Stock surrendered during survey held as business income not cash credits or unexplained money

Stock surrendered during survey held business income not cash credits or unexplained money u/s 69 or 69A. Question of application of section 115BBE doesn’t arise for consideration – ITAT

In a recent judgment, the ITAT has held that stock surrendered during survey was business income not cash credits or unexplained money u/s 69 or 69A as deeming provisions are not automatically attracted.

ABCAUS Case Law Citation:
ABCAUS 3836 (2024) (01) ITAT

Important Case Laws relied upon by parties:
Fakir Mohammed Haji Hasan Vs. CIT’, [2001[ 247 ITR 290(Guj.)
PCIT vs. M/s. Khushi Ram & Sons Pvt. Ltd.
Chokshi Hiralal Maganlal Vs. DCIT
SVS Oil Mills vs. ACIT
Kim Pharma Pvt. Ltd. vs. CIT
Fashion Fashion World Vs. ACIT
Roshan Di Hatti vs CIT [1977] 107 ITR 938 (SC)
CIT vs. M Ganpati Mudaliar [1964] 53 ITR 623
Govindrajulu Mudaliar vs. CIT [1958] 34 ITR 807
M/s. Bhima Jewellers vs. PCIT
Shri Harish Sharma Vs.The Income Tax Officer
Famina Knit Fabs Vs ACIT 176 ITD 246
Gaurish Steels Pvt. Ltd. Vs ACIT 43 ITR (Trib) 414
Marshal Machines Pvt. Ltd.
ITO vs. Dulari Digital Photo Services (P) Ltd. [2012] 24 Taxman.com 31 (CHD)
Daulatram Rawatmull vs. CIT 64 ITR 593
Sons vs. CIT 48 ITR 254 (Cal.)
Yadu Hari Dalmia v. Commissioner of Income Tax

In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming the action of the Assessing Officer (AO) in holding that the provision of Section 69 r.w.s. 115BBE of the Income Tax Act, 1961 (the Act) would be applicable on the amount surrendered during survey on account of stock.

The appellant assessee was an individual, proprietor of a business entity engaged in the business of gold smith and merchant trading of gold, silver and diamonds.

A survey u/s 133A of the Act was carried out at the business premises of the appellant assessee and during the course of survey operations, certain discrepancies were noticed. As a result, the assessee surrendered a sum of Rs. one cores and paid tax on the total income including the surrendered income at normal rate which was then accepted by the survey party.

Later, the Assessee filed its return of income including the surrendered income, which was processed u/s 143(1) and thereafter, the case of the Assessee was selected for compulsory scrutiny.

During the course of assessment proceedings, replying to Show Cause Notice, assessee explained the accounting entry passed for surrendered amount as under:

As regards the applicability of higher rate of tax under the provisions of section 115BBE, the assessee submitted that the amount surrendered relates to same business activity of the assessee and amount was offered merely to cover the discrepancies pointed out by department of stock arising out of the trading business transactions. It was also submitted that during survey proceedings, no document/ paper was found which can prove that assessee has undertaken any unexplained business other than the activities carried on by it in regular course of business.

The AO observed that the explanation offered regarding nature and source of surrendered amount was not satisfactory and therefore, the value of such explained credit / stock / investment in assets /expenditure / cash, etc. were required to be taxed u/s 68 to 69D of the Act. Accordingly, excess stock of Rs. one crore being unaccounted / unexplained be taxed as per provisions of section 115BBE of the Act.

The CIT(A) confirmed the addition made by the AO and dismissed the appeal of the assessee

The Tribunal observed that in the instant case, for the deeming provisions of section

69A to be attracted, there has to be a finding that the Assessee was found to be owner of cash so found at the time of survey, such cash has not been recorded in the books of account so maintained by the Assessee, and the Assessee offers no explanation about the nature and source of the cash or the explanation so offered is not found satisfactory in the opinion of the AO.

The Tribunal observed that in a recent judgment, the bench has held that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the Assessee has either failed to disclose the nature and source of such income or the AO doesn’t get satisfied with the explanation so offered by him.

The Tribunal observed that the deeming provisions are not automatically attracted. Rather the foundational requirement is whether the Assessee has made the investment/has been found to be owner of cash and the explanation offered by the Assessee explaining the nature and source of such undisclosed income and the reasonability of the explanation so offered by the Assessee keeping into account the facts and circumstances of the relevant case. Explanation offered by the Assessee as part of his statement recorded u/s 133A needs to be analysed and examined before drawing any conclusions in this regard.

The Tribunal noted that there was a clear statement of the Assessee that the advances were related to his business, however since the same have not been recorded in the books of account, he had offered the same to taxation. Similarly, the stock physically found has been valued and then, compared with stock as recorded in the books of account, thus, there was clear nexus of stock with the Assessee’s business.

The Tribunal opined that apparently, the AO failed to take into consideration the statement of the Assessee recorded during the course of survey holistically, and other documents and findings of the survey team which were very much part of the records.

The Tribunal pointed out that the Bench has held that it is beyond the mandate of law that wherever there is a survey and some income is detected or surrendered by the Assessee, the deeming provisions are attracted by default and by virtue of the same, provisions of section 115BBE are attracted.

The Tribunal further observed that the difference in stock found out by the authorities had no independent identity and was part and parcel of entire stock, therefore, it could not be said that there was an undisclosed asset which existed independently and thus, what was not declared to the department was receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as undeclared business income.

The Tribunal also relied upon the decision of the Co-ordinate Bench which held that

the excess stock so found during the course of survey was part of the stock and the Revenue has not pointed out the excess stock has any nexus with any other receipts other than the business being carried on by the Assessee.

With regard to the judgment of Hon’ble High Court relied upon by the Revenue, the Tribunal pointed out that in that case, during the course of survey wherein the manager had admitted the cash has been generated out of income from other sources and in the absence of nature of source of cash being proved, the addition was upheld by the CIT(A)/ ITAT and Hon’ble High Court.

With respect to another Hon’ble High Court judgment, the Tribunal opined that it only helps the Assessee rather than the Department in as much as it holds that it is the duty of the ITO to make exhaustive enquiries to gather some material as the basis of the estimation. In the present case, on the other hand, the proposition is that since the Assessee had explained the surrendered income to be from its business, the onus to prove otherwise shifted on to the AO.

Accordingly, the Tribunal held that the stock surrendered during the course of survey

cannot be brought to tax under the deeming provisions of section 69 and 69A of the Act and the same has been rightly offered to tax under the head “business income”. In absence of deeming provisions, the question of application of section 115BBE doesn’t arise for consideration.

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