Commissioner of Income Tax Vs. Gulshan Electric Store and Malhotra Jewellers - Court Judgment

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direct taxation - book profit - inclusion of income as - sections 4(b)(iii) and 69a of the income tax act, 1961 - present appeals filed against order whereby tribunal treated the amount surrender by assessee, on account of excess stock and cash as book profit as mentioned under section 69 of act - whether tribunal was right in treating amount surrendered during survey on account of excess stock and cash as 'book profit' for purpose of computing salary/remuneration to partners whereas as per definition provided in act, book profit means net profit earned by assessee during relevant previous year? - held, entry of said amount is one entry in books of accounts and not divided into various sub entries so as to show from where this amount came from - - amount in question was undisclosed income and once it is undisclosed in terms of section 69a of act, it was to be added to taxable income for purpose of computing tax - in case assessee wanted to take benefit of surrendered income for purpose of computing deductible remuneration of partners in terms of section 4(b)(iii) of act then it is for assessee to lead evidence to show that this income had arisen out of business of firm - merely including it in books of accounts would not make it an income arising out of business - in case no survey had been carried out, it would not be unreasonable to presume that no such entry would have been made in books of accounts - assessee has not led any evidence to show that amount in question is income related to particular year or was arising out of business of firm - it did not give any explanation at time of survey and even during assessment proceedings has not led any evidence or produced any records to show that this income was derived from business of company - therefore, this income was not an income derived from business of company and could not be trated as book profit - accordingly question of law is answered in favour of revenue and against assessee - keeping in view circular issued by central board of direct taxes, board has taken a policy decision not to file appeals in high courts where tax effect is less than two lakhs - therefore, one of the appeal dismissed as not maintainable as in said case tax liability is less than prescribed limit - however, another appeal is allowed - code of civil procedure, 1908.[c.a. no. 5/1908]. order 14, rule 2 [as amended by amending act of 1976]: [v.k. gupta, cj, deepak gupta & surjit singh, jj] preliminary issue of law and fact court framing all issues both of law and facts together and also tried all the issues together, including the issue relating to jurisdiction of court held, except in situations perceived or warranted under sub-rule (2) of rule 2 of order 14 where a court in fact frames only issues of law in the first instance and postpones settlement of other issues, clearly and explicitly in situations where the court has framed all issues together, both of law as well as facts and has also tried all these issues together, it is not open to the court to adopt the principle of severability and proceed to decide issues of law first, without taking up simultaneously other issues for decision. this course of action is not available to a court because sub-rule (1) does not permit the court to adopt any such principle of severability and to dispose of a suit only on preliminary issues, or what can be termed as issues of law. sub-rule (1) clearly mandates that in a situation contemplated under it, where all the issues have been together and have also been taken up for adjudication during the course of the trial, these must be decided together and the judgment in the suit as a whole must be pronounced by the court covering all the issues framed in the suit.deepak gupta, j.1. these two appeals are being disposed of by this common judgment since the substantial questions of law involved in both the appeals are very similar. the questions formulated in ita no. 74 of 2006 are as under:i) whether on the facts and in the circumstances of the case, the hon'ble tribunal was right in treating the amount of surrender of rs. 15,20,000/- on account of excess stock & cash found at the time of survey as profit from business for the purpose of book profit whereas the same has been assessed under section 69 of the i.t. act, 1961?ii) whether on the facts and in the circumstances of the case the hon'ble itat was right in treating the amount surrendered during survey on account of excess stock and cash as 'book profit' for the purpose of computing salary/remuneration to the partners whereas as per definition provided in the income-tax act, 1961 the book profit means the net profit earned by the assessee during the relevant previous year?iii) whether on the facts and in the circumstances of the case, the hon'ble itat was right in not following their own orders passed in ita no. 49/chandi/04 dated 29.6.2004 and ita no. 220/chandi/2004 dated 10.11.2005 which are on the identical issue?iv) whether the hon'ble itat misconstrued the material on records?2. the facts of ita no. 74 of 2006 are being given in this appeal because we find that in ita no. 63 of 2006, the tax effect is less than rs. 2 lac and, therefore, the appeal would not be maintainable.3. in ita no. 74 of 2006 the brief facts of the case are that the assesee is carrying on jewellery business in mandi town. on 27.3.2003 a survey under section 133a was conducted in the premises of the assessee firm. during the course of survey, excess cash amounting to rs. 41,542/-, excess stock of gold valuing rs. 14,77,022/- and excess stock of silver valuing rs. 1426/- was found. the assessee was unable to explain the source of acquisition of the excess cash or stocks. it made a surrender of rs. 15.20 lacs in respect of the financial year 2002-03 corresponding to the assessment year 2003-04. the surrender was made by one of the partners of the assessee firm in the following terms:.i after consulting all partners of the firm voluntarily surrender a sum of rupees fifteen lakh twenty thousand (rs. 15,20,000/-) for the financial year 2002-03 relevant to the assessment year 2003-04. this surrender will be in addition to my natural profit as per the books of accounts....4. thereafter, when the assessee filed its return, it showed the surrendered amount of rs. 15,20,000/- in its book profit and salary of the partners was claimed by it by adding this amount of rs. 15,20,000/- to the other book profits by invoking section 40(b)(v) of the income tax act, 1961 which reads as follows:amounts not deductible.40. notwithstanding anything to the contrary in sections 30 to [38], the following amounts shall not be deducted in computing the income chargeable under the head 'profits and gains of business or profession',-(b) in the case of any firm assessable as such,(v) any payment of remuneration to any partner who is working partner, which is authorized by, and is in accordance with, the terms of the partnership deed and relates to any period falling after the date of such partnership deed in so far as the amount of such payment to all the partners during the previous year exceeds the aggregate amount computed as hereunder:(1) in case of a firm carrying on a profession referred to in section 44aa or which is notified for the purpose of that section-(a) on the first rs. 1,00,000 rs. 50,000 or at theof the book-profit or rate of 90 perin case of a loss cent of the book-profit, whichever ismore;(b) on the next rs. 1,00,000 at the rate of 60of book-profit per cent;(c) on the balance of the at the rate of 40book-profit per cent;(2) in the case of any other firm-(a) on the first rs. 75,000 of rs. 50,000 or at thethe book-profit, or in rate of 90 percase of a loss cent of the book-profit, whicheveris more;(b) on the next rs. 75,000 at the rate of 60of the book-profit per cent;(c) on the balance of at the rate of 40the book-profit per cent:5. the assessing officer held that this amount of rs. 15,20,000/- could not be treated the book profits of the firm and should be treated as undisclosed income in terms of section 69a of the act which reads as follows:unexplained money, etc.69a. where in any financial year the assessee is found to be the owner of any money, bullion, jewellery or other valuable article and such money, bullion, jewellery or valuable article is not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of acquisition of the money, bullion, jewellery or other valuable article, or the explanation offered by him is not, in the opinion of the [assessing} officer, satisfactory, the money and the value of the bullion, jewellery or other valuable article may be deemed to be the income of the assessee for such financial year.6. the assessing officer after holding so held that the salary of the partners could be calculated in terms of the book profits of the firm without taking into consideration the surrendered amount.7. aggrieved by the said order, the assessee filed an appeal. the commissioner of income tax held that the surrendered amount had been taken into the books of accounts which is apparent from the audited statements of account enclosed with the return of income. he further held that the assessee had stated that the difference in stock is mainly on account of accumulated difference in previous years in stock, and variation in prices which could not be accounted for inadvertently. according to the commissioner since this amount was credited to the books of accounts, it formed part of the book of credit of the assessee firm and the assessee was entitled to deduct the salary paid to the partners by taking this amount to be a part of the book profit. the revenue went up in appeal and the tribunal upheld the order of the commissioner, income tax. hence the present appeal by the revenue.8. we have heard sh. vinay kuthiala, learned counsel for the revenue and sh. vishal mohan, learned counsel for the assessee.9. the main grounds raised by sh. vinay kuthiala are that the book profit as defined in explanation 3 to section 40(b)(v) of the income tax act means the profit as computed under chapter iv-d of the act. explanation 3 reads as under:explanation 3.-for the purpose of this clause, 'book-profit means the net profit, as shown in the profit and loss account for the relevant previous year, computed in the manner laid down in chapter iv-d as increased by the aggregate amount of the remuneration paid or payable to all the partners of the firm if such amount has been deducted while computing the net profit.10. explanation 3 to section 40(b)(v) clearly lays down that the book profit is the net profit as shown in the profit and loss account computed in the manner laid down in chapter iv-d. chapter iv-d of the income tax act contains section 28 to 44. these sections relate to the profits and gains of business or profession; income from profit and gains of business or profession; income from rents; depreciation etc. the question which arises is whether the amount which was surrendered could form part of the book profits or not. according to sh. kuthiala even the tribunal has taken a different stand in different cases. a number of authorities have been cited before us by both the sides.11. in lakhmichand baijnath v. commissioner of income tax, west bengal : 1959 (35) itr 416, the apex court held that when an amount is credited in business books, it is not an unreasonable inference to draw that it is a receipt from business. relying upon these observations, it is urged by sh. vishal mohan, learned counsel for the assessee that since the amount stands entered in the books before the returns were filed, it should be presumed that it is a receipt from business.12. in gordhandas hargovandas and anr. v. commissioner of income tax, bombay city-iii : 1980 (126) itr 560, the bombay high court was dealing with a case of two assessees. according to the assessees, they had inherited certain gold ornaments from their parents. the ornaments were melted and converted to gold bars. the gold bars were sold and the question was whether the amount received from sale of gold was income within the meaning of section 69a. after considering the language of section 69a, the bombay high court held that the onus of proving the source of a sum of money found to have been received by the assesse is on him and if the assessee disputes the liability to pay tax, it is for him to show that the receipt was not income or was exempt from taxation under the provisions of the act. in the absence of such proof, the revenue is entitled to treat it as taxable income.13. the apex court in chuharmal v. commissioner of income tax, m.p. : 1988 (172) itr 250 held that though the rigours of the evidence act may not be applicable to proceedings under the income tax act but this did not mean that if the taxing authorities desire to invoke principles of the evidence act, they were prevented from doing so. consequently if a person was found in possession of anything, the onus was on him to prove that he was not its owner and it was for him to prove that the income was not taxable. it further held that the expression 'income' as used in section 69a of the income tax act had a wide meaning which meant anything which came in or resulted in gain.14. in commissioner of income tax v. margaret's hope tea co. ltd. : 1993(201) itr 747, the high court of calcutta held that where the assessee's main activity is cultivation, manufacture and sale of tea, the cash credit amount appearing in the assessee's books should be treated as income of the assessee from its business and not as income from undisclosed sources. in our opinion, this judgment is not relevant to the facts of the present case.15. in commissioner of income tax and anr. v. s.k. srigiri and brothers : 2008 (298) itr 13, the karnataka high court dealt with a matter where additional income was disclosed in revised returns. the assessee filed a return. certain discrepancies were found and the assessee filed revised return. the assessments were passed on the basis of the revised returns. the question which arose was whether the partners' remuneration could be claimed in terms of section 40(b)(iii) on the basis of revised returns or on the basis of unrevised returns. the commissioner, income tax held that additional income was not an income from business but from other sources and, therefore, deduction on the remuneration paid to the partners could not be computed by including the income from other sources. the tribunal held that the assessee had received the additional income from business only and not from other sources and set aside the order. the high court only held that the tribunal had given a finding of fact that the additional income is from business and, therefore, the remuneration paid to the partners had to be deducted by taking into consideration this income. this case has been decided on its own peculiar facts and no substantial question of law has been settled.16. a bare perusal of section 40 (b)(iii) read with explanation 3 leads to only one irresistible conclusion that books profit as contemplated in explanation 3 are only those profits which are calculated in terms of chapter iv d.17. in the present case, we are dealing with the assessment year 2003-04 corresponding to the financial year 2002-03 ending on 31.3.2003. the survey was conducted on 27.3.2003 in which excess cash and stocks amounting to rs. 15,19,990/- were found. one of the partners of the assessee firm after consulting the other partners voluntarily surrendered a sum of rs. 15,20,000/- in addition to the natural profit as per the books of accounts. however, when the returns were filed, these were also shown to be part of the book profits.18. it is pertinent to mention here that this entry of rs. 15,20,000/- is one entry in the books of accounts and this entry has not been divided into various sub entries so as to show from where this amount of rs. 15,20,000/- came from. there can be no manner of doubt that this is an income falling within section 69a. it was an undisclosed income and once it is undisclosed in terms of section 69a, it was to be added to the taxable income for the purpose of computing tax. in case the assessee wanted to take benefit of the surrendered income for the purpose of computing the deductible remuneration of the partners in terms of section 4(b)(iii) then it is for the assessee to lead evidence to show that this income had arisen out of the business of the firm. merely including it in the books of accounts would not make it an income arising out of the business. in case no survey had been carried out, it would not be unreasonable to presume that no such entry would have been made in the books of accounts. the assessee has not led any evidence to show that this income related to the particular year or was arising out of the business of the firm. the assessee alone has the knowledge as to from where it acquired its excess stocks and cash. it did not give any explanation at the time of survey and even during the assessment proceedings has not led any evidence or produced any records to show that this income was derived from the business of the company. therefore, we have no hesitation in holding that this income was not an income derived from the business of the company. accordingly questions no. 1, 2 and 4 are answered in favour of the revenue and against the assessee. we need not decide question no. 3 in view of the above discussion.19. however, another question which arises as far as ita no. 63 of 2006 is concerned is whether the said appeal itself is maintainable or not. sh. vishal mohan appearing for the respondents submits that the revenue should not have filed this appeal since the tax effect even if the appeal is decided in favour of the revenue is less than rs. 2 lakhs. he has placed reliance on circular f. no. 279/126/98-it, dated march 27, 2000, issued by the central board of direct taxes, which reads as under:instruction no. 1979f. no. 279/126/98-itgovernment of india,ministry of finance (department of revenue),central board of direct taxes,new delhi, dated the 27th march, 2000.toall chief commissioners of income-tax/directors general of income-tax.sir,subject: revising monetary limits for filing departmental appeals/references before income-tax appellate tribunal, high courts and supreme court-measures for reducing litigation-regarding.reference is invited to the board's instruction no. 1903, dated 28th october, 1992, and instruction no. 1777, dated 4th november, 1987, wherein monetary limits of rs. 25,000 for departmental appeals (in income-tax matters) before the appellate tribunal, rs. 50,000 for filing reference to the high court and rs. 1,50,000 for filing appeal to the supreme court were laid down.2. in supersession of the above instruction, it has now been decided by the board that appeals will be filed only in cases where the tax effect exceeds the revised monetary limits given hereunder: (tax effect)(i) appeal before the appellate tribunal (income-tax matters) rs. 1,00,000(ii) appeal under section 260a/reference under section256(2) before the high court rs. 2,00,000(iii) appeal in the supreme court rs. 5,00,000 the new monetary limits would apply with reference to each case taken singly. in other words, in group cases, each case should individually satisfy the new monetary limits. the working out of monetary limits will therefore not take into consideration the cumulative revenue effect as envisaged in the board's earlier instruction referred to above.3. adverse judgments relating to the following should be contested irrespective of revenue effect:(i) where revenue audit objection in the case has been accepted by the department.(ii) where the board's order, notification, instruction or circular is the subject- matter of an adverse order.(iii) where prosecution proceedings are contemplated against the assessee.(iv) where the constitutional validity of the provisions of the act are under challenge.4. special leave petitions under article 136 of the constitution are filed before the supreme court only in consultation with the ministry of law. therefore, where the chief commissioner decides to contest an adverse judgment by filing special leave petition before the supreme court, they should send the proposal to the board for further processing.5. these instructions will apply to litigation under other direct taxes also, e.g., wealth-tax, gift-tax, estate duty, etc.6. these monetary limits will not apply to writ matters. 7. this instruction will come into effect from april 1, 2000.sd/-anuradha goyal,deputy secretary to the government of india.20. the question which arises is that when union of india has taken a decision not to file appeals in the high courts where the tax effect is less than two lakhs should this appeal be rejected only on this ground. the circular in question was issued with a view to reduce litigation in the high courts and the supreme court. despite the above circular having been issued the revenue has chosen to file the present appeal knowing fully well that the courts are flooded with cases and such a case should not have been filed. the filing of this appeal is contrary to the circular issued which is binding on all the chief commissioners and director general of income-tax. while taking this view, we are supported by the judgment of the bombay high court in commissioner of income-tax v. camco colour co. : (2002) 254 itr 565.21. in view of the above discussion and keeping in view the circular issued by the central board of direct taxes, we are satisfied that the board has taken a policy decision not to file appeals in the high courts where the tax effect is less than two lakhs. the said appeal is, therefore, not maintainable.22. in view of the above discussion, ita no. 63 of 2006 is dismissed as not maintainable and ita no. 74 of 2006 is allowed. no order as to costs.