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2025 (4) TMI 1662 - AT - Income TaxExcess stock found in Survey - addition u/s 68 OR business income - applicability of Sec. 115BBE - assessee has stated that the excess stock is normal business income and the reason for excess stock was mainly on account of mixed stock at godown and the business premises and also lots of stock - HELD THAT - As going through the above reply of the assessee given during the course of survey and also considering the estimated opening stock as on the date of survey calculated by the survey team huge number of items of stock held at the assessee s business premises located at 11 locations we find that the assessee has duly explained the source of excess stock and same is from business income and is therefore liable to be taxed as regular business income and both the lower authorities have erred in treating it as income from other sources and taxing the assessee u/s.115BBE of the Act. Our view is further supported by the recent decision of Kolhapur Timber And Furniture Mart 2025 (3) TMI 1430 - ITAT PUNE where also similar issue has been raised and this Tribunal after referring to various decisions and decided the issue in favour of the assessee holding that the source of excess stock is business income. Thus the source of excess stock found during the course of survey is from business income and has been rightly offered by the assessee as business income and paid due taxes. Assessee appeal allowed.
The core legal questions considered in this appeal pertain to the tax treatment of excess stock found during a survey under section 133A of the Income Tax Act, 1961. Specifically, the issues are:
1. Whether the excess stock found during the survey and offered by the assessee as business income should be treated as regular business income or as unexplained income taxable under sections 68/69 and 115BBE of the Act. 2. Whether the application of the special tax rate under section 115BBE on the excess stock is justified. 3. The jurisdictional authority of the Commissioner of Income Tax (Appeals) to substitute sections like 69, 69A, or 69B in place of section 68 applied by the Assessing Officer. 4. The liability of the assessee to pay interest under section 234 for the addition made on account of excess stock. Issue-wise Detailed Analysis Issue 1: Nature and Tax Treatment of Excess Stock Legal Framework and Precedents: The key provisions involved are sections 68, 69, 69A, 69B, and 115BBE of the Income Tax Act, 1961. Section 68 deals with unexplained cash credits, while section 69 and its sub-sections relate to unexplained investments. Section 115BBE prescribes a special higher tax rate on unexplained income or investments. The question is whether the excess stock constitutes unexplained investment/income or is part of regular business income. Several judicial precedents and coordinate bench decisions were relied upon, including:
These decisions consistently held that where excess stock found during survey is part of regular business stock and offered as business income, it cannot be treated as unexplained income under sections 68/69 or taxed under section 115BBE. Court's Interpretation and Reasoning: The Tribunal observed that the assessee's business involved trading in multiple building and hardware materials with stock kept at 11 locations. The survey team estimated excess stock of Rs.40,05,210/- based on physical inventory and tentative trading accounts. The assessee explained that the excess stock was mixed with regular stock and offered it as business income, paying normal tax accordingly. The Tribunal noted that the assessee did not maintain regular quantitative stock records, and both the assessee and survey team's stock valuations were based on estimates. No incriminating evidence or documents indicating undisclosed income or unrecorded transactions were found during the survey. Relying on the assessee's statement during survey (Q. No. 20), the Tribunal emphasized that the excess stock was not separately identifiable but was part of the overall business stock. The assessee's explanation that the difference arose due to mixed stock and was offered as income was accepted. Applying the law to facts, the Tribunal found that treating the excess stock as income from other sources and taxing it under section 115BBE was erroneous. The excess stock was rightly offered as business income and should be taxed under normal provisions. The Tribunal extensively discussed the precedents, especially the Kolhapur Timber and Furniture Mart case, which held that excess stock found during survey, when explained as business income and offered to tax, cannot be subjected to special provisions under section 115BBE. The Tribunal also cited the Suresh Aluminum case where the absence of stock records and reliance on estimates led to the conclusion that the excess stock was business income and not unexplained investment. The Tribunal further referred to the Krishna Kumar Verma decision, which distinguished cases where no addition was made under section 69 or 69A and where the surrendered amount was accepted as business income. It was held that where the excess stock is explained as business income arising from regular business activities, the provisions of sections 68/69 and 115BBE are not attracted. Similarly, the Anoop Neema case was cited to reinforce the principle that excess stock forming part of business income, duly explained and without incriminating evidence, should not be taxed under the special provisions of section 115BBE. Treatment of Competing Arguments: The Revenue argued that the excess stock represented unaccounted income from previous or current years and thus deserved to be taxed as income from other sources under section 115BBE. However, the Tribunal found this argument unsubstantiated due to lack of evidence and the assessee's consistent explanation and tax payment treating the excess stock as business income. Conclusion: The Tribunal reversed the findings of the Assessing Officer and Commissioner of Income Tax (Appeals), holding that the excess stock is business income taxable under normal provisions and not liable for tax under section 115BBE. Issue 2: Applicability of Special Tax Rate under Section 115BBE The Tribunal concluded that since the excess stock was business income, the special tax rate under section 115BBE, which applies to unexplained income or investments, was not applicable. The decision was based on the absence of any unexplained investment or income and the acceptance of excess stock as business income by the assessee. Issue 3: Jurisdiction of CIT(A) to Substitute Sections The assessee contended that the CIT(A) had no authority to substitute sections 69, 69A, or 69B in place of section 68 applied by the Assessing Officer. The Tribunal did not find it necessary to adjudicate this ground in detail as the primary issue was resolved in favour of the assessee. However, by reversing the application of section 115BBE and related provisions, the Tribunal effectively negated the relevance of this contention. Issue 4: Liability to Interest under Section 234 The assessee challenged the levy of interest under section 234. Since the Tribunal allowed the appeal and held that the excess stock is business income taxed under normal provisions, the implication is that interest charged on the basis of the erroneous addition under section 115BBE is not sustainable. Though the Tribunal did not elaborate extensively on this point, the dismissal of the addition logically entails cancellation of interest liability. Significant Holdings "The assessee has duly explained the source of excess stock and same is from business income and is therefore liable to be taxed as regular business income and both the lower authorities have erred in treating it as income from other sources and taxing the assessee u/s.115BBE of the Act." "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." "Where the surrendered income is from business sources then section 115BBE cannot be invoked." "The excess stock found during the course of survey and surrendered made thereof was found to be taxable as business income under the head 'Income from business & profession'. Identical facts and circumstances as noted above have been found to be existing in the present case then the Ld. CIT(A) was correct and justified in dismissing the contention of the AO and holding that the AO was not right in observing that the assessee is liable to be taxed as per provision of section 115BBE." "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." Core Principles Established:
Final Determinations: The Tribunal allowed the assessee's appeal, set aside the orders of the Assessing Officer and Commissioner of Income Tax (Appeals), and directed that the excess stock be treated as business income taxable under normal provisions of the Income Tax Act. The invocation of section 115BBE and related provisions was held to be erroneous. Interest liability under section 234 was also effectively negated by this decision. Grounds of appeal raised by the assessee were allowed accordingly.
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