Income tax Dept couldn't Dismantle Claim of Excess Stock as Business Income : ITAT deletes Addition u/s 69 [Read Order]

In a recent ruling the Income Tax Appellate Tribunal (ITAT), Panaji Bench, held that excess stock found during survey cannot be treated as unexplained investment where it is linked to regular business activity.The Tribunal noted that in the absence of any material to contradict or counter the assessee’s explanation, addition under Section 69 is not sustainable.

The assessee, M/s Sadanand Bhavan, a partnership firm engaged in the manufacture and sale of sweets, had filed its return for Assessment Year 2013-14 declaring income of ₹14.64 lakh. A survey under Section 133A resulted in disclosure of additional income of over ₹1 crore, which included excess stock and cash.

In the original assessment, the Assessing Officer (AO) accepted the disclosure as business income. However, the Principal CIT invoked Section 263 on the ground that the assessment was erroneous and prejudicial to the interests of the Revenue, directing the AO to re-examine the excess stock and cash under Sections 69, 69A and 115BBE.

In the consequent proceedings, the AO treated the excess stock as unexplained investment under Section 69 and made additions, which were affirmed by the CIT(A), leading to the present appeal.

Before the Tribunal, the assessee submitted that the excess stock was part of its regular business operations and was duly reflected in the books . He placed reliance on decisions such as CIT v. S.K. Srigiri & Bros. and DCIT v. Mangaldeep Chains to submit that stock found during survey, when linked to business activity, cannot be treated as unexplained income.

The Revenue, however, argued that such stock was not recorded at the time of survey and therefore attracted Sections 69/69A, stating that subsequent recording in the accounts does not change its character, and the assessee must explain its source.

The two-member bench comprising Pavan Kumar Gadale (Judicial Member) and GD Padmashali (Accountant Member) noted that the assessee had disclosed sales and stock in its financial statements and that the Revenue had not brought any contrary material on record nor rebutted or dismantled the assessee’s claim.

In such circumstances, the Tribunal held that its discovery of stock during survey alone cannot make it an unexplained investment.

However, the Tribunal took a different view on excess cash, observing that the assessee had failed to satisfactorily explain its source. The addition under Section 69A was therefore upheld.

Accordingly, the appeal was partly allowed.

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