Excess Stock Forming Part of Business Stock Cannot Be Treated as Section 69 Income: Andhra Pradesh HC

PCIT Vs Deccan Jewellers Ltd (Andhra Pradesh High Court)

Andhra Pradesh High Court dismissed the Revenue’s appeals challenging the Tribunal’s decision setting aside revisionary orders passed under Section 263 of the Income Tax Act in cases involving excess stock discovered during search. In the case of Deccan Jewellers Ltd., engaged in gold, diamond jewellery and silver articles, excess stock of ₹6,12,46,284 was declared during search. The assessee explained that the excess stock was not separately identifiable but formed part of mixed business stock comprising both recorded and excess stock, and represented suppressed business profits accumulated over the years.

The Assessing Officer examined this explanation and accepted the additional income as business income taxable at 30%, with approval under Section 153D. Similar explanations were accepted in the connected cases. The Principal Commissioner subsequently invoked Section 263 on the premise that the excess stock ought to have been treated as unexplained investment under Section 69 and consequently subjected to Section 115BBE. The High Court held that the AO had taken a possible view after conducting enquiry and considering the assessees’ explanations.

Where excess stock was neither separately identifiable nor possessed an independent physical existence, and its nature and source had been satisfactorily explained as accumulated business profits, the statutory conditions for invoking Section 69 were not satisfied. No contrary High Court or Supreme Court authority was produced by the Revenue. Accordingly, there was neither lack of enquiry nor perversity that could render the assessments erroneous under Explanation 2 to Section 263. The High Court therefore upheld the Tribunal, declined to admit the Revenue’s appeals for want of any substantial question of law, and dismissed them.

Cases Discussed

• (2017) 189 TTJ (JP) 487 — ACIT Vs. Sanjay Bairathi Gems Ltd. (ITAT Jaipur) — Relied upon by the assessees in support of the treatment of excess stock arising from business as business income where the stock was part of the overall physical business stock.
• 2017 Tax Pub (DT) 4439 (Jp-Trib) — DCIT Vs. Ram Narayan Birla (ITAT Jaipur) — Relied upon by the assessees. The decision supported treatment of excess stock connected with regular business activity as business income rather than income from an unidentified source.
• ITA No. 106 of 2011 (O&M) — M/s. Kim Pharma (P) Ltd. Vs. CIT (Punjab & Haryana High Court) — Cited by the assessees among the judicial authorities placed before the Assessing Officer while explaining the character and source of the additional income.
• 36 taxmann.com 348 (Andhra Pradesh High Court) — Spectra Shares and Scrips P. Ltd. Vs. CIT — Relied upon by the Tribunal for the principle that mere non-recording of reasons by the Assessing Officer could not, by itself, establish that the assessment order was erroneous for purposes of Section 263.
• (2011) 141 TTJ (Ahd.) 1 — Chokshi Hiralal Moganlal Vs. DCIT (ITAT Ahmedabad) — Relied upon by the assessees for the proposition that excess stock which is not separately identifiable and forms an inseparable part of regular business stock may be treated as business income rather than unexplained investment.
• (2008) 298 ITR 13 (Karnataka High Court) — CIT Vs. S.K. Srigiri and Bros. — Cited by the assessees among the authorities supporting their explanation regarding the business character of additional income.

FULL TEXT OF THE JUDGMENT/ORDER OF ANDHRA PRADESH HIGH COURT

These appeals involve similar issues and are taken up for hearing analogously for the purpose of admission. The appeals are proposed to be admitted on the following substantial questions of law:

“1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in endorsing the erroneous order of the A.O as an order after taking one of the possible views?

2. Whether on the facts and in the circumstances of the case the Tribunal is correct in law in holding that unaccounted and excess stock found during the course of search shall be assessed as business income at the rate of 30%?”

In ITTA No.8 of 2021, the assessee is doing business in Gold, Diamond jewellery and Silver Articles. Search and seizure operation under Section 132 of the Income Tax Act, 1961 (‘the Act’, for brevity) were conducted in the case of assessee and group concern and excess stock of Rs.6,12,46,284/- was declared during the course of search. Notice under Section 142(1) of the Act was issued upon the assessee. In response to such notice, revised return was filed admitting the income under the head “Profits and gains of business or profession”. During the course of assessment proceedings, the Assessing Officer called for explanation of the assessee as to why additional income admitted by the assessee should not be treated as ‘undisclosed investment’ under Section 69 of the Act and provision under Section 115BBE of the Act be not applied. The assessee filed explanation, which reads as follows:-

“We submit that the excess stock found during the search operation is not separately and clearly identifiable but is part of mixed lots of stock found at the premises which included declared stock as per books and also the excess stock as computed by the Authorized Officers during the search operation at the premise. Since excess stock is a result of suppression of profit from business over the years and has not been kept identifiable separately but is the part of overall physical stock found, the provisions of Section 69 cannot be made applicable as primary condition for invoking the provisions of the section is that the asset should be separately identifiable and it should have independent physical existence of its own. Since excess stock is result of suppression of profit from business over the years and has not been kept identifiable separately but i.e., the part of overall physical stock found and therefore the investment in the excess stock has to be treated as business income.”

The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In ITTA No.9 of 2021, pursuant to search under Section 132 of the Act, notice was issued upon the assessee under Section 142(1) of the Act and the assessing officer filed return of income declaring total income of Rs.34,47,92,320/- inclusive of additional income of Rs.7,60,53,000/- declared during search. During the assessment proceedings, the Assessing Officer called for explanation as to why the additional income admitted by the assessee should not be treated as ‘undisclosed investment’ under Section 69 of the Act and taxed under Section 115BBE of the Act. The assessee filed explanation claiming as follows:

“Our firm has brought excess stock value to the books of account by passing the necessary entries in the P & L Account as well. An amount of Rs.7,60,53,000/- was accordingly admitted as ‘other income’ in Schedule L – ‘other operating income’ and the same was also shown in the return filed in the relevant columns under the head ‘Profits and Gains of the Business’ in Part A of the Return filed for the impugned year. The same can also be verified from the P & L Account as well as from the Return filed. Copies of the above were already filed with your good self on 17/12/2018. Thus, it is submitted that there is no need to bring the excess stock once again to tax as that would result in double addition.

It is further submitted that our company is involved in the export of un-manufactured tobacco and has no other income generating activity. The excess stock found is nothing but our business stock, and accordingly, the same was offered as income from business only.”

The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In ITTA No.14 of 2021, in the course of search under Section 132 of the Act, the excess stock valued at Rs.4,41,46,445/- was declared by the assessee. In return of income, the assessee claimed the additional income was declared under the heading ‘other operating income’, which was nothing but ‘business income’. Upon show-cause notice being served upon it calling for explanation as to why the additional income was not treated as ‘undisclosed investment’ under Section 69 of the Act by applying provision under Section 115BBE of the Act, the assessee explained that the additional income was admitted in Schedule L under the heading, ‘other operating income’ in the relevant columns under the head “Profits and Gains of the Business” in Part A of the Return filed for the relevant Assessment Year. Excess stock found was business stock which accumulated and brought forward for many years. Hence, the additional income was ‘business income’. In support of their explanations, the assessees have relied on the following judgments of various High Courts as well as different Benches of the Income Tax Appellate Tribunal, a) Chokshi Hiralal Moganlal Vs. DCIT; b) ACIT Vs. Sanjay Bairathi Gems Ltd.; c) DCIT Vs. Ram Narayan Birla; (d) M/s. Kim Pharma (P) Ltd. Vs. CIT; and, (e) CIT another Vs. S.K. Srigiri and Bros.

The Assessing Officer duly considered and accepted such explanation and taxed the additional income as ‘business income’ @ 30%, which was approved by the Joint Commissioner, Income Tax, Central Range under Section 153D of the Act.

In all the aforesaid cases, the Principal Commissioner invoked revisional powers under Section 263 of the Act purportedly on the ground that the decision of the Assessing Officer was erroneous and prejudicial to the interest of the revenue and assessment orders were set aside with a direction to review the assessment orders as per law.

The said orders were appealed before the Income Tax Appellate Tribunal (for short, ‘the Tribunal’), which set aside the orders of Principal Commissioner in all these cases holding the decision of the Assessing Officer was a possible view on the matter and could not have been revised under Section 263 of the Act.

Challenging the said orders, Ms. M. Kiranmayee, learned Senior Standing Counsel for Income Tax, argues that the additional excess stock found in the course of search in these cases ought to have been treated as ‘undisclosed investment’ under Section 69 of the Act. The Assessing Officer did not consider such fact and assessed the additional income as business income @ 30% instead of 60% by applying Section 115BBE of the Act. Thus, the assessment orders being erroneous were rightly revised by the Principal Commissioner. Hence, the appeals ought to be admitted on the aforesaid substantial questions of law.

When there are two possible views on the matter and one view has been accepted by the Assessing Officer after inviting explanation from the assessee and upon being satisfied on such explanation such view cannot be said to be erroneous.

As discussed above, explanations had been given by the assessees with regard to the additional income, which were considered and duly accepted by the Assessing Officer. Assessees relied upon various authorities in support of their explanations which had been duly accepted by the Assessing Officer. Views of the Assessing Officer appear to have been approved by the Joint Commissioner, Income Tax, Central Range, under Section 153D of the Act. In this factual matrix, it cannot but be accepted that a possible view on the matter had been followed by the Assessing Officer. In doing so, the Assessing Officer, in fact, followed the consistent view of various judicial authorities binding on him, namely, where excess stock found in the course of search is neither separately identifiable nor had independent physical existence, it cannot be treated as ‘undisclosed investment’ under Section 69 of the Act. In the present cases, explanations have been offered by the assessees that excess stock was a result of suppression of profits from business over the years and is a part of the overall stock found. In ITTA Nos.9 & 14 of 2021, the assessees concerned gave further clarification that the excess stock had been admitted in Schedule ‘L’ under the heading, ‘other operating income’ under the head “Profits and Gains of the Business” in Part A of the Return filed for the relevant Assessment Year. Hence, the excess stock could not have been treated as ‘undisclosed investment’ under Section 69 of the Act. Section 69 of the Act reads as follows:

“69. Unexplained investments.—Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year.”

The above section provides investments would fall within the definition of ‘undisclosed investment’ in the event the following conditions are satisfied:

(a) Such investment is made in the course of the financial year and not reflected in the books of account, if any, maintained by the assessee for any source of income,

(b) No explanation is offered by the assessee about the nature and source of investments, and

(c) Such explanation is not found to be satisfactory in the opinion of the Assessing Officer. As explanations pursuant to the Show-cause notices issued by the Assessing Officer had been submitted claiming that the nature and source of the excess stock fell under the heading ‘Profits and Gains of the Business’ and such stock was not specifically identifiable from the profits which had accumulated from earlier years and such explanations being considered and accepted by the Assessing Officer, which came to be approved by the Joint Commissioner, Income Tax, it cannot be said that the condition precedents for holding that the excess stock as ‘undisclosed investment’ under Section 69 of the Act are satisfied. Relying on the decision of this Court in Spectra Shares and Scrips P. Ltd. Vs. CIT, the Tribunal held non-recording of reasons cannot be a ground to come to a conclusion that the opinion of the Assessing Officer was erroneous for the purposes of Section 263 of the Act.

Explanation (2) of Section 263 of the Act elucidates cases where the opinion of the Assessing Officer can be treated to be erroneous and prejudicial to the interest of the revenue. Explanation (2) reads as follows:

“Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—

(a) the order is passed without making inquiries or verification which should have been made;

(b) the order is passed allowing any relief without inquiring into the claim;

(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or

(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”

In the present cases, the Assessing Officer had issued show-cause notices calling for explanations from the assessees whether excess stock be not treated as ‘undisclosed investment’ under Section 69 of the Act. In response to the notices, elaborate explanations were offered by the assessees, which were fortifiable by consistent views by various Benches of the Tribunal as well as the High Courts. The Assessing Officer, upon consideration, accepted the explanation and taxed the additional income as ‘business income’ @ 30% instead of 60% as per Section 115BBE of the Act.

No contrary view either of any High Court or the Apex Court has been placed before us to demonstrate that the explanations offered by the assessees in the course of assessment were either perverse or contrary to law. In view of such matter, we are constrained to hold no case of perversity or lack of enquiry on the part of the Assessing Officer is made out so as to render his decision erroneous under Explanation 2 of Section 263 of the Act. Thus, the revisional powers under the said provision were illegally invoked by the Principal Commissioner and his order was rightly set aside by the Tribunal.

For the aforesaid reasons, we are of the opinion that no substantial question of law is made out in the factual matrix. Hence, we are not inclined to admit the appeals.

Accordingly, the Appeals are dismissed. There shall be no order as to costs.

As a sequel, Miscellaneous Petitions, if any, pending in these Appeals shall stand closed.