2016 (8) TMI 601 - AT - Income Tax

Nature of income - Addition on account of excess stock found during the course of survey and admitted by the assessee as its undisclosed investment in stock - Held that - It is undisputed fact that the books of account were not found during the course of survey and the admission was made by the partner of excess stock of ₹ 1.25 crores for gold and silver jewellery but he has not written this disclosure in the return itself. The ld Assessing Officer raised this issue during the assessment proceedings, which was replied by the assessee but he has not convinced with the assessee s reply. Again this issue has been considered by the ld CIT(A) and who found that valuation of jewellery was made on the date of survey at the rate prevailing of survey but as per accounting policy it has to be valued on the basis of cost price or market price whichever is less, therefore, the assessee furnished revised valuation on the basis of average price of the gold and silver jewellery purchased. This calculation has been considered by the ld CIT(A) which was found justified to him, accordingly he deleted the addition. It is settled law that statement recorded during the course of survey has no evidentiary value as held by the Hon ble Supreme Court in the case of COMMISSIONER OF INCOME-TAX Vs. S. KHADER KHAN SON 2013 (6) TMI 305 - SUPREME COURT . Non considering the excess stock surrendered in survey as part of book profit U/s 40(b) - Held that -Assessing Officer can make certain adjustments in the book profit but change of income held is subject to be examined by the appellate authority but as the facts of the case are that the assessee s books were not closed on the date of survey as such. The Coordinate Bench of Ahmadabad ITAT in the case of Chokshi Hiralal Maganlal vs. DCIT 2011 (1) TMI 125 - ITAT, AHMEDABAD has considered this issue where excess stock during the course of survey U/s 133A was found. The ld Assessing Officer considered this disclosure U/s 69 of the Act but the Coordinate Bench held that since the excess stock is a result of suppression of profit from business over the years and has not been kept identifiable separately but it is part of overall physical stock found, provisions of Section 69B cannot be invoked and assessee is entitled for higher remuneration on excess stock disclosed in the return to the partner U/s 40(b) of the Act. The other case laws relied by the assessee are also squarely applicable, therefore, we reverse the order of the ld CIT(A) and held that excess stock found during the course of survey is income from business and profession and cannot be assessed U/s 69 of the Act. It is also a fact that U/s 28(v) of the Act, the interest, salary, bonus, commission and remuneration in the name of partner is assessed to tax as income from business and profession. Therefore, we allow the assessee s appeal on this ground. Addition on account of unexplained cash found during the course of survey - Held that - We have heard the rival contentions of both the parties and perused the material available on the record. This issue required to be verified from the cash book prepared after date of survey by the assessee with reference to entries made in the cash book and accordingly, we set aside this issue to the Assessing Officer and direct to verify the cash available on the date of survey and take decision as per law.

Summary

Issues Involved:

1. Deletion of addition on account of excess stock found during the survey.
2. Justification of addition on account of unexplained investment in stock.
3. Restriction of remuneration paid to partners.
4. Addition on account of alleged unexplained cash found during the survey.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Excess Stock Found During the Survey:

The Revenue challenged the deletion of ?40,47,335/- added by the Assessing Officer (A.O.) due to excess stock found during the survey, which the assessee admitted as undisclosed investment. The A.O. observed that during the survey, no books of account were found, and the stock was inventoried and valued by an independent valuer. The excess stock of gold and silver was surrendered by the partner of the firm for taxation. However, the assessee did not return this surrender in their filed return, leading to the addition by the A.O. The CIT(A) deleted this addition, noting that the valuation was based on market value rather than cost price and that the excess stock was declared in the return of income. The Tribunal upheld the CIT(A)’s decision, citing that statements made during the survey have no evidentiary value as per the Supreme Court's ruling in CIT Vs. S. Khader Khan Son.

2. Justification of Addition on Account of Unexplained Investment in Stock:

The Revenue also contested the CIT(A)’s decision to hold that there was no justification for the A.O. to make an addition on account of unexplained investment in stock, amounting to ?8,55,862/-. The A.O. had based the addition on the difference between the disclosed stock and the stock found during the survey. The CIT(A) found that the valuation had been done at market value rather than cost, and the stock received from customers was not considered. The Tribunal upheld the CIT(A)’s finding that stock should be valued at cost or market price, whichever is lower, and dismissed the Revenue’s appeal on this ground.

3. Restriction of Remuneration Paid to Partners:

The assessee contested the CIT(A)’s confirmation of the A.O.’s action in restricting the claim of remuneration paid to partners to ?13,65,321/- against ?64,36,813/-, by not considering the excess stock surrendered as part of ‘book profit’ for section 40(b). The A.O. argued that the surrendered stock was not regular income and thus not part of book profit. The CIT(A) upheld this view, stating that the surrendered stock does not fall within the provisions of sections 28 to 44DB and is considered unexplained investment under section 69. The Tribunal reversed the CIT(A)’s decision, stating that the excess stock is a result of suppressed business profits and should be considered part of book profit for calculating partner remuneration under section 40(b).

4. Addition on Account of Alleged Unexplained Cash Found During the Survey:

The assessee also challenged the addition of ?1,69,161/- for unexplained cash found during the survey. The A.O. made this addition due to the absence of books of account during the survey. The CIT(A) confirmed the addition, noting the lack of evidence to substantiate the cash found. The Tribunal found that the actual cash found was ?1,19,161/- and directed the A.O. to verify the cash available on the date of the survey with the cash book and take a decision as per law.

Conclusion:

The Tribunal dismissed the Revenue’s appeal and partly allowed the assessee’s appeal, upholding the CIT(A)’s deletion of the addition for excess stock and reversing the restriction on partner remuneration, while remanding the issue of unexplained cash for verification.