Excess Stock Surrender Taxable as Business Income at Normal Rate: ITAT Chandigarh

A P Knit Fab Vs DCIT (ITAT Chandigarh)

Summary: The Chandigarh ITAT allowed A P Knit Fab’s appeal for AY 2018-19, holding that excess stock found during a survey of its hosiery and knitted-cloth business was assessable as business income. On 26 October 2017, physical stock of Rs.3,34,55,282 was compared with book stock of Rs.2,34,31,000, revealing a difference of Rs.1,00,24,282. The assessee surrendered Rs.1,00,00,000 on account of excess stock and offered it as business income. The Assessing Officer treated the stock difference as unexplained investment under Section 69B and applied Section 115BBE; the CIT(A) upheld that treatment.

The Tribunal found that the physical stock and recorded stock were comparable parts of the same trading stock. The Revenue identified no separate asset or source of receipts outside the assessee’s regular business. Although the excess was unrecorded at the time of survey, the Tribunal accepted the explanation of its nature and source as arising from business operations. It therefore held that the condition concerning an unsatisfactory explanation under Section 69B was not met. Applying the decisions on inseparable excess business stock and distinguishing authorities concerning unexplained cash, it directed the Assessing Officer to assess the surrendered income under profits and gains of business or profession at the normal rate. With Section 69B inapplicable, Section 115BBE did not apply.