Excess stock found during search is taxable as business income and not as unexplained investment if such stock isn’t separately identifiable

Case details: PPCIT v. Deccan Jewellera (P.) Ltd. - [2021] 132 taxmann.com 73 (Andhra Pradesh)

Judiciary and Counsel Details

• • Joymalya Bagchi and K. Suresh Reddy, JJ.

Facts of the Case

Assessee was engaged in the business of gold and diamond jewellery and silver articles. A search and seizure operation under section 132 was conducted on assessee and its group concern. During the search, the assessee declared excess stock. It was submitted that such excess stock was the result of suppression of profit from the business over the years. Since the assessee had not been kept it identifiable separately, investment in excess stock had to be treated as business income.

Assessing Officer (AO) duly considered and accepted such explanation and taxed additional income as ‘business income’ at 30 percent, which the Joint Commissioner approved. However, later the Principal Commissioner (PPCIT) invoked revisional powers under section 263 purportedly on the ground that the decision of AO was erroneous and prejudicial to the interest of revenue. On appeal, the Tribunal set-aside order of PCIT. Aggrieved-PCIT filed the instant appeal before the High Court.

High Court Held

The High Court held that as per section 69, investments would fall within the definition of ‘undisclosed investment’ in the event the following conditions are satisfied:

(a) Such investment is made in the course of the financial year and not reflected in the books of account, if any, maintained by the assessee for any source of income,

(b) No explanation is offered by the assessee about the nature and source of investments, and

(c) Such explanation is not found to be satisfactory in the opinion of the Assessing Officer.

In the given case, the assessee submitted that the nature and source of the excess stock fell under the heading ‘Profits and Gains of the Business’. Further such stock was not specifically identifiable from the profits which had accumulated from earlier years. These explanations offered by the assessee were duly accepted by the AO, which came to be approved by the Joint Commissioner.

Therefore, it couldn’t be said that the condition precedents for holding that the excess stock as ‘undisclosed investment’ under section 69 was satisfied. Accordingly, the revisional powers were illegally invoked by the PCIT, and his order was rightly set aside by the Tribunal.

List of Cases Referred to

• • Chokshi Hiralal Moganlal v. Dy. CIT [2011] 9 taxmann.com 300/45 SOT 349 (Ahd. – Trib.) (para 8)
  • Asstt. CIT v. Sanjay Bairathi Gems Ltd. [2017] 84 taxmann.com 138/166 ITD 445 (Jp. – Trib.) (para 8)
  • Dy. CIT v. Ram Narayan Birla [IT Appeal No. 482 (Jp.) of 2015, dated 30-9-2016] (para 8)
  • Kim Pharma (P.) Ltd. v. CIT [2013] 35 taxmann.com 456/216 Taxman 153 (Punj. & Har.) (Mag.) (para 8)
  • CIT v. S.K. Srigiri & Bros. [2008] 171 Taxman 264/298 ITR 13 (Kar.) (para 8)
  • Spectra Shares & Scrips (P.) Ltd. v. CIT [2013] 36 taxmann.com 348/219 Taxman 61 (Mag.)/354 ITR 35 (AP) (para 19)