Case Law Details
Mookambika Impex Vs DCIT (ITAT Chennai)
Introduction: In a landmark ruling, the ITAT Chennai deliberated upon the matter of Mookambika Impex Vs DCIT. The central issue revolved around the classification and assessment of excess stock discovered during a survey.
The Crux of the Matter: Mookambika Impex was challenged by the Department on the grounds of undisclosed business income which was allegedly used to acquire further stock. The ITAT’s decision hinged on whether this excess stock arose from normal business operations or should be deemed as an unexplained investment.
Detailed Analysis:
1. Grounds for Appeal: Mookambika Impex appealed against the order of the Commissioner of Income Tax (Appeals)-18, alleging various procedural and interpretative discrepancies. The main contention was the misclassification of the surplus stock, found during a survey, as unexplained investment.
2. Proceedings at Lower Authorities: Upon being subjected to a survey, it was found that Mookambika Impex had excess stock valued at Rs. 253.91 Lacs. The firm declared this as ‘Business Income’. However, the Assessing Officer (AO) proposed a classification as ‘Income from other sources’, which would incur a higher tax. Mookambika relied on certain case laws to argue that this excess stock was a result of normal business activities.
3. Our Findings and Adjudication: Analyzing the evidence, it’s clear that Mookambika’s sole income was from the sale of jewelry. The excess stock, found during the survey, was incorporated into the books as ‘Business Income’. Considering the firm’s history and the nature of their business, it is reasonable to infer that this surplus arose from undisclosed business income reinvested into the business. Key decisions from the Rajasthan High Court and the Supreme Court further bolstered this argument.
4. Distinguishing from Other Case Laws: The ruling also made a distinction from the case of M/s SVS Oil Mills vs. ACIT. In the latter, the stock was added, but there was no corresponding entry in the financial books. In contrast, Mookambika Impex showed corresponding credits, making the two cases different in essence.
Conclusion: ITAT Chennai, in its wisdom, has sided with Mookambika Impex, recognizing the legitimacy of their claim that the excess stock arose from regular business activities.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
1. Aforesaid appeal by assessee for Assessment Year (AY) 2019-20 arises out of the order of learned Commissioner of Income Tax (Appeals)-18, Chennai, [CIT(A)] dated 19-01-2023 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 28-09-2021. The grounds taken by assessee reads as under:-
1. The order of the learned Commissioner Of Income Tax (Appeals)-18, is wrong, illegal and is opposed to law.
2. The Ld. Commissioner of Income Tax (Appeals)-18 erred in uploading the order of assessment by assessing the business income offered by the appellant as unexplained investment under section 69B r.w.s 115BBE of the Income Tax Act.
3. The Ld. Commissioner of Income Tax (Appeals)-18 ought to have seen that addition under section 69B r.w.s 115BBE of the Income Tax Act is warranted only if the twin condition that the excess stock found at the time of survey in not recorded in the books of account and the appellant offers no satisfactory explanation. In the instant case the appellant has offered satisfactory explanation that the surplus stock found at the time of survey is generated out of business income, which source stands uncontroverted by the learned Assessing officer.
4. The Ld. Commissioner of Income Tax (Appeals)-18 ought to have seen that the appellant while accounting for difference in surplus stocks, found at the time of survey, by adding the same in the stock register and passing corresponding entry in financial books, has also given proper explanation for the source from which the surplus stock was acquired which stands uncontroverted by the revenue.
5. The Ld. Commissioner of Income Tax (Appeals)-18 ought to have seen that the excess stock found at the time of survey is part of the mixed stock and cannot be clearly identified from declared stock as per the books of accounts maintained by the appellant.
6. The Ld. Commissioner of Income Tax (Appeals)-18 erred in relying on certain case laws which are clearly distinguishable on facts in as much as in the said case laws although the difference in stock was added in stock register corresponding entries were not passed in financial books.”
As is evident, the sole issue that arises for our consideration is to determine the head of income under which the impugned additions would be assessable. The Ld. AR submitted that excess stock found during survey was brought into the books by way of credit to partners’ capital account and therefore, the case laws being relied upon by lower authorities would not apply. The Ld. AR made arguments to submit that the addition arising out of excess stock found was nothing but business income of the assessee. The Ld. Sr. DR controverted the arguments of Ld. AR and placed on record survey report. The Ld. Sr. DR submitted that the impugned income has rightly been assessed as Income from other sources. Having heard rival submissions and upon perusal of case records, the appeal is disposed-off as under.
Proceedings before lower authorities
2.1 The assessee being resident firm is stated to be engaged in sale of gold jewellery and silver articles. The assessee was subjected to survey u/s 133A on 11.10.2018 wherein the physical stock was inventorized and it was noted that there was excess stock available to the extent of Rs.253.91 Lacs. The assessee admitted the excess stock as ‘Business Income’ and offered the same to tax in its return of income. Undisputedly, the said income was separately disclosed as ‘Business Income’ in the Income Tax Return. The excess stock was included in the stock register and brought into books of accounts by way of corresponding credit to Partners’ Capital Account. The same was on the reasoning that the said stock was acquired out of excess income regenerated from business activity only and the same was nothing but ‘Business income’ of the assessee.
2.2 However, rejecting assessee’s aforesaid working, Ld. AO proposed to consider the same as unexplained investment and proceeded to add the same as ‘Income from other sources’ which would be taxable at higher rates as prescribed u/s 115BBE. The assessee submitted that the excess stock was out of normal business activity only and therefore, the same would be assessable as ‘business income’ only. Reliance was placed, inter-alia, on the decision of Hon’ble Rajasthan High Court in the case of CIT vs Bajargan Traders (ITA No.258/2017 dated 12.09.2017) wherein it was held that with respect to such excess stock found during the survey, it could be said that the investment in procurement of such stock was clearly identifiable and related to regular business stock of the assessee. Therefore, the same should be considered as ‘Business Income’ only. The assessee also submitted that the sources of purchases were on account of purchase credit and therefore the same could not be treated as unexplained investment.
2.3 Rejecting the submissions of the assessee and relying on the decision of Hon’ble High Court of Madras in the case of M/s SVS Oil Mills vs. ACIT (ITA No.765 of 2018), Ld. AO held that the excess stock was to be treated as unexplained investment u/s 69B which would be subjected to higher rates as prescribed u/s 115BBE.
2.4 During appellate proceedings, the assessee submitted that the assessee was not carrying out any other business. The stock difference arose during the course of day-to-day business activity and not otherwise. On the date of survey, the excess stock was not separately identified. The entire stock was available as trading stock at the business premises. It was part and parcel of regular business stock. The entire excess stock was business stock and nothing else. Further reliance was placed on the decision of Hon’ble Supreme court in the case of Lakshmichand Baijnath vs CIT (35 ITR 416) which held that when an amount is credited in the business books, it is not an unreasonable inference to draw that it is a receipt from business. The assessee submitted that entire stock was acquired out of income from jewellery business earned but not disclosed. The assessee had only one source of income since inception of the business, being jewellery business. The entire stock was accumulated out of income from jewellery business. The undisclosed business income was ploughed back into business to acquire further stock.
2.5 However, Ld. CIT(A) held that the assessee was unable to furnish party wise break of such purchases. It failed to specify as to how it generated excess income from business activity and how the purchases were made from such excess income. The assessee could not furnish any documentary evidence to substantiate that the excess stock was generated out of business activity only. Since the unaccounted stock was clearly identified as physical stock inventory during survey, the same was to be treated as unexplained investment. The other arguments were also rejected. Finally, the action of Ld. AO was upheld against which the assessee is in further appeal before us.
Our findings and Adjudication
3. From the fact it emerges that the only source of assessee’s income is ‘Business income’ arising out of sale of gold jewellery and silver articles. During survey proceedings, quantitative differences were found in the physical stock vis-à-vis book stock. The assessee brought the same into books of account by way of credit to partners’ capital account with corresponding increase in book-stock. The excess stock was included in the stock register. Accordingly, the differential was separately offered to tax in the return of income as ‘Business Income’. Naturally, the excess stock was acquired out of excess income regenerated from business activity only since the assessee do not have any other source of income since its inception. The entire stock was accumulated out of income from jewellery business. The undisclosed business income was ploughed back into business to acquire further stock. In such a case, the excess stock could be said to have arisen out of normal business activity only and therefore, the same would be assessable as ‘business income’ only in terms of decision of Hon’ble Rajasthan High Court in the case of CIT vs Bajargan Traders (supra) wherein it was held that with respect to such excess stock found during the survey, it could be said that the investment in procurement of such stock was clearly identifiable and related to regular business stock of the assessee. Therefore, the same should be considered as ‘Business Income only. In the present case, the stock difference has arisen in the course of day-to-day business activity only and not otherwise. The entire stock was available as trading stock at the business premises and it was part and parcel of regular business stock. The decision of Hon’ble Supreme court in the case of Lakshmichand Baijnath vs CIT (supra) also support the said conclusion. It was held by Hon’ble Court that when an amount is credited in the business books, it is not an unreasonable inference to draw that it is a receipt from business. Therefore, the impugned income, in our considered opinion, would be assessable as ‘Business Income’ only. Similar view has been taken in the decision of Chennai Tribunal in M/s Overseas Leathers vs. DCIT (ITA No.962/Chny/22 dated 05.04.2023). We find that facts in that case are quite identical to the facts of the present appeal before us.
4. After going through the case law of Hon’ble High Court of Madras in the case of M/s SVS Oil Mills vs. ACIT (supra), we find that said case is distinguishable on facts. In that case, though stock was added in the stock register but there was no corresponding credit in the books of accounts. It was thus held that stock could not come in from vacuum. Therefore, the excess stock was held to be unexplained investment. However, in the present case, there is corresponding credit to partners’ capital account. Therefore, this case law is distinguishable on facts.
5. In the result, the appeal stand allowed in terms of our above order.
Order pronounced on 26th July,2023
