2023 (5) TMI 272 - AT - Income Tax

Revision u/s 263 by CIT - AO failed to apply the correct provision - undisclosed investment in the unaccounted stock - Addition of income declared during the source of survey on account of excess stock and Disallowance on account alleged cash payments in violation of Section 40A(3) - HELD THAT - Excess stock was found during the survey - It is an admitted fact by the partner of the assessee firm that the said excess stock was not recorded in the books of the firm. In the statement the partner of the firm in question number 3 has admitted that the books are written up to 19/12/2014 i.e. up to the date of the survey. The partner has admitted in answer to question number 17 that the excess stock of 1058.686 grams in fine weight of Gold and 1060.825 grams of silver was not recorded in the books. In this case it is a fact that there was unaccounted stock, means the assessee had used its unaccounted money to purchase the said stock. The said stock is outside its purchase register. It means it is unexplained investment . The AO had erroneously not verified this aspect. Section 69B, 69A, 69 has introduced a deeming provision. The AO has failed to verify this aspect of the impugned excess stock declared during the survey. Therefore, the assessment order is erroneous and prejudicial to the interest of the revenue. If the Pr.CIT/CIT is of the opinion that inquiry required to be made in a particular case has not been made the assessment order will be deemed to be erroneous and prejudicial to the interest of the revenue. In this case the AO has failed to apply proper and correct section of Income Tax Act to the Investment in the Undisclosed Stock . The undisclosed investment in the unaccounted stock needs to be taxed separately as Income of the assessee as per the deeming provision of the Act. The tax liability is calculated as per section 115BBE of the Act. Hon ble Madras High Court in the case of SVS Oil Mills 2019 (5) TMI 1392 - MADRAS HIGH COURT has upheld the addition of excess stock found during survey u/s 69B.The AO has failed to verify this aspect. Hence, we are of the opinion that the Assessment Order is erroneous and prejudicial to the interest of the revenue. This is not the case where two plausible views are possible and the AO has adopted one plausible view. Hence, the order u/s 263 is upheld qua the investment in the undisclosed stock . CIT observed that the Assessee has made URD purchases in cash - The assessee had submitted before the AO that the assessee has accepted old gold ornaments and given the new ornaments. Assessee had submitted this fact before the AO during the Assessment Proceedings u/s 143(3) r.w.s. 263. AO had not made any addition on this issue in the order u/s 143(3) r.w.s. 263. Assessee has filed copies of the bills raised by the assessee for the so called URD purchases before the ITAT. As observed that the assessee had accepted old ornaments and then converted them into new ornaments by adding some gold. Thus, the assessee has not made any actual purchases. Therefore, the order u/s 263 qua URD Purchases is annulled. Decided in favour of assessee in part.

Summary

Issues Involved:
1. Addition of income declared during the survey on account of excess stock.
2. Disallowance on account of alleged cash payments in violation of Section 40A(3).

Summary:

1. Addition of Income Declared During Survey on Account of Excess Stock:
The Assessee, engaged in the business of manufacturing and trading gold and silver ornaments, filed a return of income for AY 2015-16. During a survey conducted on 19/12/2014, excess stock was found which was not recorded in the books. The Assessee declared this excess stock as additional income. The Principal Commissioner of Income Tax (Pr.CIT) issued a notice under Section 263, contending that the excess stock should be taxed under Section 69B of the Income Tax Act, 1961, and not merely included in the regular profit and loss account. The ITAT upheld the Pr.CIT's order, stating that the unaccounted stock represented unexplained investment and should be taxed separately under Section 69B, with tax computed under Section 115BBE. The AO's failure to apply the correct section rendered the assessment order erroneous and prejudicial to the interest of the revenue.

2. Disallowance on Account of Alleged Cash Payments in Violation of Section 40A(3):
The Pr.CIT also noted that the Assessee made purchases from unregistered dealers in cash, which should be disallowed under Section 40A(3). However, the Assessee argued that these transactions involved accepting old gold ornaments and converting them into new ones, not actual cash purchases. The ITAT found that the Assessee had adequately explained this to the AO during the assessment proceedings, and no addition was made on this issue. Consequently, the ITAT annulled the Pr.CIT's order regarding the disallowance under Section 40A(3).

Conclusion:
The ITAT upheld the Pr.CIT's order under Section 263 concerning the investment in unaccounted stock found during the survey but annulled the order regarding the alleged cash payments under Section 40A(3). The appeal of the Assessee was partly allowed.