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Facts
During a survey under Section 133A, the assessee, a gold ornaments trading firm, was found to have excess stock. The assessee explained this as sales from previous years not recorded in books and offered it as additional income, treating it as business income. The AO, however, treated this excess stock as unexplained income under Section 69B and taxed it under Section 115BBE.
Held
The Tribunal held that the excess stock found during the survey was integral to the assessee's regular business of dealing in gold and other precious items. Since the source of this stock was clearly identifiable with the business and not linked to any other receipts, it should be treated as business income under Section 28 of the Act, not as unexplained income under Section 69B or taxed under Section 115BBE.
Key Issues
Whether excess stock found during a survey, explained as unrecorded sales from previous years, should be treated as business income or unexplained income attracting higher tax rates.
Sections Cited
133A, 69B, 115BBE, 143(1), 40b(v), 69, 28
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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI. LAXMI PRASAD SAHU & SHRI. SOUNDARARAJAN K
Per Laxmi Prasad Sahu, Accountant Member :
This appeal is filed by the Revenue against Order passed by the CIT(A) vide DIN and Order No.ITBA/APL/M/250/2024-25/1073648015(1) dated 28.02.2025, on the following grounds of appeal :
"1. In the facts and circumstances of the case, whether the Id. CIT(A) has erred in holding the excess stock found and admitted during survey action u/s 133A, as income under the Profit and Gains from Business & Profession instead of treating it as "unexplained income u/s 69B of the Act" and to tax at special rates given in section 115B13E of the IT Act."
Briefly stated, the facts of the case are that assessee is a partnership firm engaged in the business of trading in gold ornamentsetc. , filed its return of income on 10.11.2020 declaring total income of Rs.3,61,72,730/-. The return was processed under section 143(1) of the Act, on 29.03.2021. The case was selected for scrutiny under compulsory scrutiny as survey under section 133A of the Act was conducted in the case of the assessee. Accordingly, a notice was issued to the assessee and subsequently other statutory ntoices were issued to the assessee. During the course of survey under section 133A of the Act on 20.01.202, discrepancy was found in the physical stock available with the assessee and stock recorded in the books of accounts of the assessee. The differences are as under:
Statements were also recorded on 21.01.2020. As per the statements, assessee has accepted it as additional income and the same was credited into the P & L account as additional income. During the course of assessment proceedings, assessee explained the mode of obtaining and excess stock stating that it is sales in the previous Assessment Years which was not recorded in the books of accounts and the AO has also acknowledged. During the assessment proceedings, assessee also furnished the purchase and sales made during the year month wise which is extracted in the Assessment Order. The AO has relied on Page 3 of 11 various case laws in the Assessment Order and calculated the difference in amount of Rs.3,23,08,950/- as income under section 69B of the Act and applied section 115BBE of the Act.
Aggrieved from the above Order, assessee filed appeal before the learned CIT(A). During the appellate proceedings, detailed written submissions were filed relying on various judgments. The learned CIT(A) dismissed ground Nos.1 and 2 and allowed the appeal of the assessee on merits, after relying on various judgments.
Aggrieved from the Order of the learned CIT(A), the Revenue has filed appeal before the Tribunal.
The learned DR relied on the Order of the AO and submitted that the learned CIT(A) has wrongly allowed the appeal of the assessee without establishing the purchase records filed by the assessee. Without purchases, the stock cannot be recorded The assessee has simply offered it as income and credited to the P & L account nd inflated in the inventoryand assessee is unable to explain the source of the purchases of the unaccounted stocks value quantified at Rs.3,23,08,950/-. Therefore, the AO is justified in making addition and submitted that the Order of the AO should be upheld.
On the other hand, learned Counsel relied on the Order of the learned CIT(A) and submitted that the CIT(A) has considered the entire aspects of the case and has allowed the appeal of the assessee.He also relied on the judgement of the Co-ordinate bench of ITAT Bangalore in the case of DCIT CC VS Krishna Diamonds and jewellery in order dated 31.08.2023 and further submitted that the facts are similar to this judgements. Therefore, he prayed that the appeal of the Revenue shoud be dismissed.
Page 4 of 11 8. The ld. counsel during the course of hearing, the statements recorded durng the survey, proceedings were also submitted and he also submitted that the Co-ordinate Bench has decided a similar issue in for the Assessment Year 2018-19 in the case of DCIT Vs. Sri Krishna Diamond and Jewellery vide Order dated 26.07.2023 in favour of the assessee and he strongly submitted that the facts are similar to the facts of the present case and he also submitted that the AO has acknowledged that the excess stock was generated out of previous years sales, so no where the AO has pointed out that it is undisclosed income of the assessee. The assessee has no other business activity except in trading in gold, silver, bullion and jewellery. Therefore, the presumptions made by the AO that it is undisclosed income under section 69B of the Act is wrong.
Considering the rival submissios and perusing the material available on records and Orders of the authorities below, there are surveys was conducted on 20.01.2020 at the assessee’s business premises and difference was noted in the stocks found in the books of accounts and it was quantified in value at Rs.3,23,08,950/- and the AO made addition under section 69B of the Act and applied section 115BBE of the Act. However, the learned CIT(A) has allowed the appeal of the assessee and treated it as a business income after relying on various judgments. We also noted from the Order of the lower authorities regarding the difference in stock found in the business premises of the assessee. It was not found separately elsewhere, the stocks found are the integral part of business activity of the assessee. The learned CIT(A) has relied on the judgment in the case DCIT Vs. Sri Krishna Diamond and Jewellery (supra) in which it has been observed as follows, and has allowed the appeal of the assessee. “9. After hearing rival contentions, we note that the assessee is dealing in gold jewellery, silver articles, diamond, platinum, other precious stones, semi precious stones and dealing in bullion etc. A survey was conducted on 04/01/2018 and the excess stocks were found of Rs. 2,50,51,072/- . During the assessment AO treated the same as Income from other source and applied sec. 69 of the Act. The CIT(A) has allowed the appeal of the assessee by observing that the AO has not pointed out that the excess stock Page 5 of 11 has any nexus with any other receipts. After discussing in detail and considering on the some judgments, he found that the assessee is engaged in jewellery business as noted supra and no other business is carried out by the assesee. We note that the assessee has stated that excess stock is kept in the premises and it was not recorded in the books of accounts. As per the submission of the ld. AR, after the survey, the assessee has made necessary entries in its books of account and offered it as regular business income. The answer to question No.26 in the statement recorded is very much clear that the assessee has offered it as excess stock of its business assets. The AO has not further established that the excess stock found was not in the nature of business assets/income and also not pointed out any adverse information that it is not regular business income. The CIT(A) has allowed the appeal of the assessee by observing as under:- "9.0 The appellant during the course of appellate proceedings has filed written submissions in support of his claim and also relied on various judicial judgements. The relevant part of the same is reproduced as under. 14.1 As stated above, in the case of appellant, a survey u's 133A was conducted on 04.01.2018 in the business premises of the appellant which is before the end of financial year 31.03.2018. In the course of survey, value of excess stock of Gold Jewellery and silver articles was declared. The stock declared under survey was credited to the capital account of the partners of appellant. Further, the stock was found in the business premises of the appellant for which the source is income from business only. The excess stock found during the course of survey and surrender made thereof was correctly returned under the head "Business and Profession' only in the Return of Income. As stated above, the appellant is dealing in Gold jewellery, Silver articles, Diamond, Platinum and other precious / semi precious, etc., and the excess stock which has been found during the course of survey is stock of Gold jewellery and Silver articles only. Therefore, the investment in procurement of such stock of Gold jewellery and Silver articles is clearly identifiable and related to the profit of regular business of the appellant only. Therefore, the investment in the excess stock has to be brought to tax under the head "Business Income" and not under the head "Income from Other Sources" and provisions of Section 69/115BBE would accordingly be not applicable. 14.2 Even in the statement recorded u/s 133A on 04.01.2018 from the appellant at the time of survey u's 133A, the appellant had stated that the extra income offered is over and above the normal profits of the appellant firm and such income declared is to be assessed as business income only. The relevant question no. 26 along with the answers are reproduced as follows;
The complete valuation of the gold articles and other articles was done during the course of the survey and the entire valuation report was enclosed herewith as an annexure. As per the valuation report there is excess in various categories of the stock. Table The excess is appearing in the books on some of the categories as shown in the valuation report please comment- Ans: Sir, I agree that the valuation is done by government authorized valuers and also I agree that there is excess gold and silver in some of the categories. The total value of the excess gold present in the premises comes to Rs.1,00,11,072/-. Further as per the books the total silver articles present in the premises as per the books is 25,43,499.000 grams in addition, there is an excess of 376 kgs of other as kept in the premises as per the valuation report which is not accounted in. 14.3 Thus, it is clear from answer to question 26 from the statement recorded at the time of survey that the income declared is on account of excess stock found in the business premises of the appellant and accordingly appellant had declared extra income in the form of excess stock of gold jewellery and silver articles under the head Income from Business only. 15 In this regard the appellant would like to rely upon several Judicial precedents wherein it has been held that income declared under survey proceedings are to be assessed as Business income only and not as Income from other sources and consequently the provision of Section 115BBE will not apply. • CIT v/s. S.K. Srigiri 298 ITR 13(kar). • ACIT Cen Cir 13, Mumbai vs Rahil Agencies, Mumbai on 23 November, 2016 • Shri Ram Swaroop Singha7& others Vs. ACIT Circle (ITA No. 145/Jodh/2018) • Pr.CIT Vs. BaJrang Traders, C/o. Kalani and Co., • Lakshminath Baijnath Vs. CIT(1959) 35 ITR 46 (SC) • DCIT vs. Ramnarayan Bir7a • Chandigarh ITAT- Famina Knit Fabs vs ACIT (2019) 176 ITD 246 • (2021) 123 taxmann.com 8 (Jaipur- Trib.) In the ITAT Jaipur Bench `A' Hari NarainGattani vs. Deputy Commissioner of Income Tax, Circle-04, Jaipur • Hon'ble ITAT, Indore Bench, Indore in the case of M/s Shahnai V/s ITO 1(1), Ujjain, vide ITA No. 658/Ind/2014, dated 15-052015. • ACIT, Circle -1(1), Ujjain V/s M/s. A one Enclave, 3687/1, Hariphatak Road, Ujjain ITA No. 828/Ind/2018 • Chokshi Hiralal Maganlal Vs. Dy. CIT (2011) 9 taxmann.com300/45 SOT 349 (Ahd.- Trib)
Page 7 of 11 • Principal Commissioner of Income Tax vs. Deccan jewellers (P.) Ltd.dated 02- 08-2021(2021) 132 taxmann.com 73 (Andhra Pradesh)/(2021) 438 ITR 13 ( HC of Andhra Pradesh) 9.1 I have heard the AR of the appellant and duly considered the submissions made. The assessing officer has considered excess stock found during the course of survey proceedings amounting to Rs. 2,50,51,072/- as unexplained stock and the same is added back to the income under section 69 of the Income tax Act, 1961. The assessing officer has relied on the decisions of Hon'ble High Court of Rajasthan in the case of PCITAiwar vs Bajargan Traders in dated 1209-2017 and also on the decision of Hon'ble High Court of Madras in the case of M/s. SVS Oils Mills vs. The Assistant Commissioner of Income Tax in of 2018. The Hon'ble High Court of Rajasthan in the case of PCIT Alwar vs Bajargan Traders in ITA No. 258/2017 dated 12-09-2017 held as follows. 2.7. It is further submitted that the real issue in this case is whether the excess stock surrendered should be made as a part of business income or not 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 Co-ordinate Bench in case of Shri Ramnarayan Birla (in ITA No. 482/JPI15dted 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 Mangnlal vs. DCIT 131, TT) (Ahd.) 1 has held that ina cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed u/s 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as Page 8 of 11 undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is observed that there is no conflict with the decision of Hon'b]e Gujarat High Court in the case of Fakir Mohd. Jajihasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under Jany other head. Therefore, the Hon'ble Coordinate Bench held that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset falling under a particular head, then the difference should be treated as undeclared business income explaining the Investment. In the present 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 Id. CIT(A) directing the AO to treat the surrendered amount as excess stock qua the excess stock found." 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 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 unreco4rded 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, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. Accordingly, we do not see any infirmity in assessee's bringing such transaction in its books of accounts and the accounting treatment thereof Page 9 of 11 so as to regularise its books of accounts. In fact, the same provides a cred- ible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future. 2.11. Having said that, the next issue that arises for consideration is whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head "business income" or "income from other sources". In the present case, the dssessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla (supra) supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head "business income" and not under the head income from other sources" In the result, ground No. 1 of the assessee is allowed. 9.2 The Hon'ble High Court of Rajasthan in the case or PCIT Alwar vs. Bajargan Traders in (supra) has affirmed the decisions of ITAT which had held that in a cases where source of investment/expenditure is clearly identifiable and related to the regular business stock of the appellant then the investment in excess stock found during the course of survey has to be brought under the head "Business Income" and not under the head "Income from other sources". 9.3 The appellant has relied on the decision of Hon'ble High Court of Rajasthan in the case of PCIT Alwar vs. Bajargan Traders in ITA No. 258/2017 dated 12- 09-2017 and also on other various judicial decisions. It is seen that the facts of the case under consideration are similar to that of PCIT Alwar vs. Bajargan Traders in ITA No. 258/2017 dated 12-09-2017 (Supra). In the instant case, the appellant is engaged in the business of jewellery. During the course of survey excess stock amounting to Rs.2,50,51,072/- was found in respect of gold and jewellery. Further, the AO has not identified any source of income apart from the business income of the appellant, to which excess stock found during the course of survey can be attributed. In the given case, the excess stock found during the course of survey proceedings is clearly identifiable and the same is related to regular business stock of the appellant therefore, the same is to brought under the head "Business income" and not under the head "Income from other source". The AO was not justified in considering the excess stock found during the course of search as unexplained stock and assessed to tax as per the provisions of section 69 of the Income Tax Act since in the present case the excess stock was part of the stock and the AO has not pointed that Page 10 of 11 the excess stock had any nexus with any other receipts. As such, ground nos. 2 to 4 as raised by the appellant is allowed"
10. On going through the above order of the CIT(A), we do not find any infirmity in the order of the CIT(A) and he has passed a reasoned order. We further note that the case laws relied by the CIT(A) as well as the ld.AR of the assessee noted supra, supports the case of the assessee and the excess stock found during the course of survey cannot be taxed u/s 69 of the Act because excess stock was part of the regular business of the assessee and the AO has not brought on record anything to show that the excess stock has nexus with any other business receipts or that it was not the part of the regular business of the assessee. Considering the entire facts, we uphold the order of the ld. CIT(A) and dismiss the appeal of the revenue.”
We also noted that the facts are similar to the facts of the present case. We have also gone through the statements recorded under section 133A of the Act. No where it has been stated by the assessee during the course of survey that it is undisclosed income of the assessee. Assessee has stated that it is additional income of the assessee. Accordingly we hold that the additional income offered by the assessee shall be treated as business income u/s 28 of the Act,
Respectfully following the above judgment, we dismiss the appeal of the Revenue.
Pronounced in the court on the date mentioned on the caption page.