DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE, VARANASI, VARANASI V. BALBHADRA RAM DASHRATH PRASAD, BALLIA

ITA 117/VNS/2024

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The case involves the Deputy Commissioner of Income Tax, Central Circle, Varanasi, as the appellant, and Balbhadra Ram Dashrath Prasad, a partnership firm engaged in trading of jewellery, as the respondent. The dispute arose from a search and seizure operation conducted on the assessee's premises, leading to the discovery of discrepancies between the physical and book stock of jewellery and unaccounted cash. The Assessing Officer (AO) made additions to the assessee's income based on these discrepancies, which were contested and partially overturned by the Ld.CIT(A). The Revenue appealed against the Ld.CIT(A)'s decision, which was ultimately upheld by the Tribunal.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 31137 (ITAT-VARANASI)
• Duration Of Justice: 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-11-2024
• Appeal Filed By: Department
• Order Result: Dismissed
• Next Hearing Date: 11-09-2024
• Assessment Year: 2018-2019
• Appeal Filed On: 28-06-2024
• Other Referred Cases: M/s. D P Jewellers, Parmod Singla v. ACIT, Veer Enterprises v. Deputy Commissioner of Income-tax, Montu Shallu Knitwears v. Deputy Commissioner of Income-tax, Pavan Kumar Agarwal v. Deputy Commissioner of Income-tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMALENDU NATH MISHRA
• Assessee Lawyers: V. K. JINDAL
• Keywords: Set aside; Business income; Unexplained investment; Income from undisclosed sources; Search and seizure
• Section: 153; 22; 69; 69B; 69A; 73; 133A

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL CIRCUIT BENCH, VARANASI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA No. 117/VNS/2024 Assessment Year 2018-19 Deputy Commissioner of Income Tax, Central Circle, Room No. 419, 3rd Floor, Aayakar Bhavan, M.A. Road, Varanasi vs. Balbhadra Ram Dashrath Prasad, Saraff Katra, Ballia, Uttar Pradesh PAN : AAGFB2558L (Appellant) (Respondent) For Assessee : Shri V.K. Jindal, C.A., and Shri Ashish Jindal, C.A., For Revenue : Shri Amalendu Nath Mishra, CIT-DR Date of Hearing : 11-09-2024 Date of Pronouncement : 21-11-2024 O R D E R PER B.R. BASKARAN, A.M : The Revenue has filed this appeal challenging the order dated 03-05-2024 passed by the Ld.CIT(A), Lucknow-3 and it relates to the Assessment Year (A.Y) 2018-19. The Revenue is aggrieved by the decision of the Ld.CIT(A) in granting relief in respect of following issues:- 2 ITA No. 117/VNS/2024 (a) Addition of undisclosed stock of Rs.1,44,40,383/- (b) Addition of suppressed business profits of Rs.20,10,248/- (c) Assessment of undisclosed stock and excess cash as business income instead of assessing the same u/s 69 of the Act chargeable u/s 115BBE of the Act. 2. The assessee herein is a partnership firm and is engaged in trading of jewellery. A search and seizure action was conducted in the hands of the assessee on 21-02-2018. 3. The first issue relates to the addition of undisclosed stock of Rs.1,44,40,383/-. The facts relating thereto are discussed in brief. During the course of search action, the search officials engaged a registered valuer to value the physical stock. The registered valuer valued the stock as on the date of search at Rs.3,92,11,490/-. However, the book stock as on that date was worked out at Rs.2,47,71,107/- at the time of search. Hence, the difference between both the values amounting to Rs.1,44,40,383/- was treated as undisclosed stock by the AO. Based on the above said value of closing stock of Rs.3,92,11,490/-, the search officials/AO prepared a profit and loss account as under:- To Opening Stock 2,08,42,934 By Sales 77,16,883 “ Purchases 80,87,470 “ Closing stock 3,92,11,490 “ Gross profit 1,79,97,969 ------------------- ------------------ 4,69,28,373 4,69,28,373 ============ ============ 3 ITA No. 117/VNS/2024 To Expenses 15,47,338 By Gross Profit 1,79,97,969 “ Net Profit 1,64,50,631 ---------------- ------------------ 1,79,97,969 1,79,97,969 ============ ============ The difference between the Profit of Rs.1,64,50,631/- arrived at in the Profit and Loss account and the stock difference of Rs.1,44,40,383/-, amounting to Rs.20,10,248/- was treated as undisclosed profit by the AO. Accordingly, he assessed the same as income of the assessee. 4. The search officials also found physical cash balance of Rs.43,86,000/-, while the book balance of Rs.16,04,186/-. Therefore, there was excess cash balance of Rs.27,82,414/-. 5. When these discrepancies were pointed out, the assessee agreed to offer a sum of Rs.1.00 crores as additional income of the firm. However, while filing return of income, the assessee offered a sum of Rs.46,96,771/- consisting of unexplained cash of Rs.27,82,500/- and excess stock of jewellery of Rs.19,14,271/-, as against Rs.1,44,40,383/- noted down by the search officials. 6. The AO noticed that the additional income offered by the assessee was not in accordance with the discrepancies noticed during the course of search operations. Accordingly, he assessed the difference between the unexplained stock determined by the search officials and that surrendered by the assessee (Rs.1,44,40,483/- less Rs.19,14,271/-) as income of the assessee The assessee itself had offered the difference in cash as its income while filing return of income. 4 ITA No. 117/VNS/2024 7. The AO also held that the tax shall be charged @ 60% of the Act is chargeable u/s 115BBE of the Act on the amount of Rs.1,72,22,883/- (Stock difference of Rs.1,44,40,383/- + undisclosed cash of Rs.27,82,500/-). 8. In the appellate proceedings, the Ld.CIT(A) deleted the additions relating to stock difference and suppressed business profits. He also held that the income surrendered by the assessee is assessable as business income taxable at normal rates. Hence the Revenue is aggrieved. 9. We heard the parties and perused the record. The first issue relates to the addition relating to stock difference and the second issue relates to the addition relating to suppressed profits. The Ld.CIT(A) has examined the valuation done by the registered valuer and he had valued the stock as under:- Gold ornaments - 14,725 grams - 3,65,98,012 Silver articles - 70.28 kgs - 18,98,965 Diamond items - 827.46 grams - 24,14,513 --------------- 4,09,11,490 Less:- Duplication in inventory 15,52,725** --------------- 3,93,58,765 ========== (** The Ld.CIT(A) noticed that there were duplications in the inventory taken and accordingly reduced the same). However, the AO had taken the value of physical stock at Rs.3,92,11,490/- and accordingly arrived at the stock difference of Rs.1,44,40,483/- and assessed the same. 5 ITA No. 117/VNS/2024 10. With regard to the difference in the value of stock, it was contended that the registered valuer has valued the stock at the “current market rate”, while the assessee has been consistently valuing the closing stock under “weighted average cost” method. The Ld.CIT(A) examined this claim of the assessee at pages 73 and 74 of his order and found that the above said submission of the assessee to be correct. The Ld.CIT(A) noticed that the assessee had valued the closing stock as on 31-03-2017 (opening stock for the current year) by following weighted average cost. Accordingly the value of stock as on the date of search was re-worked under the “weighted average cost method”. The relevant workings are given at pages 73 and 74 of the order passed by Ld.CIT(A). Under weighted average method, the value of stock as on the date of search was arrived at by Ld.CIT(A) at Rs.2,21,73,890/-. We noticed earlier that the assessee itself had surrendered stock difference of Rs.19,14,271/- in its return of income. Thus, the total value of stock available with the assessee as on the date of search was arrived at Rs.2,40,88,161/-. Accordingly, the Ld.CIT(A) held that the AO was not justified in adopting the value of book stock at Rs.3,92,11,490/-. 11. The Ld.CIT(A) examined the Profit and Loss Account prepared by the search officials as on the date of search. He noticed that the purchases value has been taken at Rs.80,87,470/- by the search officials. The Ld. CIT(A) examined the details of purchases as per books of account and noticed that the aggregate value of purchases as per books stood at Rs.45,22,569/-. Accordingly, he held that the AO was not justified in adopting the purchase value at Rs.80,87,470/-. Accordingly, the Ld.CIT(A) re-casted the Profit and Loss Account prepared by search officials by substituting the value of purchases and closing stock as under:- 6 ITA No. 117/VNS/2024 To Opening Stock 2,08,42,934 By Sales 77,16,883 “ Purchases 45,22,569 “ Closing stock 2,40,88,161 “ Gross profit 64,39,541 ------------------- ----------------- 3,18,05,044 3,18,05,044 =========== ========= To Expenses 15,47,338 By Gross Profit 64,39,541 “ Net Profit 48,92,203 ---------------- ------------------ 64,39,541 64,39,541 =========== =========== Accordingly, he took the view that there is no necessity to make addition of suppressed profits also, as the said addition was made on the basis of suppressed stock of Rs.1,44,40,483/-. Accordingly he deleted both the additions. 12. With regard to the difference in stock and cash balance surrendered by the assessee, the Ld.CIT(A) held that the same is taxable as business income of the assessee under normal rate of tax. 13. The Revenue is aggrieved by the decisions so rendered by the Ld. CIT(A). 14. We heard the parties and perused the record. We notice that the Ld CIT(A) has given a finding that there were two major mistakes in the workings made by the search officials, viz., 7 ITA No. 117/VNS/2024 (a) Valuation of stock as on the date of search by adopting the current market rates. (b) Adoption of wrong purchase value while preparing the Profit And Loss Account. There is no dispute with regard to the fact that the assessee has been consistently following the weighted average method of valuation of closing stock, which was proved by referring to the valuation done in the immediately preceding year, i.e., as on 31-03-2017. Accordingly, the Ld. CIT(A) has re-worked the value of stock as on the date of search under weighted average method, which worked out to Rs.2,40,88,161/-. The Ld. AR submitted that the value of stock was arrived by adopting the weighted average value method in a precise manner and the same is the correct value of stock as on the date of search. He submitted that the AO has mentioned in the assessment order that the value of book stock as on the date of search was Rs.2,47,71,107/- and the same is also not correct. According to the Ld.AR, the assessee has arrived at the excess stock at Rs.19,14,271/- and voluntarily offered it as income in the return of income filed. Before us, no material was placed by the Revenue to contradict the computations made by the assessee. Accordingly, we affirm the order passed by the Ld.CIT(A) in deleting the addition relating to suppressed stock. 15. The AO had also stated that the difference between the profit arrived at by the search officials and the suppressed stock is liable to assessed as suppressed profit. However, the value of purchases noted down by the search officials as on the date of search was proved to be incorrect by the assessee. The Ld.CIT(A) also examined the books and accordingly stated that the correct value of purchases is Rs.45,22,569/- only and not Rs.80,87,470/- adopted by the search officials. Accordingly, he 8 ITA No. 117/VNS/2024 has re-casted the profit and loss account and the same throws light that there was no surplus profit as noted down by the AO. In any case, it may not be proper for the AO to determine the profit in the middle of the year on the basis of unaudited profit and loss account. Accordingly, we are of the view that the addition of suppressed profits is also not warranted. Accordingly, we delete the same. 16. The AO also arrived at undisclosed purchases at Rs.35,64,901/- (Rs.80,87,470 (-) Rs.45,22,569/-), but did not add the same to the total income by telescoping the same with the addition relating to suppressed stock. However, the Ld.CIT(A) has given a specific finding that the value of purchases till the date of search was only Rs.45,22,569/- only and this finding of the Ld.CIT(A) was not shown to be incorrect by the revenue before us. Accordingly, the above said addition also not warranted in the facts and circumstances of the case. 17. The Ld.CIT(A) has held that the amount surrendered by the assessee shall constitute its business income only. We noticed earlier that the assessee is a partnership firm and its only source of income is its business activities only. Hence, it can be safely interpreted that the suppressed cash and suppressed stock have been generated out of its business activities only. Hence, the income surrendered towards suppressed stock and suppressed cash shall be assessable as business income of the assessee only. 18. Identical issue came before us in the case of M/s. D P Jewellers in ITA No.101 & 120/VNS/2024 and we have upheld the view taken by the Ld.CIT(A) in favour of the assessee. The relevant discussions made by the 9 ITA No. 117/VNS/2024 Ld.CIT(A) in the above said case, by placing reliance on various case laws, are extracted below, for the sake of convenience:- “6.16 In a case 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. 6.17 Reliance is placed in the case of ParmodSinglav. ACIT, in [2023] 154 taxmann.com 347 (Chandigarh - Trib.)wherein the Hon'ble ITAT CHANDIGARH BENCH 'A'vide order dated JULY 24, 2023 has held as under:- \"Section 69, read with sections 69A, 115BBE, 133A and 28(i), of the Income-tax Act, 1961 - Unexplained investments (Applicability of provision) - Assessment year 2017-18 - A survey was conducted in business premises of assessee during which assessee surrendered certain amount towards unaccounted advances, stock and cash in hand - Said amount was offered in return of income at rate of 30 per cent but Assessing Officer held that as per provisions of section 115BBE read with sections 69 and 69A, amount so surrendered was taxable of rate of 60 per cent - Whether mere fact that survey/search proceedings have been initiated at business premises of assessee doesn't mandate Assessing officer to automatically invoke deeming provisions of sections 69 and 69A; before invoking deeming provisions, he has to call for explanation of assessee and only where explanation so offered is not found satisfactory, he can proceed and invoke deeming provisions - Held, yes - Whether since assessee had been confronted with not just discrepancy so found during course of survey but nature and source of income surrendered during course of survey proceedings and it was clearly emerging that source of such income was from his business operations, income so surrendered could not be brought to tax under deeming provisions of sections 69 and 69A and same had been rightly offered to tax under head 10 ITA No. 117/VNS/2024 \"business income\" - Held, yes [Paras 32 and 33] [In favour of assessee]\" 6.18 Reliance is placed in the case of Veer Enterprises v. Deputy Commissioner of Income-tax, [2024] 158 taxmann.com 655 (Chandigarh - Trib.)wherein the Hon'ble ITAT CHANDIGARH BENCH 'B'vide order dated JANUARY 23, 2024 has held as under:- \"Section 69A, read with sections 69B and 28(i), of the Income- tax Act, 1961 - Unexplained money (Amount disclosed at survey) - Assessment year 2019-20 – During course of survey under section 133A, assessee surrendered excess stock, cash and receivables, stating that same was to be taxed as business income - Assessing Officer, however, treated said surrendered amount as unexplained investment under sections 69A and 69B and charged same to tax as per provisions of section 115BBE - Whether since during survey proceedings, assesse was confronted not only with discrepancies found but also with nature and source thereof and it had 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 section 69A and 69B and same had been rightly offered to tax by assessee under head of business income - Held, yes [Paras 29 and 30] [In favour of assessee]\" 6.19 Reliance is placed in the case of MontuShalluKnitwearsv. Deputy Commissioner of Income-tax, [[2024] 159 taxmann.com 677 (Chandigarh - Trib.) wherein the Hon'ble ITAT CHANDIGARH BENCH 'B'vide order dated DECEMBER 1, 2023 has held as under:- \"Section 28(i) read with sections 69B and 115BBE, of the Income-tax Act, 1961 - Business income - Chargeable as (Excess stock) - Assessment year 2019-20 - Assessee-firm was engaged in business of manufacturing of wearing apparels - During course of survey, assessee had surrendered certain amount to cover up discrepancies Assessing Officer treated surrendered amount as excess stock under section 69B read with provisions of section 115BBE - It was found that stock physically found had been valued and then, compared with value of stock so recorded in books of account and difference in value of stock so found belonging to firm had been offered to tax - Revenue had not pointed out that excess stock had any nexus with any other receipts other than business being carried on by assessee - 11 ITA No. 117/VNS/2024 Further, in surrender letter, the assessee had stated that during course of survey operations, certain discrepancy out of excess stock of Rs. 50 lakhs had been found and to avoid litigation, he had offered additional business income of Rs. 50 lakhs out of excess stock found out of their normal business income over and above normal business income - Assessee had provided necessary explanation about nature and source of such unrecorded transactions and necessary nexus with assessee's business - There was no physical distinction between accounted stock and unaccounted stock - Whether, on facts, income surrendered by assessee during survey was from business operations and, thus, should be treated as business income - Held, yes - Whether, therefore, said income could not be brought to tax under deeming provisions of section 69B read with section 115BBE and normal tax rate should be applied - Held, yes [Paras 20, 22 and 23] [In favour of assesseel\" 6.20 The reliance is placed in the case of Pavan Kumar Agarwal v. Deputy Commissioner of Income-tax, in [2023] 153 taxmann.com 531 (Telangana) wherein the Hon'ble HIGH COURT OF TELANGANA vide order dated FEBRUARY 22, 2023 has held as under:- \"I. Section 69 of the Income-tax Act, 1961 - Unexplained investments (Closing stock) - Assessment year 1996-97 - During course of assessment proceedings, Assessing Officer noticed that as per statement filed by assessee along with return of income, closing stock was higher than amount worked out by Assessing Officer - Assessing Officer noticing that assessee had admitted excess stock, presumed that assessee had invested income from undisclosed sources, and accordingly, added difference in value of stock to income of assessee under section 69 - Assessee submitted that by admitting closing stock more than stock found at time of inventory, assessee had disclosed more income and as such, no further addition could be made for excess stock - Whether since assessee had himself reflected quantum of closing stock in its books of account, closing stock shown by assessee could not be said to be unexplained investment of assessee and no addition could be sustained in this regard - Held yes [Para 16] [In favour of assessee] II. Section 69 of the Income-tax Act, 1961 - Unexplained investments (Construction of house property) - Assessment year 1996-97 - During a survey under section 133A conducted at premises of assessee, Assessing Officer found a number of vouchers and bills amounting to Rs. 6.50 lakhs 12 ITA No. 117/VNS/2024 relating to construction of house property by assessee and same was treated as unexplained investment - It was noted that to explain source of investment, it was submitted by assessee that a sum of Rs. 3.5 lakhs was borrowed from bank, amount of Rs. 3 lakhs was declared under VDIS and an additional amount of Rs. 1.5 lakhs was offered as income for year under consideration - Thus, assessee was able to explain source of investment in house property which was much higher than alleged unexplained investment in house property of Rs. 6.50 lakhs - It was also observed that Assessing Officer could very well had obtained a report from departmental valuation cell to arrive at correct figure of investment in house property - Whether, on facts, impugned addition under section 69 made to income of assessee on account of unexplained investment in house property was to be set aside - Held, yes [Para 20] [In favour of assessee]\" 6.21 The Assessing Officer has nowhere in the assessment order been able to bring on record the fact that the income surrendered during the course of survey was not out of the business of the assessee. Further, even the survey team has not found any source of income except business income. Therefore, the amount surrendered under unrecorded stock has to be brought to tax under the head \"business income\" as the excess stock which has been found during the course of survey is the investment in procurement of such stock. Such stock is clearly identifiable and related to the regular business stock of the assessee. The undisclosed investment in the case of excess stock found during carrying on business and the same is generated out of business income, no provisions of section 69 of the Act would attract. The excess stock found during the course of survey is taxable under the head business income and no provision u/s. 115BBE of the Act is attracted. In the present case as discussed above without any dispute the assessee offered additional income as excess stock and same was entered in the books of account and offered to tax under the business income. 6.22 In view of aforementioned discussion and the case laws relied upon, I am of the considered opinion that the Assessing Officer is not justified in excluding the alleged additional income offered during the course of survey and attracting the provisions u/s. 69 of the Act, consequently, the charging u/s. 115BBE of the Act.” 13 ITA No. 117/VNS/2024 In our view, the above said discussions made by the Ld.CIT(A) in the case of M/s. D P Jewellers (supra) shall apply to the facts of the present case. Accordingly, we hold that the Ld.CIT(A) is justified in holding that the income surrendered by the assessee is taxable at normal rates only. 19. In the result, the appeal of the Revenue is dismissed. Order pronounced on 21-11-2024 by way of proper mentioning in the Notice Board. Sd/- Sd/- [AMIT SHUKLA] [B.R. BASKARAN] JUDICIAL MEMBER ACCOUNTANT MEMBER Varanasi, Dated: 21-11-2024 TNMM Copy to : 1. The Appellant 2. The Respondent 3. The Pr. CIT, concerned 4. D.R. ITAT, Varanasi 5. Guard File. //By Order// //True Copy // Dy./Asst. Registrar, ITAT, Varanasi "