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TMI Blog2023 (10) TMI 194X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer. Thus, we set aside the order of the CIT(A) and direct the Assessing Officer to assess income towards excess stock under the head income from business as declared by the assessee. Decided in favour of assessee. - Shri Mahavir Singh, Hon ble Vice President And Shri Manjunatha. G, Hon ble Accountant Member For the Appellant : Shri. D. Anand, Advocate For the Respondent : Shri. AR V Sreenivasan, Addl. CIT ORDER PER MANJUNATHA. G, ACCOUNTANT MEMBER: This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income-tax (Appeals)-18, Chennai, dated 29.11.2022 and pertains to assessment year 2019-20. 2. The assessee has raised the following ground of appeal: 1. The order of the learned Commissioner Of Income Tax (Appeals)-18, is wrong, illegal and is opposed to law. 2. The Ld. Commissioner of Income Tax [(Appeals)-18 erred in uploading the order of assessment by assessing the business income offered by the appellant as unexplained investment under section 69B r.w.s 115BBE of the Income Tax Act. 3. The Ld. Commissioner of Income Tax (Appeals)-18 ought to have seen that addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was called upon to explain and reconcile excess stock found during the course of survey with books of accounts, for which Shri. Suresh Kumar Jain, in his statement u/s. 131 of the Act dated 25.02.2019, admitted the excess stock and has also agreed to offer the same for taxation. During the course of assessment proceedings, the Assessing Officer noticed that on perusal of the profit and loss account for the year ended 31.03.2019, the assessee has offered excess stock found during the course of survey under the head business income. The assessee, was show caused as to why the same should not be assessed u/s. 69B of the Act. In response, the assessee submitted that excess stock found during the course of survey is on account of numerous items of physical stock present, which cannot be immediately reconciled to books of accounts and further, said excess stock has been acquired out of business income earned for the impugned assessment year, which has been plugged back into business in the form of stock in trade. Since, the excess stock was mixed with business stock of the assessee, which has not been identified separately, the same should be considered as stock in trade of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act. The relevant findings of the ld. CIT(A) are as under: 7.9 Similar issue had come up for consideration before the jurisdictional Madras High court in the case of Ms. SVS Oils Mills Vs. The Assistant Commissioner of Income Tax in ITA No.765 of 2018 wherein it was clearly held that the investment in excess stock found should be assessed as undisclosed income and not as business income. Assessee tried to distinguish the facts in futile stating that excess stock was not identified during survey in his case, 1 .vhercas the fact is the excess stock has been identified by physical inventory during survey in the presence of the assessee and it was not recorded in the books/Registers/bill books. In the additional grounds/submissions, the assessee tried to further distinguish the facts stating that in SVS Oil Mills case the excess stock was not disclosed in the return, whereas in the assessee's case, it was disclosed in the return as 'other income' under business head. The question here is whether the stock is unaccounted and whether the source is fully and satisfactorily explained. In the instant case, the excess unaccounted stock was arrived at in the presence of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. CIT(A), erred in upholding the additions made by the Assessing Officer towards excess stock found during the course of survey u/s. 69B r.w.s. 115BBE of the Act, without appreciating fact that in order to make additions u/s. 69B of the Act, the twin conditions embedded therein must be satisfied i.e., (i) excess stock found at the time of survey is not recorded in the books of accounts and (ii) the appellant offers no satisfactory explanation. In the present case, the appellant offered explanation with regard to excess stock found during the course of survey and claimed that said excess stock is on account of numerous items of physical stock carried by the assessee including old jewellery received from customers for repair and polish and also exchange and further said excess stock has been acquired out of business income generated for the impugned assessment year. The Ld. Counsel for the assessee, further referring to the decision of ITAT, Chennai Benches in the case of M/s. Overseas Leathers vs DCIT in ITA No. 962/Chny/2022, submitted that, the Tribunal has considered an identical issue in light of excess stock found during the course of survey and by considering various decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been mixed with regular stock in trade of the assessee. We further, noted that the assessee had also explained source for excess stock and claimed that said excess stock has been acquired out of business income earned for relevant assessment years. Therefore, from the above facts, it can be safely concluded that excess stock found during the course of survey cannot be isolated with regular stock in trade of the assessee and also cannot be considered as unexplained investment of the assessee, which can be taxed u/s. 69B of the Act. In order to invoke provisions of section 69B of the Act, twin conditions must be satisfied i.e., (i) there must be unexplained investment (ii) the assessee s explanation is not satisfactory in the opinion of the Assessing Officer. In the present case, the excess stock found during the course of survey is mixed with regular stock in trade of the assessee and further the assessee has offered explanation for source for excess stock and claimed that the same has been acquired out of business income of the assessee. Once, the excess stock found during the course of survey is explained out of business income of the assessee, then same cannot be considered as un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and profession and also paid taxes. These are undisputed facts. The only dispute is with regard to head of income under which additional income offered towards excess stock to be assessed, whether it is under the head profits and gains of business or profession or unexplained investment as per section 69B of the Act. 11. The provisions of section 69B of the Act deals with, where in any financial year the assessee has made investments or is found to be the owner of any bullion, jewellery or other valuable article and the Assessing Officer finds that the amount expended on making such investments exceeds amount recorded in this behalf in the books of accounts maintained by the assessee for any source of income, and the assessee offers no explanation or the explanation offered by the assessee is not in the opinion of the Assessing Officer, satisfactory, the excess amount may be deemed to be the income of the assessee in such financial year. In order to assess any investment or other bullion, jewellery or any other valuable asset, two things must be satisfied. Firstly, the assessee must expended amount towards investment or in acquiring some asset and is not recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee that said source is not from income from business. Moreover, it is a general practice in trade that income generated is either ploughed back into the business in the form of stock in trade or receivables or spent for other purpose like acquisition of asset outside the business. In this case, during the course of survey except stock difference, no other investment with any other asset was found. Therefore, from the above it is very clear that explanation offered by the assessee that source for excess stock is out of income generated from business activity of the current year appears to be plausible explanation. Therefore, we are of the considered view that when the assessee has explained the source for acquisition of stock out of business income, the AO ought to have accepted the explanation of the assessee and assessed the income under the head profits and gains of business or profession, but not under the head unexplained investment u/s. 69B of the Act. This is because, excess stock found during the course of survey does not have any independent identity as the asset is a mixed part of overall stock found in the business premises of the assessee, which in our consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot and if so, assessee can claim deduction on account of payment of remuneration to partners on account u/s 40b(v). In this regard, our reference was drawn to the decision of Coordinate Bench in case of Shri Ramnarayan Birla (in ITA No. 482/JP/15 dted 30.09.2016). In that case, the question before the Coordinate Bench was whether the CIT(A)-2, Udaipur has erred in directing the AO to assess the unexplained investment surrendered by the assessee under the head income from Business ignoring the decision of the Hon ble Gujarat High Court in the case of Fakir Mohd. Hazi Hasan 247 ITR 290 that unaccounted income ought to be categorized under the residuary head of Income from other sources . In respect to the said issue, the findings of the Coordinate Bench are as follows: We have heard the rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that assessee is engaged in the business of jewellery. During the course of survey excess stock valuing Rs. 77,66,887/- was found in respect of gold and jewellery. The Coordinate Bench in the case of Choksi Hiralal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has incorporated this transaction by debiting the purchase account and crediting the income from undisclosed sources. In the annual accounts, the purchases of Rs. 70,04,814/- were finally reflected as part of total purchases amounting to Rs. 33,47,19,658/- in the profit and loss account and the same also found included as part of the closing stock amount to Rs. 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 Rs. 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, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re can be disallowed in view of the decision of Hon ble Supreme Court in case of S.A. Builders 288 ITR 1 and Hero Cycles Pvt. Ltd. vs. CIT 379 ITR 347 where it was held that the Revenue cannot justifiably claim to put itself in the armchair 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 Rs. 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. Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egenerated from business activity only since the assessee do not have any other source of income since its inception. The entire stock was accumulated out of income from jewellery business. The undisclosed business income was ploughed back into business to acquire further stock. In such a case, the excess stock could be said to have arisen out of normal business activity only and therefore, the same would be assessable as business income only in terms of decision of Hon ble Rajasthan High Court in the case of CIT vs Bajargan Traders (supra) wherein it was held that with respect to such excess stock found during the survey, it could be said that the investment in procurement of such stock was clearly identifiable and related to regular business stock of the assessee. Therefore, the same should be considered as Business Income only. In the present case, the stock difference has arisen in the course of day-to-day business activity only and not otherwise. The entire stock was available as trading stock at the business premises and it was part and parcel of regular business stock. The decision of Hon ble Supreme court in the case of Lakshmichand Baijnath vs CIT (supra) also support t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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