Sitaram Gupta Vs ACIT (ITAT Jaipur Bench)
Accounts Cannot Be Believed for Profit but Disbelieved for Stock—No Addition Merely Because a Stock Register Was Not Maintained
Summary: The Jaipur Bench of the ITAT has held that stock found during a survey cannot be treated as unexplained merely because the assessee did not maintain a stock register or produce item-wise purchase bills, when the stock was supported by contemporaneous financial statements and the Revenue had not identified any defect in those statements. The AO could not accept the trading results emerging from the financial accounts and simultaneously reject the closing stock reflected in the very same accounts.
The assessee, Sitaram Gupta, was engaged in the business of dealing in cloth under the name M/s Sita Ram Bhagwan Das HUF. He filed his return for AY 2018-19 declaring a total income of ₹2.98 lakh. A survey u/s 133A was conducted at his business premises on 01.11.2017, during which stock valued at ₹27,01,745 was physically found.
In the statement recorded during the survey itself, the assessee explained that stock worth approximately ₹7.05 lakh belonged to his own concern, while the balance stock of ₹19.97 lakh belonged to his son’s proprietary concern, M/s Sita Ram Vijay Kumar.
The assessee explained the circumstances in which his son’s stock was kept at the surveyed premises. His son’s establishment was situated directly opposite the assessee’s business premises. Due to his advanced age and illness, the assessee had substantially withdrawn from active business operations, and his financial affairs were being handled by his son, Vijay Kumar Gupta. The assessee’s concern had discontinued purchases after 30.06.2017, while his son was conducting business activities from the premises.
The AO rejected the explanation because the assessee did not maintain a stock register and had not produced supporting purchase bills and vouchers corresponding to each item contained in the survey inventory. Consequently, the entire stock of ₹27.01 lakh was treated as unaccounted business income. The CIT(A) confirmed the addition on the ground that the assessee had failed to furnish adequate contemporaneous evidence.
Before the ITAT, the assessee pointed out that the explanation regarding ownership of the stock had not been invented after the survey. It had been given during the survey proceedings themselves. In response to the questions posed by the survey team, the assessee had stated that he was of advanced age, remained unwell and was not regularly attending the showroom. He had also disclosed that the business and financial transactions were being looked after by his son.
The assessee had further stated that his concern did not maintain a stock register and that its stock as on the survey date was approximately ₹6 lakh to ₹6.50 lakh. While explaining the physical inventory of ₹27.01 lakh, he specifically attributed approximately ₹7.05 lakh to his concern and ₹19.97 lakh to his son’s concern.
More importantly, the explanation was supported by the financial statements of both concerns prepared up to 31.10.2017, immediately preceding the survey. The assessee’s financial statements reflected closing stock of ₹7,04,867, whereas his son’s concern reflected stock of ₹31,23,290, part of which was stated to be lying at the assessee’s premises.
The assessee also demonstrated the movement of stock through the regularly disclosed financial figures. His opening stock for the year was ₹14,30,140, corresponding with the closing stock reported in the preceding year’s return. Up to 30.06.2017, purchases of ₹39,94,340 had been made, after which purchases were discontinued. Sales of ₹52,98,484 had been recorded, leaving a closing stock of ₹7,04,867 as on 31.10.2017.
The assessee argued that the AO had accepted the opening stock, purchases, sales & profits disclosed through the same financial statements. Having accepted the business results, the AO could not selectively reject the closing-stock figure merely because a separate stock register was unavailable.
The ITAT accepted the assessee’s contentions. It noted that the assessee’s stand had remained consistent throughout the proceedings: the stock found during the survey belonged partly to his concern and partly to his son’s concern. This explanation was sufficiently supported by the profit & loss accounts and financial statements of both concerns prepared up to the survey date.
These financial statements were available before the lower authorities, but the Revenue had not pointed out any material discrepancy in them. The Tribunal held that, in the absence of any demonstrated infirmity, the financial statements constituted sufficient evidence supporting the ownership and availability of the stock.
The ITAT further observed that maintenance of a stock statement was not, by itself, mandated in the manner assumed by the Revenue. Therefore, the explanation could not be rejected solely because the assessee did not produce a stock register or stock ledger, particularly when alternate and credible documentary evidence was available.
The Tribunal accordingly directed the AO to delete the addition of ₹27,01,745 made on account of the alleged unexplained stock and allowed the assessee’s appeal.
Author’s Comments
The strength of the assessee’s case lay in the combination of contemporaneous explanation, financial reconciliation & consistency of conduct. The ownership break-up was stated during the survey itself and was not a later attempt to explain the inventory. It was also supported by the financial statements of both concerns as on the date immediately preceding the survey.
The ruling also applies the principle of consistency within the same set of accounts. If the AO accepts the opening stock, recorded purchases, sales and resultant business income, he must identify a specific defect before rejecting the closing stock flowing from those accounts. The same financial statements cannot ordinarily be reliable for computing profit but unreliable when they explain the corresponding stock.
However, the decision should not be read as holding that a stock register or purchase invoices are never relevant. Their absence may assume significance where the financial statements are unreliable, the survey inventory cannot be reconciled, the alleged third-party owner denies ownership, or defects are detected in purchases and sales. Here, the Revenue neither disproved the son’s ownership nor identified any worthwhile defect in the financial statements.
One drafting peculiarity in the order deserves attention. The assessee had also challenged a separate addition of ₹13,26,902, allegedly based on a rough noting described as a “dumb document.” However, the operative discussion deals only with the stock addition of ₹27,01,745, though the appeal is ultimately stated to be allowed. The order should therefore be relied upon cautiously regarding the second addition, since no specific adjudication or deletion direction appears in the reasoning.
The enduring proposition remains: absence of a stock register may call for verification, but it cannot erase otherwise credible accounts. When the Revenue accepts the business figures, unexplained stock cannot be manufactured by selectively ignoring the closing figure.
FULL TEXT OF THE JUDGMENT/ORDER OF ITAT JAIPUR
The present appeal has been filed by the assessee against the order passed by the Office of the Commissioner of Income Tax, Appeal CIT(A), Jaipur 04 (hereinafter referred to as “Ld. CIT(A)”), dated 11.02.2026 under Section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”).
2. The grounds raised read as under:-
1. The Ld. CIT(A) has erred on facts and in law in confirming the addition of Rs.27,01,745/- made by AO on account of alleged unexplained stock found during survey proceedings by not accepting the contention of assessee that stock of Rs.7,04,867/-is verifiable from the financial accounts of M/s Sitaram Bhagwan Dass and balance stock of Rs. 19,96,878/- is verifiable from the financial accounts of M/s Sitaram Vijay Kumar, proprietary concern of assessee’s son Sh. Vijay Kumar as explained in the statement recorded during survey by incorrectly holding that assessee failed to substantiate the same by producing contemporaneous supporting documents.
2. The Ld. CIT(A) has erred on facts and in law in confirming the addition of Rs. 13,26,902/- made by AO on account of unaccounted business income on the basis of Pg No.2 of Annexure A-18 which is only a rough noting without any name, date, signature, etc. and is only a dumb document by holding that assessee failed to substantiate the same by producing contemporaneous supporting documents.
3. The appellant craves to alter, amend and modify any ground of appeal.
4. Necessary cost be awarded to the assessee.
3. Ground No.1 raised by the assessee relates to the addition made to the income of the assessee on account of stock found during survey proceedings, which as per the AO was unaccounted.
4. The assessee is a dealer in cloth running a proprietorship firm in the name of Sita Ram Bhagwan Das HUF. For the impugned year, the assessee filed return of income declaring a total income at Rs.2,98,040/-. A survey action u/s 133A of the Act was conducted on the assessee during the year on 01.11.2017, during the course of which stock of Rs.27,01,745/- was found on physical verification . The assessee was asked to verify the same from his books of accounts ,in response to which he stated that out of the total stock found Rs.27,,01,745/- ,stock of Rs.7,04,867/- related to his firm Sita Ram Bhagwan Das HUF and the remaining stock related to the firm of his son, M/s Sita Ram Vijay Kumar. In the absence of any substantiation of the explanation of the assessee the AO treated the entire stock of Rs.27,01,745/- as unaccounted business income of the assessee and added the same to the income of the assessee.
5. The Ld. CIT(A) upheld the order of the AO.
6. Before me, ld. Counsel for the assessee contended that the assessee had duly substantiated the fact of the stock found during survey as partly belonging to the assessee firm and partly to the firm run by his son:-
- By categorically stating so in the statement recorded during survey proceedings itself.
- By explaining that the stock pertaining to his son’s firm was found at his business premises since his son’s firm was located just opposite to the business premises of the assessee, and the assessee due to old age and illness was unable to perform the business activities and had suspended purchase of goods after 30th June 2017 and his business whatever was being carried out by his son.
- By submitting the balance sheet and profit and loss account of both the assessee’s firm and that of the firm run by his son as on the date of survey, reflecting stock available with both the firms to the extent declared by the assessee in his statement recorded during survey.
In this regard he drew my attention to the statement recorded of the assessee during survey, placed in the paper Book:
- at page No.16, stating in reply to question No.9 that he was of advanced age and remained ill most of the time and therefore was not sitting in his showroom and that all financial transactions were looked after by his son Sh. Vijay Kumar Gupta
- at paper book page No.18, pointing out the reply of the assessee to question No.17 stating that the stock register is not maintained and on the date of survey i.e. 01.11.2017 the stock value of the firm was approximately Rs.6 to 6.50 lac.
- at paper book page No.19-20 to the reply of the assessee to question No.20 stating that out of stock of Rs.27,01,745/- found during survey, stock of Rs.7,06,867/- belongs to the assessee’s firm M/s Sita Ram Bhagwan Das HUF and stock of Rs.19,96,878/- belong to the firm run by his son M/s Sita Ram Vijay Kumar. That he also explained that no purchase was made in his firm from 30th June 2017 and from the premises of his firm his son was working.
7. He further drew my attention to the financial statements of both his firm and the firm of his son as on 31.10.2017 copies of which were placed before me at paper book Page No. 22-23 and 24-25 respectively, showing stock of Rs.7,04,867/- available in the assessee’s firm and Rs.31,23,290/- in the firm of the assessee’s son part of which he claimed was found in the business premises of the assessee.
8. Ld. Counsel for the assessee further contended that the assessee was regularly filing its return of income and as at the beginning of the year, the assessee was having a stock of Rs.14,30,140/- which was reflected in his return filed for AY 2017-18. That during the impugned year, A.Y 2018-19, the assessee had made purchase of Rs.39,94,340/- upto 30th June 2017, after which the assessee admittedly stopped all business operations in his firm and had made sale of Rs.52,98,484/- and reflected closing balance as on 31.10.2017 of Rs.7,04,867/-. He contended that the AO had accepted the sale & purchase made by the assessee and the opening stock was substantiated by the fact that the same was reflected as closing stock of the preceding year in the return of income filed therefore. That therefore there was no question at all for treating the stock of Rs.7,04,867/- belonging to the assessee as unexplained.
9. Ld. DR however, contended that the assessee admittedly, did not maintained any stock register nor did he furnish any supporting purchase bills and vouchers of the items mentioned in the stock inventory. She therefore, stated that the assessee’s explanation of the stock found during survey was clearly not substantiated and the AO/Ld. CIT(A) had rightly treated the same as unexplained income of the assessee.
10. I have heard the rival contentions. The issue for adjudication before me is regarding the stock found with the assessee during survey, of Rs.27,01,745/-, which allegedly the assessee was unable to explain the source of. As per the Department, the assessee had failed to substantiate the source of the said stock as pertaining to his firm and that of his son with supporting evidences. The case of the ld. Counsel for the assessee is that this stock was reflected in the financial statement of both the assessee and his son firm made upto the date of survey and no infirmity was pointed out in the same by the Lower Authorities. He has further contended that the assessee admittedly, had done some business during the year which had resulted in a stock of Rs.7,04,867/- remaining with him as on the date of survey. The profits from his business have been accepted by the Revenue. Therefore, based on the same financial statement reflecting profits of the assessee and also reflecting the stock available with the assessee, the AO cannot be accepting the profits returned by it and rejecting the stock shown by the assessee.
11. I find merit in the contention of the ld. Counsel for the assessee. The stand of the assessee throughout has been that the stock found during survey pertained partly to the assessee firm and partly to the firm run by the son of the assessee. He had substantiated his explanation sufficiently by furnishing the financial statements, that is the profit and loss account of both the firms upto the date of survey, reflecting all transactions undertaken in their business during the said period. Both the statements of the assessee firm and assessee’s son firm were there before the Lower Authorities. No infirmity worth its while has been pointed out by the Revenue Authorities in the said statements. Therefore, in my view these financial statements submitted by the assessee, sufficed to substantiate the claim of closing stock found during survey on the assessee, as partly belonging to that of the assessee firm and part to that of assessee’s son’s firm. The maintenance of stock statement is not mandated by law as such, therefore, merely for the reason that the assessee did not substantiate its explanation with the stock statement or stock ledger, the explanation of the assessee cannot be rejected, particularly when the assessee had substantiated his explanation with the financial statements upto the date of survey in which no infirmity was found by the Revenue.
12. In the light of the same, I direct the addition made of Rs.27,01,745/- on account of unexplained stock found during survey to be deleted.
13. In effect, the appeal of the assessee is allowed.
Order pronounced in the Open Court on 10.09.2026
