Montu Shallu Knitwears Vs DCIT (ITAT Chandigarh)
Recently the B Bench Of Chandigarh Income Tax Appellate Tribunal passed an judgement in the above case examining the applicability of Sec 69B r.w.s 115BBE. The central point of discussion was whether AO was right in applying the provisions of Sec 69B r.w.s 115BBE upon the excess value of stock found at the assessee’s premises during a survey conducted u/s 133A.
Issue:- Assessee is a partnership firm engaged in the business of manufacturing of wearing apparels. Apart from the said business, the assessee does not own or operate any other businesses, nor does the assessee have any other sources of income. On 29-08-2018 a survey action u/s 133A of the Act was carried out at the business premises of the assessee. During the course of survey the Ld. AO verified the stock and compared it to the value of stock in the assessee’s books of account. Discrepancies were discovered, so the assessee surrendered Rs. 50,00,000/- as an additional business income to buy peace of mind and to avoid litigation in FY 2018-19. For FY 2018-19 assessee declared a total income of Rs 1,40,22,393/- which includes that 50 lacs and paid tax at normal rate. Further that assessee’s case was selected for compulsory scrutiny assessment under CBDT guidelines, and a notice u/s 143(2) & u/s 142(1) along with a detailed questionnaire was issued to assessee on 29/9/20 & 20/01/21 respectively. On dt 28-09-2021 assessment order was passed where in the total income of the assessee was assessed at Rs 1,90,22,390/- after making additions of Rs 50,00,000/- on account of disallowance u/s 37. The Ld. AO also applied the provisions of section 115BBE on application of sec 69B of the Act.
Being aggrieved by the order of Ld. Assessing Officer the assessee filed an appeal before the Ld. CIT(A), where the additions of Rs 50,00,000/- on account of disallowance u/s 37 was deleted and the application of sec 115BBE was confirmed vide order dt 04-01-23. Further aggrieved by the order of Ld. CIT(A) the assessee filed an appeal before the Hon’ble ITAT.
In the whole case the assessee contention was that since he has no other source of income except income from business and the amt of Rs 50,00,000/- surrendered by him on account of discrepancies identified by the Ld. AO in respect of stock shall be treated as business income and should be offered to tax at normal rate.
Assessee Contention:- The assessee’s only source of income is their business income, which has been accepted by the department and it is a settled principle in law that when there is no other source of income (secret income) identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only, hence the amount surrendered shall be treated as business income.
Department Contention:- There should be no presumption to treat the value of excess stock as application of business income in absence of any evidence of earning that income or details as to when, how and from whom such income was derived. Assessee has not been able to establish nexus between the excess stock and normal business income. Further no documentary evidence has been submitted to justify the additional income of Rs. 50,00,000/- as business income. So action of the Ld. AO in applying the rates of Sec 115BBE is justified and and the Ld. CIT(A) has rightly affirmed the order of the Ld. AO.
ITAT Order:- Stock which was physically found has been valued and then, compared with the value of stock so recorded in the books of accounts and the difference so found has been offered to tax. So there is a clear commonality between the stock so found during survey and the stock as recorded in the books of accounts. Revenue failed to point out any nexus of that excess stock with any other receipts other than the business being carried on. Therefore the nature and source of such unaccounted stock is nothing but arising out of assessee’s business operations. No doubt, these transactions were not recorded at the time of survey thus qualifying as unrecorded transactions satisfying one of the essential conditions, at the same time, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and the necessary nexus with assessee’s business has been established, thus, it cannot be said that these are unexplained transactions hence not satisfying the second condition for invoking the deeming provisions of section 69B of the Act.
Conclusion:- The assessee appeal was allowed & various judicial pronouncements were relied upon. It was concluded that there was no physical distinction between the accounted stock and the unaccounted stock. The unaccounted stock has no independent identity and it is the part and parcel of entire stock, therefore, it cannot be said that there is an undisclosed asset. It is clearly evident that the unaccounted stock is linked with business of the assessee as the department itself compared it with the value of accounted stock and through the explanations and statements provided by the assessee. Thus what is not declared to department is receipt from business and the diff should be treated as business income and should taxed at normal rate. Hence the appeal was allowed.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 04/01/2023 pertaining to Assessment Year 2019-20.
2. In the present appeal, the assessee has raised the following grounds of appeal:
1. That the ld. CIT(A) has erred in treating the income surrendered during survey on account of excess stock u/s 69B r.w.s. provisions of section 115BBE of the Income Tax Act, 1961.
2. That the ld. CIT(A) has failed to appreciate the various binding judgments of Chandigarh and Amritsar Bench of the ITAT, wherein on similar facts and circumstances, the said income on account of “excess stock” during survey have been taxed at the normal rate of taxes and which ought to have been followed by the Ld. CIT(A), being jurisdictional Bench of ITAT.
3. That the various case laws as relied upon by the CIT(A) while confirming the addition are against the facts and circumstances of the case.
4. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
3. During the course of hearing, the Ld. AR submitted that this is a case of an assessee which is a partnership firm engaged in the business of the business of manufacturing of wearing apparels. Apart from said business, the assessee is not engaged in any other business and the assessee does not have any other source of income apart from the business income of the assessee.
4. It was submitted that a survey action u/s 133A of the Act was carried out at the business premises of the assessee on 29.08.2018. During the course of survey, certain discrepancies were encountered in physical verification of stock and in order to buy peace of mind and to cover up such discrepancies, the assessee surrendered an amount of Rs. 50,00,000/- as additional business income out of normal business income of the assessee for the FY 2018-19. The copy of the surrender letter of the assessee dated 30.08.2018 is placed at page no. 38 of the paper book.
5. It was submitted that during the course of survey action, statement of Sh. Munish Chopra, a Partner of the assessee firm was recorded and in the said statement, the assessee in response to question 39, again specified that the amount of Rs. 50,00,000/- as additional income over and above normal business income of the assessee. The copy of the said statement is placed in the paper book at page no. 39-44.
6. It was submitted that the assessee credited the said amount of Rs. 50,00,000/- in its profit and loss account for the year ending 31.03.2019 and the said books of account were audited by a Chartered accountant. Therefore, on the basis of audited financial statements, the assessee filed its return of income on 30.09.2019 wherein, a total income of Rs. 1,40,22,393/- was declared which includes the surrendered amount of Rs. 50,00,000/-. It is pertinent to mention on the said amount of Rs. 1,40,22,393/-, the assessee paid tax at normal rate of tax.
7. Thereafter, the case of the assessee was selected for scrutiny under compulsory scrutiny assessment as per the guidelines of CBDT and a notice u/s 143(2) of the Act was issued to the assessee on 29.09.2020. Thereafter, the assessee was issued a notice u/s 142(1) of the Act dated 20.01.2021 along with a detailed questionnaire. The copy of the same is placed in the paper book at page no. 45-49. The assessee in response to the said notice, filed various replies. The copy of the screenshot of the IT portal account of the assessee depicting the replies filed by the assessee is placed in the paper book at page no. 50-53.
8. Subsequently, the case of the assessee was finalized and assessment order dated 28.09.2021 was passed wherein, the total income of the assessee was assessed at Rs. 1,90,22,390/- after making additions of Rs. 50,00,000/- on account of disallowance u/s 37 of the Act. In addition to this, the Ld. AO also applied the provisions of section 115BBE of the Act on alleged application of section 69B of the Act in the case of the assessee.
9. Against the said order of the AO, the assessee filed an appeal before the ld CIT(A). During the course of appellate proceedings, the assessee filed its detailed submissions on the alleged application of section 69B of the Act r.w.s. 115BBE of the Act and disallowance of amount of Rs. 50,00,000/- u/s 37 of the Act. The ld CIT(A) vide order 04.01.2023 although deleted the disallowance of Rs. 50,00,000/- u/s 37 of the Act however, the submissions of the assessee on the alleged application of section 69B of the Act in the case of the assessee were not considered and the ld CIT(A) confirmed the application of section 115BBE of the Act in the case of the assessee on account of amount surrendered by the assessee during the course of survey action on account of excess stock found. Now, against the order of CIT(A), the assessee is appeal before the Tribunal.
10. In the aforesaid factual background, it was submitted that the assessee has been engaged in the business of manufacturing of wearing apparels and is not engaged in any other business and neither the assessee has any other source of income. The same fact has been accepted by the department during the course of survey action as well as during the course of assessment proceedings later on wherein, no adverse opinion w.r.t. any other source of income of the assessee. Hence, in the first instance, it is hereby submitted that the assessee is engaged only in the business of manufacturing of wearing apparels and any income which accrues to the assessee or any asset which is in the possession of the assessee are wholly earned from the business income of the assessee. During the course of survey action on 29.08.2018, the Ld. AO conducted the physical verification of the stock and compared the same with the value of stock in the books of account maintained by the assessee which itself justifies that the department itself believes that the stock belongs only to the business of the assessee.
11. It was submitted that after surrender of Rs. 50,00,000/-, the assessee credited the said amount in its profit and loss account prepared for the year ending 31.03.2019. Hence, the assessee paid tax on surrendered amount of Rs. 50,00,000/- at normal rate of tax. In addition to this, the assessee also recorded the said stock in the books of account. Now, as there is no other source of income of the assessee other than the business income earned by the assessee and the said fact has been duly accepted by the department and it is a settled principle in law that when there is no other source of income identified during the course of survey or during the course of assessment proceedings, any income arising to the assessee shall be treated to be out of the normal business of the assessee only and hence, the surrender amount of Rs. 50,00,000/- on account of excess stock should be treated as the business income of the assessee. Reliance in this regard is placed on the judgment in the case of Daulat Ram Rawatmull vs. CIT [1967] 64 ITR 593, wherein Calcutta High Court held as under:
“61. In the instant case the assessee is a firm formed for the purpose of carrying on business. There is nothing on record to show that the firm had any source of income other than business. Therefore, in our opinion, it is not unreasonable to hold that any amount representing secret income arose out of business of the firm.”
12. Reliance in this regard is placed on the judgment dated 18.02.2021 in the case of Shri Harish Sharma vs. The ITO in ITA No. 327/CHD/2020 wherein it was held that that Section 68 not applies when assessee explained nature & source of Income. Hence, when all the incomes earned by the assessee/ assets in the possession of the assessee are only from the business income of the assessee, there do not arise any question as to application of provisions of section 69B of the Act and hence taxing such income at special rate as per section 115BBE of the Act is invalid. In the case of the assessee also, there has been no other source of income identified, neither during the course of survey action nor during the revision assessment proceedings initiated later on. Hence, the income of the assessee is only on account of the business of the assessee carried on by the assessee since past many years and in these circumstances, the provisions of section 69B of the Act are not applicable.
13. Further, reliance is also placed on the following judgments:
