2024 (11) TMI 1531 - AT - Income Tax

Excess stock from s.133A survey treated as business income under s.28, not unexplained investment under ss.69/115BBE

ITAT held that excess stock detected in a section 133A survey must be treated as business income under section 28, not as unexplained investment under ... Undisclosed investment u/s. 69 as taxable u/s. 115BBE - excess stock found in survey which has been offered by the assessee in its return of income as business income OR unexplained income/investment - HELD THAT:- There was no material/documentation on record which even remotely demonstrated that assessee had expended any sum of money on excess stock found over and above amount which had been recorded in its books of accounts. The only source of income of the appellant is its income from trading in designer sarees etc. The revenue was not able to advance any evidence during assessment proceeding that the said income is not connected with the business income of the assessee, hence all the income earned by the assessee relate to business income only. Further, 5 heads of income are in a sense exclusive of one another, and income which falls within one head cannot be assigned to, or taxed under, another head. We take strength by the judgement of Honourable Supreme Court in the case of Karanpura Development Co. Pvt Ltd [1961 (8) TMI 7 - SUPREME COURT] held that several heads into which income is divided under the Income-tax Act do not make different kinds of taxes. The tax is always one; but it may arise from different sources to which the different rules of computation have to be applied. The manner of this computation is indicated in the sections that follow. Before income, profits or gains can be brought to computation, they must be assigned to one or more heads.”. The proceedings u/s. 133A of the Act introduced in the statute to have a check and balance on the business/ professional behaviour of the assessee. The survey conducted u/s. 133A of the Act is there in the statute just to verify the business affairs of the assessee. If found correct, no consequences. If something is missing out of business affairs, alarm the assessee to incorporate the same in his books of accounts and rectify their statutory computation of total income. Nowhere in the scheme it is ever anticipated or desired to change the head of income. Undisclosed income if any discovered during the survey proceedings, there is a compulsion to treat the same as income under the head business and profession. As the department surveyed business premises only and interacted and verified with business employees and documents only. An admission is extremely an important piece of evidence but it cannot be said that it is conclusive; and it is open to the person who made the admission to show that it is incorrect. The burden lies on the assessee to establish that the admission made in the statement at the time of survey was wrong and that there was no additional income. Judgement in CIT v. S. Khader Khan Son [2007 (7) TMI 182 - MADRAS HIGH COURT] is very important as Supreme Court also affirmed this judgement S. Khader Khan Son's case [2007 (7) TMI 182 - MADRAS HIGH COURT] where it has been held that the statement, obtained under section 133A would not automatically bind upon the assessee. Thus, AO is directed to calculate the tax without applying section 69B r.w.s. 115BBE of the Act, as the income of the assessee is chargeable to tax as normal business income u/s. 28 of the Act. In the light of above, Ground No. 1 raised by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether excess stock admitted/surrendered during a survey under section 133A, and offered in the return as income from business and profession, can be treated as unexplained investment taxable under section 69B read with section 115BBE, or must be taxed as normal business income under section 28. 2. Whether the Assessing Officer's selection of the assessment for scrutiny (and consequential proceedings) was valid in light of CBDT Instruction No. 4/2018 (manual selection criteria for cases involving survey under section 133A), specifically where no books/documents were impounded and returned income for the year under consideration was not less than the preceding year. 3. Evidentiary/legal weight of statements recorded during survey under section 133A: whether such statements are conclusive or only evidentiary and require corroboration before invoking deeming provisions like sections 69/69B/115BBE. 4. (Raised but not decided) Whether substituted section 115BBE (amendment date and rate applicability) applies to the surrendered investment (tax rate issue). ISSUE-WISE DETAILED ANALYSIS - Applicability of section 69B read with section 115BBE to surrendered excess stock Legal framework: Section 133A empowers survey to verify books, stocks, cash; section 69B deems unexplained investments/amounts found not recorded to be income from other sources unless satisfactorily explained; section 115BBE prescribes special rates for tax on income from undisclosed sources. Section 28 governs taxation of profits and gains of business. Precedent treatment: Multiple Tribunal decisions were cited where amounts surrendered during survey and offered as business income were held to be taxable as business income and not as unexplained investment under sections 69/69B or taxed under section 115BBE. The Court relied on principles in Karanpura Development Co. (Income heads exclusive) and decisions recognizing limited conclusive effect of section 133A statements (e.g., S. Khader Khan Son). Interpretation and reasoning: The Court examined the nature of the surrendered excess stock - it formed part of the trading stock, had no separate independent identity as an asset, and was explained as arising from regular business operations. The AO produced no material to demonstrate the excess stock was funded from sources other than business. The Court emphasized that deeming provisions under section 69B can be invoked only where the income is from a source other than the regular source and the explanation offered by the assessee is unsatisfactory. Mere initiation of survey does not automatically attract deeming provisions; the assessee's explanation must be considered in toto and assessed on its merits. The Court noted that the amount was routed through audited financials by debiting cost of goods sold and was declared in return under business income. Ratio vs. Obiter: Ratio - Where excess stock surrendered in survey is interconnected with regular trading operations and the revenue cannot show a different source, it should be taxed as business income under section 28 and not as unexplained investment under section 69B or at special rates under section 115BBE. Obiter - Broad observations on the purpose of survey and CBDB circulars explaining survey aims and scope, and reliance on multiple Tribunal precedents as persuasive support. Conclusion: The Court set aside the invocation of section 69B r.w.s. 115BBE and directed tax computation treating the amount as normal business income under section 28. Ground contesting such invocation was allowed. ISSUE-WISE DETAILED ANALYSIS - Validity of selection for scrutiny under CBDT Instruction No.4/2018 Legal framework: CBDT Instruction No. 4/2018 prescribes manual scrutiny selection parameters for cases involving section 133A surveys, including presence/absence of impounding of books/documents, comparison of returned incomes across years, and retraction from survey disclosure. Precedent treatment: Tribunal decisions interpreting Instruction No.4/2018 were considered, including a view that where books were not impounded and returned income for the year is not less than the preceding year, compulsory scrutiny category does not apply. Interpretation and reasoning: The Court noted that in the present case no books or documents were impounded; there was no record of reasons for impounding (as required by statute and settled law); the assessee did not retract its disclosure; and returned income for the year under appeal was not less than the previous year. On these facts, the Court observed that the case did not satisfy mandatory conditions for manual selection under the CBDT instruction and that scrutiny/assessment under section 143(3) would be vulnerable. The Court, however, expressly recorded that validity of jurisdiction was not a ground before it and therefore did not adjudicate the point finally, but flagged the issue for the authorities' future care and vigilance. Ratio vs. Obiter: Predominantly obiter guidance - the Court's remarks serve as binding admonition to apply CBDT instructions strictly, but it did not decide the jurisdictional challenge because the assessee had not raised it. Conclusion: The Court refrained from deciding jurisdictional invalidity but held that instruction requirements are binding and urged strict compliance; it observed that the facts did not meet the instruction's criteria for compulsory scrutiny selection. ISSUE-WISE DETAILED ANALYSIS - Evidentiary value of statements recorded during survey under section 133A Legal framework: Section 133A does not expressly empower recording of statements; case law establishes that statements obtained during survey are important but not conclusive, and admissions can be rebutted by the maker. Precedent treatment: Reliance on judicial authority (including S. Khader Khan Son) that statements under section 133A do not automatically bind the assessee and may be rebutted; requirement that the entirety of the statement be read and evaluated, not piecemeal. Interpretation and reasoning: The Court held that while a surrender or admission in survey is significant evidence, it cannot be the sole basis for invoking deeming provisions absent corroborating material showing the income is from undisclosed/non-business sources. The revenue must examine explanations and apply mind before classifying the income under sections 69/69B rather than business income. Ratio vs. Obiter: Ratio - Survey statements are evidentiary, not conclusive; Assessing Officer must test explanations before invoking deeming provisions. Obiter - emphasis on reading statements as whole and on the departmental duty under principles of natural justice and CBDT Circular No.14 (1955). Conclusion: Statements recorded under section 133A do not conclusively determine that amounts are unexplained investments; they require appraisal alongside other material before deeming provisions are applied. ISSUE-WISE DETAILED ANALYSIS - Head-wise taxation and exclusivity of income heads Legal framework: Statutory scheme divides income into distinct heads; an income belonging to one head cannot be arbitrarily shifted to another; computation procedures vary by head (Karanpura principle). Precedent treatment: Reliance on the Supreme Court principle that income must be assigned to the appropriate head and cannot be taxed under a different head without justification. Interpretation and reasoning: The Court applied this principle to hold that amounts forming part of trading stock and arising from business operations must be assessed under the head 'profits and gains of business' and not as unexplained investments under section 69B. The character of the amount (part of stock, routed through cost of goods sold, offered in return) supported business income classification. Ratio vs. Obiter: Ratio - Proper classification matters; where surrendered amounts relate to business operations, they must be taxed as business income. Obiter - discussion of survey's purpose to verify and prompt adjustment in books rather than change income head. Conclusion: The surrendered excess stock was properly assessable as business income and not as unexplained investment. ADDITIONAL OBSERVATIONS 1. The Court declined to decide the tax-rate/section 115BBE substitution ground as unnecessary after allowing the substantive ground on classification of income. 2. The Court set aside the orders of the authorities below and remitted to the Assessing Officer to compute tax treating the surrendered amount as normal business income under section 28, without applying section 69B r.w.s. 115BBE.