT THE AMOUNT OF SURRENDERED UNDISCLOSED INVEST MENT IN STOCK AS INCOME UNDER THE HEAD OTHER SOURCES EXCLUSIVELY. THUS T HE AMOUNT WAS EXCLUDED FROM THE TRADING AND PROFIT AND LOSS ACCOUNT AND WA S TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES. 2.3 BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTE R IN APPEAL BEFORE THE LD CIT(A). THE FINDINGS OF THE LD. CIT(A) IS REPRODU CED AS UNDER: ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 4 I HAVE CONSIDERED THE ABOVE MENTIONED FACTS. I HA VE ALSO NOTED THE FACT THAT APPELLANT HAS FURTHER INCLUDED THE AMOUNT OF R S.70,04,814/- BOTH THE CREDIT SIDE AND DEBIT SIDE, THEREBY NEGATING TH E IMPACT OF THIS EXCESS STOCK TO NAUGHT. FURTHERMORE , I HAVE ALSO PERUSED THE STATEMENT GIVEN BY THE APPELLANT DURING THE COURSE OF SURVEY OPERAT ION WHERE IN RESPONSE TO THE QUESTION NO. 30 WITH REGARD TO EXCESS STOCK VALUED AT RS.70,04,814/- HE HAS CATEGORICALLY STATED THAT TH E 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 THE AMOUNT OF RS. 70, 04,814/- AS SURRENDERED AMOUNT ON ACCOUNT OF EXCESS STOCK WHICH HAS BEEN ACCEPTED BY THE APPELLANT AS HIS INVESTMENT. THEREFORE, THE RE IS NO REASON TO BACKTRACK FROM THE STATEMENT GIVEN BY THE APPELLANT DURING SURVEY OPERATION ABOUT THE UNDISCLOSED INVESTMENT OF RS. 7 0,04,814/-. HENCE THE ADDITION OF RS. 57,46,980/- IS SUSTAINED. ACCO RDINGLY APPELLANTS 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 SURV EY U/S 133A WAS CONDUCTED ON THE BUSINESS PREMISES ON 08.11.2012. DURING THE SU RVEY, ASSESSEE SURRENDERED EXCESS STOCK OF RICE AMOUNTING TO RS. 70,04,814/-. IN THE PROFIT AND LOSS ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 5 ACCOUNT, THE AMOUNT SO SURRENDERED IS CREDITED AS I NCOME FROM UNDISCLOSED SOURCES AND AFTER CLAIMING DEDUCTION ON ACCOUNT OF INTEREST/REMUNERATION TO PARTNERS, RETURN DECLARING INCOME OF RS. 43,36,920/ - WAS FILED ON 28.09.2013. 2.5 IT WAS SUBMITTED BY THE LD AR THAT BOTH THE LOW ER AUTHORITIES HAVE NOT APPRECIATED THE FACTS IN CORRECT PERSPECTIVE. THIS IS BECAUSE THE ASSESSEE IN THE AUDITED PROFIT & LOSS ACCOUNT HAS DEBITED THE U NDISCLOSED INVESTMENT IN STOCK IN PURCHASE ACCOUNT AND SIMULTANEOUSLY IT HAS BECOME PART OF SALES/CLOSING STOCK IN THE CREDIT SIDE, NULLIFYING THE EFFECT OF THE SAME. THEREFORE, THE UNDISCLOSED INVESTMENT IN STOCK IS S EPARATELY CREDITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD INCOME FRO M UNDISCLOSED SOURCES. IT IS FOR THIS REASON THAT THE NET PROFIT WITHOUT CONS IDERING REMUNERATION TO PARTNERS AS PER THE AUDITED PROFIT & LOSS ACCOUNT IS RS.1,08,55,878/- (APB 23). IF THIS AMOUNT IS EXCLUDED BOTH FROM PURCHASE AND T HE CLOSING STOCK, THEN ALSO THE NET PROFIT REMAINS THE SAME (APB 24). HAD THIS AMOUNT NOT CREDITED SEPARATELY TO THE PROFIT & LOSS ACCOUNT THE NET PRO FIT WITHOUT CONSIDERING THE REMUNERATION TO PARTNERS WOULD HAVE BEEN ONLY RS.39 ,35,632/- (APB 25). THUS, IT IS CLEAR THAT ASSESSEE HAS SEPARATELY OFFERED T HE UNDISCLOSED INVESTMENT IN STOCK FOUND IN SURVEY AS BUSINESS INCOME. IT WOULD NOT MAKE ANY DIFFERENCE TO THE TOTAL INCOME WHETHER IT IS OFFERED UNDER THE HE AD BUSINESS INCOME OR UNDER THE HEAD INCOME FROM OTHER SOURCES. 2.6 IT WAS FURTHER SUBMITTED THAT THE AO HAS MADE INCORRECT CALCULATION AT PARA 4 OF THE ASSESSMENT ORDER. THIS IS BECAUSE, TH OUGH HE HAS REDUCED THE AMOUNT OF RS.70,04,814/- FROM BOTH THE DEBIT SIDE A ND THE CREDIT SIDE, HE FAILED TO CONSIDER THAT THOUGH THIS AMOUNT IS A PAR T OF THE SALES/CLOSING STOCK, ASSESSEE HAS FURTHER CREDITED THIS AMOUNT IN THE P ROFIT AND LOSS ACCOUNT. THEREFORE, HE OUGHT TO HAVE FURTHER REDUCED THIS AM OUNT FROM THE CREDIT SIDE ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 6 OF THE PROFIT AND LOSS ACCOUNT, ONCE HE INTENDED TO INCLUDE IT UNDER THE HEAD INCOME FROM OTHER SOURCES. NOT EXCLUDING THE SAME H AS RESULTED INTO DOUBLE ADDITION OF THE SAME AMOUNT IN AS MUCH AS IT HAS RE MAINED AS A PART OF THE INCOME UNDER THE HEAD BUSINESS AND AGAIN ASSESSED B Y 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 HI S STATEMENT IGNORING THAT THIS AMOUNT IS ALREADY OFFERED TO TAX BY THE ASSESS EE 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 O F 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 C ASE OF SHRI RAMNARAYAN BIRLA (IN ITA NO. 482/JP/15 DATED 30.09.2016). IN THAT C ASE, THE QUESTION BEFORE THE COORDINATE BENCH WAS WHETHER THE CIT(A)-2, UDA IPUR HAS ERRED IN DIRECTING THE AO TO ASSESS THE UNEXPLAINED INVESTME NT SURRENDERED BY THE ASSESSEE UNDER THE HEAD INCOME FROM BUSINESS IGNO RING THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF FAKIR MOH D. HAZI HASAN 247 ITR 290 THAT UNACCOUNTED INCOME OUGHT TO BE CATEGORIZED UND ER THE RESIDUARY HEAD OF INCOME FROM OTHER SOURCES. IN RESPECT TO THE SAID ISSUE, THE FINDINGS OF THE COORDINATE BENCH ARE AS FOLLOWS: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED T HE MATERIAL AVAILABLE ON RECORD. UNDISPUTED FACTS EMERGED FROM THE RECORD THAT AT THE TIME OF SURVEY EXCESS STOCK WAS FOUND. IT IS ALSO NOT DISPUTED T HAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF JEWELLERY. DURING THE COURSE OF SU RVEY EXCESS STOCK VALUING RS. 77,66,887/- WAS FOUND IN RESPECT OF GOLD AND JEWELL ERY. THE COORDINATE BENCH IN THE CASE OF CHOKSI HIRALAL MAGANLAL VS. DCIT 131, TTJ (AHD.)1 HAS HELD THAT ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 7 IN A CASES WHERE SOURCE OF INVESTMENT/EXPENDITURE IS CLEARLY IDENTIFIABLE AND ALLEGED UNDISCLOSED ASSET HAS NO INDEPENDENT EXIST ENCE OF ITS OWN OR THERE IS NO SEPARATE PHYSICAL IDENTITY OF SUCH INVESTMENT /E XPENDITURE THEN FIRST WHAT IS TO BE TAXED IS THE UNDISCLOSED BUSINESS RECEIPT I NVESTED IN UNIDENTIFIABLE UNACCOUNTED ASSET AND ONLY ON FAILURE IT SHOULD BE CONSIDERED TO BE TAXED U/S 69 ON THE PREMISES THAT SUCH EXCESS INVESTMENT IS NOT RECORDED IN THE BOOKS OF ACCOUNT AND ITS NATURE AND SOURCE IS NOT IDENTI FIABLE. ONCE SUCH EXCESS INVESTMENT IS TAXED AS UNDECLARED BUSINESS RECEIPT THEN TAXING IT FURTHER AS DEEMED INCOME UNDER SECTION 69 WOULD NOT BE NECESS ARY. THEREFORE, THE FIRST ATTEMPT OF THE ASSESSING AUTHORITY SHOULD BE TO FIN D OUT LINK OF UNDECLARED INVESTMENT/EXPENDITURE WITH THE KNOWN HEAD, GIVE OP PORTUNITY TO THE ASSESSEE TO ESTABLISH NEXUS AND IF IT IS SATISFACTORILY ESTA BLISHED THEN FIRST SUCH INVESTMENT SHOULD BE CONSIDERED AS UNDECLARED RECEI PT UNDER THAT PARTICULAR HEAD. IT IS OBSERVED THAT THERE IS NO CONFLICT WI TH THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF FAKIR MOHD. HAJIH ASAN (SUPRA) WHERE INVESTMENT IN AN ASSET OR EXPENDITURE IS NOT IDENTI FIABLE AND NO NEXUS WAS ESTABLISHED THEN WITH ANY HEAD OF INCOME AND THUS W AS NOT AVAILABLE FOR SET OFF AGAINST ANY LOSS UNDER ANY OTHER HEAD. THEREFO RE, THE HONBLE COORDINATE BENCH HELD THAT WHERE ASSET IN WHICH UNDECLARED INV ESTMENT 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 TREA TED AS UNDECLARED BUSINESS INCOME EXPLAINING THE INVESTMENT. IN THE PRESENT C ASE 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 TREA T THE SURRENDERED AMOUNT AS EXCESS STOCK QUA THE EXCESS STOCK FOUND. ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 8 2.8 IT WAS FURTHER SUBMITTED THAT EVEN IF IT IS ASS ESSED AS INCOME FROM OTHER SOURCES, ONCE THIS AMOUNT IS MADE A PART OF BOOK PR OFIT, 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 26 5 , 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 T HE MANNER LAID DOWN IN CHAPTER IV-D SUBJECT TO SPECIFIED ADJUSTMENTS. SEL ECTION 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 CREDITE D TO P&L A/C SHOULD BE ASSESSED UNDER DIFFERENT HEADS OF INCOME AS CLASSIF IED 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 EM POWERS THE AO TO GO BEHIND THE NET PROFIT SHOWN IN THE P&L A/C EXCEPT T O THE EXTENT OF ADJUSTMENTS PROVIDED THEREIN. SINCE THE BOOK PROFIT HAS BEEN DE FINED TO BE THE NET PROFIT SHOWN IN THE P&L A/C OF THE FIRM, IT IS THE PROFIT WHICH THE PARTNERS HAVE AGREED TO SHARE AND, THEREFORE SUCH NET PROFIT HAS TO BE C ONSIDERED AS BUSINESS INCOME AT LEAST FOR THE PURPOSE OF S. 40(B). PROVISIONS OF S. 28(V) ALSO SUPPORT THIS VIEW. IF THE NATURE OF THE INCOME HAS BEEN DEEMED BY THE LEGISLATURE TO BE THE BUSINESS INCOME BY THE RECIPIENT, THE SOURCE ALSO S HOULD BEAR THE SAME CHARACTER I.E. BUSINESS INCOME. THEREFORE, INTEREST INCOME IS NOT TO BE EXCLUDED FROM THE NET PROFIT DECLARED BY THE ASSESSEE FIRM OF COMPUTING BOOK PROFIT FOR THE PURPOSE OF DETERMINING THE ALLOWABLE DEDUCTION OF REMUNERATION PAYABLE TO THE PARTNERS UNDER S. 40(B). ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 9 IN ANY CASE, THE AO HIMSELF HAS ALLOWED REMUNERATIO N TO PARTNERS AS CLAIMED BY THE ASSESSEE WHICH IS AFTER CONSIDERING THE EXCE SS STOCK SURRENDERED BY THE ASSESSEE AND THEREFORE, THIS ISSUE IS NOT A MATTER OF DISPUTE BY THE DEPARTMENT BEFORE THE HONBLE ITAT. IN VIEW OF THE ABOVE ADDIT ION CONFIRMED BY THE LD. CIT(A) BE DELETED. 2.9 THE LD DR IS HEARD WHO HAS RELIED ON THE ORDER S OF THE LOWER AUTHORITIES. 2.10 WE HAVE HEARD THE RIVAL CONTENTIONS AND PURSUE D THE MATERIAL AVAILABLE ON RECORD. DURING THE COURSE OF SURVEY, THE ASSESS EE HAS SURRENDERED AN AMOUNT OF RS. 70,04,814/- TOWARDS INVESTMENT IN STO CK OF RICE WHICH HAD NOT BEEN RECORDED IN THE BOOKS OF ACCOUNTS. SUBSEQUENT LY, IN THE BOOKS OF ACCOUNTS, THE ASSESSEE HAS INCORPORATED THIS TRANSA CTION BY DEBITING THE PURCHASE ACCOUNT AND CREDITING THE INCOME FROM UNDI SCLOSED SOURCES. IN THE ANNUAL ACCOUNTS, THE PURCHASES OF RS. 70,04,814/- W ERE 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 A CCOUNT SINCE THE SAID STOCK OF RICE WAS NOT SOLD OUT. IN ADDITION TO THE PURCHASE S 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 RECO RDED STOCK WHICH CAN BE SUBSEQUENTLY SOLD OUT AND THE PROFIT/LOSS THEREFRO M WOULD BE SUBJECT TO TAX AS ANY OTHER NORMAL BUSINESS TRANSACTION. SECONDLY, T HE UNRECORDED INVESTMENT WHICH HAS GONE IN PURCHASE OF SUCH UNRECORDED STOCK OF RICE HAS BEEN RECORDED IN THE BOOKS OF ACCOUNTS AND OFFERED TO TA X BY CREDITING THE SAID AMOUNT IN THE PROFIT AND LOSS ACCOUNT. HAD THIS IN VESTMENT BEEN MADE OUT OF ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 10 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 ASSESSEES BRINGING SUCH TRANSACTION IN ITS BOOKS O F ACCOUNTS AND THE ACCOUNTING TREATMENT THEREOF SO AS TO REGULARISE IT S BOOKS OF ACCOUNTS. IN FACT, THE SAME PROVIDES A CREDIBLE BASE FOR REVENUE TO BR ING TO TAX SUBSEQUENT PROFIT/LOSS ON SALE OF SUCH STOCK OF RICE IN FUTURE . 2.11 HAVING SAID THAT, THE NEXT ISSUE THAT ARISES F OR 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 I NCOME OR INCOME FROM OTHER SOURCES. IN THE PRESENT CASE, THE ASSESSEE IS DEALING IN SALE OF FOODGRAINS, RICE AND OIL SEEDS, AND THE EXCESS STOC K WHICH HAS BEEN FOUND DURING THE COURSE OF SURVEY IS STOCK OF RICE. THER EFORE, THE INVESTMENT IN PROCUREMENT OF SUCH STOCK OF RICE IS CLEARLY IDENTI FIABLE AND RELATED TO THE REGULAR BUSINESS STOCK OF THE ASSESSEE. THE DECISI ON OF THE CO-ORDINATE BENCH IN CASE OF SHRI RAMNARAYAN BIRLA (SUPRA) SUPPORTS T HE CASE OF THE ASSESSEE IN THIS REGARD. THEREFORE, THE INVESTMENT IN THE EXCE SS 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. 3. IN RESPECT OF GROUND NO. 2, THE FACTS OF THE CAS E ARE THAT THE ASSESSEE HAS GIVEN LOAN AND ADVANCES TO SMT. RITA GUPTA OF R S. 34,84,160/- AND CHARGED INTEREST @ 10%, WHEREAS ASSESSEE FIRM WAS PAYING IN TEREST @ 14%-17% ON LOANS AVAILED BY IT. THE ASSESSEE WAS ASKED TO EXPL AIN AS TO WHY INTEREST @ 14% IS NOT CHARGED FROM SMT. RITA GUPTA AS THE ASSESSEE IS PAYING SUCH AMOUNT ON LOANS AVAILED BY IT. THE ASSESSEE SUBMITTED THAT SU CH INTEREST IS DUE TO VARIOUS REASONS I.E. DEMAND AND SUPPLY OF MONEY, SLACK OR B OOM SEASON, PERIOD FOR WHICH LOANS IS GIVEN OR TAKEN ETC. THE ASSESSEES C ONTENTION WAS NOT ACCEPTED ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 11 BY THE AO. THE AO OBSERVED THAT IF THE ASSESSEE HA D NOT ADVANCED SUCH LOAN TO SMT. RITA GUPTA, WHO IS RELATED TO PARTNERS OF A SSESSEE FIRM, THEN THE AMOUNT WOULD HAVE BEEN UTILIZED TO FUND THE FIRM AN D IT WOULD NOT HAVE TAKEN THE LOANS WHERE IT IS PAYING 14%-17% LOANS. THUS, T HIS ACT WAS HELD PREJUDICIAL TO THE INTEREST OF THE ASSESSEE FIRM AND AN AMOUNT OF 4% (14%-10%) OF THE LOAN AMOUNT OF RS. 34,84,160/-, I.E. RS. 1,39,366/- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE AND THE MATTER WAS CARRIED I N APPEAL BEFORE THE LD CIT(A). 3.1 THE FINDINGS OF THE LD. CIT(A) IS REPRODUCED AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER AS WELL A S SUBMISSIONS MADE BY THE APPELLANT AND FIND THAT THE AO HAS GIVEN COG ENT REASON ABOUT CHARGING OF INTEREST AT 10% WHILE PAYING INTEREST R ATE OF 14-17%. ACCORDINGLY, THE DISALLOWANCE OF INTEREST AMOUNTING TO RS. 1,39,366/- IS SUSTAINED AND THE APPELLANTS GROUND OF APPEAL IS D ISMISSED. 3.2 THE LD. AR OF THE ASSESSEE SUBMITTED THAT AT TH E OUTSET, IT MAY BE NOTED THAT THE AO HAS MADE ADDITION ON ACCOUNT OF NOTIO NAL INTEREST OF RS. 1,39,366/-. THERE CANNOT BE ANY ADDITION ON ACCOUN T OF NOTIONAL INCOME AS HELD BY THE HONBLE SUPREME COURT IN CASE OF E.D.S ASSOON & 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 TAXE D, 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 DE LETED. THE LD. CIT(A) HAS CONFIRMED THE ADDITION BY STATING THAT IT IS THE DI SALLOWANCE OF INTEREST. IT IS SUBMITTED THAT THE LOWER AUTHORITIES HAVE NOT DISPU TED ABOUT THE COMMERCIAL EXPEDIENCY ABOUT THE ADVANCE GIVEN TO SMT. RITA GUP TA. IN FACT, THE ADVANCE WAS GIVEN TO SMT. RITA GUPTA IN EARLIER YEARS FOR C ONSTRUCTION OF GODOWN AND ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 12 THE SAME WAS GIVEN ON RENT BY THE ASSESSEE. THEREF ORE ONCE COMMERCIAL EXPEDIENCY FOR GIVING THE ADVANCE IS ESTABLISHED, NO PART OF THE INTEREST EXPENDITURE CAN BE DISALLOWED IN VIEW OF THE DECISI ON OF HONBLE SUPREME COURT IN CASE OF S.A. BUILDERS 288 ITR 1 AND HERO C YCLES PVT. LTD. VS. CIT 379 ITR 347 WHERE IT WAS HELD THAT THE REVENUE CANNOT JUSTI FIABLY 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 REASONABL E EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURT HER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE A ND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LO OK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINESSMAN. F URTHER, IN PAST, NO SUCH DISALLOWANCE/ADDITION WAS MADE. THEREFORE, NEITHER THE ADDITION OF NOTIONAL INTEREST MADE BY THE AO OR DISALLOWANCE OF INTEREST AS HELD BY THE LD. CIT(A) IS AS PER LAW. IT MAY ALSO BE NOTED THAT THE PARTNERS OF THE FIRM HAVE A CAPITAL OF RS. 1,96,73,637/-. PARTNERS ARE PAID INTEREST @12% / THE BALANCE IN THE PARTNERS ACCOUNT IS MUCH MORE THAN THE AMOUNT ADVAN CED TO SMT. RITA GUPTA WHO IS A WIFE OF ONE OF THE PARTNER. THEREFORE, EV EN THE DISALLOWANCE MADE @4% IS NOT JUSTIFIED AND THE SAME SHOULD BE RESTRI CTED @ 2% ONLY. RELIANCE IS ALSO PLACED ON THE FOLLOWING CASES: CIT VS. RAM KISHAN VERMA (2016) 132 DTR 107/132 TAX MAN 107 (RAJ.) (HC) CIT VS. VIJAY SOLVEX LTD. (2015)113 DTR 382 (RAJ.) (HC) 3.3. THE LD DR IS HEARD WHO HAS RELIED ON THE ORDER OF THE LOWER AUTHORITIES. 3.4 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS NOTED THAT THE ADVANCE WAS GIVEN TO SMT. RITA GUPTA IN EARLIER YEARS FOR CONSTRUCTION OF GODOWN AND THE SAME WAS G IVEN ON RENT BY THE ITA NO. 137/JP/17 M/S BAJARGAN TRADERS, ALWAR VS. THE ACIT, CIRCLE-2, ALWAR. 13 ASSESSEE. THE TEST OF COMMERCIAL EXPEDIENCY FOR GI VING THE ADVANCE HAVING BEING ESTABLISHED, THE AO IS NOT CORRECT TO CHALLEN GE THE RATE OF INTEREST WHICH HAS BEEN CHARGED BY THE ASSESSEE. FURTHER, NO NEXUS HAS BEEN ESTABLISHED BETWEEN THE BORROWED FUNDS AND FUNDS ADVANCED TO SM T RITA GUPTA. IN THE RESULT, THE GROUND NO. 2 OF THE ASSESSEE IS ALLOWED . IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 17/03/2017. SD/- SD/- (KUL BHARAT ) (VIKRAM SINGH YADAV) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER JAIPUR DATED:- 17/03/2017 VKNS'K DH IZFRFYFI VXZSF'KR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S BAJARGAN TRADERS, ALWAR 2. IZR;FKHZ@ THE RESPONDENT- THE ACIT, CIRCLE-2, ALWAR 3. VK;DJ VK;QDR@ CIT ALWAR 4. VK;DJ VK;QDRVIHY@ THE CIT(A) ALWAR 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 137/JP/2017) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASSISTANT. REGISTRAR.