Excess stock found during survey, acquired from suppressed

Excess stock found during survey, acquired from suppressed business profits, is taxable as business income, not under Section 69B.

Issue

Whether excess stock discovered during a Section 133A survey, consisting of regular trading commodities acquired out of suppressed business profits, is assessable as business income under normal provisions or as unexplained investment under Section 69B with higher tax rates under Section 115BBE.

Facts

Assessment Year: AY 2018-19.
Survey & Discovery: The assessee-firm, engaged in trading activities, was subjected to a survey under Section 133A, during which excess stock was found.
Partner’s Surrender Statement: The partner contemporaneously explained that the excess stock was acquired out of suppressed business profits and surrendered the amount as undisclosed income.
Accounting Treatment: The assessee incorporated the excess stock into its books by debiting purchases and crediting sundry creditors, subsequently reversing creditors and crediting the surrendered amount to the Profit and Loss Account.
Nature & Location of Stock: The excess stock consisted of the exact same commodities as the regular business stock, stored at the regular business warehouses, with no separate business activity or unrelated assets detected.
Assessing Officer’s Action: The Assessing Officer treated the excess stock as unexplained investment under Section 69B and invoked Section 115BBE to levy a higher rate of tax.

Decision

Nature of Income: The excess stock represented accumulated business profits derived from trading operations and was assessable as normal business income rather than deemed income under Section 69B. [Paras 20 and 21] [In favour of assessee]
Inapplicability of Section 115BBE: Since the addition fell under normal business income heads, the consequential application of Section 115BBE higher tax rates was set aside. [Paras 20 and 21] [In favour of assessee]

KeyTakeaways

Nexus with Business Operations: Excess stock found at regular business premises involving regular trading commodities has a direct nexus to business operations and represents income from business.
Inapplicability of Section 69B: Where the source of excess stock is established as unrecorded business income, it cannot be treated as an independent unexplained asset/investment under Section 69B.
Exclusion from Section 115BBE: Surrendered stock/income originating from business operations is taxed under normal tax rates for business income, thereby escaping the penal tax rates under Section 115BBE.

IN THE ITAT MUMBAI BENCH ‘F’

JSV ingredient

ACIT

Amit Shukla, Judicial Member
and MAKARAND VASANT MAHADEOKAR, Accountant Member

IT Appeal No. 5290 (Mum.) of 2025
[Assessment year 2018-19]

SEPTEMBER 7, 2026

Sukhsagar Sayal and Atul T. Suriya for the Appellant. Ms. Sandhya Mathur for the Respondent.

ORDER

Amit Shukla, Judicial Member.- The aforesaid appeal has been filed by the assessee against the order dated 30.06.2025 passed by the learned Commissioner of Income-tax (Appeals)-48, Mumbai, arising out of the assessment order passed under section 143(3) of the Income-tax Act, 1961, for the Assessment Year 2018-19. In the various grounds raised before us, the principal grievance of the assessee relates to the applicability of section 115BBE in respect of excess stock amounting to Rs. 2,75,63,760 found during the course of survey and treated by the Assessing Officer as unexplained investment under section 69B. The case of the assessee is that the excess stock represented undisclosed income generated from its regular business and, therefore, ought to be assessed as business income at the normal rate applicable to the assessee, and not as deemed income under section 69B attracting the higher rate of tax prescribed under section 115BBE.

2. The brief facts relevant for adjudication of the issue are that a survey action under section 133A was carried out at the business premises of the assessee on 19.02.2018. During the course of survey, the survey team undertook physical verification of the stock lying at the different warehouses and business premises of the assessee. The value of the stock physically found was determined at Rs. 8,10,25,692, whereas the value of stock appearing in the books of account as on the date of survey was Rs. 5,34,61,932. Consequently, a difference of Rs. 2,75,63,760 was found between the physical stock and the stock recorded in the books. The assessee accepted the quantitative and valuation exercise undertaken by the survey team and did not dispute either the existence or the valuation of the excess stock.

3. During the survey, the statement of one of the partners of the assessee-firm, Shri Minesh P. Vora, was also recorded. In response to Question Nos. 23 and 24, the partner accepted the difference of Rs. 2,75,63,760 between the physical stock and the stock appearing in the books. Thereafter, in Question No. 25, the survey officer specifically called upon him to explain the source of the investment in the excess stock, to which he replied as under:

“The source of such investment to the extent of Rs. 2,75,63,760 is mainly arisen out of suppression of net profit in earlier years which cannot be ascertained for a particular year. The undisclosed money arisen out of such modus operandi has been deployed towards these stocks.”

In response to Question No. 26, the partner further offered the aforesaid amount as undisclosed income for Financial Year 2017-18 and agreed to discharge the corresponding tax liability. Thus, the existence of the excess stock as well as its business origin was accepted during the survey itself. The contemporaneous explanation of the partner was that the stock had been acquired out of profits generated from the assessee’s business which had not been fully disclosed in the books of account.

4. In the return of income, the assessee included the amount surrendered during the survey under the head “Other Income”. In order to bring the stock physically found during survey into its regular books of account, the assessee recorded the corresponding purchases by debiting the Purchase Account and crediting the accounts of sundry creditors. Since those creditors did not represent actual outstanding liabilities, their accounts were thereafter debited and the corresponding amount was credited in the Profit and Loss Account as income disclosed during the survey under section 133A. The stock so brought into the books formed part of the closing stock reflected in the trading account.

5. The Assessing Officer, however, held that the excess stock had not been recorded in the books prior to its detection during survey and that the assessee had failed to produce purchase bills, challans, vouchers or other supporting documents evidencing its acquisition. He further proceeded on the premise that, by debiting the Purchase Account and reflecting the corresponding stock as closing stock, the assessee had effectively neutralised the income surrendered during the survey. According to the Assessing Officer, since the investment represented by the excess stock was not recorded in the books and its acquisition was not supported by contemporaneous purchase documents, the amount was liable to be treated as unexplained investment under section 69B. Accordingly, the amount of Rs. 2,75,63,760 was brought to tax at the higher rate prescribed under section 115BBE.

6. The learned CIT(A) upheld the action of the Assessing Officer. According to him, the statement that the excess stock had been acquired out of suppressed profits of the earlier years did not constitute a satisfactory explanation of the source of the investment. He further observed that recording the stock in the books after its detection during survey could not alter its original character as an unexplained investment. The learned CIT(A) also approved the finding of the Assessing Officer that the entries passed in the Purchase Account and closing stock had the effect of neutralising the surrendered income and that, in the absence of purchase invoices and supporting documents, the purchase entry was merely a fictional entry intended to reduce the tax liability. The contention of the assessee that the amount ought to be taxed at the normal rate as business income was accordingly rejected.

7. Before us, the learned counsel for the assessee submitted that the assessee had, in the statement recorded during the survey itself, categorically explained that the excess stock was acquired out of suppressed profits of its regular business. The stock consisted of the same commodities in which the assessee was regularly carrying on its trading activities and was found at its regular warehouses. Neither any other business activity nor any source of income unconnected with the disclosed business of the assessee was discovered during the survey. No independent asset, investment, money or valuable article extraneous to its existing business was found. Thus, according to the learned counsel, the excess stock was merely the physical manifestation of undisclosed profits generated from the regular business of the assessee and could not be treated as an unexplained investment made out of any unidentified source.

8. The learned counsel further submitted that the accounting entries passed by the assessee had been misunderstood by the authorities below. Once the stock physically found during survey was accepted and brought into the books, an entry recording its corresponding acquisition was necessary for correctly reflecting the quantity and value of the closing stock. The debit to the Purchase Account was absorbed in the corresponding enhancement of closing stock and was, therefore, neutral in its effect upon the trading account. The sundry creditors initially credited were thereafter debited, and the corresponding amount was separately credited as income disclosed during the survey. Thus, the surrendered income continued to remain part of the taxable income and was neither reduced nor neutralised. In support of the substantive contention, reliance was placed upon the decision of the coordinate Bench in the case of Govind Gidomal Lulla v. CIT(A) [IT Appeal No. 2285 (Mum.) of 2022, dated 11-4-2023].

9. The learned Departmental Representative, on the other hand, strongly relied upon the orders of the authorities below. He submitted that the stock physically found during survey was admittedly in excess of the stock appearing in the books and the assessee had failed to furnish purchase invoices, challans or other supporting documents establishing its acquisition. The subsequent recording of the stock in the books would not efface the fact that, on the date of survey, the investment represented by such stock remained unrecorded. It was thus contended that the conditions of section 69B stood fulfilled and, once the amount was assessable under section 69B, the application of section 115BBE followed as a necessary statutory consequence.

10. We have heard the rival submissions and perused the relevant material placed on record. The applicability of section 115BBE is consequential upon the income being chargeable under any of the provisions specified therein, including section 69B. Section 115BBE does not, by itself, determine the nature or character of an income, nor does the mere discovery of an amount or asset during survey automatically attract its rigour. Before the higher rate prescribed under section 115BBE can be applied, the statutory conditions contemplated under one of the specified deeming provisions must first be shown to have been fulfilled. Thus, the threshold enquiry is whether, on the facts and material available, the excess stock is liable to be regarded as an unexplained investment under section 69B or whether it represents undisclosed income generated from the assessee’s regular business. This determination must necessarily depend upon the nature of the stock, the business carried on by the assessee, the explanation furnished regarding its source, the statement recorded during the survey and the other material found by the survey team.

11. The mere existence of excess stock does not invariably lead to the conclusion that it represents an investment made out of an independent or unidentified source. Stock is ordinarily acquired, held and circulated as an integral incident of a trading or manufacturing business. Where the stock found during survey is of the same nature as the stock regularly dealt with by the assessee, is found at its regular business premises or warehouses, and the assessee contemporaneously explains that it was generated out of undisclosed profits of the same business, the explanation cannot be discarded merely because the corresponding purchases had not earlier been recorded in the books. The non-recording of purchases may establish the undisclosed character of the transactions or suppression of business profits; however, it does not, without anything further, establish that the source of the stock was extraneous to the business. If the Revenue seeks to invoke section 69B despite such an explanation, there must be some material indicating that the stock was acquired from a source distinct from, or unconnected with, the disclosed business activity. In the absence of such material, unrecorded business stock cannot be transmuted into an unexplained investment merely by applying the nomenclature of section 69B.

12. In the present case, the excess stock was not an independent or separately identifiable asset unrelated to the assessee’s regular business. It consisted of the very same commodities in which the assessee was admittedly trading and was found at its regular warehouses. There was no difference in the nature or character of the recorded and unrecorded stock; the only difference was in their quantity and value. The excess stock was intermingled with and formed part of the regular business stock. No other business activity, source of income, unexplained investment or asset extraneous to the assessee’s existing business was detected during the survey. There is also no finding that the assessee had any other undisclosed source from which such stock could have been acquired. These facts furnish a direct and proximate nexus between the excess stock and the business carried on by the assessee.

13. More significantly, when the partner was specifically asked about the source of investment in the stock in Question No. 25, he did not leave the source unexplained. Rather, he categorically stated that the investment had arisen from the suppression of net profits of the business and that the undisclosed money generated through such business activity had been deployed in acquiring the stock. This explanation was given during the survey itself when the excess stock was detected and was not an attribution devised subsequently in the course of assessment proceedings to avoid the consequences of section 115BBE. The statement, therefore, contains not merely an admission of excess stock but also a contemporaneous explanation of its source and character. There is no material brought on record by the Assessing Officer to demonstrate that the excess stock emanated from any source other than the assessee’s existing business.

14. The reference in the statement to suppression of net profits in earlier years does not, by itself, render the source unexplained or alter the intrinsic business character of the stock. The partner had stated that the suppressed profits could not be apportioned to a particular earlier year, but had consistently maintained that those profits arose from the assessee’s business and were deployed in acquiring the stock. The Revenue has accepted the surrender and brought the amount to tax in the year under consideration. Therefore, for the limited purpose of determining its character and the applicable rate of tax, the Revenue cannot segregate the stock from the very business which, according to the contemporaneous statement, generated the funds utilised for acquiring it, without bringing any contrary material on record. The inability to identify the precise year in which each component of the suppressed profit arose cannot be equated with a failure to explain the nature and source of the stock, particularly when its origin in the regular business remains uncontroverted.

15. We are also unable to endorse the finding of the authorities below that the assessee had neutralised the surrendered income by the accounting entries passed after the survey. This aspect is fundamental to the correct appreciation of the controversy. Once the physical stock found during survey was accepted and sought to be incorporated into the regular books, the assessee was necessarily required to account for the corresponding purchases. Accordingly, the Purchase Account was debited and the accounts of sundry creditors were credited, thereby bringing the previously unrecorded stock into the books. Since the creditors so created did not represent actual liabilities payable to identified suppliers, their accounts were thereafter debited and the corresponding amount was credited to the Profit and Loss Account as income disclosed during the survey. The stock introduced through the Purchase Account ultimately formed part of the closing stock. Thus, the entries have to be appreciated in their entirety and not by isolating the debit appearing in the Purchase Account.

16. The accounting consequence of these entries is unambiguous. The debit to the Purchase Account stood correspondingly reflected in the value of the closing stock and, therefore, did not result in any diminution of the trading profit. Quite apart from this, the liability initially credited in the names of sundry creditors was reversed and an equivalent amount was separately credited as the income surrendered during survey. That credit continued to form part of the taxable income declared by the assessee. Thus, the surrendered income was not extinguished, reduced or absorbed by any corresponding claim of expenditure. The entries merely served the legitimate accounting purpose of bringing the stock physically found into the books while simultaneously recognising the corresponding undisclosed business income in the Profit and Loss Account.

17. Viewed in this manner, the absence of purchase invoices or actual creditors does not support the inference drawn by the authorities below. The assessee itself never claimed that the stock had been acquired through recorded purchases from those creditors. On the contrary, its consistent explanation was that the stock had been acquired out of profits generated from its business which had remained undisclosed. The temporary credit to the sundry creditors was merely one part of the accounting mechanism adopted for introducing the unrecorded purchases; the subsequent reversal of those creditors and the credit of the surrendered amount as income completed the accounting treatment. Therefore, the Purchase Account cannot be regarded as containing a deduction claimed against the surrendered income. It represents the cost of stock which was simultaneously carried into the closing stock, leaving its effect upon the trading result neutral, whereas the separate credit of the surrendered amount remained fully exigible to tax.

18. Section 115BBE(2), therefore, cannot be invoked on the reasoning that the assessee had claimed an expenditure or allowance against the surrendered income. The prohibition contained in that provision operates where income has first been validly assessed under sections 68 to 69D and the assessee seeks a deduction, allowance or set-off against such income. In the present case, neither was the surrendered income neutralised through the Purchase Account nor, for the reasons already discussed, was the stock liable to be characterised as unexplained investment under section 69B. The accounting entries cannot determine the statutory character of the income; nevertheless, when correctly understood, they fortify the assessee’s case that the stock was brought into the books and the corresponding undisclosed business income was separately and fully offered to tax.

19. On materially similar facts, the coordinate Bench in Govind Gidomal Lulla(supra) considered a case where excess stock found during survey consisted of raw materials and ingredients used in the assessee’s regular business. The assessee had offered the difference as business income, whereas the Assessing Officer treated it as unexplained investment and applied section 115BBE. The Tribunal held that where an assessee carrying on business is found in possession of undisclosed stock arising in the course of that business, the same is taxable as undisclosed business income and cannot, in the absence of any other unexplained asset or source, be treated as an unexplained investment. It was further held that where the stock had been generated from the business itself, section 69 and, consequently, section 115BBE had no application. The principle laid down therein applies to the facts before us with greater force, since in the present case the partner had expressly identified the source of the excess stock as suppressed profits of the assessee’s regular business in his statement recorded during the survey itself.

20. Thus, on a cumulative consideration of the nature of the stock, the place from which it was found, the regular business carried on by the assessee, the contemporaneous explanation furnished by the partner and the accounting treatment accorded to the disclosure, we find a direct and discernible nexus between the excess stock and the assessee’s existing business. The stock was incorporated into the books by recording the corresponding purchases; the resultant credit to sundry creditors was reversed; and an equivalent amount was separately credited to the Profit and Loss Account as income disclosed during the survey. The surrendered income was, therefore, neither neutralised nor reduced by any deduction. In the absence of any material demonstrating that the stock was acquired from a source extraneous to the assessee’s business, its mere non-recording in the books prior to the survey cannot justify its treatment as unexplained investment under section 69B. The conclusion of the authorities below, therefore, lacks adequate factual and evidentiary foundation.

21. Accordingly, we hold that the excess stock of Rs. 2,75,63,760 is assessable as undisclosed business income under the normal provisions of the Act and not as deemed income under section 69B. Once section 69B is found to be inapplicable, the consequential application of section 115BBE also fails. The Assessing Officer is, therefore, directed to assess the said amount as business income and charge tax thereon at the normal rate applicable to the assessee, i.e., 30 per cent, together with the applicable surcharge and cess. The grounds raised by the assessee on this issue are accordingly allowed.

22. Insofar as the levy of interest under section 234A is concerned, the learned counsel submitted that the Assessing Officer had levied interest for a period of two months, whereas, according to the assessee, the period of default was only one month. Since the levy of interest is mandatory and consequential, but its period of computation depends upon the relevant dates, the Assessing Officer is directed to verify the statutory due date, the actual date of filing of the return and the period of default, and thereafter recompute the interest strictly in accordance with law after granting due credit for the interest already charged or paid.

23. The ground challenging the validity of the notice issued under section 143(2) was not pressed by the learned counsel for the assessee during the course of hearing. The same is, therefore, dismissed as not pressed.

24. In the result, the appeal of the assessee is allowed in terms indicated above.