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Facts
During a survey, excess stock worth Rs. 75,03,652/- was found. The assessee claimed this excess stock was due to purchases from unaccounted business income. The Assessing Officer rejected the books of account under Section 145(3) and added the excess stock and a further amount of Rs. 24,98,345/- to the total income.
Held
The Tribunal noted that the partner's statement indicated the excess stock was from unaccounted purchases and was voluntarily disclosed and taxed. The books of account were audited and regularly maintained, and no specific defects were pointed out to justify their rejection. The Tribunal relied on a Gujarat High Court judgment stating that regular maintenance and audit of accounts with no material brought on record to establish inflated expenses or suppressed sales preclude invoking Section 145(2) or 145(3).
Key Issues
Whether the Assessing Officer was justified in rejecting the assessee's books of account and making additions based on the survey findings, particularly regarding excess stock.
Sections Cited
143(3), 69C, 115BBE, 145(3), 131(1A), 133A, 44AB, 145(2)
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Income Tax Appellate Tribunal, RAJKOT BENCH, RAJKOT
Before: DR. ARJUN LAL SAINI & SHRI DINESH MOHAN SINHA
�नधा�रती क� ओर से/Assessee by : Shri Mehul Ranpura, ld.AR राज�व क� ओर से/Revenue by : Shri Abhimanyu Singh Yadav, Sr-DR सुनवाई क� तार�ख /Date of Hearing : 30/06/2025 घोषणा क� तार�ख /Date of Pronouncement : 11/09/2025 ORDER Per, Dr. Arjun Lal Saini, Accountant Member: Captioned appeal filed by the assessee, pertaining to Assessment Year (AY) 2017-18, is directed against the order passed by the Learned Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre, Delhi[in short ‘Ld.CIT(A)/NFAC’], under section 250 of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’), dated 07.05.2024, which in turn
Grievances raised by the assessee, which are interconnected and will be taken up together, are as follows:
“1. The grounds of appeal mentioned hereunder are without prejudice to one another.
2. The ld. Commissioner of Income-tax (Appeals), National Faceless Appeal Centre, Delhi (hereinafter referred to as the "CIT(A)"] in dismissing appeal ex-parte.
3. The ld. CIT(A)in confirming rejection of book results and thereby confirming the estimated addition on account of suppressed sales and profit.
4. The ld. CIT(A)erred on facts as also in law in retaining addition of Rs.24,98,345/- by estimating profit at Rs.1,05,09,124/- as against profit declared of Rs.80,10,779/- in return of income filed for the assessment year under consideration. The addition confirmed is unjustified and uncalled for, which deserves to be deleted and may kindly be deleted.
5. Your Honour's assessee craves leave to add, to amend, alter, or withdraw any or more grounds of appeal on or before the hearing of appeal.”
3. Succinctly, the factual panorama of the case is that assessee before us is a Firm. In this case, return of income for assessment year (AY) 2017-18 declaring, total income of Rs. 81,08,690/- was e-filed, on 31/10/2017. The return of income so filed, was processed u/s 143(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). Since the books of accounts of the assessee were liable to get audited u/s. 44AB of the Act, audit report in Form No. 3CB & 3CD, dated 27/10/2017 were also e-filed on E-filing portal, by the assessee. A survey conducted during the previous year revealed a discrepancy in stock, with excess stock worth Rs. 75,03,652/- found. Consequently, the return was selected for scrutiny. The assessee failed to provide certain documents such as the Acknowledgment of ITR and signed confirmation for a specific (AY : 2017-18) 3 transaction. The excess stock disclosed during the survey was considered as unexplained expenditure under Section 69C, to be taxed under Section 115BBE, as the source of expenditure was not satisfactorily explained by the assessee. The assessing officer also noticed that net profit percentage for the year decreased significantly compared to the previous year. Therefore, the books of accounts were rejected, by the assessing officer, under Section 145(3) due to the discrepancies found during the survey. The disclosed amount of Rs. 75,03,652/- was treated as unexplained expenditure and added to the total income, to be taxed under Section 115BBE. Further, the net profit percentage for the year was computed, and the difference was added to the total income, as Rs. 24,98,345/-. Therefore, assessing officer made the total addition to the tune of Rs. 1,00,01,997/-(Rs. 75,03,652 + Rs. 24,98,345).
4. Aggrieved by the order of the assessing officer, the assessee carried the matter in appeal before the ld.CIT(A), who has confirmed the action of the assessing officer. The ld.CIT(A) noted that what has been found during survey is excess stock of the business of the assessee, being derived from the undisclosed business income of the assessee. Therefore, excess stock amount of Rs. 75,03,652/- is to be treat as undisclosed business income of the assessee. As regard, the ground relating to rejection of the books of accounts, the ld CIT(A) observed that this issue has not been controverted by the assessee in appeal. Hence, the action of the assessing officer was confirmed by ld.CIT(A). The ld.CIT(A) also confirmed the addition of Rs. 24,98,345/-.
5. Aggrieved by the order of the Ld. CIT(A), the assessee is in further appeal before us.
(AY : 2017-18) 4 6. Learned Counsel for the assessee submitted that during the course of survey proceedings excess stock of raw materials and semi-finished goods valuing to Rs. 75,03,652/- was found. In this connection, the statement of one of the partners of firm namely Shri Naman C. Saradava was recorded u/s 131(1A) of the Act on 22.06.2016 wherein he had categorically stated that such excess stock was part and parcel of the business stock which was earned out of unaccounted business income. Thus, the statement recorded during survey, the Partners have vide answer to question no. 12 stated that an amount of Rs. 90,02,282/- was earned by the Firm during the previous year relevant to assessment year under consideration and from out of such income, it had purchased stock of raw materials and remained to be accounted for in the books of account at the point the survey team conducted inquiry. Further, a detailed working of such excess stock was furnished to the survey team at the time of survey. From such working, an income of Rs. 75,03,652/- was worked out and then offered for taxation, therefore, addition made by the assessing officer may be deleted.
The ld. Counsel further argued that in response to the notices issued, by the assessing officer, the assessee has e-filed its written submission from time to time against the queries/clarification asked by the assessing officer. The assessee has submitted copy of audited account, break up of direct & indirect expenses for Pre & Post survey period, copy of VAT return, details of sundry creditors & debtors, details of bank accounts held in the name of firm, copy of cash book for FY 2016-17 and details of loans/advances given, and books of accounts etc. Therefore, ld.Counsel submitted that before rejecting books of account, the assessing officer has to dissatisfy himself regarding: (1) correctness or completeness of accounts; or (2) method of accounting provided in sub section (1) has not been regularly followed, or (3) income has not been (AY : 2017-18) 5 computed in accordance with the standards notified under sub-section (2)(iii). In the present case, there is no any condition is applicable to the assessee. Therefore, mere doubting regarding book's result does not empower the assessing officer automatically to reject the books of accounts. Therefore, the net profit percentage for the year computed, by the assessing officer should be rejected and the difference added to the total income, as Rs. 24,98,345/-, by the assessing officer, should be deleted.
However, Ld. D.R. for the Revenue submitted that the Assessing Officer has passed a reasoned order and speaking order and explained the entire facts of the assessee by taking into account, the entire documents and evidences filed by the assessee. The Ld. Sr. D.R. also submitted that during the survey proceedings discrepancy was found in the stock and excess stock worth Rs. 75,03,652/-, was found by the survey team. The assessee has failed to explain the source of excess stock disclosed during the survey. That is, the assessee has failed to explain the source of expenditure, for such excess stock, therefore the Assessing Officer has rightly rejected the books of accounts u/s. 145(3) of the Act and estimated the profit also in accordance with law. Therefore, the Ld. Sr. D.R. for the Revenue submitted that the addition made by the Assessing Officer should be upheld.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. The assessee, a partnership firm. It is engaged in the business of manufacturing ceramic clay and chemical mixture and other allied items. The assessee is (AY : 2017-18) 6 maintaining regular books of account which are duly audited as per the provisions of section 44AB of the Income-tax Act, 1961 (hereinafter referred to as the "Act").A survey action u/s 133A of the Act was carried out at the business premises of the assessee -firm on 22.06.2016. During the course of survey proceedings, excess stock of raw materials and semi-finished goods valuing to Rs. 75,03,652/-, was found. In this connection, the statement of one of the partners of firm namely Shri Naman C. Saradava was recorded u/s 131(1A) of the Act on 22.06.2016 wherein he had categorically stated that such excess stock was part and parcel of the business stock which was earned out of unaccounted business income. During the course of assessment proceedings, the assessing officer on the basis of excess stock found during the survey proceedings alleged that the books of account of the assessee are not reliable and accordingly should be rejected vide provisions of section 145(3) of the Act. Further, the assessing officer also alleged that the assessee has failed to explain the source of expenditure towards purchase of unaccounted business stock and should be taxed under provisions of section 115BBE of the Act. During the assessment proceedings, the assessee submitted that the partner of the firm Shri Naman C. Saradava has in his statement recorded u/s 131(1A) of the Act clearly stated that the difference in stock being excess stock of Rs. 75,03,652/- is generated from unaccounted purchase made from unaccounted business income of the assessee firm. Further, during the course of assessment proceedings, the assessee- firm also submitted that stock found pertained to the same commodity which the assessee is dealing in therefore the same should be considered as business income. Thus, prima facie, the source of the excess stock found, was from the business of the firm. The stock found was the same commodity in which the assessee dealt. However, assessing officer rejected the above contention of the assessee and made addition to the tune of Rs. 75,03,652/-. However, the assessing officer also without taking into the cognizance of the (AY : 2017-18) 7 statement recorded of the partner during the survey proceedings, alleged that the assessee has failed to explain the source of acquisition of unaccounted business stock of Rs 75,03,652/ and accordingly taxed the same as unexplained expenditure u/s section 69A r.w.s. 115BBE of the Act. The assessing officer at para 11.1 of the assessment order has stated that it is an admitted fact of the case that excess stock of Rs.75,03,652/- was found and same was admitted by the assessee and incorporated in the books of accounts. When stock was not correct it cannot be inferred that the books of account were properly maintained. Moreover, in view of the above major defects which are apparent in the books of accounts the book result as offered by the assessee cannot be accepted as it is and the provisions of section 145 are clearly attracted to the facts of the instant case. The assessing officer further stated that ITAT, Ahmedabad Benches in dated 12/02/2005, dated 30/10/2001 and ITA No. 4248/Ahd/95 DCIT Vs Suresh Scrap Pvt Ltd dated 02/11/2001 has taken a view that the total profit should be current year profit plus amount of disclosure. The assessing officer accordingly rejected the books of account u/s. 145(3) of the Income Tax Act. The assessing officer then held that if the net profit @3.92% [of AY 2016-17] is applied to the current years turnover the net profit will be Rs.30,05,472/-(exclusive survey disclosure). To this the disclosure made by assessee during the course of survey i.e. Rs. 75,03,652/- requires to be added as per the ration of the Ahmedabad benches of the Tribunal which would give the total income of Rs. 1,05,09,124/- (Rs.7503652+ Rs.3005472). Therefore, the assessee has offered lower income by Rs.24,98,345/- (Rs.1,05,09,124- Rs.80,10,779) which is worked out after considering the profitability for preceding previous year which was added to the total income of the year.
(AY : 2017-18) 8 10. We note that the assessee, under consideration, offered current year's profit on the turnover excluding the disclosure in the trading account and the disclosure of Rs. 75,03,652/- has also been offered separately under the head ‘Other Income’ at schedule P6 of the profit and loss account which are duly audited u/s 44AB the Act. Besides, merely by assuming that net profit ratio of the year under consideration was lower as compared to immediately preceding previous year, the assessing officer is not automatically authorised to conclude that the books of account are not giving true and correct picture. The Books of account were duly audited under section 44AB of the Act and nothing were reported which established that books of account are not reliable, for that we rely on the judgement of the Jurisdictional Hon'ble Gujarat High Court in the case CIT vs. Vikram Plastic & Ors 239 ITR 161, 163, where in it was held as follows:
"In view of the finding reached by the Tribunal that there were no discrepancies or defects pointed out in the books of account and further that they were regularly maintained and also on the finding that there was no material brought on record to establish that purchase expenses were inflated or sales suppressed and also in view of the finding that this was not a case that there was no method of regular accounting employed, the Tribunal was fully justified in coming to the conclusion that the Provisions of 145(2) count not be invoked” Therefore, assessee's books of account could not be rejected by invoking provisions of section 145(3) of the Act when there is no specific defect pointed out in the books of account maintained by the assessee following a regular method of accounting and these books of accounts are audited and assessee maintains stock register, cashbook, bank book, ledger account of parties, and debtors and creditors were reflecting correctly.
We also note that during the survey, inventory of stock of raw materials, semi -finished goods, finished goods was taken and total of that physically counted inventory was compared with the statement of stock furnished by the (AY : 2017-18) 9 assessee, on the day of survey. In the course of survey statement of partner Shri Namanbhai Chaturbhai Saradava was recorded on 22.06.2016. The assessing officer in charge of survey party vide Q. 12 has asked as under:
Question. 12 In the course of survey as per the valuation made by Government approved Valuer BEST APPRAISAL CONSULTANTS stock of Rs. 98,46,181/- was physically found whereas as per stock statement produced by you, the stock as at 22.06.2016 comes to Rs. 23,42,529/-. Please explain the difference of stock of Rs. 75,03,652/-.
Ans. Sir, it appears that the difference in stock is due to purchases made from time to time of M/s Rolex Ceramics. After consulting the partners the amount of Rs. 75,03,652/- is disclosed as M/s Rolex ceramics current years income from purchases and no deduction shall be debited against income of Rs. 75,03,652/- and shall pay the tax thereon as confirmed by all the partners.
Thus, we note that even at the stage of survey the source of disclosure being the purchases made from time to time by the firm was verified by the survey party.
We note that the schedule 'P6' of profit and loss account reflect an amount of Rs. 87,18,040/- has been shown as indirect income which include an amount of Rs. 75,03,652/-, being the excess unrecorded stock of raw material and semi finished goods found in the course of survey. Thus, entire income of Rs. 75,03,652/- has been offered to tax. In the statement recorded in the course of survey, partner, Shri Chaturbhai Saradava submitted that the excess stock found contains raw material and semi -finished goods. Thus, the source of the excess stock found is from the business of the firm. Further the stock found is the same commodity in which the assessee deals. In reply to Q. 12 Shri Chaturbhai Saradava has confirmed the excess stock and further stated that the difference in (AY : 2017-18) 10 stock being excess stock of Rs. 75,03,652/- is generated from unaccounted purchases of stock which is additional business income of the firm and it was voluntarily disclosed and paid the taxes thereon, hence there is no loss to the revenue. Based on these facts and circumstances, we allow the appeal of the assessee.
In the result, appeal filed by the assessee, is allowed.