Case Law Details
Jayshree Sarees Vs PCIT (ITAT Rajkot)
The case of Jayshree Sarees Vs. PCIT (ITAT Rajkot) revolves around the appeal filed by the assessee challenging the Principal Commissioner of Income Tax’s (PCIT) order dated March 10, 2023, concerning the Assessment Year 2018-19. The assessee contested the invocation of revisionary powers under Section 263 of the Income Tax Act, claiming that the assessment order passed by the Assessing Officer (AO) was neither erroneous nor prejudicial to the revenue’s interest. The PCIT had argued that the AO failed to adequately address the applicability of Section 115BBE, which prescribes a higher tax rate on undisclosed income, citing that the disclosed income of ₹71,50,000 from excess stock should not be treated as regular business income but rather as deemed income under Section 69. The assessee contended that this additional income had already been accounted for in their tax filings.
The appeal also addressed a procedural delay of 31 days in filing, which the ITAT condoned, considering the circumstances surrounding the late receipt of the demand notice. The ITAT examined the facts, including the partner’s admission of unaccounted income during a survey conducted on February 19, 2018. The assessing body ultimately ruled that the undisclosed excess stock discovered during the survey was effectively part of the business income, rejecting the PCIT’s assertion that it should be taxed at a higher rate. The ITAT referenced prior rulings, emphasizing that when excess stock is not distinctly identifiable as separate investments, it can be appropriately classified as business income, thereby upholding the AO’s initial assessment and dismissing the PCIT’s revision order.
In conclusion, the ITAT Rajkot reaffirmed the principle that unaccounted stock, which lacks clear separability, is to be treated as business income, providing clarity on the interpretation of tax provisions concerning undisclosed income during assessments. This ruling highlights the importance of thorough inquiries and substantiation by the Assessing Officer when addressing discrepancies arising during surveys.
FULL TEXT OF THE ORDER OF ITAT RAJKOT
This appeal has been filed by the assessee against the order passed by the Ld. Principal Commissioner of Income Tax-1, (in short “Ld. PCIT”), Rajkot vide order dated 10.03.2023 passed for Assessment Year 2018-19.
2. The assessee has taken the following grounds of appeals:-
“1. The Ld. Principle Commissioner of Income Tax has erred in invoking revision powers under section 263 of the act purportedly on the ground that the decision of the AO was erroneous and prejudicial to the interest of the revenue. Assessment order passed u/s 263 of the act is bad in law.
1.1 The Ld. PCIT has erred in not believing contention of the Appellant that fully inquiry made by the Assessing Officer and AO has considered and accepted our explanation and taxed additional income as “business income @ 30%” and based on which assessment order u/s 143(3) was passed by the learned Assessing Officer.
1.2 The Ld. PCIT has erred in law and/or facts in considering that the disclosed income of Rs. 71,50,000/- by way of excess stock found during the course of survey was not assessable under the head “Profit and loss of the business” but as deemed income under section 69 r.w.s. 115BBE of the act.
2. Appellant reserves right to leave to add/delete/alter or substitute all or any of the ground of appeal before passing final appeal order.”
3. At the outset, we note that there is delay of 31 days in filing of the present appeal. The assessee has furnished an Affidavit before us, in which it has been submitted that order under Section 263 of the Act was put up on the Income Tax Portal on 13.03.2023 with instruction to the Ld. Assessing Officer to create tax pendency on the ITBA portal. The assessee submitted that he was waiting for a demand notice under Section 156 of the Act, which was not received within a period of 60 days from date of revision order under Section 263 of the Act. It was submitted before us that the order under Section 263 of the Act was uploaded on ITBA portal on 14.03.2023, whereas the demand notice was uploaded by the Department on 12.06.2023. Accordingly, the delay of 31 days in filing of the present appeal occurred due to late receipt of demand notice from the Department. The assessee requested that looking into the instant facts, the delay of 31 days in filing of present appeal may kindly be condoned.
4. Looking into the instant facts, we are of the considered view that it is a fit case where in the interest of justice, the delay in filing of the present appeal may be condoned. In the result, the delay in filing of the present appeal is hereby being condoned.
5. The brief facts of the case are that the assessee is a partnership firm and had filed return of income on 27.10.2018 declaring total income at Rs. 77,57,510/-. The assessment was finalized under Section 143(3) of the Act on 25.02.2021 accepting the return of income. On verification of case records, the Ld. PCIT, Rajkot observed that survey action under Section 133A(1) of the Act was carried out on the assessee on 19.02.2018. On verification of the statement of the partner recorded during the course of survey, it was found that the main partner had accepted unaccounted income of Rs. 71,50,000/- being unaccounted excess stock. The partner of the firm accepted the said income as additional income over and above it’s regular income. The PCIT was of the view that thought he assessee has surrendered excess stock, as his unexplained income, and the assessee has paid taxes as per normal provisions of the Act, however, while passing the assessment order the Assessing Officer has not discussed the applicability of provision of Section 115BBE of the Act, according to which, such undisclosed income unearthed during the course of search should have been taxed at a higher rate of 60% (instead of the same being taxed under the normal tax rate). During the course of survey as well as in the assessment proceedings, the assessee has not explained the sources of such unaccounted stock. The Assessing Officer has not referred to any material found during the course of search which proves the contention of the assessee that unaccounted stock is out of undisclosed business income only. As the assessee has failed to explain the source of unaccounted purchase, as per the PCIT such undisclosed income was required to be taxed as per the provisions of Section 69 of the Act r.w.s. 115BBE and not as business income as computed by the assessee. Further, the PCIT was of the view that Ld. Assessing Officer never asked the assessee to prove the source of such excess stock and call the assessee to prove that such purchases are made out of undisclosed business income, and therefore, the assessment order passed by the Assessing Officer is erroneous and prejudicial to the interest of the Revenue.
6. Before us, the Counsel for the assessee submitted that in the instant fats, a survey under Section 133A of the Act was carried out at the premises of the assessee on 19.02.2018. During the survey, physical stock amounting to Rs. 1,11,28,063/- was found at the premises of the assessee, whereas the stocks as per the books of the assessee was Rs. 39,78,063/-. Accordingly, the statement of the partner of the assessee firm was taken in which the partner of the assessee firm, stated / accepted that excess stock amounting to Rs. 71,50,000/-was unaccounted business income of the assessee firm for the year under consideration. The Counsel for the assessee drew our attention to Question Nos. 12 & 13 of the statement of the partner at Pages 56 & 57 of the Paper Book, in which the main partner of the firm accepted such excess stock as unaccounted business income of the assessee firm. Thereafter, inventory of the physical stock was prepared by the survey team and the survey team observed that the excess stock found is not separately and clearly identifiable stock and is part of the mixed lot of stock found during the survey at the premises of the assessee. Further, the Counsel for the assessee submitted that the additional income on account of excess stock found during the course of survey was reflected in the Profit & Loss Account in Schedule P-6 of the Audit Report by the assessee. Further, the Counsel for the assessee submitted that in the computation of income total business of income of Rs. 77.66 lakhs includes additional income of Rs. 71.50 lakhs under the head business income in the return of income. Accordingly, it was submitted that in light of the above facts, the undisclosed excess stock is clearly the business income of the assessee.
7. Secondly, the Counsel for the assessee submitted before us that during the course of assessment proceedings the Assessing Officer vide notice dated 04.02.2021 had made a specific enquiry with respect to disclosure made during the course of survey proceedings, with respect to physical stock, cash and books etc. In response to the same, the assessee vide reply dated 12.02.2021 had given details of physical stock found during the course of assessment proceedings. Accordingly, the Counsel for the assessee submitted that after considering all the evidences, disclosures made before survey team and judicial decision of various Courts, the Assessing Officer has taken a plausible view and finalized the assessment and accepted the additional disclosed income as business income of the assessee. Accordingly, looking into the instant facts, the order of the Assessing Officer cannot be held to be erroneous and prejudicial to the interest of the Revenue.
8. Thirdly, the Counsel for the assessee submitted that in case of sister concern of the assessee (Kalpa Arunbhai Panchamiya) survey was conducted on the same date and by the same team on 19.02.2018. Just as in the case of the assessee, undisclosed excess stock was found during the course of survey and the Assessing Officer had taken a view that the excess stock disclosed during survey is to be assessed as income under Section 69 of the Act and thereby imposed higher rate of taxed under Section 115BBE of the Act. However, in appeal the Ld. CIT(A) held that the excess stock was undisclosed business stock of the assessee, which is not separately identifiable. The Ld. CIT(A) considered such undisclosed excess stock as business income of the assessee and allowed the appeal in favour of the assessee. The Counsel for the assessee has placed the above order for our perusal and records (refer Pages 119 to 121 of the Paper Book).
9. Fourthly, the Counsel for the assessee relied upon the Ahmedabad ITAT decision in the case of Nilaykumar & Bros. Jewellers vs. PCIT, Vadodara in ITA No. 146/Ahd/2022 in which the ITAT on identical facts has reversed the order of the PCIT by holding that undisclosed stock discovered during the course of survey under Section 133A of the Act is the business income of the assessee.
10. In response, the Ld. D.R. placed reliance on the observations made by the Ld. PCIT in the 263 order.
11. We have heard the rival contentions and perused the material on record.
12. On going through the facts of the instant case, we are of the considered view that this is not a fit case for revising the order passed by Ld. Assessing Officer by taking recourse to 263 proceedings. In this case, we observe that during the course of survey conducted at the premises of the assessee, certain excess stock was found, which was admitted to be the undisclosed business income of the assessee, by the main partner in the assessee firm. It is not the case of the Department that certain cash / jewellery / other income etc. was found which could be attributed as the business income of the assessee. As per the report by the survey team, the excess stock was a mixed stock and was not separately and clearly identifiable. Therefore, in our considered view, the said undisclosed excess stock should normally presumed to be the business income of the assessee only. We further observe that in the case of PCIT vs. Deccan Jewellers Pvt. Ltd. 132 com 73 (Andhra Pradesh), the High Court held that where nature and source of excess stock found during search was not specifically identifiable from profits which had accumulated from earlier years, AO was justified in holding that said excess stock was not undisclosed investment of assessee and no case of perversity or lack of enquiry on part of Assessing Officer was made out so as to render his decision erroneous under Explanation 2 to section 263. The brief facts of the case are that Assessee was engaged in business of gold and diamond jewellery and silver articles. A Search and seizure operation under section 132 was conducted in case of assessee and group concern and excess stock was found to be declared and assessee submitted that excess stock was a result of suppression of profit from business over years and had not been kept identifiable separately and, therefore, investment in excess stock had to be treated as business income. The Assessing Officer duly considered and accepted such explanation and taxed additional income as ‘business income’ at rate of 30 per cent, which was approved by Joint Commissioner. However, Principal Commissioner invoked revisionary powers under section 263, purportedly on ground that decision of Assessing Officer was erroneous and prejudicial to interest of Revenue. The High Court held that in view of consistent view of various judicial authorities that where excess stock found in course of search, is neither separately identifiable nor has independent physical existence, it cannot be treated as ‘undisclosed investment’ under section 69 and since explanations offered by assessee were fortifiable by said consistent view, no case of perversity or lack of enquiry on part of Assessing Officer was made out so as to render his decision erroneous under Explanation 2 to section 263. In the said case the High Court made the following observations:-
“….7. 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’.
8. 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 v. Dy. CIT [2011] 9 taxmann.com 300/45 SOT 349 (Ahd. – Trib.); (b) Asstt. CIT v. Sanjay Bairathi Gems Ltd. [2017] 84 taxmann.com 138/166 ITD 445 (Jp. – Trib.); (c) Dy. CIT v. Ram Narayan Birla [IT Appeal No. 482 (Jp.) of 2015, dated 30-9-2016]; (d) Kim Pharma (P.) Ltd. v. CIT [2013] 35 taxmann.com 456/216 Taxman 153 (Mag.) (Punj. & Har.) and (e) CIT v. S.K. Srigiri & Bros. [2008] 171 Taxman 264/298 ITR 13 (Kar.).
9. 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.
10. 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.
11. 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.
12. 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.
13. 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.
14. 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.
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18. 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…..”
13. In the case of Veer Enterprises vs. DCIT 158 taxmann.com 655 (Chandigarh Tribunal), the ITAT held that where during course of survey, assessee surrendered excess stock, cash and receivables and offered same to tax as business income, however, AO treated said surrendered amount as unexplained investment under Sections 69A and 69B, since it emerged that source of income of assessee was from its business operations, income surrendered by assessee during survey could not be brought to tax under deeming provisions of Sections 69A and 69B of the Act. In the case of Baljinder Kumar vs. DCIT 157 taxmann.com 739 (Chandigarh Tribunal), the ITAT held that where there are unrecorded sales made by assessee during current financial year and receivables arising out of such unrecorded sales had been offered to tax as additional business income by assessee, such amount could not be brought to tax under Section 69 of the Act. In the case of Parmod Singla vs. ACIT 154 taxmann.com 347 (Chandigarh Tribunal), the ITAT held that mere fact that survey/search proceedings have been initiated at business premises of assessee does not mandate Assessing officer to automatically invoke deeming provisions of Sections 69 and 69A; said provisions can be invoked only where explanation offered by assessee is not found satisfactory; where from explanation offered by assessee it clearly emerged that source of income offered during survey was from his business operations, such income could not be taxed under Sections 69 and 69A of the Act.
14. Accordingly, in light of the aforesaid decision cited above and the facts of the assessee’s case, wherein clearly it has been found that excess business stock was found from the premises of the assessee, in our considered view, the order passed by the Assessing Officer considering the undisclosed excess stock as the business income of the assessee, is not erroneous and prejudicial to the interest of the Revenue.
15. In the result, the appeal of the assessee is allowed.
This Order pronounced in Open Court on 24/04/2024
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