Excess stock found during survey – business income or undisclosed investments

[Vivek Jalan]

Whoever makes an assertion, must substantiate it. But whoever requires substantiation must also accept it or prove otherwise! In case an assessee explains the source of the investment in excess stock in his statement that the same was undisclosed income of the assessee from its business for last few years and is reflected in the excess stock found during the survey, then the department must also take the same into cognizance. If the same is to be refuted, then enquiry has to be made as to the source of the stock.

To set in the context, post demonetisation, there were views that source of the cash that is deposited could be attributed to the specified sections voluntarily and tax could be paid on such income at the rate of 30% as per the pre amended Section 115BBE of The Income Tax Act and escape the rigours of penalty. Hence, on 15.12.2016, this section was amended with effect from 01.04.2017 and the rate of tax was increased to 60%. However, once the assessee proves that a particular income is derived over the past few years from his business, then the higher rate of tax under Section 115BBE cannot be invoked.

Now in case of excess stock found during survey, the assessee has generally got the following submissions –

1. There is a difference between earning income from “undisclosed sources and income being “additional undeclared income” in addition to regular income. Only if “additional undeclared income” is earned from undisclosed or unknown sources, can Section 115BBE be invoked.
2. If the assessee from the last many years has the same source of income and there no evidence indicating any other source of income and the assessee claims that the excess-stock was outcome of suppressed business income over the years, then this undeclared income shall be treated as being from business and Section 115BBE cannot be invoked.
3. The primary condition for invoking Section 69B is that the asset should be separately identifiable, and it should have independent physical existence on its own. If the physical stock found at the business premises of the assessee is in excess to the stock recorded in the books of account and such stock is not separated from other stock of the assessee but it is one and common nature of stock found during survey, then the excess stock cannot be given a separate identity. One also needs to understand that the assessee would always have the opportunity to disclose it in the current years return of income.

Accordingly, it was held in the case of ACIT (CENTRAL) UJJAIN VERSUS M/S. ITALIAN EDIBLES PVT. LTD. - 2024 (2) TMI 520 - ITAT INDORE, that the additional income offered on account of excess stock found during course of survey is nothing but income from business and is therefore, liable to be taxed under head of income from business & profession; the provisions of Section 115BBE of the Act are not applicable on surrendered income on account of excess stock found during course of survey.