2023 (7) TMI 1594 - AT - Income Tax

Survey surrendered excess stock and cash treated as business income, not other income; s.69, s.69A, s.115BBE rejected

Ashok K. Kriplani & Kanhaiyalal M. Kriplani Versus Dy. Commissioner of Income Tax, Central Circle-1, Nashik

ITAT, Pune (AT) allowed the assessee's appeal, holding that amounts surrendered during survey as excess stock and excess cash constitute business income ... Income disclosed during the survey - assessee surrendered an amount on account of excess stock and excess cash - business income or unaccounted stock u/s. 69 and excess cash u/s. 69A of the Act, charged the same u/s. 115BBE - HELD THAT:- As in the case of Bajargan Traders[2017 (11) TMI 388 - RAJASTHAN HIGH COURT] observed that the amount surrendered under unrecorded stock has to be brought to tax under the head “business income” as the excess stock which has been found during the course of survey is the investment in procurement of such stock is clearly identifiable and related to the regular business stock of the assessee. The Hon’ble High Court clearly held the investment in excess stock has to be brought to tax under the head “business income” but not under the head “income from other sources”. In the present case without any dispute the assessee offered additional income under excess stock and excess cash during the course of survey and same were entered in the books of account as on the last day of financial year ending on 31-03-2018 and offered the said amounts to tax under the business income. Therefore, CIT (A) is not justified in confirming the order of AO in excluding the alleged additional income offered during the course of survey and attracting the provisions u/s. 69 and 69A of the Act, consequently, the charging u/s. 115BBE - Appeal of assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether amounts of excess stock and excess cash discovered during a survey and subsequently declared in the return can be treated as business income rather than unexplained investments/credits under sections 69 and 69A of the Act and consequently be taxed at normal rates instead of being charged under section 115BBE. 2. Whether the assessing authority and the first appellate authority were justified in treating surrendered amounts found on survey as unexplained (sections 69/69A) when such amounts were entered into the books of account as at the end of the relevant financial year and offered to tax as business income. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterisation of excess stock and excess cash found on survey: business income v. unexplained investments/credits (sections 69/69A) and charging under section 115BBE Legal framework: Income-tax law distinguishes taxable business income from unexplained investments/credits. Section 69 treats unexplained investments as incomes of the assessee where entries or investments are not satisfactorily explained; section 69A treats unexplained cash credits similarly. Section 115BBE prescribes a special tax treatment for income assessed as unexplained under sections 68/69/69A etc., typically attracting tax at specified rates rather than normal slab rates applicable to business income. Precedent treatment: The Court considered and relied on the reasoning in a High Court decision which held that excess stock discovered on survey, being identifiable as procurement/investment in regular business stock, is to be brought to tax under the head 'business income' and not as 'income from other sources'; the Tribunal benches referred to have applied that ratio to hold that excess stock/cash generated out of regular business do not attract section 69 and hence not section 115BBE. Interpretation and reasoning: The Tribunal examined material answers recorded during the survey and noted that the amounts of excess stock and excess cash were included in the assessee's computation and were reflected in the books of account as at the end of the relevant financial year (31-03-2018). The Tribunal reasoned that where the undisclosed amounts are identifiable as procurement/inventory related to the regular business and are subsequently recorded in the books and offered as business income, they constitute business receipts rather than unexplained investments/credits. The Tribunal rejected the authorities' concern that allowing business characterisation would permit diversion of undisclosed non-business income into business to secure preferential taxation, on the basis that in the present facts the surrendered amounts were tied to regular business operations and reflected in accounts as business items. Ratio vs. Obiter: Ratio - Where excess stock and excess cash discovered on survey are demonstrably attributable to the assessee's regular business (identifiable procurement/inventory) and are recorded in the books of account for the relevant year and offered to tax as business income, such amounts are taxable under the head 'profits and gains of business or profession' and not to be treated as unexplained investments/credits under sections 69/69A; consequently section 115BBE does not apply. Obiter - The Tribunal's general observations rejecting a hypothetical risk of tax-motivated reclassification of non-business undisclosed income into business receipts (without specific contrary facts) are ancillary and not essential to the ratio. Conclusions: The Tribunal concluded that the assessing officer and the first appellate authority were not justified in excluding the surrendered amounts from business income and invoking sections 69/69A and section 115BBE. The surrendered excess stock and excess cash were held to be business income and should be taxed as such at normal rates; the order of the lower authorities was set aside and the appeals allowed. Issue 2 - Applicability of precedent authorities and consistency of approach Legal framework: Administrative and judicial consistency requires that similar factual matrices be governed by like reasoning; reliance on binding or persuasive precedent is appropriate in tax characterisation disputes. Precedent treatment: The Tribunal explicitly followed the ratio of the cited High Court decision and the similar findings of other Tribunal benches which applied that High Court ratio to survey-discovered excess stock/cash. The Tribunal treated those authorities as directly applicable and controlling on the classification question, distinguishing them from decisions that classify survey-disclosed amounts as unexplained where facts show absence of connection with regular business or where amounts were not recorded or offered as business income. Interpretation and reasoning: The Tribunal observed factual parity between the present matters and the precedents relied upon: (i) surrendered amounts were linked to procurement/regular business stock, (ii) amounts were recorded in the books by year-end, and (iii) amounts were offered as business income in the return. Given this alignment, the Tribunal applied the precedent ratio to hold that sections 69/69A and 115BBE did not get attracted. Ratio vs. Obiter: Ratio - Precedential reasoning that excess stock/cash discoverable on survey and shown to be investment in regular business stock should be taxed under business income and not as unexplained investments/credits. Obiter - Any commentary on the need for caution against misuse of business classification in different factual scenarios (where connection to business is not established) remains persuasive guidance but not binding on the present facts. Conclusions: The Tribunal accepted and followed the cited authorities as applicable, finding no distinguishing factual features to warrant departure. The lower authorities' invocation of sections 69/69A/115BBE was therefore held incorrect. Cross-reference The resolution of Issue 1 is interlinked with Issue 2: factual establishment of the connection between the surrendered amounts and the regular business (and their recording in books by financial year-end) is the critical determinant for applying the precedent ratio and thereby excluding sections 69/69A and 115BBE.