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IT : Surrendered income during course of survey has to be assessed separately as deemed income without setting off losses under sections 70 and 71
 29 taxmann.com 268 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'A'
Liberty Plywood (P.) Ltd.
Assistant Commissioner of Income-tax, Ambala*
T.R. SOOD, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NO. 727 (CHD.) OF 2012
[ASSESSMENT YEAR 2005-06]
DECEMBER 17, 2012
Section 70, read with section 71, of the Income-tax Act, 1961 - Losses - Set off of, from one source against income from another sources under same head of income - Assessment year 2005-06 - Whether income surrendered during course of survey has to be assessed separately as deemed income and set-off of losses under sections 70 and 71 is not possible against such income - Held, yes [Paras 11 & 12] [In favour of revenue]
Section 32 of the Income-tax Act, 1961 - Depreciation - Unabsorbed depreciation - Assessment year 2005-06 - Whether in view of amendment brought out in section 32(2) with effect from 1-4-1997 by Finance Act (No.2) of 1996 and again on 1-4-2002 by Finance Act, 2001 unabsorbed depreciation for block of assessment years 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off in subsequent assessment year - Held, yes [Para 14] [In favour of assessee]
During the course of survey assessee surrendered an additional income of Rs.70 lakhs.
Assessment was completed by Deputy Commissioner.
Later on assessment records were examined by the Commissioner wherein he found that the assessment order was erroneous and prejudicial to the interest of the revenue. The Commissioner passed an order under section 263 and opined that surrendered income of Rs. 70 lakhs should be treated as deemed income under section 69, 69A, 69B and therefore, same was not eligible to be set off against carry forward business loss or depreciation in view of the decision of the Gujarat High Court in case of Fakir Mohmed Haji Hasan v. CIT  247 ITR 290/ 120 Taxman 11.
Though the order under section 263 was challenged before the Tribunal, the Tribunal observed that the assessment order was definitely erroneous and prejudicial to the interest of the revenue, however, the Commissioner himself was not correct in observing that surrendered income should be treated as deemed income under section 69, 69A, 69B. Accordingly, the Tribunal held that such a conclusion can be drawn only after necessary enquiry and accordingly, the matter was sent to the file of the Assessing Officer for conducting enquiries.
The Assessing Officer held that since income surrendered during survey was not recorded in the books of account therefore, no deduction of set off of loss on depreciation could be allowed. Accordingly, the surrendered income was assessed separately.
On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
Arguments of assessee
The assessee submitted that the income surrendered during survey could not be assessed as deemed income under sections 69, 69A, 69B and 69C if nature of source could be properly identified.
The assessee further argued that as per section 32(2) if unabsorbed depreciation could not be set off in a year under consideration then the same would be added to the depreciation allowance of the following previous year which means it would become current depreciation of the next year. Such depreciation could be adjusted or set off against any head of the income.
Argument of revenue
Revenue however, relied on the decision of Punjab and Haryana High Court in case of Kim Pharma (P.) Ltd. v. CIT [IT Appeal No. 106 of 2011 (O&M)] wherein the Court held that in case of surrendered income brought forward losses cannot be set off under sections 70 and 71 against the surrendered income.
Issue for consideration
Whether the surrendered income should be treated as business income so as to set off brought forward losses under section 70 as well as the depreciation under section 32(2)?
Surrendered income during course of survey has to be assessed separately
The Punjab and Haryana High Court in case of Kim Pharma (P.) Ltd. (supra), clearly held that surrendered income can be taxed as deemed income without setting off of the losses under sections 70 and 71. Following the decision of the Punjab and Haryana High Court it is held that surrendered income has to be assessed separately as deemed income and set off of losses under sections 70 and 71 is not possible against such income. [Paras 11 & 12]
Issue relating to setting off of depreciation under section 32(2)
The plain reading of section 32(2) clearly shows that if the depreciation cannot be fully adjusted against profits and gains chargeable in the relevant year because of inefficiency of the profits then the same would be added to the depreciation of the following year. This means that unabsorbed depreciation which cannot be set off in a particular year, would become current depreciation in the following year and there is no restriction against such set off. Therefore, unabsorbed depreciation which is carry forward as current depreciation under section 32(2) is clearly available for setting off. [Para 12]
However, this provision has been amended twice with effect from 1-4-1997 by the Finance Act (No. 2) of 1996 and again on 1-4-2002 by the Finance Act, 2001. [Para 13]
Keeping in view the said amendment it is held that unabsorbed depreciation for the block of assessment years 1997-98 to 2001-02 which could not have been set off earlier, cannot be allowed to be set off in subsequent assessment year. Therefore, the order of the Commissioner (Appeals) is set aside and the matter is remitted back to the file of the Assessing Officer with a direction to only allow set off of unabsorbed depreciation which is outside the block of assessment years 1997-98 to 2001-02. [Para 14]