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Facts
During a survey, discrepancies were found regarding excess stock, cash, and expenditure on furniture. The assessee, engaged in footwear retail, accepted these as additional income. The Assessing Officer taxed this under specific sections taxing unexplained income, while the assessee claimed it was business income.
Held
The Tribunal held that since the assessee's sole business was footwear retail and no other activity was found, the additional income declared during the survey should be treated as business income, not unexplained income attracting higher tax rates.
Key Issues
Whether additional income declared during a survey, arising from stock, cash, and expenditure discrepancies in a sole proprietorship business, should be taxed as business income or as unexplained income under specific penalty provisions.
Sections Cited
133A, 131, 143(1), 143(2), 142(1), 139, 69C, 69, 115BBE, 69B, 69A
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Income Tax Appellate Tribunal, PUNE BENCH “A”, PUNE
Before: SHRI R. K. PANDA & MS. ASTHA CHANDRA
This appeal filed by the Revenue is directed against the order dated 29.04.2024 of the Ld. CIT(A) / NFAC relating to assessment year 2017-18.
Facts of the case, in brief, are that the assessee is an individual and engaged in footwear business on retail basis under the name and style of M/s. Patel Shoes Company. She filed her return of income on 29.11.2017 declaring total income of Rs.3,57,16,860/- which was duly processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’). Subsequently, the case was selected for limited scrutiny under CASS. Accordingly, statutory notices u/s 143(2) and 142(1) of the Act were issued and served on the assessee in response to which the assessee filed the requisite details.
During the course of assessment proceedings the Assessing Officer noted that a survey action u/s 133A of the Act was conducted in the case of the assessee on 15.03.2017 during which certain incriminating documents were found. On the basis of these documents the authorized officer had observed that the assessee has excess stock of Rs.3,20,25,540/-, excess cash of Rs.9,55,920/- and excess expenditure made on furniture and fixtures for Rs.19,98,263/- which were not recorded in the books of account. On being confronted by the survey party regarding these discrepancies, the son of the assessee Shri Sayyed Minhaj Sayyed Baba Patel in his statement recorded on oath u/s 131 of the Act accepted the said discrepancy and agreed to offer the same as additional income all totaling to Rs.3,49,79,723/- (i.e. Rs.3,20,25,540/- + Rs.9,55,920/- + Rs.19,98,263/-).
The Assessing Officer noted that the assessee has offered the additional income disclosed amounting to Rs.3,49,79,723/- in the return filed u/s 139 of the Act under the head ‘Income from other sources’ at normal rate of tax. Since there was no explanation offered by the assessee about the source for the expenditure towards furniture and fixtures for Rs.19,98,263/- and excess stock of Rs.3,20,25,540/-, the Assessing Officer proceeded to tax the same by invoking the provisions of section 69C / 69 r.w.s. 115BBE of the Act. He, therefore, asked the assessee to explain as to why the excess stock found during the course of survey action amounting to Rs.3,20,25,540/- and the unexplained expenditure on furniture and fixtures at Rs.19,98,263/- shall not be brought to tax u/s 69 r.w.s. 115BBE of the Act and u/s 69C r.w.s. 115BBE of the Act respectively. Rejecting the various explanations given by the assessee the Assessing Officer held that the income offered during the survey action u/s 133A(1) of the Act by the assessee amounting to Rs.19,98,263/- as unexplained expenditure under the provisions of section 69C r.w.s. 115BBE of the Act and the unexplained stock of Rs.3,20,25,540/- be taxed under the provisions of section 69 r.w.s. 115BBE of the Act.
Before the Ld. CIT(A) / NFAC the assessee challenged the applicability of the provisions of section 115BBE of the Act. It was argued that the Assessing Officer was not justified in assessing the additional income declared during the course of survey action u/s 133A of the Act as unexplained u/s 69 / 69C and taxing the same u/s 115BBE of the Act. It was argued that the assessee’s only source of income was from retail trading in shoes and the income is from business activity. It was further submitted that the assessee had inadvertently declared the above income under the head ‘Income from other sources’ instead of ‘business income’. Since the assessee had no other source of income other than the business income, therefore, the additional income so offered during the course of survey has to be treated as business income. Relying on various decisions it was argued that the additional income declared during survey action should be assessed as normal business income and there is no question of applicability of provisions of section 115BBE of the Act.
Based on the arguments advanced by the assessee, the Ld. CIT(A) / NFAC deleted the additions made by the Assessing Officer by observing as under:
“5.9 I have considered the arguments of the AO while making the assessment and the submissions of the appellant. It is noted that the survey u/s 133A took place on 14.03.2017 and a stock inventory was prepared and tallied with the trading account of the appellant. There is no finding by the AO in the assessment order that the appellant was engaged in any other activity other than the business of retail of shoes. The AO assessed the excess investment in stock and excess expenditure in the furniture at the business premise under section 69 and section 69C respectively. However, no case or justification of assuming the excess stock / unexplained in furniture to be from unexplained sources other than business income has been made out. In view of this and respectfully following the various judicial pronouncements of higher authorities, it is held that the AO has wrongly assessed the additional income offered by the appellant under section 69 & 69C instead of assessing it as business income. 5.10 Hence, the action of the AO in applying the provisions of section 115BBE to the case of the appellant is held to be based on wrong appreciation of facts. Hence, the AO is directed to assess the income under the head business income only and under normal provisions of the tax. As a result the appellant succeeds on ground No. 1 & 3 and the same are hereby allowed.”
Aggrieved with such order of the Ld. CIT(A) / NFAC, the Revenue is in appeal before the Tribunal by raising the following grounds:
1. Whether based on facts and circumstances of the case and in law, the CIT(A), NFAC erred in holding that additional income of Rs.3,20,25,540/- offered by the assessee on account of unexplained stock should be taxed under the head business income?
2. Whether based on facts and circumstances of the case and in law, the CIT(A), NFAC erred in holding that additional income of Rs.19,98,263/- offered by the assessee on account of unexplained expenditure should be taxed under the head business income?
8. The Ld. DR strongly challenged the order of the Ld. CIT(A) / NFAC in holding the additional income offered by the assessee on account of unexplained stock of Rs.3,20,25,540/- and the additional income of Rs.19,98,263/- offered by the assessee on account of unexplained expenditure towards furniture & fixtures under the head ‘Business income’. He submitted that the assessee during the course of survey action could not satisfactorily explain the source of such unexplained stock and unexplained expenditure on account of furniture and fixtures. The Ld. CIT(A) / NFAC has no power to change the nomenclature i.e. ‘Income from other sources’ declared by the assessee to treat the same as ‘Business income’. He accordingly submitted that the order of the Ld. CIT(A) / NFAC be reversed and that of the Assessing Officer be restored.
9. The Ld. Counsel for the assessee on the other hand while supporting the order of the Ld. CIT(A) / NFAC submitted that the cash so found during survey action was out of business income and no query was raised by the survey team regarding the source of cash and they have confined their questions to the discrepancies in the stock and discrepancies in the expenditure towards furniture and fixtures.
10. Referring to the copy of the statement recorded during the course of survey, copy of which is placed at pages 1 to 7 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the question Nos.16 and 17 which read as under: “Q.No.16 During the course of survey action under section 133A of the Act in your premises a cash to the extent of Rs.9,86,450/- was inventorised. While as per your tentative balance sheet cash in hand is shown at Rs.30,530/- kindly explain the difference between the same? Ans. The source of entire cash found is out of business regularly done by me. As per the tentative balance sheet, cash in hand is Rs 30,530/- however excess cash found at Rs.9,55,920/- is also from my business income. Therefore in this regard, I hereby voluntarily declare the difference amount of Rs.9,55,920/- as additional income over and above the regular income during the financial year 2016-17 relevant to the assessment year 2017-18. No.17 During the course of survey action under section 133A of the Act in your premises a stock to the extent of Rs.4,18,80,040/- is inventorised as annexed while as per your tentative trading account closing stock is shown at Rs.98,54,500/- kindly explain the difference of Rs.3,20,25,540/- between the same? Ans. The survey team has inventorised the stock physically at Rs.4,18,80,040/- is correct. However I could not explain the excess stock found at Rs 3,20,25,540/-. Therefore in this regard, I hereby voluntarily declare the difference amount of Rs.3,20,25,540/- as additional income over and above the regular income during the financial year 2016-17 relevant to the assessment year 2017-18.”
He submitted that the survey team has prepared a tentative trading account and computed tentative GP account and there was no physical demarcation. Since the assessee is not well educated, her son was questioned who accepted the discrepancies and offered the same to tax as additional income. He submitted that the assessee has credited the additional income to his capital account by increasing the stock and furniture & fixtures. Further, closing stock of this year has become the opening stock of the subsequent year. He submitted that simply because the assessee erroneously offered the additional income as income from other sources, it cannot change the colour. Relying on the following decisions, he submitted that under identical circumstances the Tribunal has considered such additional income declared during survey as normal business income and that the provisions of section 115BBE of the Act are not applicable to such additional income: i) Yash Construction Co. vs. ACIT vide & 677/PUN/2024 for assessment years 2017-18 & 2018-19, order dated 31.07.2024 ii) Late Harilal Mavjibhai Patel vs. ACIT vide for assessment year 2019-20, order dated 25.04.2025
iii) Vijay Shriram Gundale vs. ACIT & Two Ors vide to 81/PUN/2023 for assessment year 2019-20, order dated 03.08.2023
He accordingly submitted that the order of Ld. CIT(A) / NFAC be upheld and the grounds raised by the Revenue be dismissed.
We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) / NFAC and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find in the instant case a survey action u/s 133A of the Act was conducted in the business premises of the assessee during which various discrepancies were found on account of stock, cash in hand and expenditure towards furniture and fixtures. The assessee when confronted, offered the same as additional income, the details of which are as under: Sr. No. Disclosure Amount (Rs.) 1 Declaration on account of excess stock 3,20,25,540/- 2 Declaration on account of excess cash 9,55,920/- 3 Investment in furniture 19,98,263/- -------------- Total 3,49,79,723/-
We find the Assessing Officer in the assessment order rejected the explanation of the assessee that the same be assessed to tax as normal business income and brought the same to tax u/s 69 / 69C r.w.s. 115BBE of the Act. When the assessee challenged the action of the Assessing Officer in bringing to tax the additional income declared during the course of survey u/s 69 / 69C r.w.s. 115BBE of the Act as against the normal business income, the Ld. CIT(A) / NFAC allowed the appeal of the assessee by holding that the Assessing Officer has wrongly assessed the additional income offered by the assessee u/s 69 / 69C of the Act instead of assessing it as business income, the reasons of which have already been reproduced in the preceding paragraphs.
We do not find any infirmity in the order of the Ld. CIT(A) / NFAC on this issue. It is an admitted fact that the assessee is engaged in footwear business on retail basis under the name and style of M/s. Patel Shoes Company. The Revenue has no other information or material that the assessee is engaged in any other activity other than the shoe business on retail basis. Under these circumstances, we have to see as to whether the income so offered during the course of survey u/s 133A has to be taxed as normal business income or unexplained investment / unexplained expenditure u/s 69 / 69C r.w.s. 115BBE of the Act.
We find an identical issue had come up before the Co-ordinate Bench of the Tribunal in the case of Vijay Shriram Gundale vs. ACIT vide Vidyatai Vijay Gundale vs. ACIT vide and Rajiv Shriram Gundale vs. ACIT vide ITA No.81/PUN/2023, common order dated 03.08.2023 for assessment year 2019-20. We find the Tribunal following the decision of Hon’ble Rajasthan High Court in the case of Bajargan Traders reported in (2017) 86 taxmann.com 295 (Rajasthan) reversed the order of the Ld. CIT(A) and directed the Assessing Officer to consider the excess stock found during the course of survey as normal business income instead of attracting the provisions of section 69B r.w.s. 115BBE of the Act. The relevant observations of the Tribunal read as under: “7. Heard both the parties and perused the material available on record. There is no dispute regarding offering of additional income on account of excess stock for an amount of Rs.37,00,000/- during the course of survey. We note that as rightly pointed by the ld. AR which is not disputed by the ld. DR crediting the said additional income to profit and loss account and by including in the computation of income in the total income of the assessee which clearly demonstrate the assessee offered the same as business income. The ld. AR vehemently submitted the assessee explained the difference in valuation stock as per the books explained by the assessee through answers to Q. Nos. 10 and 11 of the statement u/s. 131 of the Act and also in response to notice invoking the provisions u/s. 115BBE of the Act during the course of assessment proceedings. We note that the Q. No. 10 is reproduced by the CIT(A) at page No. 10 of the impugned order and on perusal of the same, we note that the assessee explained the difference of Rs.37,00,000/- as stock purchased on high demand during the marriage seasons and bills will be received late. Therefore, it can be fairly concluded that the excess stock as found during the course of survey is nothing but business income flowing from assessee’s regular business.
The Hon’ble High Court of Rajasthan in the case of Bajargan Traders reported in (2017) 86 taxmann.com 295 (Rajasthan) was pleased to observe that the amount surrendered under unrecorded stock has to be brought to tax under the head “business income” as the excess stock which has been found during the course of survey is the investment in procurement of such stock is clearly identifiable and related to the regular business stock of the assessee. The Hon’ble High Court clearly held the investment in excess stock has to be brought to tax under the head “business income” but not under the head “income from other sources”. The Mumbai Benches of the Tribunal in the case of Govind Godomal Lulla (supra) held undisclosed investment in the case of excess stock found during carrying on business and the same is generated out of business income, no provisions of section 69B of the Act would attract. Further, the Jodhpur Benches of the Tribunal in the case of Shri Lovish Singhal (supra) held the excess stock/cash found during the course of survey is taxable under the business and no provision u/s. 115BBE of the Act is attracted. In the present case as discussed above without any dispute the assessee offered additional income under excess stock during the course of survey and same was entered in the books of account as on the last day of financial year ending on 31-03-2019 and offered the said amounts to tax under the business income. Therefore, in our opinion, the ratio laid down by the Hon’ble High Court of Rajasthan in the case of Bajargan Traders (supra) which was followed by the Jodhpur Benches of Tribunal is similar and identical to the issue in the present case. Therefore, the CIT(A) is not justified in confirming the order of AO in excluding the alleged additional income offered during the course of survey and attracting the provisions u/s. 69B of the Act, consequently, the charging u/s. 115BBE of the Act. Thus, the order of CIT(A) is set aside and the grounds raised by the assessee are allowed.
The ld. AR submits that the assessee is not interested to prosecute additional grounds. Hence, the same are dismissed as not pressed.
In the result, the appeal of assessee is allowed.”
We find similar view has been taken by the Tribunal in the case of Yash Construction Co. vs. ACIT (supra) and in the case of Late Harilal Mavjibhai Patel vs. ACIT (supra). Respectfully following the above decisions and considering the fact that the only source of income of the assessee is from retail shoe trading and no other business activity has been found by the Revenue either during survey action or subsequently, therefore, the additional income so declared during the course of survey action has to be considered as business income to be taxed at normal rate instead of applying the provisions of section 69 / 69A / 69B / 69C r.w.s. 115 BBE of the Act. We, therefore, uphold the order of the Ld. CIT(A) / NFAC and dismiss the grounds raised by the Revenue.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open Court on 22nd May, 2025.