The Chandigarh bench of the Income Tax Appellate Tribunal ( ITAT ) ruled that investment income from excess stock cannot be taxed under Section 69 B of Income Tax Act, 1961 must be assessed as business income.
The facts of the case are that during the financial year relevant to impugned assessment year, the assessee was engaged in the business of manufacturing and selling of Knitted Cloths, hosiery garments and dyed yarn under the name and style of M/s A.P. Knit Fab, Ludhiana.
A survey action under Section 133A was carried out at the business premises of the assessee on 26/10/2017 wherein the assessee had surrendered a sum of Rs. 1,00,24,282/- on account of excess stock. Subsequently, the assessee filed its return of income on 21/09/2018 declaring total income of Rs. 92, 36,240/- which includes the surrendered income which was offered to tax under the head “business income”.
The AO observed that during the course of survey, physical stock valued at Rs. 3,34,55,282/- was found and as per Trial Balance as on the date of survey, the assessee has shown stock in its books of account at Rs. 2,34,31,000/- and therefore there was excess stock of Rs. 1,00,24,282/- which the assessee has surrendered as business income in its P&L Account.
Mr. Sudhir Sehgal representing the assessee submitted that during the course of survey action at the business premises of the assessee on 26/11/2017, certain discrepancies were found on account of physical verification of stock regular books of account and there was a difference of Rs. 1,00,24,282/- and in order to buy peace of mind, the assessee surrendered an amount of Rs. 1,00,00,000/- on account of excess stock over and above its normal business income.
It was submitted that during the course of survey action as well as during the course of assessment proceedings, no other source of income has been identified and all the income which accrues to assessee is on account of its regular business of manufacturing and selling of Knitted cloths, hosiery garments and sale of dyed yarns which the assessee has been carrying on for last so many years. It was accordingly submitted that the excess stock of Rs. 1,00,24,282/- pertains only to the regular business of the assessee and therefore be assessed under the head “business income”.
Mr. Amanpreet Kaur representing the revenue submitted that for the unaccounted stock found during the survey proceedings, there can be no presumption to treat the value representing such excess stock as application of business income in absence of any evidence of earning that income or details as to when, how and from whom such income was derived which has been invested in stock. It was submitted that the assessee has not been able to establish a nexus between the excess stock and normal business income.
No documentary evidence has been provided to justify the additional business income of Rs. 1,00,24,282/-. Therefore, it was argued that the Assessing Officer’s application of the rate prescribed under Section 115BBE of the Income Tax Act to the surrendered income, treated as income under Section 69B of the Act, was justified.
The CIT(A) upheld the AO’s decision regarding the treatment of the surrendered income from unaccounted stock found during a survey as deemed income under Section 69B, taxed according to Section 115BBE. It is hence requested that the CIT(A)’s order be upheld and the Assessee’s appeal dismissed.
The two member bench of the tribunal comprising Sanjay Garg (Judicial member) and Vikram Singh Yadav (Accountant member) observed that the income so surrendered on account of investment in excess stock during the course of survey cannot be brought to tax under the deeming provisions of section 69B of the Income Tax Act and the same has to be assessed to tax under the head “business income”. In absence of deeming provisions, the question of application of Section 115BBE doesn’t arise and normal tax rate shall apply.
The AO was thus directed to assess the income under the head “Income from Business/profession” and apply the normal rate of tax. Accordingly, the appeal of the assessee was allowed.
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