2022 (7) TMI 1483 - AT - Income Tax

Categorization of income Surrendered during survey - assessable as business income OR undisclosed income - huge difference of stock and excess cash found at the business premises - HELD THAT - As excess stock was found in the business premises of the assessee on physical verification by the survey team with the help of employees of the assessee. Assessee, without objecting to the figures of excess stock arrived at by survey team accepted the same and offered the same as undisclosed income for the current year. In this context, we are of the considered view that since the excess stock of rice and paddy are the commodities in which the assessee was dealing under his regular business and accordingly any surrender on account of mismatch in physical stock and accounting balance of the stock can not be treated as income from the other source, the same has to be brought to tax under income from business, which the assessee has rightly done. See BAJARGAN TRADERS C/O. KALANI CO. 2017 (11) TMI 388 - RAJASTHAN HIGH COURT Thus we are of the opinion that the investment in the excess stock ought to be taxed under the head business income and not under the head income from other sources . Accordingly, we set aside the orders of the authorities below and direct the AO to delete the addition. Assessee appeal allowed.

Summary

Issues Involved:
1. Assessability of surrendered income during survey as business income or undisclosed income.
2. Applicability of Section 69 of the Income Tax Act.
3. Distinguishability of the case from the precedent set by Dhanush General Stores vs CIT.

Detailed Analysis:

1. Assessability of Surrendered Income During Survey as Business Income or Undisclosed Income:
The primary issue was whether the income of Rs. 49,98,762/- surrendered during a survey should be assessed as business income or undisclosed income. The assessee argued that the surrendered income was business income, as it was credited to the trading and profit and loss account and included in the computation of income. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] held that the surrendered income was undisclosed income and not business income, relying on the decision of the Hon'ble Chhattisgarh High Court in Dhanush General Stores vs CIT. However, the Tribunal found that the facts of the present case were distinguishable from Dhanush General Stores, as the surrendered income was included in the computation of income and tax was paid on it.

2. Applicability of Section 69 of the Income Tax Act:
The AO assessed the surrendered income under Section 69 of the Income Tax Act, which deals with unexplained investments. The assessee contended that Section 69 was not applicable because the surrendered income was from business and not from undisclosed sources. The Tribunal agreed with the assessee, noting that the AO had admitted that the excess stock and cash were accumulations of business profits. The Tribunal emphasized that income must be computed under one of the five heads of income, and since the source of the surrendered income was business, it should be assessed as business income.

3. Distinguishability of the Case from Dhanush General Stores vs CIT:
The Tribunal distinguished the present case from Dhanush General Stores on several grounds:
- In Dhanush General Stores, the surrendered amount was not disclosed in the return of income, whereas in the present case, it was.
- The High Court in Dhanush General Stores observed that the surrendered income was not included in the computation of income, while in the present case, it was.
- The AO in the present case admitted that the excess stock and cash represented accumulated business profits, which was not the case in Dhanush General Stores.
- The High Court in Dhanush General Stores noted that penalty under Section 271(1)(c) was initiated, indicating that the surrendered income was not offered for tax, whereas in the present case, it was.

Tribunal's Conclusion:
The Tribunal concluded that the surrendered income should be treated as business income. It relied on several judicial precedents, including decisions from the Pune and Jodhpur Benches of the Tribunal and the Rajasthan High Court, which held that income from excess stock and cash found during surveys should be assessed as business income. The Tribunal directed the AO to delete the addition made under Section 69 and assess the surrendered income as business income.

Order:
The Tribunal allowed the appeals of the assessees, concluding that the surrendered income should be assessed as business income and not as undisclosed income. The decision in ITA No.249/RPR/2017 was applied mutatis mutandis to the other appeals, resulting in all the appeals being allowed.

Conclusion:
The Tribunal's judgment emphasized the importance of assessing surrendered income based on its source and the necessity of including it in the computation of income. The decision distinguished the present case from the precedent set by Dhanush General Stores and reaffirmed the principle that income from business activities should be assessed under the head of business income.