Unrecorded stock of rice noticed during survey taxable as Business Income

FULL TEXT OF THE HIGH COURT JUDGMENT / ORDER IS AS FOLLOWS:-

By way of this appeal, the appellant has assailed the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the assessee.

2. Counsel for the appellant has framed the following substantial questions of law:–

“(i) Whether the Tribunal was legally justified in reversing the findings of the Commissioner (Appeals) and deleting the addition of Rs. 70,04,814 which was surrendered by the assessee by holding that such amount was included in the purchases and was reflected in the sales and closing stock, specifically when the assessee failed to show that the said amount was included in the sales and closing stock?

(ii) Whether the Tribunal was legally justified in treating the investment in excess stock for Rs. 70,04,814 found during the course of survey as ‘business income’ instead of ‘income from other sources’ which was to be liable to tax under section 69?

(iii) Whether the Tribunal was legally justified in reversing the findings of the Commissioner (Appeals) and deleting the addition of Rs. 1,39,366 made on account 5 of less interest charged by the firm from the wife of one of the partner specifically when the interest was paid at higher rates on the loans taken?”

3. The Tribunal while considering the matter has observed as under:–

“2.7. It is further submitted that the real issue in this case is whether the excess stock surrendered should be made as a part of business income or not and if so, assessee can claim deduction on account of payment of remuneration to partners on account under section 40b(v). In this regard, our reference was drawn to the decision of Co-ordinate Bench in case of Shri Ramnarayan Birla (in ITA No. 482/JP/15 dated 30-9-2016). In that case, the question before the Coordinate Bench was “whether the Commissioner (Appeals)-2, Udaipur has erred in directing the assessing officer to assess the unexplained investment surrendered by the assessee under the head “income from Business” ignoring the decision of the Hon’ble Gujarat High Court in the case of Fakir Mohd. Hazi Hasan 247 ITR 290 that unaccounted income ought to be categorized under the residuary head of ‘Income from other sources’. In respect to the said issue, the findings of the Coordinate Bench are as follows:

“We have heard the rival contentions and perused the material available on record. Undisputed facts emerged from the record that at the time of survey excess stock was found. It is also not disputed that assessee is engaged in the business of jewellery. During the course of survey excess stock valuing Rs. 77,66,887 was found in respect of gold and jewellery. The Coordinate Bench in the case of Choksi Hiralal Mangnlal v. DCIT 131, TTJ (Ahd.) 1 has held that in a cases where source of investment/expenditure is clearly identifiable and alleged undisclosed asset has no independent existence of its own or there is no separate physical identity of such investment/expenditure then first what is to be taxed is the undisclosed business receipt invested in unidentifiable unaccounted asset and only on failure it should be considered to be taxed under section 69 on the premises that such excess investment is not recorded in the books of account and its nature and source is not identifiable. Once such excess investment is taxed as undeclared business receipt then taxing it further as deemed income under section 69 would not be necessary. Therefore, the first attempt of the assessing authority should be to find out link of undeclared investment/expenditure with the known head, give opportunity to the assessee to establish nexus and if it is satisfactorily established then first such investment should be considered as undeclared receipt under that particular head. It is observed that there is no conflict with the decision of Hon’ble Gujarat High Court in the case of Fakir Mohd. Jajihasan (supra) where investment in an asset or expenditure is not identifiable and no nexus was established then with any head of income and thus was not available for set off against any loss under any other head. Therefore, the Hon’ble Coordinate Bench held that where asset in which undeclared investment is sought to be taxed is not clearly identifiable or does not have independent identity but is integral and inseparable (mixed) part of declared asset falling under a particular head, then the difference should be treated as undeclared business income explaining the investment. In the present case the excess stock was part of the stock. The revenue has not pointed out that the excess stock has any nexus with any other receipts. Therefore, we do not find any fault with the decision of the learned Commissioner (Appeals) directing the assessing officer to treat the surrendered amount as excess stock qua the excess stock found.”

2.10. We have heard the rival contentions and perused the material available on record. During the course of survey, the assessee has surrendered an amount of Rs. 70,04,814 towards investment in stock of rice which had not been recorded in the books of accounts. Subsequently, in the books of accounts, the assessee has incorporated this transaction by debiting the purchase account and crediting the income from undisclosed sources. In the annual accounts, the purchases of Rs. 70,04,814 were finally reflected as part of total purchases amounting to Rs. 33,47,19,658 in the profit and loss account and the same also found included as part of the closing stock amount to Rs. 1,94,42,569 in the profit/loss account since the said stock of rice was not sold out. In addition to the purchase and the closing stock, the amount of Rs. 70,04,814 also found credited in the profit and loss account as income from undisclosed sources. The net effect of this double entry accounting treatment is that firstly the unrecorded stock of rice has been brought on the books and now forms part of the recorded stock which can be subsequently sold out and the profit/loss therefrom would be subject to tax as any other normal business transaction. Secondly, the unreco4rded investment which has gone in purchase of such unrecorded stock of rice has been recorded in the books of accounts and offered to tax by crediting the said amount in the profit and loss account. Had this investment been made out of known source, there was no necessity for assessee to credit the profit/loss account and offer the same to tax. Accordingly, we do not see any infirmity in assessee’s bringing such transaction in its books of accounts and the accounting treatment thereof so as to regularise its books of accounts. In fact, the same provides a credible base for Revenue to bring to tax subsequent profit/loss on sale of such stock of rice in future.

2.11. Having said that, the next issue that arises for consideration is whether the amount surrendered by way of investment in the unrecorded stock of rice has to be brought to tax under the head “business income” or “income from other sources”. In the present case, the assessee is dealing in sale of foodgrains, rice and oil seeds, and the excess stock which has been found during the course of survey is stock of rice. Therefore, the investment in procurement of such stock of rice is clearly identifiable and related to the regular business stock of the assessee. The decision of the Co-ordinate Bench in case of Shri Ramnarayan Birla (supra) supports the case of the assessee in this regard. Therefore, the investment in the excess stock has to be brought to tax under the head “business income” and not under the head income from other sources”. In the result, ground No. 1 of the assessee is allowed.

3.2. The learned Authorised Representative of the assessee submitted that at the outset, it may be noted that the assessing officer has made addition on account of notional interest of Rs. 1,39,366. There cannot be any addition on account of notional income as held by the Hon’ble Supreme Court in case of E.D. Sassoon & Co. & Ors. v. CIT (1954) 26 ITR 27(SC) and Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 where it was held that only real income can be taxed, hypothetical income cannot be taxed nor income can be taxed in vacuum. Therefore, the addition made by the assessing officer is not as per law and the same be deleted. The learned Commissioner (Appeals) has confirmed the addition by stating that it is the disallowance of interest. It is submitted that the lower authorities have not disputed about the commercial expediency about the advance given to Smt. Rita Gupta. In fact, the advance was given to Smt. Rita Gupta in earlier years for construction of godown and the same was given on rent by the assessee. Therefore once commercial expediency for giving the advance is established, no part of the interest expenditure can be disallowed in view of the decision of Hon’ble Supreme Court in case of S.A. Builders 288 ITR 1 and Hero Cycles Pvt. Ltd. v. CIT (2015) 379 ITR 347 (SC) where it was held that the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. If further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. Further, in past, no such disallowance/addition was made. Therefore, neither the addition of notional interest made by the assessing officer or disallowance of interest as held by the learned Commissioner (Appeals) is Rs. 1,96,73,637. Partners are paid interest @ 12% the balance in the partners account is much more than the amount advanced to Smt. Rita Gupta who is a wife of one of the partner. Therefore, even the disallowance made @ 4% is not justified and the same should be restricted @ 2% only. Reliance is also placed on the following cases.

• CIT v. Ram Kishan Verma 132 Taxman 107 (Raj.)(HC)
• CIT v. Vijay Solvex Ltd. DB Income Tax Appeal No.147/2004, dated December 10, 2014

4. We are in complete agreement with the view taken by the Tribunal. No substantial question of law arises.

5. Hence, the appeal stands dismissed.