2024 (8) TMI 1589 - AT - Income Tax

Excess stock found during the survey u/s 115BBE - treatment to surrendered income in the form of excess stock - AO treating the surrendered income as unexplained investment - whether the surrendered income is to be treated as business income or as Income from other source u/s 69 - HELD THAT - Method applied by survey team for calculating such stock and whether it was actually the stock as per books is nowhere discernable from the records. Further it is also noted that no other incriminating material was found during the survey proceedings. So in all it is purely an exercise based on estimation and there is no concrete evidence put-forth by the revenue authorities which could support their action of treating the alleged surrender as Income from other sources and not business Income for invoking Section 115BBE of the Act. Under these given facts and circumstances find that the alleged sum surrendered by the assessee was only to buy peace of mind and it was admittedly business income which has been offered to tax and by no canon can be treated as unexplained investment u/s 69 of the Act. Ld. CIT(A) thus erred in confirming the addition of A.O of taxing the excess income as per the provisions of Section 115BBE of the Act. Thus considering the fact that the alleged excess stock was found at the business premises and related to the same business which is carried out by the assessee and more importantly there is no case of difference in quantity of excess stock being found at the business premises and lastly the excess stock has been calculated by the survey team on estimated basis only reverse the finding of Ld. CIT(A) and Ld. A.O is directed to calculate the tax on the surrendered stock under normal provisions of I.T. Act and not to apply the provisions of Section 115BBE - Appeal of the assessee is allowed.

Summary

The core legal questions considered by the Tribunal in this appeal pertain to the tax treatment of surrendered excess stock found during a survey under the Income Tax Act. Specifically, the issues are:

1. Whether the excess stock surrendered by the assessee during the survey operation should be treated as business income or as unexplained income/deemed income under Section 69 of the Income Tax Act.

2. Whether the provisions of Section 115BBE of the Income Tax Act, which mandate a higher rate of tax on unexplained income, are applicable to the surrendered excess stock.

3. Whether the appellate authorities erred in rejecting the affidavit and submissions filed by the assessee partners claiming that the surrendered stock represented business income and not undisclosed investment or income from other sources.

Issue-wise Detailed Analysis:

Issue 1: Nature of the surrendered excess stock - business income or unexplained income under Section 69

The legal framework revolves around Section 69 of the Income Tax Act, which deals with unexplained investments. It provides that if an assessee has made investments not recorded in the books of account and fails to satisfactorily explain the nature and source of such investments, the value of such investments may be deemed as income of the assessee for the relevant financial year. Section 115BBE prescribes a higher rate of tax on such unexplained income.

The Tribunal noted that the assessee is a partnership firm engaged in trading aluminium items. During the survey under Section 133A, excess stock valued at Rs. 52,25,297 was found and surrendered by the assessee. The assessee declared this amount as business income in the return and paid tax accordingly under normal provisions.

The Assessing Officer (AO) invoked Section 115BBE, treating the surrendered stock as unexplained investment under Section 69, on the basis that the assessee did not provide a satisfactory explanation for the excess stock. The AO's view was premised on the absence of stock records and the inability of the assessee to explain the source of the excess stock during survey proceedings.

The Tribunal carefully examined the facts and found that the assessee did not maintain quantitative stock records and estimated closing stock on the basis of cost or market value, whichever was less. The survey team itself estimated the book stock value at Rs. 27,59,426, without a clear methodology, and then compared it with the physical stock to arrive at the excess stock figure. This indicated that both the assessee and the revenue authorities relied on estimates rather than concrete records.

Importantly, no other incriminating material or evidence of undisclosed sources of income was found during the survey. The Tribunal emphasized that Section 69 applies when there is an unexplained investment not recorded in books, but here the stock was part of the business and only estimated. The absence of stock records weakened the revenue's case that the excess stock was unexplained investment.

The Tribunal relied heavily on precedents where excess stock found during survey was held to be business income when it related to the trade activity of the assessee and was offered to tax accordingly. Specifically, the Tribunal referred to the decision in Italian Edibles Pvt. Ltd., where it was held that excess stock forming part of total stock and offered to tax as business income cannot be treated as deemed income under Section 69 or 69B. Similarly, the decision in DCIT vs. Krishna Kumar Verma was cited, where the surrendered excess stock and cash were held to be business income as the assessee successfully explained the source as business transactions.

The Tribunal also noted that the assessee had filed an affidavit clarifying that the surrendered stock was not undisclosed investment but accumulated business income from past periods. This was supported by the absence of any other business activity or income source besides trading in aluminium items.

Thus, the Tribunal concluded that the excess stock surrendered was business income and not unexplained investment under Section 69.

Issue 2: Applicability of Section 115BBE to the surrendered excess stock

Section 115BBE applies to income referred to in Sections 68, 69, 69A, 69B, 69C, or 69D, which generally cover unexplained cash credits, investments, and similar unexplained income. The AO applied this section to tax the surrendered excess stock at a higher rate, treating it as unexplained income.

The Tribunal, after determining that the surrendered stock was business income and not unexplained investment, held that Section 115BBE is not applicable. The Tribunal observed that the AO and CIT(A) had erred in applying Section 115BBE, as the surrendered amount was duly offered to tax under normal provisions and no addition under Section 69 or related sections was made by the AO.

The Tribunal relied on the consistent view in various decisions that where surrendered income is explained as business income and accepted by the AO without invoking Section 69 or related provisions, Section 115BBE cannot be applied. The Tribunal also cited the decision in ACIT vs. Anoop Neema, which held that excess stock forming part of business stock and surrendered during survey is business income and not subject to Section 115BBE.

Therefore, the Tribunal directed that tax on the surrendered stock be computed under normal provisions and not under Section 115BBE.

Issue 3: Consideration of affidavit and submissions by the assessee partners

The assessee filed an affidavit clarifying that the surrendered stock was not undisclosed investment but business income accumulated from past periods. The CIT(A) had rejected this affidavit and the submissions, upholding the AO's view.

The Tribunal found that the affidavit and submissions were relevant and supported by the facts that no other incriminating material was found and the assessee's business was solely trading in aluminium items. The Tribunal criticized the CIT(A) for not properly appreciating these facts and the affidavit, which explained the nature of the surrendered stock.

The Tribunal's approach was to give effect to the substance of the transaction and the evidence, rather than relying on mere technicalities or presumptions. This approach was consistent with the principle that unexplained income provisions should not be invoked where the assessee satisfactorily explains the source and nature of the income.

Treatment of competing arguments

The revenue relied on the statement of the partner during survey, where no explanation was given for the excess stock, and argued that this justified invoking Section 69 and 115BBE. The Tribunal observed that such statements were modified later by affidavit and that the absence of stock records and reliance on estimates by both parties weakened the revenue's case.

The Tribunal gave weight to the fact that the surrendered stock was offered to tax as business income and accepted by the AO without any addition under Section 69. The revenue's argument that the excess stock was unexplained was not supported by any concrete evidence of undisclosed investments or other sources of income.

Conclusions

The Tribunal concluded that the excess stock surrendered during the survey was business income and not unexplained investment under Section 69. Consequently, the provisions of Section 115BBE were not applicable. The affidavit and submissions filed by the assessee partners were relevant and should have been considered. The CIT(A) erred in confirming the AO's application of Section 115BBE.

Significant Holdings:

"Therefore, once the facts emerging from record shows that the excess stock found during survey was a part of entire lot of stock of assessee, part of which is recorded in books of account and part of the same was not found recorded and therefore, treated as excess stock at the time of survey and consequently surrendered by the assessee and also offered to tax in the return of income then the excess stock cannot be treated as deemed income u/s 69 or 69B of the act..."

"...the alleged sum surrendered by the assessee was only to buy peace of mind and it was admittedly business income which has been offered to tax and by no canon can be treated as unexplained investment u/s 69 of the Act."

"In view of above as the assessee has successfully explained and established the source of excess stock and excess cash as his business activity... the facts of present case do nothing the impugned income in the clutches of section 69/69A/69B and therefore do not warrant application of section 115BBE at all."

"...the alleged excess stock was not kept separately at any other place and was part of the total business stock found at the assessee's business premises are sufficient enough to indicate that the alleged investment in excess stock is part of the business income..."

The Tribunal's final determination was to allow the appeal, set aside the order of the CIT(A), and direct the AO to compute tax on the surrendered excess stock under normal provisions of the Income Tax Act, without invoking Section 115BBE.