Surrendered income during survey assessed as business income under Section 68, not higher-taxed deemed income under Section 115BBE

ITAT Chandigarh ruled on the nature of income surrendered during survey proceedings. The assessee surrendered an amount after being unable to explain the source of capital introduced in financial year 2018-19. The tribunal held that provisions of Section 68 applied to the unexplained capital credit entry due to lack of explanation from the assessee. However, regarding excess stock found during survey, the tribunal distinguished that since there was no physical distinction between accounted and unaccounted stock, the difference represented business receipts rather than undisclosed assets under Section 69. The tribunal directed assessment of surrendered income as business income at normal tax rates, not under deeming provisions requiring higher taxation under Section 115BBE.

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Issues Involved:

1. Legality of assessing the surrendered amount as "deemed income" under Section 69 of the Income Tax Act, 1961.
2. Justification for assessing the surrendered amount as deemed income contrary to Section 14 of the Income Tax Act, 1961.
3. Applicability of Section 68 versus Section 69 for assessing the surrendered amount.
4. Correctness of treating the surrendered amount as "deemed income" instead of "business income."

Summary:

Issue 1: Legality of Assessing Surrendered Amount as "Deemed Income" Under Section 69

The assessee contended that the surrendered amount of Rs. 31,77,029, which includes excess stock and credit entry in the capital account, was shown as "business income" in the return of income. However, the Assessing Officer (AO) treated it as "deemed income" under Section 69, which pertains to unexplained investments. The Tribunal noted that the surrender was made during a survey operation under Section 133A, and the entries were disclosed in the profit and loss account. The AO's assessment of the surrendered amount as "deemed income" was challenged as it was already included in the business income.

Issue 2: Justification for Assessing Surrendered Amount as Deemed Income Contrary to Section 14

The assessee argued that the AO assessed the surrendered amount as income from undisclosed sources but added it to business income, which contradicts Section 14 of the Income Tax Act. The Tribunal observed that the AO did not find any incriminating documents regarding bogus purchases or sales outside the books of accounts. The excess stock found was related to business transactions, and the assessee had no other source of income. Therefore, the surrendered amount should be assessed as business income.

Issue 3: Applicability of Section 68 Versus Section 69

The Tribunal examined whether the provisions of Section 68 or Section 69 should apply to the surrendered amount. Section 68 deals with unexplained cash credits, while Section 69 pertains to unexplained investments. The Tribunal referred to various judicial precedents and noted that the surrendered amount was recorded in the books of accounts, which aligns with Section 68. The AO's assessment under Section 69 was found to be incorrect as the amount was already recorded in the books.

Issue 4: Correctness of Treating Surrendered Amount as "Deemed Income" Instead of "Business Income"

The Tribunal held that the excess stock found during the survey was part of the business stock and had no independent identity. It was integral to the business operations, and the difference in stock value was due to valuation discrepancies. The Tribunal concluded that the surrendered amount should be treated as business income rather than deemed income under Section 69. Consequently, the normal tax rate should apply, and the provisions of Section 115BBE, which impose a higher tax rate on deemed income, were not applicable.

Conclusion:

The Tribunal directed the AO to assess the surrendered amount of Rs. 17,07,029 as "Income from Business/Profession" and apply the normal tax rate. The appeal of the assessee was partly allowed. The judgment emphasized the importance of correctly categorizing income based on its nature and source, ensuring that legal provisions are applied appropriately.

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