Assessee Explained The Source Of The Excess Stock Found During The Course Of Survey: ITAT Deletes Addition

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the assessee has explained the source of the excess stock found during the course of the survey.

The bench of Aby T. Varkey (Judicial Member) and Manjunatha (Accountant Member) has observed that when the assessee has explained that the source of excess stock found during the course of the survey is income generated from current-year business and the explanation offered by the assessee is plausible, then income offered towards excess stock cannot be treated as an unexplained investment.

The appellant/assessee is a partnership firm that is engaged in the business of manufacturing and selling finished leather and allied products. The assessee has filed its return of income for the assessment year 2018-19, admitting a total income of Rs. 6,39,80,090.

A survey operation under Section 133A of the Income Tax Act, 1961, was conducted at the business premises of the assessee firm on March 14, 2018. During the course of survey proceedings, an inventory of physical stock was taken, which resulted in the excess physical stock of Rs. 5.08 crore.

The statement under Section 131 was recorded by the managing partner of the firm. The managing partner had admitted the excess stock found in the business premises and also offered an additional income of Rs. 5.08 crore for the financial year relevant to the assessment year 2018-19. The assessee was also called upon to explain the source of excess stock found during the course of the survey, for which the assessee explained that excess stock found during the course of the survey was on account of non-reconciliation of stock in books of accounts. The excess stock has been acquired out of the current-year business income of the firm.

The case was selected for scrutiny, and during the course of assessment proceedings, the Assessing Officer noticed that the assessee firm had declared additional income of Rs. 5.08 crore towards excess stock found during the course of the survey under the heading ‘profits and gains from business and profession'. Therefore, the AO called upon the assessee to explain why the additional income admitted towards excess stock found during the course of the survey should not be treated as an unexplained investment under Section 69B of the Act.

The assessee submitted that excess stock found during the course of the survey is part of the regular stock of the assessee's business and said stock was mixed with regular stock. As of the date of the survey, the book stock was pending an update. The assessee could not reconcile the stock found during the course of the survey with book stock. However, to buy peace from the Department, the same has been offered to be taxed as income generated from the business activity for the relevant assessment year.

The Tribunal directed the AO to assess additional income offered towards excess stock found during the course of the survey under the heading profits and gains of business and profession as considered by the assessee.

Case Title: M/s. Overseas Leathers Versus Deputy Commissioner of Income-tax

Case No.: ITA No.: 962/Chny/2022

Date: 05.04.2023

Counsel For Appellant: D. Anand

Counsel For Respondent: P. Sajit Kumar

Click Here To Read The Order