2023 (11) TMI 1093 - AT - Income Tax

Addition u/s. 69A - income surrendered during survey - undisclosed business income or income from other sources - CIT(A) treated it as being in the nature of business income and thus allowing deduction of interest and salary paid to partners against the same - HELD THAT - CIT(A) has rightly applied the decision of Fashion World . 2010 (2) TMI 1171 - ITAT AHMEDABAD wherein in identical set of facts, as analysed the provisions of section 69A, 69B, 69C etc. and held that for invoking the said provision, there are two conditions to be satisfied; (i) that investment or expenditure is not recorded in the books of the assessee, and (ii) nature source of acquisition of assets or expenditure are not explained or are not explained satisfactorily. Thereafter the meaning of nature was elaborated upon stating that it would require the assessee to explain the description of the investment or the expenditure and to explain the corpus or funds from where investment or expenditure has been met. Where the assessee is able to explain the nature and source of investment or expenditure, and if they are recorded in the books of accounts, then such investment or expenditure will not be treated as deemed income, but if these conditions are not fulfilled, the same would be treated as deemed income of the assessee. ITAT, thereafter went on to hold that the important aspect that emerges was that for invoking deeming provisions under sections 69,69A, 69B 69C there should be clearly identifiable asset or expenditure, and thereafter they held that in a scenario where excess stock of the business is found, there is no physical distinction between the accounted and unaccounted stock, and such assets found cannot be said to be distinct or separate assets. Difference in stock has no independent identity of its own and is part and parcel of the entire lot of stock. The difference is only a mathematical expression in terms of value and not a separate independent identifiable asset, and therefore, it could not be stated that there is an undisclosed asset existing independently ; that once it was so held, then what was not declared to the department was receipt from business and not any investment. ITAT thereafter went to distinguish the decision of Fakir Mohmed Haji Hasan ( 2000 (8) TMI 44 - GUJARAT HIGH COURT ) pointing out that in the said case what was found was separate and distinguishable asset or investment, source of which remained unexplained, and was therefore treated as deemed income of the assessee. Thus CIT(A), has rightly applied the said decisions to the facts of the present case which are identical as in what has been found during survey is excess stock of the business of the assessee. The assesses case, in fact, we find on a better footing since the assessee has disclosed investment made by way of purchases for the excess stock not only in its business books of accounts but also in the VAT return filed to the VAT authorities. Therefore undoubtedly the assessee has demonstrated the excess stock as relating to its business. And therefore, the l.d CIT(A), we hold, has rightly treated the same as being derived from the undisclosed business income of the assessee. Decided against revenue.

Summary

Issues Involved:

1. Deletion of addition made under Section 69A of the Income Tax Act.
2. Deletion of addition made under Section 69C of the Income Tax Act.
3. Allowability of deduction of interest and salary paid to partners against surrendered income.

Issue 1: Deletion of Addition under Section 69A

The Revenue challenged the deletion of Rs. 1,93,69,473/- added by the AO under Section 69A, arguing that the unexplained bullion, gold ornaments, and cash found during the survey were not satisfactorily explained as business income. The AO treated the surrendered income as unexplained investment, thus disallowing any deductions. The CIT(A), however, accepted the assessee's explanation that the excess stock was part of the business and allowed the deduction of partners' remuneration.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee had demonstrated that the excess stock was related to its business. The Tribunal also referenced the ITAT Ahmedabad Bench's decision in Fashion World, which held that excess stock found during a survey should be treated as business income if it has no separate identity and is part of the business's stock.

Issue 2: Deletion of Addition under Section 69C

The Revenue also contested the deletion of Rs. 7,20,600/- added by the AO under Section 69C for unaccounted shop renovation expenses. The AO treated these expenses as unexplained, thus disallowing any deductions. The CIT(A) accepted the assessee's explanation that these expenses were incurred for business purposes and allowed the deduction.

The Tribunal agreed with the CIT(A), noting that the unaccounted expenses were related to the business premises and were explained as being incurred from the business's undisclosed income. The Tribunal found no merit in the Revenue's arguments and upheld the CIT(A)'s decision.

Issue 3: Allowability of Deduction of Interest and Salary Paid to Partners

The Revenue's main grievance was the CIT(A)'s decision to allow the deduction of partners' remuneration and interest against the surrendered income, which the AO had treated as deemed income under Sections 69A and 69C. The CIT(A) treated the surrendered income as business income, allowing the deduction of partners' remuneration as per Section 40(b).

The Tribunal upheld the CIT(A)'s decision, noting that the surrendered income was related to the business and was recorded in the business's books of accounts and VAT returns. The Tribunal referenced the ITAT Ahmedabad Bench's decision in Fashion World, which supported treating excess stock as business income and allowing related deductions.

Conclusion

The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decision to treat the surrendered income as business income and allowing the deduction of partners' remuneration and interest. The Tribunal found that the excess stock and unaccounted expenses were related to the business and were satisfactorily explained by the assessee.