2024 (4) TMI 91 - AT - Income Tax

Estimation of income - Excess stock found during the survey operation - assessee has declared profit at the rate of 1.87% from AY 2007-08 to AY 2013-14 which can be considered a yardstick to work out the profit out of such unaccounted stock - whether the gross value of the unaccounted stock is liable to be added to the income of the assessee or some percentage of profit embedded in such unaccounted stock should only be brought to tax? - HELD THAT - Unaccounted purchase in itself does not give any rise to the income to the assessee until it is sold out. Though the assessee has claimed before us that such unaccounted stock has either been sold in the year under consideration or has shown as part of closing stock or the same has been sold in the subsequent assessment year. AR appearing before us has not brought anything on record demonstrating from the financial statements that such unaccounted purchases have either been shown as part of the closing stock or sold out in the current/ subsequent year. Thus in the absence of such details and to render equitable justice to the assessee and the revenue we are of the view that some percentage of profit on such unaccounted purchases/stock is required to be added. The assessee before us has suggested vide letter dated 10-01-2022 such percentage of profit at the rate of 2% of the value of unaccounted stock. The above submission of the assessee has nowhere been countered by the revenue. However we note that the above percentage of the net profit shown by the assessee is from disclosed business whereas the issue before us is of unaccounted stock found in the course of the survey. Therefore we are of the view that the percentage of net profit of such unaccounted purchases/ stock should be higher than the profit already shown by the assessee from accounted/disclosed transaction. Hence for the sake of justice and fair play we hold that profit element embedded in such unaccounted/excess stock shall be brought to tax @ 5% - Decided partly in favour of assessee.

Summary

Issues involved:
The only issue raised by the assessee is the addition made on account of excess stock found during a survey operation.

Details of the Judgement:

Issue 1: Addition on account of excess stock found during survey operation
- The assessee, a partnership firm engaged in the business of manufacturing and trading of cotton, cotton seeds, and cotton seeds oil, had unaccounted stock of 2119 quintal worth Rs. 65,68,900 found during a survey operation under section 133A of the Income Tax Act.
- The learned CIT(A) confirmed the addition made by the Assessing Officer.
- The assessee contended that only an element of profit should be taxed from the unaccounted stock, not the entire amount.
- The Tribunal noted that the unaccounted stock arises from unaccounted purchases, and the money invested in such stock was not quantified or taxed by the authorities.
- Citing precedents, the Tribunal held that only the profit element embedded in such unaccounted stock should be taxed.
- The Tribunal determined the profit element at 5% of the value of unaccounted stock, resulting in an addition of Rs. 3,28,445 to the total income of the assessee.
- The order of the CIT(A) was set aside, and the appeal of the assessee was partly allowed.

Conclusion:
The Tribunal ruled in favor of the assessee, holding that only the profit element embedded in the unaccounted stock should be taxed at the rate of 5%.