2017 (3) TMI 1828 - AT - Income Tax

Excess stock found during the survey - partner of the assessee firm admitted that the investment had been made out of undisclosed sources - Suddenly in the books of accounts, the assessee has incorporated this transaction by debiting the purchase account and crediting the income from undisclosed sources - HELD THAT - The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known sources, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. No infirmity in assessee s bringing such transaction in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future. Whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head business income or income from other sources ? - In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla 2016 (9) TMI 1354 - ITAT JAIPUR supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head business income and not under the head income from other sources . In the result, ground No.1 of the assessee is allowed. Addition of interest - assessee has given loan and advances to Smt. Rita Gupta and charged interest @ 10%, whereas assessee firm was paying interest @ 14%-17% on loans availed by it - HELD THAT - It is noted that the advance was given to Smt. Rita Gupta in earlier years for construction of godown and the same was given on rent by the assessee. The test of commercial expediency for giving the advance having being established, the AO is not correct to challenge the rate of interest which has been charged by the assessee. Further, no nexus has been established between the borrowed funds and funds advanced to Smt Rita Gupta. In the result, the ground no. 2 of the assessee is allowed.

Issues Involved:
1. Classification of income from excess stock found during a survey.
2. Disallowance of interest expenses on advances given at a lower interest rate than the borrowing rate.

Detailed Analysis:

Issue 1: Classification of Income from Excess Stock Found During Survey

Facts of the Case:
- A survey under section 133A of the Income Tax Act was conducted at the business premises of the assessee on 08.11.2012.
- During the survey, the assessee surrendered an amount of ?70,04,814/- due to a major discrepancy in the stock of rice, which was not recorded in the books of accounts.
- The assessee credited this amount as income from undisclosed sources in the Profit and Loss Account and paid due tax.

Assessee’s Arguments:
- The assessee argued that the excess stock should be assessed under the head "Profits and Gains from Business" rather than "Income from Other Sources."
- The assessee claimed that the double entry accounting treatment nullified the effect of the undisclosed stock, as it was included in both purchases and closing stock.
- The net profit remained the same whether or not the undisclosed stock was included in the Profit and Loss Account.

Revenue’s Arguments:
- The Assessing Officer (AO) argued that the assessee took double benefit by including the undisclosed stock in both the credit and debit sides of the Trading and Profit & Loss account.
- The AO treated the amount as "Income from Other Sources" and excluded it from the Trading and Profit and Loss account.

Judgment:
- The Tribunal held that the investment in the excess stock of rice is clearly identifiable and related to the regular business stock of the assessee.
- Citing the decision of the Co-ordinate Bench in the case of Shri Ramnarayan Birla, it was concluded that the excess stock should be taxed under the head "Business Income" and not "Income from Other Sources."
- The Tribunal found no infirmity in the assessee’s accounting treatment and allowed the appeal on this ground.

Issue 2: Disallowance of Interest Expenses

Facts of the Case:
- The assessee had given a loan to Smt. Rita Gupta at an interest rate of 10%, while it was paying interest at 14%-17% on borrowed funds.
- The AO added an amount of ?1,39,366/- to the total income of the assessee, representing the difference in interest rates.

Assessee’s Arguments:
- The assessee argued that the addition was based on notional interest, which is not permissible under the law.
- It was submitted that the advance to Smt. Rita Gupta was for the construction of a godown, which was commercially expedient as the godown was rented out by the assessee.
- The assessee cited the Supreme Court decisions in S.A. Builders and Hero Cycles Pvt. Ltd., which held that the Revenue cannot question the commercial expediency of a businessman.

Revenue’s Arguments:
- The AO contended that if the assessee had not advanced the loan at a lower interest rate, the funds could have been used to reduce the high-interest loans.

Judgment:
- The Tribunal noted that the advance was given for commercial purposes and the interest rate charged was a business decision.
- No nexus was established between the borrowed funds and the funds advanced to Smt. Rita Gupta.
- The Tribunal allowed the appeal on this ground, concluding that the AO was not justified in disallowing the interest expenses.

Conclusion:
The appeal filed by the assessee was allowed. The Tribunal ruled that the excess stock should be taxed under "Business Income" and not "Income from Other Sources." Additionally, the disallowance of interest expenses was overturned, recognizing the commercial expediency of the loan advanced to Smt. Rita Gupta.

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