Deeming Provisions Of Sec 69B Can't Be Invoked Once Nexus Of Source Of Unrecorded Transactions With Assessee's Business Is Proved: Chandigarh ITAT

The Bench of Sanjay Garg (Judicial Member) and Vikram Singh Yadav (Accountant Member) observed that “the nature and source of such unaccounted stock is nothing but arising out of assessee's business operations. No doubt, these transactions were not recorded at the time of survey thus qualify as unrecorded transactions satisfying one of the essential conditions, at the same time, the assessee has provided the necessary explanation about the nature and source of such unrecorded transactions and the necessary nexus with assessee's business has been established, thus, it cannot be said that these are unexplained transactions thus, doesn't satisfy the second condition for invoking the deeming provisions of section 69B of the Act”. (Para 8.2)

As per the brief facts of the case, the assessee was engaged in the business of manufacturing and selling of Knitted Cloths, hosiery garments and dyed yarn. A survey action under Section 133A was carried out at the business premises of the assessee wherein the assessee had surrendered a sum of Rs. 1,00,24,282/- on account of excess stock. Subsequently, the assessee filed its return declaring total income of Rs. 92,36,240/- which includes the surrendered income which was offered to tax under the head “business income”. During assessment proceedings, the AO observed that physical stock valued at Rs. 3,34,55,282/- was found and as per Trial Balance as on the date of survey, the assessee has shown stock in its books of account at Rs. 2,34,31,000/- and therefore there was excess stock of Rs. 1,00,24,282/- which the assessee has surrendered as business income in its P&L Account. As per the AO, excess stock was found not recorded in books of accounts of the assessee on the date of survey and the assessee had not explained the nature & source of investment in such stock either during survey or post survey or during the assessment proceedings. Thus, such investment in excess stock of Rs 1,00,24,282/- was considered as unexplained investment of the assessee firm u/s 69B of the Income Tax Act.

The Bench observed that it is a settled legal proposition that there is difference between the undisclosed income and unexplained income and the deeming provisions are attracted in respect of undisclosed income however, the condition before invoking the same is that the assessee has either failed to explain the nature and source of such income or the AO doesn't get satisfied with the explanation so offered by him.

The Bench found that the stock physically found has been valued and then, compared with the value of stock so recorded in the books of accounts and the difference in the value of the stock so found belonging to the assessee firm has been offered to tax.

The Bench stated that the Revenue has not pointed out that the excess stock has any nexus with any other receipts other than the business being carried on by the assessee.

There is thus a clear nexus of stock physically so found with the stock in which the assessee regularly deals in and recorded in the books of accounts and thus with the business of the assessee and the difference in value of the stock so found is clearly in nature of business income, added the Bench.

Hence, the ITAT allowed the assessee's appeal and concluded that the income so surrendered on account of investment in excess stock during survey cannot be brought to tax under the deeming provisions of section 69B of the Act and the same has to be assessed to tax under the head “business income”.

Counsel for Appellant/ Taxpayer: Sudhir Sehgal

Counsel for Respondent/ Revenue: Amanpreet Kaur

Case Title: M/s A.P Knit Fab verses DCIT

Case Number: ITA NO. 732/Chd/ 2022

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