TaxTMI 
TaxTMI 
2026 (9) TMI 707
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....s income at the normal rate applicable to the assessee, and not as deemed income under section 69B attracting the higher rate of tax prescribed under section 115BBE. 2. The brief facts relevant for adjudication of the issue are that a survey action under section 133A was carried out at the business premises of the assessee on 19.02.2018. During the course of survey, the survey team undertook physical verification of the stock lying at the different warehouses and business premises of the assessee. The value of the stock physically found was determined at Rs.8,10,25,692, whereas the value of stock appearing in the books of account as on the date of survey was Rs.5,34,61,932. Consequently, a difference of Rs.2,75,63,760 was found between the physical stock and the stock recorded in the books. The assessee accepted the quantitative and valuation exercise undertaken by the survey team and did not dispute either the existence or the valuation of the excess stock. 3. During the survey, the statement of one of the partners of the assessee-firm, Shri Minesh P. Vora, was also recorded. In response to Question Nos. 23 and 24, the partner accepted the difference of Rs.2,75,63,760 betwee....
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....mount was liable to be treated as unexplained investment under section 69B. Accordingly, the amount of Rs.2,75,63,760 was brought to tax at the higher rate prescribed under section 115BBE. 6. The learned CIT(A) upheld the action of the Assessing Officer. According to him, the statement that the excess stock had been acquired out of suppressed profits of the earlier years did not constitute a satisfactory explanation of the source of the investment. He further observed that recording the stock in the books after its detection during survey could not alter its original character as an unexplained investment. The learned CIT(A) also approved the finding of the Assessing Officer that the entries passed in the Purchase Account and closing stock had the effect of neutralising the surrendered income and that, in the absence of purchase invoices and supporting documents, the purchase entry was merely a fictional entry intended to reduce the tax liability. The contention of the assessee that the amount ought to be taxed at the normal rate as business income was accordingly rejected. 7. Before us, the learned counsel for the assessee submitted that the assessee had, in the statement re....
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....of section 69B stood fulfilled and, once the amount was assessable under section 69B, the application of section 115BBE followed as a necessary statutory consequence. 10. We have heard the rival submissions and perused the relevant material placed on record. The applicability of section 115BBE is consequential upon the income being chargeable under any of the provisions specified therein, including section 69B. Section 115BBE does not, by itself, determine the nature or character of an income, nor does the mere discovery of an amount or asset during survey automatically attract its rigour. Before the higher rate prescribed under section 115BBE can be applied, the statutory conditions contemplated under one of the specified deeming provisions must first be shown to have been fulfilled. Thus, the threshold enquiry is whether, on the facts and material available, the excess stock is liable to be regarded as an unexplained investment under section 69B or whether it represents undisclosed income generated from the assessee's regular business. This determination must necessarily depend upon the nature of the stock, the business carried on by the assessee, the explanation furnished reg....
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....ut the source of investment in the stock in Question No. 25, he did not leave the source unexplained. Rather, he categorically stated that the investment had arisen from the suppression of net profits of the business and that the undisclosed money generated through such business activity had been deployed in acquiring the stock. This explanation was given during the survey itself when the excess stock was detected and was not an attribution devised subsequently in the course of assessment proceedings to avoid the consequences of section 115BBE. The statement, therefore, contains not merely an admission of excess stock but also a contemporaneous explanation of its source and character. There is no material brought on record by the Assessing Officer to demonstrate that the excess stock emanated from any source other than the assessee's existing business. 14. The reference in the statement to suppression of net profits in earlier years does not, by itself, render the source unexplained or alter the intrinsic business character of the stock. The partner had stated that the suppressed profits could not be apportioned to a particular earlier year, but had consistently maintained that ....
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....ed, reduced or absorbed by any corresponding claim of expenditure. The entries merely served the legitimate accounting purpose of bringing the stock physically found into the books while simultaneously recognising the corresponding undisclosed business income in the Profit and Loss Account. 17. Viewed in this manner, the absence of purchase invoices or actual creditors does not support the inference drawn by the authorities below. The assessee itself never claimed that the stock had been acquired through recorded purchases from those creditors. On the contrary, its consistent explanation was that the stock had been acquired out of profits generated from its business which had remained undisclosed. The temporary credit to the sundry creditors was merely one part of the accounting mechanism adopted for introducing the unrecorded purchases; the subsequent reversal of those creditors and the credit of the surrendered amount as income completed the accounting treatment. Therefore, the Purchase Account cannot be regarded as containing a deduction claimed against the surrendered income. It represents the cost of stock which was simultaneously carried into the closing stock, leaving its....
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....osure, we find a direct and discernible nexus between the excess stock and the assessee's existing business. The stock was incorporated into the books by recording the corresponding purchases; the resultant credit to sundry creditors was reversed; and an equivalent amount was separately credited to the Profit and Loss Account as income disclosed during the survey. The surrendered income was, therefore, neither neutralised nor reduced by any deduction. In the absence of any material demonstrating that the stock was acquired from a source extraneous to the assessee's business, its mere non-recording in the books prior to the survey cannot justify its treatment as unexplained investment under section 69B. The conclusion of the authorities below, therefore, lacks adequate factual and evidentiary foundation. 21. Accordingly, we hold that the excess stock of Rs.2,75,63,760 is assessable as undisclosed business income under the normal provisions of the Act and not as deemed income under section 69B. Once section 69B is found to be inapplicable, the consequential application of section 115BBE also fails. The Assessing Officer is, therefore, directed to assess the said amount as business....