2024 (5) TMI 637 - AT - Income Tax

Excess stock found during survey constitutes business income, not unexplained investment under section 69B

M/s AP Knit Fab Versus The DCIT Central Circle-3 Ludhiana

ITAT Chandigarh ruled in favor of the assessee regarding addition under section 69B read with section 115BBE. During survey, authorities found stock ... Addition u/s 69B r.w.s.115BBE - during the course of survey action discrepancies were found on account of physical verification of stock vis-a-vis regular books of account - assessee surrendered an amount on account of excess stock over and above its normal business income in order to buy peace - HELD THAT:- We find that the difference in stock so found out by the authorities has no independent identity and is part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as undeclared business income. Following the said decision of Shri Ram Narayan Birla [2016 (9) TMI 1354 - ITAT JAIPUR] has taken a similar view holding that the excess stock so found during the course of survey was part of the stock and the Revenue has not pointed out the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. There is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as business income. Thus the income so surrendered on account of investment in excess stock during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same has to be assessed to tax under the head “business income”. Thus question of application of section 115BBE doesn’t arise and normal tax rate shall apply - Decided in favour of assessee. Issues Involved:1. Taxation of excess stock under Section 69 read with Section 115BBE of the Income Tax Act, 1961.2. Consideration of the surrendered amount as business income.3. Applicability of various judicial precedents and case laws.4. Treatment of unexplained investment in excess stock.5. Assessment of income under normal tax rates versus deemed income provisions.Summary:Issue 1: Taxation of Excess Stock under Section 69 read with Section 115BBEThe primary issue in this case is whether the excess stock found during a survey should be taxed under Section 69B and subjected to the provisions of Section 115BBE. The Assessing Officer (AO) determined that the excess stock of Rs. 1,00,24,282/- found during the survey was an unexplained investment and thus should be taxed under Section 69B, leading to the application of the higher tax rate under Section 115BBE.Issue 2: Consideration of Surrendered Amount as Business IncomeThe assessee argued that the excess stock pertains to its regular business activities and should be taxed under the head 'business income' at normal tax rates. The AO, however, did not accept this explanation, stating that the assessee failed to prove the source of the investment in the excess stock, thus classifying it under Section 69B.Issue 3: Applicability of Judicial PrecedentsThe assessee cited several judicial precedents, including decisions from the Chandigarh Bench of ITAT, which have held that excess stock found during surveys, if related to regular business activities, should be taxed as business income. The AO and the CIT(A) did not find these precedents applicable, maintaining that the unexplained investment should be taxed under Section 69B.Issue 4: Treatment of Unexplained Investment in Excess StockThe Tribunal examined whether the excess stock had an independent identity or was part of the regular business stock. It was noted that the stock found during the survey was part of the regular business inventory and not separately identifiable. The Tribunal referred to various cases, including Chokshi Hiralal Maganlal vs. DCIT, where it was held that if the excess stock is part of the regular business inventory, it should be treated as business income.Issue 5: Assessment of Income under Normal Tax RatesThe Tribunal concluded that the excess stock should be assessed under the head 'business income' and not under the deeming provisions of Section 69B. Consequently, the provisions of Section 115BBE, which prescribe a higher tax rate, would not apply. The Tribunal directed the AO to assess the income at normal tax rates applicable to business income.Conclusion:The appeal by the assessee was allowed. The Tribunal directed that the income from the excess stock found during the survey should be assessed as business income and taxed at normal rates, rejecting the application of Section 69B and Section 115BBE.