2019 (9) TMI 859 - AT - Income Tax

Excess stock found from seized documents during search - Unexplained investment - HELD THAT - Physical verification of stock was carried out by the assesese-company on its own as a matter of internal control in the month of January and February, 2015 well before the search and the surplus stock found on such physical verification having been accounted for by the assessee-company in its books of account in the month of March, 2015 itself, the same, in our opinion, cannot be treated as unexplained investment of the assessee, which is chargeable to tax under section 69. The amount in question representing excess stock found on physical verification carried out by the assessee-company on its own well before the search action and duly accounted for in the books of account of the assessee-company constituted its business income. As noted by the CIT(Appeals) AO himself in the case of M/s. Industrial Safety Products Pvt. Limited, a sister concern of the assessee had brought to tax the value of similar excess stock in identical facts and circumstances as regular business income of the assessee. We, therefore, find ourselves in agreement with the CIT(Appeals) that the value of surplus stock in the facts and circumstances of the assessee s case did not represent assessee s unexplained investment under section 69 and it constituted its regular business income for the year under consideration. Set off current year s business loss against the income on account of surplus value of stock - HELD THAT - We also agree with the alternative basis given by the CIT(Appeals) for giving relief to the assessee by holding that the assessee was entitled to set off current year s business loss of ₹ 1,17,55,657/- against the income on account of surplus value of stock even if it is presumed for the sake of argument that the same was assessable under section 69 as the same is duly supported by the decision of the Hon ble Madras High Court in the case of CIT vs.-Chensing Ventures 2007 (4) TMI 204 - MADRAS HIGH COURT and CIT vs.- Shilpa Dyeing Printing Mills (P) Limited 2015 (7) TMI 691 - GUJARAT HIGH COURT The prohibition against allowing such set off was statutorily provided by the Finance Act, 2016 w.e.f. 1st April, 2017 and there was thus no such prohibition or restriction in allowing the claim of the assessee for the set off for the year under consideration, i.e. A.Y. 2015-16. We, therefore, find no infirmity in the impugned order of the ld. CIT(Appeals) giving relief to the assessee - Decided against revenue

Summary

Issues Involved:
1. Assessment of excess stock as regular income or unexplained investment under Section 69 of the Income Tax Act.
2. Entitlement to set off business loss against income assessed under Section 69.

Detailed Analysis:

1. Assessment of Excess Stock:
The primary issue revolved around whether the excess stock valued at ?4,70,54,450 found during the search should be treated as regular income of the assessee or as unexplained investment under Section 69 of the Income Tax Act. The Revenue argued that the excess stock was not recorded in the books of account at the time of the search and should be treated as unexplained investment. However, the assessee contended that the surplus stock had been accounted for in its books for the financial year 2014-15, as part of an internal physical verification process conducted in January and February 2015. The CIT(A) found that the physical verification and subsequent accounting of the surplus stock were completed before the search commenced on March 20, 2015, and thus, the stock was part of the regular business income. The Tribunal upheld this view, noting that the stock verification was an internal control measure and the surplus was duly accounted for in the books of the assessee before the search, thus not qualifying as unexplained investment under Section 69.

2. Set Off of Business Loss:
The second issue was whether the assessee was entitled to set off its business loss of ?1,17,55,657 against the income assessed under Section 69. The Assessing Officer had denied this set off, arguing that income assessed under Section 69 falls under a separate chapter and cannot be set off against business losses. However, the CIT(A) allowed the set off, citing judicial precedents from the Madras High Court in CIT vs. Chensing Ventures and the Gujarat High Court in CIT vs. Shilpa Dyeing & Printing Mills (P) Ltd., which supported the set off of current year’s business loss against income assessed under Sections 68 to 69D. The Tribunal agreed with the CIT(A), noting that the prohibition against such set off was introduced only by the Finance Act, 2016, effective from April 1, 2017, and was not applicable for the assessment year 2015-16. Therefore, the assessee was entitled to set off its business loss against the income assessed under Section 69.

Conclusion:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision that the excess stock of ?4,70,54,450 was part of the regular business income and not an unexplained investment under Section 69. Additionally, the Tribunal confirmed that the assessee was entitled to set off its business loss of ?1,17,55,657 against the income assessed under Section 69 for the assessment year 2015-16.