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TMI Blog2024 (5) TMI 639X X X X Extracts X X X X X X X X Extracts X X X X ..... t pointed out that the excess stock has any nexus with any other receipts other than the business being carried on by the assessee. There is thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found is clearly in nature of business income. Apparently, the AO has failed to appreciate the statement of the assessee recorded during the course of survey and other documents and findings of the survey team which are very much part of the records in correct perspective. We therefore find that the nature and source of such unaccounted stock is nothing but arising out of assessee s business operations. There is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeming provisions and has to be assessed to tax under the head business income . In absence of deeming provisions, the question of application of section 115BBE doesn t arise and normal tax rate shall apply. The AO is thus directed to assess the income under the head Income from Business/profession and apply the normal rate of tax. Assessee appeal allowed. - Shri. Aakash Deep Jain, VP And Shri. Vikram Singh Yadav, AM For the Assessee : Shri Sudhir Sehgal, Advocate For the Revenue : Smt. Amanpreet Kaur, Sr. DR ORDER PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 25/11/2022 pertaining to Assessment Year 2018-19. 2. In the present appeal, the assessee has raised the following grounds: 1. That the Ld. CIT(Appeals) 5, Ludhiana has assessed the amount of Rs. 50,53,000/- u/s 68/69A/69B and taxed the same u/s 115BBE instead of normal rates, ignoring the fact that the surrendered amount was a part of the business income of the assessee. 2. That the Ld. CIT(Appeals)5, Ludhiana has erred in confirming addition amounting to Rs. 29,23,000/- u/s 143(3) of the Income Tax Act, 1961 framing the assessment at an income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e from other sources but not as business income which itself shows that the assessee himself has not treated such surrender income as business income. Further, from the perusal of the trading account, the AO observed that the assessee had claimed expenses of equal amount of the surrender of stock of Rs. 28,53,000/- on the debit side in the manufacturing and trading account given that the assessee has not declared any business income on the credit side of the P L Account. The AO observed that the net effect is that the assessee has nullified the effect of the surrender income claimed to be income from other sources by making entry of Rs. 28,53,000/- which cannot be allowed and same was disallowed under section 37 of the Act. 3.3 Further, the AO observed that the surrender of Rs. 14,00,000/- on account of construction of building cannot be considered as part of actual cost of the building for the reason that the assessee has failed to show as to how the provision of Section 43(1)do not apply in the instant case and depreciation on the said amount @ 5% of Rs. 14,00,000/- amounting to Rs. 70,000/- was disallowed under section 32 r.w.s 43(1) of the Act. 4. Being aggrieved, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee and hence, the treatment of the assessee in the manufacturing and trading account has not resulted in nullifying the effect of surrender. Instead, the assessee has duly paid taxes on such amount of surrender under a different head of income, and as the surrender is only on account of the business of the assessee, the same is credited to the capital account of the assessee. Hence, when the tax has already been paid by the assessee on certain income, then making additions again on such income would lead to double taxation which is against the principles of natural justice and spirit of law. 6.4 It was further submitted that the additions made by the Ld. AO only on account of a mistaken view of law taken by the assessee are invalid. Reliance in this regard was placed on the judgment of Jaipur Bench of ITAT in the case of Smt. Rekha Shekhawat vs PCIT as reported in 218 DTR 161 wherein the matter has been decided in the favor of the assessee and wherein, it has been held as under: Therefore, merely because the assessee had taken the mistaken view of the correct legal position by wrongly showing such additional income under head income from other sources, of the surrounding circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 290 (Guj), Kim Pharma Pvt. Ltd. v CIT 216 Taxman 153 (P H), Famina Knit Fab v ACIT 176 ITD 246 (Chandigarh Trib.), Pr. CIT v. Khushi Ram Sons Foods (P) Ltd. In this regard, it was submitted that the said judgments are duly discussed in the judgment of the Hon ble Chandigarh Bench of ITAT in the case of M/s Khurana Rolling Mills Pvt. Ltd. (ITA No. 745/CHD/2016) as well as in the case of judgment of the Hon ble Chandigarh Bench of ITAT in the case of M/s. Bindas Foods Pvt. Ltd. in ITA No. 409/CHD/2021. 6.7 With regard to the disallowance of depreciation amounting to Rs. 70,000/-, it was submitted that the assessee has duly paid the taxes on whole amount of surrender of building to the tune of Rs. 14,00,000/-which have been surrendered by the assessee. The Ld. AO in para 5.3 of the assessment order has stated as under: 5.3 The reply filed by the assessee has been considered and is not found acceptable. The assessee himself has not declared the surrendered income in the Profit Loss Account and has shown it under the head of Income from other sources 6.8 As stated above, reliance in this regard is placed on the judgment of Jaipur Bench of ITAT in the case of Smt. Rekha Shekhawat vs PCI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO has invoked the deeming provisions of Section 69B and brought to tax excess stock found during the course of survey which is under challenge before us. It is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn t get satisfied with the explanation so offered by him. 8.1 In particular, for the deeming provisions of Section 69B to be attracted in the instant case, there has to be a finding that the assessee has made investments in the stock during the financial year and such investments are not fully recorded in the books of accounts so maintained by the assessee, and the assessee offers no explanation about the nature and source of the investments or the explanation so offered is not found satisfactory in the opinion of the AO, the latter can proceed and the value of the investment may be deemed as income of the assessee for such financial year. Therefore, the explanation so offered by the assessee exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e recorded during the course of survey and other documents and findings of the survey team which are very much part of the records in correct perspective. We therefore find that the nature and source of such unaccounted stock is nothing but arising out of assessee s business operations. No doubt, these transactions were not recorded at the time of survey thus qualify as unrecorded transactions satisfying one of the essential conditions, at the same time, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and the necessary nexus with assessee s business has been established, thus, it cannot be said that these are unexplained transactions thus, doesn t satisfy the second condition for invoking the deeming provisions of section 69B of the Act. 8.3 In case of Chokshi Hiralal Maganlal vs. DCIT, 131 TTJ (Ahd.) 1, briefly the facts of the case before the Coordinate Ahmedabad Benches were that during the course of survey under section 133A which was carried out at the premises of the assessee, excess stock of gold and silver ornaments were found and in the return of income subsequently filed by the assessee, he had included the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck or unaccounted stock. No such physical distinction was found by the Revenue either. The assessee has repeatedly claimed that unaccounted business income is invested in stock and there is no amount separately taxable under section 69. The department has ignored this claim of the assessee and sought to tax the difference between book-stock and physical-stock as unaccounted investment under section 69 without considering the claim of the assessee that first the business receipt has to be considered and then investment should be treated as coming out of such unaccounted income. The difference in stock so worked out by the authorities below had no independent identity of its own and it is part and parcel of entire lot of stock. The difference between declared stock in the books and what is physically found would only be a mathematical expression in terms of value and not a separate independent identifiable asset. Therefore, it cannot be said that there is an undisclosed asset existed independently. Once this is so then what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset. 13. Thus in a case where sou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot have a direct nexus with business and therefore investment therein has to be considered under section 69 only. 15. In view of the above, AO is directed to consider the sum of Rs. 8,10,011/- as undisclosed business income assessable under the head business and other two sums under section 69. The business income including application of section 40(b) has to be considered accordingly. For calculation of income in view of our above observations, we restore the matter to the file of AO. 8.4 In the instant case as well, we find that the difference in stock so found out by the authorities has no independent identity and is part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific asset and the difference should thus be treated as undeclared business income. 8.5 Following the said decision of the Coordinate Ahmedabad Bench, the Jaipur Bench in case of DCIT Vs. Shri Ram Narayan Birla (ITA No. 482/JP/2015 dt. 30/09/2016) has taken a similar view holding that the excess stock so foun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore, we do not find any fault with the decision of the ld. CIT (A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found. 8.6 Thereafter, the Coordinate Jaipur Benches in case of Bajargan Traders Vs. ACIT (in ITA No. 137/JP/2017 dt. 17/03/2017) has similarly held as under: 2.10. We have heard the rival contentions and perused the material available on record. During the course of survey, the assessee has surrendered an amount of Rs. 70,04,814/- towards investment in stock of rice which had not been recorded in the books of accounts. Subsequently, in the books of accounts, the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld as under: 10. We have heard the rival contentions and perused the material available on record. This is a fact on record that the assessee surrendered an amount of Rs. 70 lacs as additional income during the course of survey conducted at its premises on account of following heads: (i) Discrepancy on account of cash found Rs. 9 lacs (ii) Discrepancy on cost of construction of building Rs. 21 lacs (iii) Discrepancy in stock Rs. 10 lacs (iv) Discrepancy in advances and receivable Rs. 30 lacs 11. These facts have not been disputed by any one at any stage. The only issue to be considered by us is whether the income of Rs. 70 lacs surrendered is to be taxable as business income or income from other sources or as deemed income under sections 69A, 69B and 69C of the Act as held by the Assessing Officer. A number of judicial pronouncements have been cited during the course of hearing, however, we have to bow down to the proposition laid down by the Jurisdictional Punjab Haryana High Court in the case of M/s Kim Pharma Pvt. Ltd.(supra) since this is the only judgment of the Jurisdictional High Court which were brought to our notice. 12. On perusal of the said judgment, we find ourselves i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g to the surrender made by the assessee stating that during survey a pocket diary was found from the account section of the assessee company which contained entry of receivables amounting to Rs. 1.25 crores on pages 27, 28, 31 and 33, which were not recorded in the regular books of the assessee and were subsequently surrendered stating that these entries were unaccounted sundry receivables being surrendered as income under the head business, to buy piece of mind and subjected to no penalty and further that the losses incurred by the assessee in the impugned year will be adjusted against this surrendered income. The relevant facts as stated by the CIT(A) in para 9 of his order and which are not disputed, are reproduced hereunder: 9. Adverting now to the facts of the instant case, it is seen that when survey proceedings were conducted at the business premises of the appellant company, a pocket diary was found from the accounts section which contained entries of receivables amounting to Rs. 1.25 crores on page nos. 27, 28, 31 and 33, which were not recorded in the regular books of accounts. When these entries were confronted to the appellant company while recording the statement on 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A No.408/Chd/2018 is dismissed. 23. Now coming to the facts of the case in ITA No/1494/Chd/2017, the income surrendered was on account of the following as narrated above in earlier part of our order: (i) investment of Rs. 60 lacs in Kothi at Sukhmani Enclave in the name of Smt. Rekha Miglani; (ii) Sundry creditors and advances received from customers amounting to Rs. 132 lacs; (iii) Gross profit on sale out of books amounting to Rs. 198 lacs and; (iv) surrender to cover miscellaneous discrepancies in loose papers etc. amounting to Rs. 10 lacs. 24. As far as the surrender made on account of investment in Kothi of Rs. 60 lacs, neither is the same disclosed in the books of the assessee nor source of the same disclosed. Therefore, the same is to be assessed as deemed income u/s 69 of the Act. The same applies to the surrender of Rs. 10 lacs made to cover the miscellaneous discrepancies in loose paper of Rs. 10 lacs. Neither the nature of the discrepancies, nor any source relating to the same has been disclosed and, therefore, the same is also to be assessed as deemed income u/ss 69, 69A, 69B and 69C of the Act. 25. As far as the surrender of Rs. 132 lacs made on account of sundry credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lery and Silver articles and during the search and seizure operation u/s 132, excess stock was found to be declared and the assessee had submitted that excess stock was result of suppression of profit from business over the years and the same had not been kept identified separately and the AO had duly considered and accepted the assessee s explanation that investment in excess stock was to be treated as business income, the revisional powers invoked by the Principal Commissioner u/s 263 of the Act were not correct in the eyes of law. 10.19 The ITAT Chandigarh Bench in the case of Famina Knit Fabs Vs. ACIT reported in (2019) 176 ITD 246 (Chd-Trib) has held that, wherein during the course of survey, a surrender was made by the assessee on account of debtors / receivables which was based on a diary found during the course of survey and the Revenue had accepted that the surrender was on account of receivables, it followed that the debtors were generated from the sales made by the assessee during the course of carrying on the business of the assessee which was not recorded in the books of the assessee. The Coordinate Bench of the ITAT went on to further hold that though the said income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, we respectfully state that judgement of the Hon ble Punjab and Haryana High Court in the case of Kim Pharma Pvt. Ltd (supra) would not apply on the facts of the present case. 10.23 Accordingly, keeping in view the various judicial precedents as cited above and respectfully following the same, we hold that the AO could not have legally invoked the provisions of section 115BBE of the Act in the present case and further the Ld. CIT(A) was also not legally correct in upholding of the application of provisions of section 115BBE of the Act. Accordingly, ground Nos. 8 and 9 are also allowed. 8.12. In the instant case as well, there is no physical distinction between the accounted stock and unaccounted stock. No such physical distinction was found by the Revenue either. We therefore find that the difference in stock so found out by the authorities has no independent identity and is in terms of value terms only and thus part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset which existed independently and thus, what is not declared to the department is receipt from business and not any investment as it cannot be co-related with any specific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. At the same time, it is also a matter of record that the assessee has not retracted from the said surrender either as part of filing of the return of income or during the assessment proceedings and even before us, no such prayer has been made. Therefore, the fact that the assessee has honoured the surrender so made inspite of the fact that there is no corroborative material against the assessee, the same can t be held against the assessee and more so, cannot form the basis for invocation of deeming provisions as has been done in the instant case as the conditions stated therein are not satisfied. Merely the fact that survey has taken place and certain expenditure on estimated basis has been surrendered doesn t satisfy the requirements for invoking the deeming provisions as has been done in the instant case. Accordingly, the order of the ld CIT(A) is set-aside and the AO is directed to tax the surrendered income at normal rates as applicable to the business income. 8.16 Coming to the related issue of disallowance of depreciation on such cost of construction, we find that there is no legal and justifiable basis to disallow the depreciation. Once the assessee has surrendered the am ..... 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