2024 (11) TMI 1119 - AT - Income Tax

Additional income relating to excess stock surrendered by the assessee - shall form part of its business income or not? - CIT(A) has also placed reliance on various case laws and accordingly rendered his decision in favour of the assessee that income surrendered by it was generated from its business activities only - HELD THAT - The assessee herein is a Partnership Firm. There is no dispute with regard to the fact that the assessee does not have any other income other than the business income. Hence the assessee could have accumulated the stock out its business income only, which was not disclosed earlier. In the cases relied upon by CIT(A), the co-ordinate benches of Tribunal and the Hon ble High Courts as relied upon have held that the discrepancy in the stock found during the course of search/survey operations should be assessed as business income only. Since the CIT(A) has rendered his decision on the basis of various case laws and since the revenue did not contradict them, we affirm the order passed by Ld CIT(A) on this issue. Adhoc disallowance of expenses incurred shop expenses, office expenses and packing expenses - HELD THAT - AO has not given any basis for making disallowance @ 20%. Before CIT(A), the assessee contended that making of adhoc disallowance is bad in law. Assessee did not disprove the observations of the AO that many expenses are supported by self made vouchers. However, we notice that the AO has examined the expenses on test check basis only and accordingly concluded that all the expenses are supported by self made vouchers only. The presumption so arrived at by the AO is debatable one. Under these set of facts, disallowance of part of expenditure so claimed is required in order to take care of leakage of revenue, if any, in making the claim. We are of the view that the disallowance made @ 20% is on the higher side. Accordingly, we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 10% of shop, office and packing expenses. Decided partly in favour of assessee.

Summary

Issues Involved:

1. Classification of additional income from excess stock as business income or unexplained investment under Section 69.
2. Adhoc disallowance of shop, office, and packing expenses.

Detailed Analysis:

1. Classification of Additional Income from Excess Stock:

The primary issue in the cross-appeals was whether the additional income from excess stock discovered during a survey should be classified as business income or as unexplained investment under Section 69 of the Income Tax Act. The survey conducted on the assessee, a partnership firm in the jewelry business, revealed an excess stock valued at Rs. 5,72,39,510/-. The assessee declared this as business income in its return, but the Assessing Officer (AO) assessed it under Section 69, treating it as unexplained investment, and taxed it under Section 115BBE.

The CIT(A) accepted the assessee's contention, supported by several case laws, that the surrendered income was generated from business activities and should be assessed as business income. The decision was based on the fact that the excess stock was accounted for in the books and related to the regular business operations. The judgment referred to various precedents, including Parmod Singla v. ACIT and Veer Enterprises v. Deputy Commissioner of Income-tax, where similar issues were resolved in favor of treating such income as business income. The Tribunal upheld the CIT(A)'s decision, affirming that the discrepancy in stock should be assessed as business income, as the revenue did not contradict the case laws relied upon.

2. Adhoc Disallowance of Expenses:

The second issue concerned the adhoc disallowance of 20% of shop, office, and packing expenses by the AO, which was confirmed by the CIT(A). The disallowance was based on the observation that these expenses were supported by self-made vouchers, making them unverifiable. The assessee argued that the adhoc disallowance was arbitrary and unsupported by law. However, the AO had only conducted a test check, leading to a debatable presumption about the nature of the vouchers.

The Tribunal noted that while some disallowance was necessary to prevent revenue leakage, the 20% rate was excessive. Consequently, the Tribunal modified the CIT(A)'s order, directing the AO to restrict the disallowance to 10% of the expenses, thereby partially allowing the assessee's appeal.

Conclusion:

The Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision to classify the surrendered income from excess stock as business income. The assessee's appeal was partly allowed, with the disallowance of expenses reduced to 10%. The order was pronounced in open court on 21/11/2024.