Income Towards Discount and Incentives to be Assessed under Head Income from Business and Profession if Books of Account is Linked to Business: ITAT [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) held that the nature and source of credit found in the books of accounts of the assessee is linked to business, then any income generated out of such business activity is assessable under the head income from business and profession.

The assessee M/s. Mangal & Mangal is engaged in the business of trading in gold jewellery, silvery ornaments, electronic and home appliances and metal wares. The assessee firm had filed its return of income for the assessment year 2017-18, declaring a total income of Rs. 126,97,84,860/-.

The case was selected for scrutiny under Computer-Assisted Scrutiny Selection (CASS) to verify the claim of short term capital gains declared under Section 111A of the Income-tax Act, 1961 and expenses debited into profit and loss account for earning exempt income as per schedule BP of Income Tax Return is significantly lower when compared to investment made to earn exempt income.

The appellant has filed its return of income for the assessment year 2017-18 and admitted total income of Rs. 126,97,84,860/-, which included sum of Rs. 50 crores under the head discounts and incentives.

The Assessing Officer(AO), has assessed Rs. 50 crores under Section 68 of the Income Tax Act and levied tax under Section 115BBE of the Income Tax Act and concluded that the appellant firm had disclosed Rs. 50 crores under the head discounts and incentives, towards unaccounted income earned from suppression of sales turnover for earlier period.

Being aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)].

The  CIT(A) opined that the Assessing Officer having rendered a finding of fact that the sum credited in the books of accounts is inextricably linked to the business of the appellant is erred in invoking provisions of Section 68 read with Section 115BBE of the Income Tax Act. Therefore, directed the AO to compute tax under the head discounts and incentives, without invoking provisions of Section 115BBE of the Income Tax Act.

Aggrieved by the CIT(A) order, the revenue is in appeal the Tribunal.

The Departmental Representative (DR), R. Mohan Reddy, submitted that the CIT(A) erred in directing the AO to treat the income offered under the caption discounts and incentives relating to cash deposits made in the bank account as income under the head profit and gains of business and the said income is to be taxed under normal provisions.

He further added that it is clear that the nature and source of unaccounted income of Rs. 50 crores has not been substantiated by the assessee. Therefore, the AO has rightly invoked the provisions of Section 68 and 115BBE of the Income Tax Act and in this regard, he relied upon the decision of Kerala High Court in the case of Maruthi Babu Rao Jadav vs ACIT.

The Authorised Representative of the assessee S. Sridhar submitted that the AO has erroneously applied provisions of Section 68 of the Income Tax Act and taxed the income under the provisions of Section 115BBE of the Income Tax Act, even though the AO himself had accepted the fact that said income was earned out of suppression of sales for the earlier period.

The Two Member Bench comprising of Manjunatha.G, Accountant Member and Manomohan Das, Judicial Member observed that the appellant had suppressed its turnover and accumulation of unaccounted cash over the period has been declared under the head discounts and incentives. Therefore, by considering relevant facts, assessed a sum of Rs. 50 crores as unexplained credit under Section 68 of the Income Tax Act and brought to tax under Section 115BBE of the Income Tax Act.

It was further observed that the AO had not given any specific reasons anywhere in the assessment order that, he had changed the head of income from profit and gains to income from other sources, in respect of income declared under the head discounts and incentives of Rs. 50 crores.

Therefore it was held that once the nature and source of credit found in the books of accounts of the assessee is linked to business, then any income generated out of such business activity is assessable under the head income from business and profession alone, but not under the provisions of section 68 of the Act.

The CIT(A), after considering relevant facts has rightly held that income declared by the appellant towards discounts and incentives is assessable under the head income from business and profession, but not under Section 68 of the Income Tax Act.

It was further held that in the present case, since the assessee has declared income under the head profit and gains of the business, and further the same has been held so, the question of application of higher rate of tax under provisions of Section 115BBE of the Income Tax Act, does not arise.

Hence appeal filed by the revenue was dismissed.

To Read the full text of the Order CLICK HERE

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