2025 (6) TMI 1396 - AT - Income Tax

Addition u/s 69 - excess stock found during the survey - Addition being GP on suppressed sales found during the course of survey - HELD THAT - Since the addition on account of suppressed GP was made by extrapolating the sales figure and the excess stock found during the survey therefore we find merit in the submission of the Ld. Counsel for the assessee that the benefit of telescoping should be given As we find the Coordinate Benches of the Tribunal are taking the consistent view that the excess stock found during the course of survey should be taxed as business income at normal rate. Th As in the case of Yash Construction Co. 2024 (7) TMI 1649 - ITAT PUNE has taken the view holding that the excess stock found during the course of survey should be treated as business income to be taxed at normal rate. We therefore set aside the order of the CIT(A) on this issue and direct the Assessing Officer to tax the amount at normal rate instead of u/s 69 r.w.s. 115BBE of the Act. The ground Nos.1 and 2 are accordingly partly allowed. Addition u/s 68 - unsecured loan received - In absence of production of the persons or their confirmation letters or bank statements of the above persons the AO held that the assessee could not prove the creditworthiness of the said persons - HELD THAT - It is the submission of the Ld. Counsel for the assessee that the loan creditors have declared such loan amounts in their respective Balance Sheets which were filed along with the returns of income prior to the completion of the assessment. It is also his submission that given an opportunity the assessee is in a position to substantiate his case with evidence to the satisfaction of the AO regarding the identity and creditworthiness of the loan creditors and genuineness of the transactions. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the AO with a direction to give one final opportunity to the assessee for proving the identity and creditworthiness of the loan creditors and genuineness of the transactions and decide the issue as per fact and law. Addition u/s 68 of the Act on account of increase in capital - due to non submission of any details before the AO regarding the details of increase in the capital AO made addition - HELD THAT - Introduction of capital by the assessee is out of the funds given by close relations for betterment of the business the details of which are already available in the cash book of the assessee. Further an amount is the opening capital. It is also his submission that given an opportunity the assessee is in a position to furnish the full details before the Assessing Officer. Considering the totality of the facts of the case and in the interest of justice we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate his case by furnishing all the details and decide the issue as per fact and law.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the addition of Rs. 18,21,792/- under section 69 of the Income Tax Act, 1961 (the Act) on account of excess stock found during survey is justified;

(b) Whether the addition of Rs. 16,31,913/- as undisclosed business income on account of gross profit (GP) on suppressed sales extrapolated from survey findings is justified;

(c) Whether the addition of Rs. 70,11,472/- under section 68 of the Act for unexplained unsecured loans is justified when the source of loans is explainable;

(d) Whether the addition of Rs. 49,62,507/- under section 68 of the Act on account of increase in capital under the head 'by self-account' is justified;

(e) Issues relating to admission of additional evidence, additions under section 69C and disallowance under section 40A(3) were raised but not pressed and hence not considered;

(f) Whether invoking section 115BBE of the Act for taxation of the additions was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issues (a) and (b): Addition on account of excess stock and suppressed GP on sales

Legal framework and precedents: Section 69 of the Act deals with unexplained investments and allows the Assessing Officer (AO) to make additions if the assessee fails to explain the nature and source of such investments. Section 115BBE prescribes a special tax rate for unexplained income. The principle of telescoping is relevant where additions are made on overlapping bases to avoid double taxation.

Court's reasoning and findings: The survey under section 133A revealed a red colour note book showing sales figures for 51 days and excess stock of Rs. 18,21,792/-. The AO extrapolated the sales to estimate suppressed turnover and applied the declared GP rate of 18% to compute an addition of Rs. 16,31,913/- for suppressed GP. Both additions were confirmed by the Commissioner of Income Tax (Appeals) (CIT(A)).

The assessee admitted the excess stock and suppressed GP but contended that the benefit of telescoping should be given to avoid double addition. Further, the assessee argued that the additions should be taxed at normal rates and not under section 69 read with section 115BBE, relying on a coordinate bench decision holding that excess stock found during survey should be treated as business income taxable at normal rates.

The Tribunal agreed that since the addition on suppressed GP was derived by extrapolating sales which included the excess stock, the benefit of telescoping was warranted. It held that the addition should be restricted to the difference between excess stock and suppressed GP, i.e., Rs. 1,89,879/-. Further, following the coordinate bench precedent, the Tribunal directed that this amount be taxed at normal rates rather than under the penal provisions of section 69 read with section 115BBE.

Application of law to facts: The Tribunal applied the principle of telescoping to avoid double taxation on overlapping income components and aligned with precedent that excess stock found in survey is business income taxable at normal rates.

Treatment of competing arguments: The Department supported the additions and penal taxation, but the Tribunal found merit in the assessee's submissions and coordinate bench rulings.

Conclusion: Additions on account of excess stock and suppressed GP are partly allowed by restricting the addition to Rs. 1,89,879/- and taxing it at normal rates instead of penal provisions.

Issue (c): Addition of Rs. 70,11,472/- under section 68 for unexplained unsecured loans

Legal framework and precedents: Section 68 requires the assessee to prove the identity, creditworthiness of the lender, and genuineness of the loan transaction. The burden is on the assessee to satisfactorily explain the cash credits. Leading Supreme Court decisions (Roshan Di Hatti vs CIT, Kale Khan Mohammad Hanif vs CIT) and various High Court and Tribunal precedents establish that failure to prove these elements justifies addition under section 68.

Court's reasoning and findings: The AO noted unsecured loans totaling Rs. 70,11,472/- from multiple parties. The assessee provided PAN numbers but failed to furnish confirmation letters, bank statements, or income tax returns (ITRs) of the creditors before the AO. During appeal, some bank statements were filed but without explanation for their late submission, leading the CIT(A) to reject them as inadmissible under Rule 46A of the Income Tax Rules, 1962.

The CIT(A) held that the assessee failed to discharge the primary onus of proving identity and creditworthiness of creditors and genuineness of transactions, and upheld the addition.

The assessee contended that the loan creditors had filed their returns before assessment completion and that the loans were from close family members, submitting various documents during appeal proceedings. The assessee requested an opportunity to substantiate the case before the AO.

The Tribunal observed that the CIT(A) did not admit the additional evidence due to procedural lapses but noted that the assessee had taken unsecured loans. It recognized the assessee's contention that the creditors had filed returns and that the assessee could furnish further evidence.

Application of law to facts: The Tribunal reiterated the settled legal position placing the onus on the assessee to prove identity, creditworthiness and genuineness. It found that the assessee had not sufficiently discharged this onus before the AO and CIT(A), but in the interest of justice, it restored the issue to the AO for one final opportunity to examine the evidence and decide as per facts and law.

Treatment of competing arguments: The Department pressed for upholding the addition, citing failure to prove creditworthiness. The Tribunal balanced procedural fairness and substantive justice by allowing a final opportunity to the assessee.

Conclusion: The addition under section 68 for unsecured loans is set aside for statistical purposes and remanded to the AO for fresh adjudication after giving the assessee a final opportunity to prove the loans' genuineness.

Issue (d): Addition of Rs. 49,62,507/- under section 68 on account of increase in capital under 'by self-account'

Legal framework and precedents: Similar to unsecured loans, unexplained credits in capital account require the assessee to prove the source and genuineness under section 68. Failure to do so warrants addition.

Court's reasoning and findings: The AO noticed an unexplained increase in capital of Rs. 49,62,507/- under 'by self-account' and made addition under section 68 read with section 115BBE due to non-submission of any explanation. The CIT(A) confirmed the addition, noting the assessee's failure to provide specific details of the source, despite general claims that funds came from relatives and friends.

The assessee submitted that the capital was introduced from close relatives out of love and affection for business betterment, and that details were available in cash books but were not produced before AO or CIT(A). The assessee requested an opportunity to furnish details before the AO.

The Tribunal observed the absence of explanation before AO and CIT(A) but acknowledged the assessee's claim and the availability of details in books. In the interest of justice, it restored the issue to the AO for one final opportunity to examine the evidence and decide as per facts and law.

Application of law to facts: The Tribunal applied the principle that the onus lies on the assessee to explain credits. However, procedural fairness warranted remand for fresh adjudication upon production of evidence.

Treatment of competing arguments: The Department supported confirmation of addition, but the Tribunal emphasized the assessee's right to be heard and furnish evidence.

Conclusion: The addition on account of increase in capital is set aside for statistical purposes and remanded to the AO for final decision after giving opportunity to the assessee.

Issues relating to additional evidence, section 69C addition, disallowance under section 40A(3), and invocation of section 115BBE

The assessee did not press grounds relating to admission of additional evidence, addition under section 69C for cash payment to a relative, and disallowance under section 40A(3) for cash payments. These were dismissed as not pressed. The issue of invoking section 115BBE was addressed in the context of other additions, with the Tribunal directing that the addition on excess stock and suppressed GP be taxed at normal rates, effectively disallowing the application of section 115BBE to those amounts.

3. SIGNIFICANT HOLDINGS

"Since the addition on account of suppressed GP was made by extrapolating the sales figure and the excess stock found during the survey, therefore, we find merit in the submission of the Ld. Counsel for the assessee that the benefit of telescoping should be given. We, therefore, modify the order of the Ld. CIT(A) and direct the Assessing Officer to restrict the addition to Rs. 1,89,879/- being the difference between the excess stock of Rs. 18,21,792/- and the suppressed GP of Rs. 16,31,913/-."

"The excess stock found during the course of survey should be treated as business income to be taxed at normal rate. We, therefore, set aside the order of the Ld. CIT(A) on this issue and direct the Assessing Officer to tax the amount of Rs. 1,89,879/- at normal rate instead of u/s 69 r.w.s. 115BBE of the Act."

"It is a well settled legal position that onus of proving the source of money found to have been received by an assessee is on him. If the assessee has failed to satisfactorily explain these credits, it is open for the revenue to hold that the sum credited, is income of the assessee and no further burden lies on the revenue."

"In order to discharge his onus, the assessee must prove the identity of creditors, capacity of creditors to advance money and genuineness of transaction. Once the assessee has discharged his primary onus by submitting supporting documents for above three ingredients, then only burden shifts to the department."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee for proving the identity and creditworthiness of the loan creditors and genuineness of the transactions and decide the issue as per fact and law."

"The primary onus for explaining any credit entry in his books, is on the assessee and in the absence of same, the amount credited, is liable to be added u/s 68 of the Act."

"Considering the totality of the facts of the case and in the interest of justice, we deem it proper to restore the issue to the file of the Assessing Officer with a direction to give one final opportunity to the assessee to substantiate his case by furnishing all the details and decide the issue as per fact and law."