2025 (3) TMI 1430 - AT - Income Tax

Excess stock found in Survey - addition u/s 68 - Appellant prays to cancel the applicability of Sec.115BBE accepting the same as Business Income to which Normal Tax rate will be applicable. Whether the value of excess stock found at the premises of the assessee during the course of survey u/s 133A is to be treated as business income or income from other sources ? - HELD THAT - Excess stock found during the course of survey is from regular business income of assessee firm having no other source of income and has been rightly disclosed at business income in the audited financial statements as well as computation of income as business income and both the learned lower authorities erred in treating it as income from other sources and further erred in invoking section 68 r.w.s. 115BBE. Under similar set of facts and circumstances this Tribunal in plethora of decisions have consistently held that if the unexplained income is from business sources then section 115BBE cannot be invoked. Accordingly finding of Ld. CIT(A)/NFAC is set-aside and the excess stock offered by the assessee in its books of accounts is held to be from business income and therefore Ld. Assessing Officer erred in invoking section 68 r.w.s. 115BBE of the Act. Effective grounds of appeal raised by the assessee are allowed.

ISSUES PRESENTED and CONSIDERED

The primary issue considered in this judgment is whether the excess stock found during a survey conducted under section 133A of the Income Tax Act should be treated as 'business income' or 'income from other sources.' This determination affects the applicability of section 68 read with section 115BBE of the Act, which imposes a higher tax rate on unexplained income. Additionally, the judgment addresses whether the Commissioner of Income Tax (Appeals) erred in confirming the applicability of section 68 and section 115BBE, and whether the appellant is liable for interest under section 234.

ISSUE-WISE DETAILED ANALYSIS

1. Treatment of Excess Stock as Business Income or Income from Other Sources

Relevant Legal Framework and Precedents: The relevant legal provisions include section 68, which deals with unexplained cash credits, and section 115BBE, which imposes a higher tax rate on unexplained income. The appellant cited several precedents, including decisions from the Pune ITAT and other tribunals, which held that excess stock found during surveys should be treated as business income.

Court's Interpretation and Reasoning: The Tribunal examined whether the excess stock identified during the survey should be treated as 'business income' or 'income from other sources.' It considered the nature of the business, which involved machinery packing and small furniture items, and noted that the appellant had consistently treated the excess stock as business income in its financial statements.

Key Evidence and Findings: The Tribunal noted that the appellant had not maintained detailed stock records due to the nature of the business. The excess stock was calculated based on a tentative trading account prepared during the survey. The appellant argued that the excess stock resulted from accumulated suppressed business profits.

Application of Law to Facts: The Tribunal found that the excess stock was part of the regular business operations and not attributable to any other source of income. It emphasized that no incriminating documents or evidence of unaccounted transactions were found during the survey.

Treatment of Competing Arguments: The Revenue argued that the excess stock should be treated as 'unaccounted investments' and taxed as 'income from other sources.' However, the Tribunal found the appellant's explanation credible and consistent with the nature of the business.

Conclusions: The Tribunal concluded that the excess stock should be treated as business income, and sections 68 and 115BBE were not applicable.

2. Jurisdiction and Authority of CIT(A)

Relevant Legal Framework and Precedents: The appellant argued that the CIT(A) lacked the authority to substitute sections like 69, 69A, and 69B for section 68 as applied by the Assessing Officer.

Court's Interpretation and Reasoning: The Tribunal did not find it necessary to address this argument in detail as it had already concluded that section 68 was not applicable.

3. Interest Liability under Section 234

Relevant Legal Framework and Precedents: Section 234 deals with interest for defaults in payment of advance tax.

Court's Interpretation and Reasoning: The Tribunal did not specifically address the issue of interest liability under section 234, as the primary focus was on the treatment of excess stock.

SIGNIFICANT HOLDINGS

Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal emphasized that "the excess stock found during the course of survey is from regular business income of assessee firm having no other source of income and has been rightly disclosed at business income in the audited financial statements."

Core Principles Established: The judgment reinforces the principle that excess stock found during a survey should be treated as business income if it is part of regular business operations and no evidence of other income sources is found.

Final Determinations on Each Issue: The Tribunal allowed the appeal, holding that the excess stock should be treated as business income, and sections 68 and 115BBE were not applicable. Consequently, the appeal was allowed, and the orders of the lower authorities were set aside.

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