2025 (5) TMI 1315 - AT - Income Tax

Excess stock found during Survey - applicability of provisions of section 115BBE in respect of income declared during the course of survey proceedings and offered to tax in the return of income - HELD THAT - Admittedly the value of excess stock found during the course of survey was offered for taxation as an additional income. Therefore the amount representing excess stock is certainly undisclosed business income and cannot be termed as unexplained investment. Therefore the presumption is to be drawn that the additional income was derived from the business. Thus it cannot be said that the source for the additional income remain unexplained and therefore the provisions of section 115BBE have no application to the present case. Case of PCIT vs. Bajargan Traders 2017 (11) TMI 388 - RAJASTHAN HIGH COURT also other decisions relied on by the assessee are squarely applicable to the facts of the present case. Thus as additional income was derived from business orders of the Assessing Officer as well as of Ld. CIT(A) are reversed and accordingly the Assessing Officer is directed not to tax the additional income under the provisions of section 115BBE. Appeal filed by the assessee stand allowed.

Summary

The core legal questions considered in this appeal are:

1. Whether the excess stock of Rs. 52,45,600/- found during the survey can be taxed under the head "Profit and Gains from Business and Profession" as declared by the assessee, or whether it should be treated as unexplained income under sections 68 or 69B of the Income-tax Act, 1961 ('the Act').

2. Whether the provisions of section 115BBE of the Act, which prescribe a special tax rate on unexplained income, are applicable to the additional income declared by the assessee arising from the excess stock found during the survey.

Issue-wise Detailed Analysis

Issue 1: Classification of Excess Stock Income under the Income-tax Act

Relevant legal framework and precedents: Sections 68 and 69B of the Income-tax Act deal with unexplained cash credits and unexplained investments respectively, allowing the Assessing Officer to make additions to income if the assessee fails to satisfactorily explain the source of such credits or investments. Section 133A authorizes survey operations to detect undisclosed income. The assessee declared the excess stock value as business income in the return of income.

Court's interpretation and reasoning: The Tribunal noted that the excess stock was discovered during a survey under section 133A and was declared by the assessee as additional business income. The assessee explained that the discrepancy arose due to variations in discounting practices and admitted the additional income accordingly. The Tribunal emphasized that since the additional income was voluntarily declared as business income and the source of the excess stock was explained as arising from business activities, it cannot be treated as unexplained investment or unexplained cash credit under sections 68 or 69B.

Key evidence and findings: The stock physically found was valued at Rs. 1,42,21,591/- compared to Rs. 89,75,991/- as per books, resulting in a difference of Rs. 52,45,600/-. The partner's statement during the survey acknowledged the excess stock and explained the valuation difference. The assessee declared this amount as business income in the return filed.

Application of law to facts: The Tribunal applied the principle that income voluntarily declared as business income, with an explanation of its source, cannot be reclassified as unexplained investment or cash credit. It relied on precedents where similar facts led to the conclusion that such income should be taxed under the normal head of business income.

Treatment of competing arguments: The Assessing Officer and CIT(A) treated the excess stock as unexplained investment under section 69B and applied section 115BBE for taxation at a special rate. The assessee argued for normal business income treatment. The Tribunal distinguished the facts from cases relied upon by revenue, noting that in those cases no explanation was offered for the source of income, unlike the present case.

Conclusions: The Tribunal held that the excess stock represents undisclosed business income and not unexplained investment. Therefore, it should be taxed under the head "Profit and Gains from Business and Profession" at normal rates.

Issue 2: Applicability of Section 115BBE on Additional Income Declared

Relevant legal framework and precedents: Section 115BBE prescribes a special tax rate for income referred to in sections 68, 69, 69A, 69B, 69C, and 69D, which generally relate to unexplained income or investments. The key question is whether the additional income declared voluntarily as business income falls within the ambit of section 115BBE.

Court's interpretation and reasoning: The Tribunal observed that since the additional income was disclosed as business income and the source was explained, the income does not fall within the scope of unexplained income provisions triggering section 115BBE. The Tribunal relied on the judgment of the Rajasthan High Court in PCIT vs. Bajargan Traders, which held that income voluntarily declared as business income cannot be taxed under section 115BBE.

Key evidence and findings: The assessee's return included the additional income as business income, and tax was paid at normal rates. The explanation given during the survey was accepted by the Tribunal as satisfactory.

Application of law to facts: The Tribunal applied the principle that section 115BBE applies only when income is unexplained or unexplained investment is detected, and not where income is voluntarily declared with explanation. The Tribunal distinguished the present case from the Madras High Court decision relied upon by CIT(A), where no explanation was offered for excess stock.

Treatment of competing arguments: The revenue contended that section 115BBE should apply as the income was unexplained and hence taxable at special rates. The Tribunal rejected this, emphasizing the voluntary disclosure and explanation of the source.

Conclusions: The Tribunal ruled that section 115BBE is not applicable to the additional income declared as business income in this case, and directed the Assessing Officer to tax it at normal rates.

Significant Holdings

"The amount representing excess stock is certainly undisclosed business income and cannot be termed as unexplained investment. Therefore, the presumption is to be drawn that the additional income was derived from the business."

"The provisions of section 115BBE have no application to the present case."

"The orders of the Assessing Officer as well as of Ld. CIT(A) are reversed and accordingly the Assessing Officer is directed not to tax the additional income under the provisions of section 115BBE of the Act. The Assessing Officer shall tax the additional income under the normal rate of income tax."

Core principles established include:

• Income voluntarily declared as business income, with explanation for its source, cannot be reclassified as unexplained investment or cash credit under sections 68 or 69B.
• Section 115BBE applies only to unexplained income or investments and not to income disclosed voluntarily with explanation.
• Survey findings of excess stock, when explained and declared as business income, must be taxed under normal business income provisions.

Final determinations:

• The excess stock of Rs. 52,45,600/- found during the survey is to be treated as business income and taxed accordingly.
• The addition made under sections 68 and 69B and the consequent application of section 115BBE by the Assessing Officer and CIT(A) are set aside.
• The appeal filed by the assessee is allowed.