Excess Stock Found During Survey Cannot Be Treated as Unexplained Investment Without Corroborative Evidence: ITAT Panaji

Case Overview: Sadanand Bhavan Vs ITO (ITAT Panaji)

The Income Tax Appellate Tribunal, Panaji, recently delivered a significant ruling in the matter of Sadanand Bhavan Vs ITO, where an appeal was preferred against the order of the Commissioner of Income Tax (Appeals)-2, Panaji. The said CIT(A) order had upheld additions framed by the Assessing Officer pursuant to proceedings under Section 143(3) read with Section 263 and Section 250 of the Income Tax Act, 1961.

The ruling carries considerable weight for assessees in the trading and manufacturing sector, particularly those who face survey action under Section 133A and are subsequently subjected to revision proceedings. The Tribunal's findings clarify the boundaries of revisionary directions, the treatment of excess stock found during survey, and the applicability of Section 69, Section 69A, and Section 115BBE of the Income Tax Act, 1961.

Background and Facts of the Case

The Assessee and Initial Return Filing

The assessee, Sadanand Bhavan, is a partnership firm engaged in the manufacturing and sale of karadant/sweets. For Assessment Year 2013–14, the firm filed its return of income on 18-03-2014, declaring a total income of Rs. 14,64,500/-. The case was subsequently selected for scrutiny, and a notice under Section 142(1) of the Income Tax Act, 1961 was issued.

Survey Under Section 133A and Declarations Made

Prior to the scrutiny proceedings, survey operations were conducted at the business premises of the assessee on 06-09-2012 under Section 133A of the Income Tax Act, 1961. During the course of the survey, a statement of the partner was recorded, and declarations were made offering income for Assessment Year 2013–14 amounting to Rs. 44,50,279/-, which comprised the following components:

  • Excess cash found: Rs. 8,96,190/-
  • Renovation and interior decoration of the shop: Rs. 6,70,000/-
  • Excess stock found: Rs. 28,84,089/-

Subsequently, summons were issued under Section 131 of the Income Tax Act, 1961, and a further statement of the partner was recorded. In those proceedings, additional income of Rs. 56,00,000/- was declared in the hands of the firm for Assessment Year 2013–14. Thus, the total aggregate declaration across both stages amounted to Rs. 1,00,50,279/-.

Original Assessment Order Under Section 143(3)

The Assessing Officer, after examining the submissions, books of accounts, financial statements, and the statement recorded under Section 131 of the Income Tax Act, 1961, accepted the return of income. The additional income offered was treated as business income, partner remuneration was allowed as a deduction, and the total income was assessed at Rs. 49,64,500/-. The assessment order was passed under Section 143(3) of the Income Tax Act, 1961, dated 28-08-2014.

Revision Proceedings Under Section 263

Pr. CIT's Invocation of Revisionary Jurisdiction

The Principal Commissioner of Income Tax, upon examining the records, formed the view that the assessment order passed under Section 143(3) was erroneous and prejudicial to the interests of the revenue. The Pr. CIT observed that:

  1. The assessee had offered higher income during the survey proceedings but subsequently declared a lower income in the return of income.
  2. The assessee had failed to satisfactorily explain the sources of investment and the additional income declared.
  3. The Assessing Officer had treated the additional income as ordinary business income and allowed partner remuneration without appreciating the applicability of Section 69, Section 69A, and Section 115BBE of the Income Tax Act, 1961.

Accordingly, the Pr. CIT cancelled the original assessment order and directed the Assessing Officer to examine specifically whether the excess stock and excess cash found during the survey were related to the assessee's business activities and whether the sources of investment were properly explained. The revision order was passed under Section 263 of the Income Tax Act, 1961, dated 20-03-2017.