2017 (11) TMI 388 - HC - Income Tax

Excess stock surrendered during the course of survey - whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head business income or income from other sources ? - Held that - ITAT is correct to conclude that in the annual accounts, the purchases of ₹ 70,04,814/- were finally reflected as part of total purchases amounting to ₹ 33,47,19,658/- in the profit and loss account and the same also found included as part of the closing stock amount to ₹ 1,94,42,569/- in the profit/loss account since the said stock of rice was not sold out. In addition to the purchase and the closing stock, the amount of ₹ 70,04,814/- also found credited in the profit and loss account as income from undisclosed sources. The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unrecorded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known source, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. Accordingly, we do not see any infirmity in assessee s bringing such transaction in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future. In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla (2016 (9) TMI 1354 - ITAT JAIPUR) supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head business income and not under the head income from other sources Addition on account of notional interest - Held that - Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. If further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. Further, in past, no such disallowance/addition was made. Therefore, neither the addition of notional interest made by the AO or disallowance of interest as held by the ld. CIT(A) is ₹ 1,96,73,637/-. Partners are paid interest @ 12% the balance in the partners account is much more than the amount advanced to Smt. Rita Gupta who is a wife of one of the partner. Therefore, even the disallowance made @ 4% is not justified and the same should be restricted @ 2% only. Revenue appeal dismissed.

Summary

Issues:
1. Reversal of findings by Tribunal regarding addition of surrendered amount in purchases and sales.
2. Classification of excess stock investment as 'business income' or 'income from other sources'.
3. Deletion of addition made on account of less interest charged by the firm.

Analysis:

Issue 1:
The Tribunal reversed the findings of the CIT(A) regarding the addition of a surrendered amount of ?70,04,814 by the assessee. The Tribunal held that the excess stock found during a survey should be considered as part of business income. The Tribunal referred to a Co-ordinate Bench decision and emphasized that if the investment/expenditure is clearly identifiable and has no independent existence, it should be treated as undeclared business income. In this case, the excess stock was part of the recorded stock and had no nexus with any other receipts, justifying the decision to treat it as excess stock found. The Tribunal concluded that the CIT(A) was correct in directing the AO to treat the surrendered amount as excess stock.

Issue 2:
Regarding the excess stock investment of ?70,04,814 in unrecorded stock of rice, the Tribunal determined that it should be brought to tax under 'business income' rather than 'income from other sources'. The Tribunal noted that the investment was clearly identifiable and related to the regular business stock of the assessee. Citing a Co-ordinate Bench decision, the Tribunal supported the assessee's case, leading to the allowance of ground No. 1 of the assessee. The excess stock investment was deemed to fall under 'business income'.

Issue 3:
The Tribunal addressed the addition made on account of less interest charged by the firm from the wife of one of the partners. The Tribunal agreed with the assessee's argument that no addition can be made on account of notional income, citing relevant legal precedents. The Tribunal emphasized the commercial expediency of the advance given to the partner's wife and highlighted that no disallowance had been made in the past. The Tribunal concluded that no substantial question of law arose, leading to the dismissal of the appeal.

In conclusion, the Tribunal upheld the decisions of the CIT(A) and provided detailed reasoning for each issue raised in the appeal, ultimately dismissing the appeal.