Case Law Details
Fathima Jewellers Vs DCIT (ITAT Chennai)
In the case of Fathima Jewellers vs. DCIT (ITAT Chennai), the Income Tax Appellate Tribunal (ITAT) provided a crucial ruling regarding excess gold jewellery stock discovered during a survey. The ITAT clarified that this stock should not be considered an unexplained investment under the Income Tax Act.
Detailed Analysis:
1. Background: Fathima Jewellers is a retail business dealing in gold and silver jewellery. In February 2019, a survey was conducted under Section 133A of the Income Tax Act at the business premises of Fathima Jewellers.
2. Assessment and Controversy: During the subsequent scrutiny assessment, the Assessing Officer (AO) treated the excess stock, valued at Rs. 40,77,814, as unexplained investment under Section 69B of the Income Tax Act. The AO’s reasoning was that this stock was not accounted for and, therefore, constituted unexplained investment.
3. AO’s Observations: The AO observed that the physical stock at Fathima Jewellers’ business premises was inventoried during the survey. When this inventoried stock was compared with the books of accounts, it was found that there was an excess stock valued at Rs. 40,77,814. The AO assumed that this excess stock mainly consisted of stock transferred from the proprietary concern to the partnership firm.
4. CIT(A) Confirmation: The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the AO’s decision. The CIT(A) stated that Fathima Jewellers could not provide evidence to prove that the excess stock had a legitimate source. Without proper documentation for purchases, the source of unaccounted purchases, unaccounted sales linked to those purchases, and the reinvestment of proceeds, the CIT(A) concluded that this excess stock was not generated from the regular business activities in the current financial year.
5. Tribunal’s Ruling: The ITAT considered the accounts of the proprietary concern (Fathima Jewellers, run by Shri S.S. Haja Mohideen) for the period from April 1, 2018, to December 1, 2018. During this period, the proprietary concern was closed, and the gold jewellery stock from the showroom became part of the stock taken over in the business succession by the partnership firm, Fathima Jewellers.
6. Crucial Evidence: The ITAT noted that the partnership firm commenced business on December 1, 2018, while the survey took place on February 28, 2019. The ITAT also reviewed the reconciliation of stock between the proprietary concern and the partnership firm. This reconciliation demonstrated that the excess gold jewellery stock found during the survey had its origins in the stock transferred from the proprietary concern to the partnership firm.
7. Business Income, Not Unexplained Investment: The ITAT emphasized that the excess stock was a result of a legitimate business transaction. It was transferred from the proprietary concern to the partnership firm upon the succession of business. The ITAT firmly disagreed with the earlier assessment, which categorized this excess stock as unexplained investment under Section 69B of the Act.
8. Result: As a result of this judgment, the ITAT allowed Fathima Jewellers’ appeal, effectively overturning the earlier assessment. The ITAT directed the Assessing Officer to assess the excess stock as business income and tax it accordingly.
Conclusion: The ITAT’s ruling in the Fathima Jewellers case clarifies that excess stock discovered during a survey should not automatically be considered an unexplained investment. In cases where stock is transferred from one legitimate business entity to another, it remains part of the regular business income and should be assessed as such. This judgment underscores the importance of proper documentation and transparency in tax assessments, especially when dealing with stock and inventory discrepancies.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal by the assessee is arising out of the order of the Commissioner of Income Tax (Appeals)-18, Chennai in Appeal Reference No. CIT(A),Chennai-18/10760/2018-19 dated 24.11.2022. The assessment was framed by the DCIT, Central Circle-3(4), Chennai for the assessment year 2019-20 u/s.143(3) of the Income Act, 1961 (hereinafter the ‘Act’), vide order dated 29.09.2021.
2. The only issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO treating the excess business stock as unexplained investment and assessed the same u/s.69B of the Act. For this, assessee has raised various grounds, which are argumentative and factual and need not be reproduced.
3. Brief facts are that the assessee is a firm engaged in retail business of gold and silver jewellery. A survey u/s.133A of the Act was carried out in the business premises of the assessee on 02.2019. During the course of scrutiny assessment proceedings, the AO treated the excess stock valued at Rs.40,77,814/- as unexplained investment u/s.69B of the Act. For this, the AO observed in para 4.1.1 & 4.1.3 as under:-
4.1.1 During the course of survey, the physical stock available at the business premises of the assessee was inventorised. When the inventorised stock was compared with books of accounts, it was seen that there was an excess stock available valued at Rs. 40,77,814/-. The assessee was requested to explain the discrepancy. Since the stock of the firm as on 28.20.2019 mainly consisted of the stock transferred from the proprietary concern, the same rate was adopted for the valuation of the stock. Accordingly, the value of the excess stock of |Gold of 1435.85 gms as on 28.02.2019 works out to Rs.40,77,814/-. The same was offered for taxation by the assessee firm for the A.Y. 20 19-20.
4.1.3 In view of the above discussion, the excess stock amounting to Rs. Rs.40,77,8 14/- is treated as unexplained investment u/s.69B of the Income Tax Act, 1961 and subjected to tax as per provisions of section 1 15BBE of the Income Tax Act, 1961 .Penalty proceedings u/s.27 1 AAC is initiated. From the above, it is clear that the AO has followed the decision of Hon’ble Madras High Court in the case of M/s. SVS Oil Mills vs. ACIT in ITA No.765 of 2018. Aggrieved, assessee preferred appeal before CIT(A).
4. The CIT(A) confirmed the action of AO and held that the assessee is unable to prove with evidence as to how the excess stock was generated in its business so as to tax the same as business income. The assessee is unable to file proof for purchases made, source for such unaccounted purchases, the unaccounted sales made out of such unaccounted purchases and how the proceeds were ploughed back to generate the unaccounted stock. As the assessee has not furnished any documentary evidence to substantiate its claim, the CIT(A) noted that the excess stock has not been earned from regular business activity done during the current financial year only. Hence, he uphold the action of AO to treat the excess stock found on account of unexplained investment u/s.69B of the Act and to be taxed @ 60% u/s.115BBE of the Act. Aggrieved, assessee is in appeal before the Tribunal.
5. Before us, the ld. counsel for the assessee filed copy of trading account, profit & loss account and balance sheet of proprietor concern of Fathima Jewellers, proprietor Shri S.S. Haja Mohideen from 01.04.2018 to 01.12.2018 whereby during the year proprietary concern was closed and the gold jewellery stock held in the showroom become part of the stock taken over in the business succession by the assessee’s firm as on 01.12.2018. According to ld. counsel for the assessee, the assets and liabilities as on 30.11.2018 of this proprietary concern was taken over by three sons of Shri S. S. Haja Mohideen namely Shri H. Zahir Hussain, Shri H. Syed Ariff and Shri H. Ashiq, who formed partnership firm i.e., present assessee firm Fathima Jewellers amongst themselves as per Deed of Partnership dated 12.10.2018. The ld. counsel for the assessee stated that this partnership commenced business from 01.12.2018 and survey took place on the business premises of the assessee only on 28.02.2019 i.e., after three months of formation of this firm. According to ld. counsel, the excess stock on the date of survey is nothing but acquired out of stock taken over by the proprietary business solely the aggregate physical excess stock generated in the business of proprietary concern over the past many years. The ld. counsel for the assessee stated that the excess stock was surrendered during the course of survey for the reason that the assessee do not want to fight a legal battle with the Department and to buy peace, they surrendered the same as business income. The ld. counsel drew our attention to the finding of the AO wherein he noted that “the stock of the firm as on 28.02.2019 mainly consisted of the stock transferred from the proprietary concern.” In term of the above, the ld. counsel stated that once this is a business stock of proprietary concern which got merged with the assessee firm or stock transferred from there, that cannot be treated as unexplained investment u/s.69B of the Act.
6. On the other hand, the ld.Senior DR argued that the assessee before AO or before CIT(A) or even now could not prove that the excess stock belongs to the proprietary concern of Shri S.S. Haja Mohideen and there is no evidence that this is a stock transferred from that proprietary concern to assessee firm. According to Senior DR, this excess stock found during the course of survey is unexplained investment and is to be assessed u/s.69B of the Act. Hence, he urged that the order of AO and that of CIT(A) be confirmed.
7. We have heard rival contentions and gone through facts and circumstances of the case. Before us, the assessee filed the accounts statement for the period 01.04.2018 to 01.12.2018 that of the old Fathima Jewellers i.e., the Proprietary concern of Shri S.S. Haja Mohideen. From these accounts, we noted that mainly the gold stock in the partnership firm is taken from the proprietary concern i.e., on account of succession of business and the gold jewellery of stock is to the extent of Rs.6,60,93,638/- and silver jewellery stock transferred is to the extent of Rs.11,39,825/-. The assessee has filed the reconcillation of stock between the sole proprietary concern and the stock transferred to the books of the partnership firm. The assessee has given the following details:-
In the Sole Proprietary concern
Event 1 On 14/11/2018 date 10316.900 gms Jewellery out of the business stock was set apart exclusively for MS Nafeesath Thaira, wife of the deceased Sole Proprietor S S Haja Mohideen.
A Sale Invoice was raised for this in the name of MS Nafeesath Thahira. Values –
Sale Value Rs 2,93,00,000
GST Rs 8,79,000
Total Value Rs 3,01,79,000
Event 2 On 01/12/2018 date 232 17.960 gms Jewellery was transferred to
Partnership Firm Account. This was through a Journal entry.
Value – Rs 6,60,93,638
In the books of the Partnership-
Event 1 On 01/12/2018 date – 23217.960 gms jewellery came inwards as Stock Transfer from the Proprietary concern
Value – Rs 6,60,93,638 (Same as accounted in the Proprietorship)
Event 2 Along with this, the 10316.900 gms jewellery set apart for MS Nafeesath Thahira in the Proprietorship is also accounted as Stock Transfer Inwards in the Partnership, in the name of the 3 Partners. Value is the same Rs 3,01,79,000 as accounted in the Sole Proprietorship.
(Distribution of mother’s share of proprietorship jewellery to her 3 sons is on a personal arrangement between them)
Total of the 2 Stock Transfer Inwards is Rs 9,62,72,63 8, This is the Stock ‘Transfer line item in the Firm’s Profit and Loss Statement.
From the above details, it is clear that the excess gold jewellery stock found during the course of survey to the Income-tax Department as on 28.02.2019 is on account of stock transferred from proprietary concern to the partnership firm Fathima Jewellers. No doubt, assessee has surrendered this amount but this is purely arising out of business income and it is to be considered as business stock of the assessee and it has to be assessed under the head “business income”. Hence, we find that the order of the AO and the CIT(A), both have erred in treating the same as unexplained investment and assessed u/s.69B of the Act. We direct the AO to assess the same as business income and tax accordingly.
8. In the result, the appeal filed by the assessee is allowed.
Order pronounced in the open court on 15th September, 2023 at Chennai.
